Averaging down opportunities! (latest watchlist)

This summer was by far one of the best in the last few years. The weather was great and I went two times on vacation. I also got to spent a lot of time outside enjoying everything that was going on over here.

Unfortunately, everything is coming to an end, also this great summer. This also means that autumn will soon knock on the door. Hence, I will probably spend several weekends outside preparing the garden for the winter. I guess I’m not alone in this, right? ๐Ÿง‘โ€๐ŸŒพ

At the same time, it also means that the days are becoming darker and that I will have more time to continue with my passion: blogging about financial independence and dividend growth investing.

I must confess, I’m already looking forward to it, because there still so many topics I would love to write about. But that’s more for another time.

In this article I would just like to share with you my watchlist for this month. It’s a special month, because of the good old adage:

Sell in May and go away, but remember to come back in September

Wall Street

And boy, it sounds like we’re up for some increased volatility. As an example, Jerome Powel recently brought many investors back on their feet after the recent run-up in stock prices. At the same time we’ve crossed Euro / Dollar parity. something many people felt as nearly impossible for years.

But honestly, I love those periods. Like Peter Lynch once said: volatility is our friend.

It simply allows us to buy the same business at a lower price than before. And honestly, I have no clue whether we will experience a severe market crash in the upcoming months. I do hope so, but it’s really hard to predict.

That’s why it’s so important for me to keep on dollar-cost-averaging as that’s the main element that I have control on when realizing my financial plans.

Having said that, I believe it’s time to share with you the stocks that are on my watch list for the remainder of September and the start of October.

Let’s get started!

Johnson & Johnson ($JNJ)

Dividend Yield2.74%SectorHealthcare
Dividend Per Share$1.13Years Dividend Growth / Remain58 Years
5 Year Average Dividend Growth5.87%EPS Payout Ratio46%

I’m not sure if you saw this one coming, because I really don’t speak enough about this dividend aristocrat. But what a difference a month makes!

We can get Johnson and Johnson at a 2.74% dividend yield right now and this didn’t happen too often over the last 2 years.

johnson and johnson average dividend yield
Johnson & Johnson dividend yield 5-year history

It’s still just a 10th position in my portfolio with a 3.13% portfolio allocation size. So there’s still enough room to grow.

But it’s also a stock I typically buy on the dip as you can see in the below screenshot (grab dividend portfolio template).

$JNJ buy history
my $JNJ transactions

Last but not least, it also starts to check all my dividend stock screener criteria and I believe that we’re starting to experience a dip again.

However, I would like to call out that Johnson & Johnson is becoming less diverse than it used to be in the past. Spinning of their consumer business means that it’s becoming a pure-play pharma company stooling on two legs: Pharma and Medtech.

Actually, their latest quarterly earnings report showed us that the year-over-year sales increase was mostly driven by a single drug in their portfolio: DARZALEX.

This is not something that I feel entirely comfortable about, so I will keep a close eye on this in the upcoming earnings reports.

But other than that, I really hope to buy some additional shares in the upcoming weeks. I’ve got my order set at 160 USD (= 16 Forward Price to Earnings).

HP Inc ($HPQ)

Dividend Yield3.67%SectorInformation Technology
Dividend Per Share$1.00Years Dividend Growth / Remain11 Years
5 Year Average Dividend Growth10.5%EPS Payout Ratio24%

Talking about dips. HP Inc is really experiencing this right now after their most recent earnings. The notebook and printer producer announced some very poor 2nd quarter earnings and especially regarding their free cash flow.

In itself, this wasn’t really a surprise to me, because both Intel, TSMC, and Microsoft reported a significant slowdown in PC sales during the last quarter.

However, the Free Cash Flow was largely impacted by working capital adjustments. In this case mainly related to paying bills to their suppliers and some balance sheet adjustments which led to a cash outflow.

$HPQ cash flows
HPQ snapshot June 30 cash flow statement

These results were not received well by the stock market and the share price tanked by ~8% on a single day. The company mentioned that this is a bad quarter which will impact their full year free cash flow number. Hence, they adjusted their outlook accordingly:

“For fiscal 2022, HP anticipates generating free cash flow in the range of $3.2 billion to $3.7 billion, inclusive of an approximately $0.3 billion headwind related to Poly acquisition costs”.

This outlook doesn’t really concern me, because they pay approximately 1 billion in dividends. At the same time, they are buying back their shares at a quarterly 1 billion burndown rate. So the only thing we need to pay attention to is their balance sheet. We don’t want them to leverage it up too much.

Again, not such an issue right now, because they are still having a sober balance sheet. However, their buybacks might get more constraint due to lower Free Cash Flow in the upcoming years. In other words, continuing like this doesn’t feel sustainable over the long run.

On the other hand, their share repurchases are a key to my investment case, because they’ve been massively buying back shares at a ~6 P/E multiple. As you can imagine, this had a massive impact on shareholder returns:

$HPQ share repurchases by Dividend Wave
Source: Dividend Wave, please give him a follow on Twitter!

The other part of the investment case, and actually the core part, is of course their dividend. The stock currently yields 3.71% at a payout ratio of ~24%. This gives the company ample room to grow its dividends in the upcoming years, even if they decide to scale down its share repurchase program.

On top of that, we can also expect a dividend hike to be announced somewhere at the start of November. Hence, there’s even more yield potential in the short term.

Last but not least, I do expect more headwinds if we would experience a further global economic slowdown. The company is very sensitive to corporate purchases and the recent scale-down in worldwide hiring of new employees has contributed to last quarter’s earnings impact.

In other words, there is quite some cyclicality in this stock so we might expect the price of the stock to easily drop more than other stocks we have in our portfolios.

Note: this article was some time in the working and in the meantime, my purchase order at 28 USD got triggered ๐Ÿ™Œ.

Watch more: HP Inc. A Buffett stock!

Siemens (ETR:SIE)

Dividend Yield3.99%SectorIndustrials
Dividend Per Share$4.00Years Dividend Growth / Remain1 Year
5 Year Average Dividend Growth2.33%EPS Payout Ratio64%

Siemens is an iconic German industrial and is proudly listed as a tier-2 stock in my portfolio allocation strategy. It is one of the last remaining global industrials out there and in my example a role model in how to manage a conglomerate of this size.

I mean, we all know the story about General Electric and also the recent lawsuits at 3M. It doesn’t mean that Siemens can’t experience something similar to 3M, but Siemens has managed their business much more proactively over the last few years.

Unlike other industrials of their size, Siemens’s business lines seem very well aligned with some key global trends (i.e. climate change, growing population, mobility).

And their earnings are evidence of that! They were able to grow the business by 4% compared to last year while keeping Free Cash Flow stable. This is quite a good result compared to what we’ve seen elsewhere in the market.

Note: technically they are at a loss this year, due to required assets impairments on Siemens Energy and formerly owned Russian assets. This is not a concern to me.

Having said that, their business is very cyclical due to the products they offer. There is typically very strong demand for it during the good years, but we might see a significant slowdown during the bad years.

As an example, governments are often cash constraint during an economic recession and therefore postpone their investments in for instance new trains. This hits Seimens extremely hard, unlike for instance an Ahold Delhaize. Ahold will continue to sell its groceries in a very stable manner.

Hence, the best time to buy a company like Siemens seems to be at the bottom of an economic cycle. And honestly, I think that we are still far away from that. The noise that we’re seeing in the economy feels like dark clouds signaling an upcoming storm.

But that’s also the reason why I decided to add it to my watchlist. I like Siemens so much as a business and it’s still a very small position in my portfolio with only 0.73% allocation.

My fair value price for the company stands at 155 Euro, so I feel like nibbling in some additional shares at a 4% yield (= 100 Euro per share). Update: my purchase order got already triggered on Friday, just after I wrote this section.

However, this would just be a small purchase and I would double down much more if it enters the low 80’s.

PS: are you wondering why Siemens has only 1 year of dividend growth? They spun off Siemens energy and took a ~10% dividend cut which was similar to the size of their asset reduction. It was growing its dividends for more than 2 decades until the spin off and has since recovered from the dividend reduction.

Watch more: Siemens Stock Analysis

Texas Instruments (TXN)

Dividend Yield3.00%SectorInformation Technology
Dividend Per Share$4.96Years Dividend Growth / Remain16 Years
5 Year Average Dividend Growth17.2%EPS Payout Ratio62%

Texas Instruments is operating in the semiconductor industry and is the leading analog chip producer in the world. We all know them from the iconic calculators, but did you also know that this company is a pure cash flow machine?

Sometimes I wonder whether one led to the other because those calculators were very user-friendly to calculate the net present value of an investment.

Having said that, have you ever visited their investor relations website?

Honestly, I just love their welcome page!

$TXN investor relations
Texas Instruments Investor Relations Website

Their messaging is so aligned with my philosophy!

And some good news on top of that: they just announced another 7.8% dividend increase. This is their 16th consecutive dividend hike and the stock now yields 3%.

On top of that, they announced a 15 billion buyback program which is the equivalent of 10% of their market cap. Historically they have been buying back 3 to 5 billion annually and I would therefore expect something similar under this program.

A lot of shareholder returns and I’m really happy with that.

And just to be clear, I’m not worried about the impact on their balance sheet because they can easily afford it. They have a 48% debt-to-equity ratio and an Aa3 high-grade credit rating.

To me, this company has high quality written all over it and it’s a stock I would like to own for the very long term.

It’s a true example of a slow-compounder.

However, like with every company, there are some risks that you should be aware of. The biggest I would say is their sensitivity to an economic slowdown.

As an example, their chips are used in many discretionary consumer products. These are products people usually buy less when they are constrained in their budgets.

Hence, there is a certain cyclicality in their business that you should be aware of.

Though, I don’t think that Texas Instruments will drop faster in share price than the average stock in the S&P500. Investors tend to move to high-quality stocks during bear markets and Texas Instruments is, in my opinion, one of them.

Watch more: Texas Instruments Q2 Performance

Final thoughts

This is my watchlist for the upcoming weeks. I like all of these stocks right now and I was able to already accumulate some additional $HPQ and $SIE.

However, there are many more interesting stocks that I’m interested in. Examples are Allianz, T Row Price Group and Realty Income.

My focus will naturally gravitate towards more and more high-quality stocks. HPQ is not an example of the highest quality for me but offers a good risk & reward right now.

But ideally, I would like to accumulate more of my Tier-1 stocks like Johnson & Johnson, Microsoft, PepsiCo, Realty Income and L’Oreal.

Let’s cross our fingers and hope that the stock market would drop by another 20% on average. I’m sure that by that time we will see some very attractive buying opportunities for those high-quality names.

Yours Truly,

European Dividend Growth Investor

PS: what are you buying these days?

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European DGI

I am European DGI and it's my desire to retire early via Dividend Growth Investing as a passive income stream. This is not easy and especially when living in Europe. That's why I started this blog because I truly believe we can learn a lot from each other by sharing our journeys!


Iโ€™m not a certified financial planner/advisor nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer. Iโ€™m not a finance professional through formal education. Iโ€™m a person who believes and takes pride in a sense of freedom, satisfaction, fulfillment and empowerment that I get from being financially competent and being conscious managing my personal money. The contents on this blog are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I canโ€™t promise that the information shared on my blog is appropriate for you or anyone else. By reading this blog, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information provided on this blog.

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