Tuesday, January 17, 2017

Next purchase thoughts

For my next purchase I am considering adding more to my higher yielding companies. Since my contribution in 2017 will be less since most of my money is being put into a savings account for a down payment, I want to get more dividends for every dollar invested.


Recently, BTI has announced that they will purchase Reynolds American (RAI). I hold some shares in RAI and they have run up quite a bit due to this takeover. I am very sad to see my RAI shares go and I do not have an intention to hold BTI because BTI is a British company that pays dividends in pounds. I want all my dividends paid in dollars since foreign currency exchange rates can affect the dividends received from BTI. Also BTI pays their dividends biannually and the amount paid in the first half is always substantially more than the second half. I prefer the American company's norm of quarterly US Dollar payments with one quarter being increased every year.


The sell of my RAI shares will likely be used to purchase MO + PM. I am still debating if I should buy only PM or only MO. RAI yields now only 3.19% after all the price appreciation. MO yields 3.56% and PM yields 4.50% so the trade from RAI to MO and/or PM will be small bump in yield. I currently have around $5700 in RAI. My positions in MO and PM are much larger at $39,100 and $10,500 respectively. I have so far profited quite well from my shares in MO and PM.

There are suspicions that PM may purchase MO. BTI's purchase of RAI now makes BTI the largest tobacco company in the world. PM may likely join in so that it can continue to be the dominant force in the world's tobacco economy. To merge or not, I will let the management at MO and PM decide since they have a very impressive track record of making decisions that best benefit shareholder wealth.



My 401k will also have some funds for my next purchase. There is around $1360 in cash. It's not a large amount but I will put this money to work soon. My first choice is Realty Income (O) which recently announced a healthy 4% dividend increase from $0.2025 to $0.2105 (this is very large for a monthly dividend paying REIT). O has pulled back recently. Alternatively I am also thinking of just adding more into MO and PM although MO is quite expensive now. PEP, KMB, CL, and MKC have also pulled back and are high quality companies that I like to add to. The first two are possible choices since they yield over 3% and the latter two are not too high yielding so I have less interest for them.

I have largely ignored the Industrials, Energy, and Materials sectors at this time since they have run up quite a lot. Utilities do yield higher but they haven't pulled back enough for me considering the interest rates will be continuously increasing going forward. Tech has run up a lot and I largely ignore tech in my portfolio.

4 comments:

  1. Hello

    I have both MO and PM. I'm just curious what will happen with my shares in both stocks if PM buys MO? Do you benefit more from having MO or PM during a mereger? I still like both stocks regardless what happens. And for sure want to keep them if they do merge.

    Thanks
    Shane

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  2. If you believe PM will takeout MO, then you will want to own MO because PM will have to pay MO owners a premium to buy them out. PM shares may decline as a result since PM will have to take on leverage or dilute shares to fund the purchase. Alternatively if investors find the buyout attractive for PM's future, then PM's share price may end up staying flat or increasing instead of declining. But usually the buyer experiences a share price decline.

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  3. Some high quality stocks there. I hope you can get a decent yield from your shares. All the best for 2017.

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  4. I think you should keep your BAT shares. By eating up the rest of RAI, they will develop into a behemoth that will be tough to reckon with. You're young and may one day regret giving them up. Also, given your weight in the other tobaccos, I think you're opening the door to more risk than you need by adding to them. I would stay diversified and see what happens with the BTI dividend going forward. They already pay a good yield. My two cents, and yes I'm putting my money where my mouth is by doing the same.

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