Buy Great Companies at Good Prices

It's very rare for great companies to go on sale. As the great value investor Charlie Munger said, "A great business at a fair price is superior to a fair business at a great price." The market knows and understands that incredibly well, and while it does offer reasonable prices on great companies from time to time, they rarely go on sale.

So when energy pipeline giant Kinder Morgan (NYSE: KMI  ) went on sale earlier this month after providing downbeat guidance, I had to jump on it, buying more shares at that rare discount. What makes Kinder Morgan a great company is its tollbooth-like operations of shipping energy around the country, combined with a shareholder-friendly dividend policy and reasonable balance sheet.

The sale is over-now what?
Unfortunately, like most sales on great companies, that one didn't last long. Kinder Morgan closed last Friday at $35.91, near the $36-and-change fair-value estimate that I calculated when picking Kinder Morgan for the real-money Inflation Protected Income Growth portfolio. Kinder Morgan's recovery was part of the reason the portfolio gained a touch over $525 since last week's update, and its price around fair value means its shares still look to be worth owning.

Still, while Kinder Morgan's recovery was nice, toymaker Hasbro (NASDAQ: HAS  ) drove the largest share of last week's gains for the IPIG portfolio. It looks like a classic Santa Claus rally on that holiday-dependent company, helped by a surge in last-minute Christmas purchases that propelled overall spending ahead of last year's levels.

We'll know soon whether the market's faith in Hasbro was justified. Hasbro's recent surge prices it above my recent fair-value estimate, but a strong December-ending quarter could cause an upward swing in that valuation.

While Hasbro looks like a clear winner from last-minute shopping, the jury is still out on how UPS (NYSE: UPS  ) fared. While the rise in online shopping meant more products shipped by UPS this season, the company wasn't quite as prepared for the surge as it needed to be. The surge in last-minute online shopping overloaded UPS's infrastructure, and it delayed some Christmas deliveries.

Like Hasbro, UPS is an IPIG pick trading above my recent fair-value estimate. Also like Hasbro, a strong December quarter for UPS could swing that estimate higher. So the big question now is whether the gain from that late surge will make its way to UPS's shareholders, or whether it will be eaten by the costs of recovering from those delays.

So now, we wait and reassess when the new numbers are known.

Make waiting easier
While both Hasbro and UPS are trading near rich valuation levels, both of their underlying businesses remain solid. In addition, both pay dividends that are covered by cash flows and have decent track records of increasing their dividends. That makes it easier to hold on and wait for the new financial information that's needed to reassess their values before rushing in to sell their shares

Solid businesses with rising dividends are at the foundation of the IPIG portfolio, which as of Friday's close, looked like this:

Company Name

Purchase Date

Total Investment (Including Commissions)

Current Value
Dec. 27, 2013

Current Yield
Dec. 27, 2013

United Technologies

Dec. 10, 2012

$1,464.82

$2,030.40

2.09%

Teva Pharmaceutical

Dec. 12, 2012

$1,519.40

$1,515.82

3.19%

J.M. Smucker

Dec. 13, 2012

$1,483.45

$1,754.06

2.25%

Genuine Parts

Dec. 21, 2012

$1,476.47

$1,914.06

2.58%

Mine Safety Appliances

Dec. 21, 2012

$1,504.96

$1,841.76

2.35%

Microsoft

Dec. 26, 2012

$1,499.15

$2,050.95

3%

Hasbro

Dec. 28, 2012

$1,520.60

$2,339.20

2.94%

UPS 

Jan. 2, 2013

$1,524.00

$2,094.40

2.37%

Walgreen

Jan. 4, 2013

$1,501.80

$2,297.20

2.19%

Texas Instruments

Jan. 7, 2013

$1,515.70

$2,052.49

2.75%

Union Pacific

Jan. 22, 2013

$805.42

$996.30

1.90%

CSX

Jan. 22, 2013

$712.50

$961.86

2.12%

McDonald's

Jan. 24, 2013

$1,499.64

$1,550.56

3.34%

Becton, Dickinson

Jan. 31, 2013

$1,518.64

$1,986.30

1.98%

AFLAC

Feb. 5, 2013

$1,466.35

$1,815.75

2.20%

Air Products & Chemicals

Feb. 11, 2013

$1,510.99

$1,928.31

2.50%

Raytheon

Feb. 22, 2013

$1,473.91

$2,452.95

2.42%

Emerson Electric

April 3, 2013

$1,548.12

$1,965.88

2.45%

Wells Fargo

May 30, 2013

$1,525.48

$1,683.50

2.64%

Kinder Morgan

June 21, 2013

$1,518.37

$1,508.22

4.57%

Cash

   

$2,714.67

 

Total Portfolio

   

$39,454.64

 

Data from the IPIG portfolio brokerage account, as of Dec. 27, 2013.

Get rewarded for owning businesses, not just stocks
While an individual dividend may seem like a small thing, over time, dividend stocks can make you rich. It's as simple as that. While they don't garner the notability of high-flying growth stocks, they're also less likely to crash and burn. Also, over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine.

With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, simply click here.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2013, at 11:49 PM, Heidikitty wrote:

    Please explain how K MI profit could affect KMP or vice versa. I have more KMP but am seriously thinking of buying additional KMI and tend to hold on to KMP as I would loose some of the portion I paid for some shares as I bought at different times. If they are in the same family how could you loose on one and not the other? Confused!

  • Report this Comment On December 30, 2013, at 10:26 AM, TMFBigFrog wrote:

    Hi Heidikitty,

    The Kinder Morgan family of companies has a complex corporate structure. The best explanation of how it all fits together comes from the company's Investor Relations department. I used a key chart from one of their presentations in this recent article: http://www.fool.com/investing/dividends-income/2013/10/04/ki... , and it shows how cash flows through the partnership and ultimately to unitholders/shareholders.

    Best regards,

    -Chuck

    Inside Value Home Fool

    Disclosure: I own shares of Kinder Morgan and of Kinder Morgan Management.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2778309, ~/Articles/ArticleHandler.aspx, 10/23/2014 3:27:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement