It’s almost the end of the year, so today I’m sharing with you my December watchlist!
We have just 4 weeks left to make our last investments before we’ll have to close the books. Hence, this is our last chance to work on our statistics to ensure we stay on track to reach our financial dreams.
Unless you’re an overachiever, then you would definitely like to crush those goals!
Now that I’m thinking about it, I’m actually looking really forward to write my 2nd annual report in January. I enjoyed it a lot at the start of this year, because it allowed me to reflect on my performance, the decisions I made and what I could do better going forward.
I feel that I’ve been doing well, because I had a lot of focus on consistency this year. Just as an example, I’ve made the following stock purchases in November which shows the consistency of investing every month:
- Rio Tinto @ 44.00
- Alibaba @ 137.00 (full position now, not adding more)
- Bristol-Myers Squibb @ 55.00
Besides that I’ve also initiated a new position into Fresenius SE & Co KGaA @ 34.00 Euro. I’m very happy with this position, because it has given me some further diversity into the healthcare sector beyond big pharma.
But hey, that was November. Let’s now start thinking about December.
As you have probably noticed, the stock market has increased it’s volatility again and it had several days of proper price declines. I truly love this, because some stocks fall even harder.
And that in itself means to me: Opportunities!
But having said that, let’s therefore have a look at my December watchlist.
FRESENIUS SE
It may come as no surprise, but Fresenius SE (ETR:FRE | ISIN:DE0005785604) is the first stock on my watchlist. This stock is not to be mistaken with Fresenius Medical Care, which originates from the same founding company.
Speaking about which, I would truly recommend reading a bit up on the history of Fresenius in case you are interested. The story about Else Kröner really sparked my interest and she’s in my opinion an exemplary entrepreneur. I think that the German readers of this blog can be really proud on what she has achieved in her life.
But let’s get back to the current situation. Fresenius SE is a company in the health care sector and it earns its money via 4 main segments:
- Fresenius Helios (management of hospitals and clinics)
- Fresenius Kabi (generics and biosimilars)
- Fresenius Vamed (consultancy services to design and build hospitals)
- Dividends from Fresenius Medical Care
It is a pretty well diversified business, but its gross margin has been under pressure due to COVID-19. On one hand hospitals are more occupied with covid patients, which prevents them to work on full capacity for other treatments.
On the other hand there is an increased mortality rate of dialysis patients, which means a temporary decrease in patient population (I know, this sounds very cruel).
But this is also were the opportunity lies. The company has a sound balance sheet and ample free cash flow to cover the dividends (29% FCF payout ratio).
At the same time it’s heavily investing in it’s biosimilar business as part of the Kabi business unit. Kabi has strong capabilities in drug manufacturing which is really important when we’re thinking about biosimilars. I’m quite optimistic on this business segment and I think it’s a very interesting bet from Fresenius. If this works out, then it has a lot of potential for multi-year revenue growth
Hence, I’m quite optimistic about the future prospects of Fresenius SE. It should really be able to get its mojo back once we get the corona virus under control.
In the meanwhile the stock is trading at 33,83 Euro. This means a dividend yield of 2.60% which is likely to be increased with their announcement of the annual report in February 2022.
It would also mean a 29th consecutive dividend increase which is something very special in Europe. In fact, they haven’t even frozen their dividend during any of those years.
In my opinion the stock is also attractively valued with an ~11 P/E and a fair value estimate of ~43 Euro. This means that it’s trading at a 20% margin of safety right now, just in case I’m wrong in my assessment.
It doesn’t stop there and I’ve got much more to say about this company. But no worries though, I’ve got you covered. Just check out one of my more recent videos in case you haven’t seen it yet: Fresenius Stock Analysis. It includes the full story and the assumptions behind my fair value calculation.
VONOVIA
Vovovia SE (ETR:VNA | ISIN: DE000A1ML7J1) is a German Real Estate company which was founded 20 years ago. The company as we know it today is a result of a merger between Deutsche Annington and GAGFAH.
As a fact, It currently owns around 400.000 apartments in Germany, Austria and Sweden. So I think we can fairly say that this is one of the biggest real estate companies in Europe.
But what is important to mention is their very recent acquisition of Deutsche Wohnen. This was really big news and especially in Germany and the final offer got approved on the 30th of September.
A part of the take-over plan is also a rights issue (share dilution) to finance the acquisition so that the company has a healthy loan-to-value ratio. I noticed that several people in the community got surprised by this, and rightly so, because Vonovia only communicated on the 21st that they would commence the right issue on the 24th.
This rights issue is also the reason why the share price dropped below 50 Euros again. And that’s also where it gets interesting, because if you believe in the future of this Real Estate company, then now might be an interesting entry price.
Having said that, the company currently yields 3.19% and it expects to continue to grow it’s dividend next year (see Vonovia roadshow presentation, slide 9).
At the same time it has been growing its dividend with an average of 14% since it’s inception in 2013. Let’s see if it can continue such a steep dividend growth rate!
Their dividend seems to be safe though with a pay-out ratio of 67.5% based on their Funds from Operations (FFO).
All in all, consider me a buyer if the stock dips towards 45 Euro in December.
BRISTOL-MYERS SQUIBB
Bristol-Myers Squibb ($BMY | ISIN: US1101221083) manufactures prescription pharmaceuticals and biologics in several therapeutic areas, including cancer, HIV/AIDS, cardiovascular disease & diabetes.
It is the 10th biggest pharma company in the world after their Celgene acquisition in 2019. But the reason behind that acquisition is also why the company is currently struggling from a share price point of view.
The bear case for the company is the fear for a patent cliff combined with a high debt load after the Celgene acquisition. I think it’s fair to say that those bears are driving the narrative right now based on the recent share price development.
But let’s also look at the bull case for Bristol-Myers: the company has strengthened its pipeline a lot in the last 2 years and it has now 22 Phase 3 and registration opportunities versus “just” 11 in 2019.
It is also very focused on disease areas with lucrative opportunities which should allow for revenue replacement based on future patent expirations. I very much liked a slide from their recent investor day on the 16th of November which was highlighting this:
I would actually recommend analyzing the entire presentation from their investor event, because it presents their pipeline potential very well (#KnowWhatYouOwn).
In the meanwhile the stock is having a ~12% free cash flow yield which is a typical sign of undervaluation. It yields 3.57% and it has a current FCF payout ratio of ~30%.
What I also like is their focus on capital allocation, because they have continued to pay down their long-term debt quite significantly. At the same time they have also bought back more than 5 Billion in shares this year which means a share reduction of slightly more than 2%.
Having said this, 90% of the dividends, share buybacks and debt repayment was funded by free cash flow. The other 10% was funded by pulling cash from their cash reserves.
In my opinion the company is doing all the right things as what I would like to see as a long-term investor. I currently value the stock very conservatively at ~60 USD which gives it a margin-of-safety of about 10%.
Honestly, from all the three stocks on the watchlist I’m most bullish on Bristol-Myers Squibb.
At the same time I don’t want to buy too much at the current share price to avoid going all-in at once. Hence, I would like to add some more shares again if it drops to the low 50’s. Remember that I just bought some shares at 55 USD at the beginning of this week on Monday the 29th.
Recommended read: how to average down stocks when a share price is falling.
Read more about Bristol-Myers Squibb in some of my earlier articles:
Final Thoughts
These are the 3 dividend stocks from my December watchlist that I will put my most focus on this month.
The process of making a watchlist on a monthly basis really helps with this, because it prevents me from “copying the crowd” and rather triggers me to do my own homework.
Hence, that’s also my recommendation to you: just spend a little bit of time on a monthly basis screening for dividend stocks which you would like to own. Read a bit up on it, verify if there are no major red flags and try to form an opinion about the stock.
It shouldn’t take you more than 2 hours and by doing so you are probably already doing much more homework than the regular investor.
And I promise you that such a process would also make you feel much more comfortable with your portfolio. Especially on those red days when you can hear the most bearish and awkward arguments to sell certain stocks which you might own.
I believe that reading information builds knowledge. Knowledge builds confidence.
In my opinion it’s that simple.
Having said all of this, just know that I’m also keeping an eye on BASF, Vici and Visa right now. Three totally different companies again which I don’t intend to invest in this month, but who knows. If Visa continues to drop at this pace then I might end up initiating a position in the stock.
That’s it from my side. I’m curious to hear what you think of this watchlist 🙏
At the same time I would love to hear your suggestions as well. The more ideas, the better it might be for the community and the readers.
Yours Truly,
European Dividend Growth Investor
