Over Valuation Dilemma

[Robandcindy2]

Wouldn't it be nice to always have this problem?

So I guess I could subtitle this to "When do you sell?"

I/we are currently 3-5 years from mandatory airline retirement and for all practical purposes we have our portfolio humming along 70%/30% with a 3.2% steady stream of income form dividends and interest.

Several of our consumer staple stocks are considerably overvalued.  I consider this sector a foundation for the portfolio and unless the company tanks see no reason to liquidate.

That said I want to share a different perspective.

We have a small position in Colgate with a 35% profit.  It yields $120/year in dividends.

If I sold our position I would pocket over 10 years worth of dividends (less $7.95 charge).

Eventually I would expect CL to come back down to a normal valuation at which time I would re-purchase it.  Of course, unless I could earn the current 2.1% or better somewhere else those 10 years of equivalent dividends might turn out to be only 9, 8, 7 years or less.

As we all tend to be "buy and hold" types, I am curious what the DGI brain trust thinks of this.

   

https://www.fastgraphs.net/

[NilesMike]

I am certainly not a DGI savant by any means but will share my viewpoint.

When investing, the 1st rule is more (income) is better and (receiving that income) sooner is better than later.

I view the dividends and their growth as bonus or incentive to hold the stock when capital appreciation lags.

I rotate from expensive stocks to cheaper stocks and liquidate them when they become expensive.

Given your fact set, I wouldn't hesitate to move the CLX money into CTAS, T or SHW and let them go from undervalued to overvalued.

[Caversham]

I think this is a question most DGI investors struggle with.

CL is clearly overvalued, but it is also one of the best companies in the world.  Basically, the only time you can buy it for fair value is during a significant market downturn.  If the company being presented was of lesser quality, I would probably say yes.  But CL is such a quality company I'm a lot less sure.

Also, FAST Graphs is great, but according to Chuck Carnevale there are some companies that the market puts a premium on and values differently.  For most companies you can use the earnings line (orange line) as "fair value".  But other companies, the market values based upon historical PE (blue line).   A great example of this is KO.  Look at KO's 15 year FAST graph (15 years to ignore the insane valuations in late 90's/early 00's).  KO's price hovers around the blue line, not the orange line.  I believe CL should be valued the same way in FAST graphs, based upon the historical PE line and not the earnings line.  If you do this, then CL is still overvalued, but not nearly as much.

[NilesMike]

Isn't the object to look only at quality DGI stocks and buy them when undervalued and anticipate they rise to fair and or overvalued levels? When one buys/holds overvalued stocks where MUST they go? To fair/undervalued levels.

Am I missing something in this regard?

[Kerim]

Yep, this is indeed one of the central conundrums.

For me, it helps to think in terms of both DG investing and Value investing. What you're describing is a blend of the two, which IF YOU CAN DO IT RIGHT will give you the best of both wolds. Most all DG investors would agree that a core principle is to buy the best DG companies when they are fairly valued or undervalued, often with the intention of holding forever while the dividends grow. An accomplished value investor buys undervalued companies and sells them when they revert to fair value or become overvalued.

The reason I love DG investing is that it is an easier and much more forgiving strategy than most of the others, including value investing. But pure value investing, or a blend of the two, again if executed properly, will certainly outperform straight DG.

So, the question is, are you confident enough about the sell decision? If you can part with the income stream that this holding provides, and upgrade to a higher-yielding company of equal or better quality, it would make sense to do so. But I think Cav makes a great point that CL may not be as significantly overvalued as it might look, which makes it less of a no-brainer to sell.

Best of luck, and keep us posted about what you decide!

[NilesMike]

Actually, one could get a lower yielding stock as they have 35% more cash to invest while looking for a rise to fair value.

(10-09-2016, 10:42 AM)Kerim Wrote: So, the question is, are you confident enough about the sell decision? If you can part with the income stream that this holding provides, and upgrade to a higher-yielding company of equal or better quality, it would make sense to do so. But I think Cav makes a great point that CL may not be as significantly overvalued as it might look, which makes it less of a no-brainer to sell.

Best of luck, and keep us posted about what you decide!

[Dividend Watcher]

Rob, I think Caversham's reply is excellent. To that I would add my response to Amos over in this thread.

I just did a quick scan of CL's stats and recent performance. Yes, if you look at CL's ttm P/E it is in the 40s due to some problems dealing with inflation in South America and the slow growth in emerging markets which factor into their strategy to grow the business in the future. However, IIRC, FAST Graphs uses a portion of the expected short-term forward earnings to calculate P/Es. As to the value, in the 20 year history you show, CL has almost always traded at a premium to both its earnings-justified value (orange line) and the market as a whole.

I don't believe the company is broken and has a bright future ahead. In fact, I just bought some of their products in the last week. They still make products that are good quality, reasonably priced and need to be bought on a frequent basis. I don't see it as that grossly overvalued.

If it were me with your time frame, I'd hang on and collect the dividends to use somewhere else but that's me. I'm doing that in my own portfolio. In either case, you seem well-positioned.

[rayray]

I like to buy and hold, with the intention of holding forever, assuming all remains equal. What I like to do is collect the dividends and allocate them properly.

Let me add, the companies I have divested over the years, for the most part I'm sorry I sold.

[EricL]

(10-09-2016, 09:19 PM)rayray Wrote: I like to buy and hold, with the intention of holding forever, assuming all remains equal. What I like to do is collect the dividends and allocate them properly.

Let me add, the companies I have divested over the years, for the most part I'm sorry I sold.

Agree completely. Most of the sales I've made due to overvaluation I've regretted ever since. I'm investing for next 20+ years, and have no idea where shares are going in the short term. If a company is performing how I want it to, I now continue to hold and reinvest, valuation be da**ed.

I generally won't invest new funds into something that is overvalued, but have no problem holding onto something that is.

[Robandcindy2]

Thank you all for the thoughtful replies.

This is really just a "bird in the hand" debate.   Nothing wrong at all with CL and as I mentioned the ability to "capture" the next 10 years of dividends today got my attention.  The bigger question (at least to those building a sustainable DG Retirement Portfolio) is will there be a re-entry price for CL down the road?  Eight plus years into this pseudo bull market you have to wonder. Will there be another August 2015 or January 2016?   Trump-Clinton-Johnson?  The Fed???

   

http://stockcharts.com/h-sc/ui

I very much like the Cruise Missile "Launch and Leave" theory especially when I often find myself not in a position to defend my portfolio at 39,000 feet and no internet (and I'm sure you're glad about that too).  But all stocks go up...all stocks go down...just some more than others.

I wonder how big this next correction will be?

[Robandcindy2]

CL is a 53 year Champion....let me torment your early morning coffee with another....

We bought DPS (a 7 year dividend payer) years ago and are currently up 88%.  Selling today would pocket 19 years of forward dividends....

   

   

Decisions.....decisions.....   Bird in the hand?????

I need more coffee 

[DividendGarden]

So, I've owned DPS for many years and my cost basis is so low that I don't think I'll ever consider selling. I think Kerim hit the nail on the head when he said it's a blend of DGI and value investing. For me, my cost basis on DPS is so low (value investing) that I'll just hang on to it forever, but I can turn DRIP off and reinvest those dividends into other companies (value investing). Of course, all companies I would consider are DGI companies, so it really is a blend.