The biggest factor that determines whether or not you will be a successful investor is buying a stock when it is undervalued. Investors are constantly asking themselves “is this a good price?” What you think is a good price could be very different from what I consider a good price. In the end, we all want to buy a company on sale; who doesn’t like getting a bargain?
For many of the dividend stocks I follow, the month of May provided much lower prices. I was tempted to add more shares to the companies I own - the pipelines, the banks, the insurance companies, even my oil and gas producers - but at the back of my mind the word “recession” always crept in and I questioned whether or not it was the right time.
Worry of a recession is a daily topic of conversation. With the BOC raising rates again yesterday, people will soon begin to halt discretionary spending (if they haven’t already). There is no way we can endure a decade of low interest rates and not have a reckoning. Anyone who didn’t see this coming was not looking.
Despite all the recession noise, many investors I follow were taking advantage of the dip this past month to add to their portfolio, but even with the attractive drop, are many stocks still overvalued?
One thing is for sure, the future is great at showing us what we missed.
Looking Back
Speaking of hindsight, my mother recently gave me a binder of her old stock investment newsletters. One was dated May 10, 2013, (almost exactly 10 years ago) and rated Pembina Pipelines, AltaGas, Arc Resources and Freehold Royalties all as “buys”.
Here is the information the newsletter provided:
This newsletter referenced the MRI ratio (more on this later) as a valuation measure. The lower the number the better.
What are your thoughts when you look at these two charts?
This is what I see…
Only 1 company is paying a higher annual dividend today than it was in 2013 (PPL). Three have reduced their dividend at some point over the last 10 years.
All but one (ARX) have higher yields today as compared to 10 years ago (much of that can be attributed to the lower share price today)
All have higher Earnings Per Share
All have lower Price to Earnings ratios
All have significantly lower MRI ratios
If you had purchased these companies in 2013 after reading this newsletter, and never added to your position, your 10 year yield on cost would look like this:
Pembina 10 yr YOC 8.28%
Arc Resources 10 yr YOC 2.49%
AltaGas 10 yr YOC 3.02%
Freehold Royalties 10 yr YOC 4.52%
Compare those with the current yields for each company. You’ll see that for Arc, AltaGas and FRU the yield today is much greater than the 10 year yield on cost. These companies certainly look more attractive today than they did 10 years ago.
Remember, when you buy, what you pay, and what your starting yield is matters.