It's time to put some money to work.
Drip Port has saved up nearly $800 in cash by saving $100 a month. We normally invest our money monthly, in small increments, but sometimes we hold off when we're not in a hurry to buy anything. We haven't been aching to buy for a while. But now we may. But what?
First, a comment on Intel's (Nasdaq: INTC) dividend reinvestment plan. As many of you know from Rick Munarriz's column, Intel added a $4 fee, plus $0.05 per share, for any optional cash purchase made in its Drip plan. A four-dollar-and-change commission still beats the commission charged by most brokers (one exception being ShareBuilder.com), but if you're only investing $100 a month, as we used to, that $4 is a hefty 4% fee. We refuse to pay more than a 2% fee off any transaction base.
Therefore, henceforth, we need to invest at least $200 in Intel whenever we buy more of it. Additionally, Intel will need to look especially attractive for us to choose it over our free investment options in, say, Johnson & Johnson (NYSE: JNJ) or Pepsi (NYSE: PEP). We're very unhappy to see Intel add fees to its plan, but we hope to continue investing in it when the share price looks uniquely promising.
Today, we have five companies to choose from in deciding where to invest our limited and valuable funds. Ya'll know who they are: J&J, Intel, Pepsi, newbie Paychex (Nasdaq: PAYX), and oldbie Mellon Financial (NYSE: MEL). All our companies remain in good standing. No criminal investigations. Knock on wood. Let's start with some numbers.
Price EV* '01 FCF** EV/FCF*** Paychex $35 $9.7B $249M 38.9 Mellon $35 $16 N/A N/A Pepsi $52 $91 $2.87B 31.7 Intel $22 $140 $1.34B 104 J&J $57 $165 $7.13B 23.0Notes: Prices as of midday 6/18/02.
*EV (Enterprise Value) equals market cap minus cash and equivalents and plus long-term debt. EV is in billions.
**FCF (Free Cash Flow) equals cash from operations minus capital expenditures. We did not subtract costs for options programs in these figures. FCF is for year ended 2001, except in the case of Paychex, which is for year ended May '01.
***EV/FCF is Enterprise Value divided by Free Cash Flow, which gives us a valuation metric similar to P/Es, but much more meaningful.
On an Enterprise-Value-to-Free-Cash Flow basis, Johnson & Johnson -- our largest company -- remains our most attractively priced, at 23 times trailing free cash flow. Our attraction to J&J increases when we consider that it might grow free cash flow another 16% this year.
With so many capital investments, Intel is lucky to have any free cash flow at all in this environment. Meanwhile, Pepsi and Paychex aren't horribly priced, but they aren't cheap by any means, either. With a grain of salt, here are consensus earnings per share growth estimates.
'02 EPS Est. '01 Results '02 % Growth Est. Paychex* $0.84 $0.73 15% Mellon $1.95 $1.57 24% Pepsi $1.95 $1.72 13% Intel $0.60 $0.52 15% J&J $2.23 $1.91 16%
*All estimates for year-ended December 2002, except Paychex which is for year ended May '03.
All our companies have been profitable even under duress. We're happy about that. Analysts have considerable hopes for Paychex and Mellon, though, after flat 2001 results. How likely will they grow 15% and 24% in this economy? We won't hold our breath. J&J and Pepsi performed exceptionally well in 2001, and are most likely, in our opinion, to perform well again this year. (Rule Maker wrote on J&J's attributes yesterday.)
The estimated fiscal year-end P/Es for our holdings are: Mellon 17, J&J 25, Pepsi 26, Intel 36 and Paychex 41.
We've considered cash flow and income statement numbers for our companies. We need to keep a close eye on the balance sheet, too. Although we already know the following balance sheet numbers for our companies, let's review.
Cash & Equiv.* Long-term Debt Paychex $724 million $5.6 million Pepsi $2.0 billion $2.2 billion Intel $10.8 b $1.0 b J&J $7.4 b $2.2 b
*Cash & equivalents includes short-term investments. All numbers in $billions except Paychex and as of 3/30/02, except Paychex which is as of 5/31/02. The source of the numbers in all the above tables is SEC filings and MultexInvestor.
So, our companies have strong balance sheets. All could withstand severe economic pressure for a long time. Many -- even most -- companies don't have this luxury.
So, which to buy?
Though none of our stocks are screaming "buy me" on a valuation basis, we've seen a brutal stock market and we don't know when it'll turn, so sending some money now to companies we believe in -- continuing to average in at lower prices -- makes reasonable sense, and has always been part of our mode of operation.
We'll send $100 to J&J, $100 to Mellon, and $100 to Pepsi. We'll consider Paychex further soon, and we'll wait on Intel. Why send money to these three? Because they're the lowest priced of our holdings based on free cash flow valautions and on estimated earnings. Additionally, I believe J&J and Pepsi are the least likely to disappoint this year. We'll send the checks next week. Have a great week!
Disclosure: Jeff Fischer owns the stocks in Drip Port, as shown online per the Fool's disclosure policy. Jeff lives on Capitol Hill (probably about 35 Jeffs do) and enjoys Washington D.C.'s many free Smithsonian museums.
Drip Port's Simple Returns as of 6/19/02 Market Close:
Drip Port: 3.9% S&P 500: 9.6% Nasdaq: -4.2%
These are Drip Port's straight or simple returns (including fees) on invested funds since launching 7/28/97 (not accounting for the fact that we dollar-cost average, which, when accounted for, accurately increases our return by typically a few percentage points). Because we started with a small investment base, $500, and add money every month, much of our money has not yet been invested long. Additionally, we've received $46.34 in reinvested dividends since September 2001 that have not been recorded in our numbers yet, due to functionality issues with our port tracking provider. Thank you for your interest and patience.