A stock market that keeps hitting all-time highs — despite the coronavirus-battered economy being in rough shape — presents quite a challenge for investors who care about valuation.
If I only buy undervalued names, the IBP would be filled with struggling companies that have languished even as the overall market approaches bubble territory.
So I try to pay attention to valuation without letting it rule my every move, and that was the case again with my latest selections.
On Tuesday, Dec. 22, I executed purchase orders on Daily Trade Alert’s behalf for small chunks of Broadcom (AVGO), AbbVie (ABBV) and Amgen (AMGN).
The ABBV purchase executed in two transactions about a second apart, as sometimes happens with limit orders. For AVGO, I first bought 1 share at $430 via limit order, and then used the $40 that remained of the $1,000 allocation to buy an additional fraction of a share, utilizing Schwab Stock Slices.
This was the third time we have bought shares of semiconductor giant Broadcom for the IBP.
On the first two occasions — in August 2018 and in January 2020 — the stock was relatively inexpensive, at price/earnings ratios of about 11 and 14, respectively.
FAST Graphs
This time, the “blended P/E ratio” (a metric that combines both the current year’s earnings and expected future earnings) was almost 19 — the highest it’s been in at least a decade, and considerably greater than the 10-year norm of about 14.3.
So, in the not-too-distant future, we might get to see if adding to the IBP’s Broadcom position at this price point was brilliant, foolish or somewhere in between.
For what it’s worth, AVGO is still considered a “Strong Buy” by a consensus of the 20 analysts surveyed by TipRanks.
What about AbbVie and Amgen, the biopharmaceutical companies we topped off as part of our last buy of 2020?
Well, here is a compilation of what various analytical services say about our three most recent purchases:
In the cases of ABBV and AMGN, quite a few of the above numbers get my green “most favorable” designation.
Amgen, especially, has lots of room to run if most of those market-watchers are right. Value Line includes the company in its model portfolio of “Stocks with Above-Average Year-Ahead Price Potential.”
The TipRanks survey shows about a 15% upside for Amgen, although nearly half of the analysts consider the stock a “Hold.”
The FAST Graphs illustration suggests Amgen is fairly valued, trading very close to its normal blended P/E ratio.
As for AbbVie, most analysts used by TipRanks believe it is a Buy here.
The FAST Graphs for ABBV is quite favorable, too, particularly if one believes the company’s earnings will grow annually at a double-digit percentage for the next several years.
Let’s Talk About Income
While there might be some debate about whether AbbVie, Amgen and/or Broadcom are good values now, few would deny that they are quality businesses.
And there is no doubt at all that they are dividend dandies.
Indeed, ABBV and AVGO have become the portfolio’s two best income producers, and AMGN has moved into the top 10. (See all 37 IBP components HERE.)
Each company recently raised its dividend at least 10%. That’s a huge increase for most stocks, but for these it actually was on the low side.
These have been big-time dividend growers for years, led by Broadcom’s massive series of hikes.
These purchases will give the portfolio a nice income jolt over the next year.
The small number of shares we just bought will bring more than $38 of dividends into the IBP, and the three full positions will combine to produce nearly $400 in income over the next 12 months. That’s about 15% of the portfolio’s total anticipated income of $2,566.
We bought our additional 1.0932 shares of AVGO just a little too late for the Dec. 18 ex-dividend date. But the rest of the position — 8.5608 shares — will generate a $30.82 dividend on Dec. 31, and that will be reinvested right back into Broadcom stock.
Similarly, the income the IBP will receive in February from ABBV ($38.87) and March from AMGN ($24.19) will buy fractions of shares of those companies.
That dividend reinvestment — a process informally called “dripping” — will continue every quarter for years.
Dripping will happen not only with these companies but with all IBP components, repeatedly demonstrating why we gave this project the name we did.
Wrapping Things Up
There’s always some wiggle room in assigning valuations to companies; one investor might think Company ZYX is a bargain, while another thinks it’s outrageously expensive.
So whenever there’s any doubt, I stick with quality, dividend-growing businesses for the Income Builder Portfolio — and Broadcom, AbbVie and Amgen certainly fit the bill.
My colleague, Dave Van Knapp, selected Amgen as his High Quality Dividend Growth Stock for November. Read his article HERE.
In addition, Jason Fieber wrote about all three of these companies in the past 6 months; click on each stock’s name to read his reports: Amgen; AbbVie; Broadcom.
For a look at another real-money portfolio I manage, the “growth and income” Grand-Twins College Fund, see the home page HERE.
— Mike Nadel
This article first appeared on Dividends & Income
We’re Putting $2,000 / Month into These StocksThe goal? To build a reliable, growing income stream by making regular investments in high-quality dividend-paying companies. Click here to access our Income Builder Portfolio and see what we’re buying this month.