A sizable part of our portfolio is invested in blue chip stocks. We give these companies some leeway due to how well they are run. Normally, the most difficult decision with these positions is knowing when to sell them. Do we keep them long term indefinitely, or do we sell them when we feel their valuations reflect the respective intrinsic values of the companies?
That is an argument for another day. However, if one of our blue-chips, for example, were to significantly decrease the growth rate of its dividend, then this could be reason enough to start liquidating that respective position.
In essence though, with these positions, we prefer time "in the market", so compounding can do its thing. Obviously, if another blue chip was to come on the scene with a much more attractive valuation and dividend growth profile, then something like this would at least make us consider rebalance our portfolio.
One such stock which has enjoyed a strong trending move over the past 2.5 months is Pfizer Inc. (PFE). Its P/E ratio has now almost reached 23 and its sales multiple almost 5. Many investors would state that these types of valuation numbers demonstrate that the stock is trading close to its fair value. However, valuations only speak to one side of the story. At just under $44 a share, we remain willing to hold Pfizer for more time here. Here are some reasons why.
First of all, the technicals look really strong.
- Price has still not closed above the highs of last year, but buying volume continues to increase. We use volume trends as a predictive indicator when analyzing stocks. The trend in this key indicator usually precedes price-action. We believe it is only a matter of time before price closes above those 2018 highs.
- Although Pfizer's share price has been rallying steadily since April, the weekly chart is only now beginning to give buy signals with respect to the MACD and MACD-Histogram. Although we are only a mere $2 to $3 off the 2018 highs, we are showing nothing of the sort on the MACD indicator. The recent bullish crossover also should result in higher prices going forward.
If we go to a chart of the S&P, we can see that we got a break-out to fresh highs this week. The S&P, as shown above, consolidated from 2014 to 2016 as well as over the past 18 months or so. Whereas many bears believed a double top was in play, we believe that the S&P is in the process of breaking out of this recent consolidation pattern. In fact, we believe $3,000 a share soon will be a distant memory.
If a double top was in play (bearish), we should not have broken out to fresh highs this week. We just can't see Pfizer diverging from the main equity markets, irrespective of its present valuation.
With respect to the financials, Pfizer's dividend growth rate has only slowed fractionally and currently sits at just over 6% over the past 12 months. However, the firm's dividend pay-out ratio has been on the slide since 2016 and currently sits at an attractive 49%.
Furthermore, earnings expectations for this year were increased by management after an encouraging Q1. Remember, many investors are invested in Pfizer because of the handsome dividend yield of 3.26%. As long as earnings continue to increase, this trend alone should provide the fuel for the continued growth of the dividend. With an interest coverage ratio of 9.84 and a debt to equity ratio of 0.61, Pfizer looks in solid financial shape at present.
To sum up, knowing when to begin liquidating a position is one of the hardest decisions in investing. However, Pfizer's technicals and financials, along with recent developments in the S&P, demonstrate to us that more gains are coming. Remaining long.
Elevation Code's blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not not stop until it reaches $1 million.
Disclosure: I am/we are long PFE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.