It’s hard to find interesting investments right now, because many typical dividend growth stocks feel so expensive right now.
On the other hand, my dividend growth portfolio value just keeps on growing. For many people this is a blessing, but in my case it makes me frustrated.
It just means that it get’s harder and harder for me to accumulate into positions. This is especially the case if the share price appreciation outpaces the earnings and dividend growth.
But luckily this doesn’t apply to all the stocks in my portfolio or in the market.
That’s why I keep reiterating that we are having a market of stocks, not a stock market.
As an example, Koninklijke Philips NV just recently flew onto my radar after a significant price drop.
I didn’t have to think about it that long, because I had done my homework already (read: Koninklijke Philips – Stock Analysis).
That’s why I decided to quickly pull the trigger and initiate a position in the company.
The share purchase
I purchased 30 shares at 40.455 per share on Monday 5 July. I bought these shares on the Amsterdam Stock Exchange for a total of ~1215 Euro (Ticker: PHIA | ISIN: NL0000009538)
The company currently pays 0.85 cents per share in dividends excluding the 15% dividend withholding tax from the Netherlands.
This means that I will earn an additional gross 25.50 Euro per annum in dividends.
And as a fun fact, this is not only a new position in Koninklijke Philips NV!
It is also the first ever position at my newly created Interactive Brokers account 👌
My Perspectives on Philips NV
This purchase was exactly in line with my July watchlist in which I already described some of my thinking.
However, let me provide you my 3 main thoughts behind this purchase.
1. Expanding my exposure to med-tech
The Med-tech is a growing industry and forecasted to grow with an average of 5.4% CAGR until 2025.
I like this industry a lot and therefore I would like to have another position in the diagnostics and med-tech space besides Medtronic Plc.
Philips NV is therefore a logical company for me, because I know the brand and what it stands for. Let’s call it a Peter Lynch – One up on Wall Street candidate 😉
I like that it is a relatively new pure-player after disposing all their legacy businesses.
2. Opportunity to increase profits and cashflows
What I also like is that the profit margins are still relatively low compared to a company like Medtronics plc (thanks to a reader pointing this out as well to me).
For instance, Medtronics has a gross margin of 65% while Philips has a gross margin of 45%.
This is a significant difference and I think it’s fair to use Medtronics as a benchmark for Phililps.
As an example, Medtronics Plc is a well oiled machine which already operates in this industry since the early 60’s.
Philips still has a long runway ahead of it and I think that there’s definitely opportunity for margin-expansion.
Besides that I’m also quite convinced with Philips product portfolio and current innovations.
Hence, I believe that management’s forecast of 4-6% sales growth is possible.
3. Where I’m having my doubts
My fair value estimate for the company is about 39 Euro per share.
However, this does assume that the company really lives up to the promise of management (4-6% sales growth).
If they are not able to hit those numbers, then it means that I will have overpaid for this company right now.
And sometimes that’s not bad if you have a strong yield in return for it.
But this is not the case here, because the current dividend yield is slightly above 2%.
Besides that the company’s past 10-year history regarding dividend growth is really poor with 1.26% annual growth.
I only like that they really showed commitment to their dividend over the last 10 years.
They actually had all the opportunities to cut it during their business transformations to give themselves more financial wiggle room.
And then we had the recent recalls off course.
To be honest, I’m not concerned about that at all. I have found this to be an excellent trigger for the recent share price dip.
But to conclude, my doubts are therefore really about the solidity of management’s predictions and their commitment to growing a dividend which is in line with my required target (6% per year).
The bet I’m taking here is that I’m buying a high quality company at a fair price.
I’ve been often too greedy in the past by requiring a strong discount.
This is what I’ve learnt from looking at my past purchase decisions, but also from the decisions in which I didn’t pull the trigger.
Many of those companies have now significantly performed and they always seem to stay ahead of me.
That’s why I decided to start initiating a position in Philips right now.
If it goes down another 20% then I’ll probably feel pity that I didn’t wait a bit longer. But from the other side I will then be happy that I didn’t buy a lot either.
Hence, it would give me a great opportunity to buy more.
If management indeed hits their targets then I’m sure the share price will quickly recover to 50 Euros under the current stock market conditions.
In that case I will feel happy that I wasn’t too greedy right now.
That’s it, these are my thoughts about this new position.
It was not such an easy decision as usual, but that’s exactly why I decided to write this quick post.
I hope you find such content useful.
European Dividend Growth Investor