Friday, July 22, 2016

Recent Buy - TIF



The market is very difficult. There are not many companies to buy. Times like this are scary!
After going through my screen, Tiffany & Co showed up. Actually, it showed up before, but I didn’t want to increase my consumer retail space. Still, I wanted to continue my investments in good quality dividend paying companies. Yesterday, I bought some shares in Tiffany and Co (TIF).

Date
Transaction
Ticker
Price
Quantity
Amount
Divs/Year
Est. For Dividend
7/212016
Buy
TIF
62.0
27
1674+fees
1.80
$48.60


About Tiffany & Co

Tiffany & Co. sells Jewelry - whether its own brand or third-party designer brands in its stores in the United States. They have a presence out of the NA; in Asia, there are popular through the Tiffany branded boutiques. The business model is easy enough to explain to my son. The more diamonds they sell, the better!

Criteria Table

TIF 7/2016
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
Yes
13 Years
ROE/Op Margin
Stable
Yes
Stable
Long term Avg Growth
Stable
Yes
Stable- but slight decline in recent years
FCF over Dividends
FCF>Dividend
Yes
FCF covers Dividends in 2016 except 2012-2015
M* Moat
Wide Moat
Yes
M* Wide
M* & S&P
Credit Rating
> BBB+
Yes
S&P credit BBB+
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes
Cash to Debt 0.72
Interest Coverage 14.15
Debt to Equity 37.27
M* & S&P Stars
> 3 Stars for both
Yes
M* 4 Stars
S&P CapIQ 3 Stars
Payout Ratio
<60%
Yes
46%
Dividend Growth
& Yield
Dividend Yield
>3%
No
2.90%
Dividend Growth
>5%
Yes
9.95%
Chowder
>12%
Yes
12.86%
Valuation
Yield/Avg Yield
>1.1
Yes
1.65
Dividend Yield Theory Mid Point
Below Mid Point
Yes
Mid Point 90.
Low Point 60
P/E
Below Mid Point
Yes
Median 23.36 Current 17.86 Forward 15.66
DRRM
~10%
Yes
Assuming 7% growth; projected return=10.09%
M* Estimate
<M* est
Yes
M* 85
S&P Estimate
< S&P cap IQ est
Yes - equal
S&P Cap IQ 62
* Data from Gurufocus, MorningStar, S&P CapIQ, Yahoo Finance, Google Finance

Fundamentals

TIF is a new company for me, so I usually take the extra time for due diligence. ROE and OMs are the first for me to review, and they look okay. The ROIC is excellent. Nice and stable. A slight dip in 2014.


What about the FCF over Dividends?


Ouch! Look at the red bars!

While the earnings can easily cover the dividends (with the exception of 2014), we all want the FCF to cover it. Clearly, it has recovered in the most recent quarters - but this is clearly something to watch out for.

So, based on the earnings information above, we should see a bump in 2014-2015, and sure enough - we do.


The mid-point is around 30-40% - so overall, not bad.

The moat is wide per Morningstar. The branding is obvious. BBB+ credit rating just meets my threshold. The cash to debt, interest coverage and cash to equity are all within parameters.

So, the company is fundamentally okay - with the exception FCF and the dip in 2014.

Btw, the charts are generated using my 10 year trend spreadsheets tool - https://div4son.blogspot.com/2016/01/metrics-10-year-trends-for-dgi-stock.html

Dividend Growth

The next thing to review is the dividend history. 13+ years is not bad. After plotting out the chart, the picture is clearer.


Pretty good growth here - there are some ‘flat’ years, but the growth resumes afterwards which means I shouldn’t worry too much if the dividend is held back a year or two. Chowder number is greater than 12 which is a good sign.

What about the Valuation?

I use the dividend yield theory, PE analysis and DDRM for fair price calculation. You can get the valuation tool here: https://div4son.blogspot.com/2016/01/d4s-valuation-tool.html

Since Tiffany is not perfect (unlike their diamonds :-) ), I need a good ‘buffer’. So, let’s see what the fair value pricing.

Yield Theory



The high and low yields are 3% and 1.5% with the mean at 2.25%.

Value Percent:

High
3.00%
Mid
2.25%
Low
1.50%

Which converts to the fair price of $90.

High Price:
120.00
Mid Price:
90.00
Low Price:
60.00

PE analysis


P/E High and Low

High P/E
30.40
Mid P/E
23.40
Low P/E
16.40


High Price
105.49
Mid Price
81.20
Low Price
56.91

This gives a fair value of around $81.

DDRM

With a DDRM model, I look for a return of around 10%. Assuming a core growth of 7%, which is a fair estimate since the EPS estimated growth is around 9.22%. The ROE and EPS are based on current numbers.

DDRM

Dividend Rate ($)
1.81
Divided by: share price
62.03
Current yield (%)
2.91
Core Growth Estimate (%)
7.00
Divided by: ROE (%)
15.45
Multiplied by: EPS ($)
3.50
Cost of Growth (%)
1.59
Earnings per Share ($)
3.50
Minus: Dividend
1.81
Minus: Cost of Growth
1.59
Funding Gap ($)
0.11
Divided by: Share Price ($)
62.03
Share Change (%)
0.18
Core Growth (%)
7.00
Plus: Share Change (%)
0.18
Total Dividend Growth (%)
7.18
Plus: Dividend Yield (%)
2.91
Projected Total Return (%)
10.09


Dividend Rate ($)
1.81
Required Return (%)
10.00
Growth (%)
7.18
Price
63.92


Dividend Rate ($)
1.81
Required Return (%)
10.00
Growth (%)
8.00
Price
90.25


Average
77.09

The average fair estimate using the DDRM tool is around $70.

Based on above tools and with the M* estimate at 85 and S&P Cap IQ estimate at $62, I think the fair price ballpark is around $75.

Risks

There are risks with Tiffany. Of course, we talked about FCF above. A cyclical business will have its ups and downs. With jewelry sales, this is the first thing to get hit in a recession. While the NA market is probably okay in the near term, the world is falling into a recession. Plus, have you been to a Tiffany store? The product selection is actually quite complex - meaning that there are costs associated with product management.

Let’s check how TIF performs with my recently implemented Risk Grade Charting tool.


TIF
.INX
Relative RG
7/20/2016
136.06
75.79
1.80
2/19/2016
140.96
89.63
1.57
9/20/2015
142.04
87.26
1.63
4/21/2015
139.51
60.66
2.30
11/20/2014
105.54
56.31
1.87
6/21/2014
107.39
49.44
2.17
1/20/2014
109.34
58.13
1.88
8/21/2013
107.98
57.15
1.89
3/22/2013
125.69
62.99
2.00
10/21/2012
149.96
71.01
2.11
5/22/2012
167.76
89.11
1.88
12/22/2011
196.27
106.60
1.84
7/23/2011
232.63
130.07
1.79
2/21/2011
140.19
67.98
2.06
9/22/2010
152.96
83.58
1.83
4/23/2010
195.75
110.53
1.77
11/22/2009
195.94
106.91
1.83
6/23/2009
271.39
145.11
1.87
1/22/2009
353.39
209.63
1.69
8/23/2008
398.86
249.91
1.60
3/24/2008
216.11
102.95
2.10
10/24/2007
226.91
100.36
2.26
5/25/2007
156.81
76.29
2.06
12/24/2006
119.11
51.03
2.33
7/25/2006
131.31
45.59
2.88
2/23/2006
128.34
57.29
2.24
Median
146.00
79.93
1.88


With a median of 1.88 (my threshold is <2.0), I think I am okay with the level of risk.

Conclusion

I really don’t like this sector - but Tiffany is a good company with an excellent brand. The dividend growth is pretty good. The fundamentals are within parameters with the exception of the recent FCF. The valuation is around 10-15% below the fair point mark. My position a relatively small. I think I can add a few more positions if it dips further. This is very possible since the market is very heated. So, my next buy will probably been another small addition when it dips into the mid 50s.

What do you think of TIF?

D4s

Note: I just read yesterday that Papa Div recently bought some TIF.


5 comments:

  1. As you know already, I like your choice. :)

    I also just saw that StockFox purchased TIF this week, so word is getting out.

    http://www.thestockfox.com/home/free-content/107-weekly-update/2963-weekly-purchases-7-22-16.html

    I think the FCF swing is due to a ~half a billion dollar arbitration award in 2014. They still obviously had a couple of other down years that appear to have been caused by a lot of inventory (but that could probably be explained with some more digging) but the big one in 2014 appears to be caused by that one-time event.

    ReplyDelete
    Replies
    1. Papa Div,
      Per the 2014 IR report, there was a restructuring of debt which a degree of loss. Having said this, their most recent quarters are very healthy.
      I think word is definitely getting out. Their dividend history and growth are solid. For me, I will add more positions (albeit small ones) when it dips further.
      D4s

      Delete
    2. I saw that restructuring of debt but when I looked at the cashflow, the big difference for 2014 appeared to be Net Income, and when I went back to the income statements, operating expenses were way out of line and there was the $480M arbitration award. In the end, I agree that the recent financials look quite good. Let's hope we are right. :)

      Delete
  2. D4S,

    I'll be honest - had no idea that Tif & Co had this long of a div streak as well as a yield that's creeping near 3%! That's wild and never has it come across my screener. Very interesting. I agree, though, it is SO hard to find a stock nowadays in the market, and there's been one direction it's going, UP...

    -Lanny

    ReplyDelete
    Replies
    1. Lanny,
      It has been very difficult indeed to find good companies. All the ones I wanted to buy are beyond my buy point. Still, after some research, there are some that I may add small positions to.
      Thanks for your comments!
      D4s

      Delete