The original Sharpe Income post can be found here.
The Sharpe Income category be be found by clicking on that red ‘Sharpe Income‘ tag next to this post title, or by clicking here.
We continue the discussion from the last entry.
So I stated in the last Sharpe Income entry that I was looking at the purchase for another company for the project.
Their next earnings release is tomorrow, so I thought … there is no time like the present … and yes, I am looking at American Express (AXP).
At the moment, American Express (AXP) is trading in the $88.00 range, and is sporting a P/E of around 16.24. Just a little shy of the market overall.
But Dan … American Express (AXP) … where is the higher dividend yield?
On of the single worst mistakes you can make, in Fixed Income, is to chase high yield. I’m going to say it again … give me yield stability over high yield every day of the week! I see amateurs do this again and again.
Chasing an instrument because it has a ‘high dividend payment’. Never mind the fact that their company is in debt to pay that dividend. I swear, I see people treat that dividend yield like a crack vial. And if they don’t get burned on unsustainable dividends, they certainly do as soon as we have experience even a 5 sigma event. In my 18 years of doing this, I have met only one person that can purchase yield instruments north of 7%, and not only get away with it, but remain profitable. It takes a lot of specialized knowledge to be able to do it well.
So quite frankly, I could give five flying rips about the “small yield”. Especially since I can turn that 1.19% dividend yield (at the moment) into a 7% yield, or even 50% yield-on-cost, easily enough, with patience and persistence.
What attracts me to American Express (AXP) is the fact that they do not vary, and are not lured away from what has demonstrated itself to be a very sound business plan. I swear every single conference call, some green analyst asks when they are going to leverage up, and the answer is the same each and every time.
I like that.
I like their low 18.7% dividend payout ratio, and therefore they have a tremendous amount of room in the future to grow that dividend and thus assist my yield-on-cost for this particular asset.
I like their reasonable leverage.
On a multi-year basis I like their growing profit margins.
I like that it is diversified away from the technology sector, since I also hold IBM for Fixed Income.
In short, I like the business.
And I really like the fact that it’s stock has been beat up. That is almost a pre-requisite for me before any Fixed Income purchases. A good company has to have been beaten up first. I don’t buy things when they are expensive, I buy them when they are cheap.
For the project, I have no orders at this time.
But do not surprised if you see an entry in the future, that announces an order for this project, and for American Express (AXP).
The next Sharpe Income entry can be found here …
The Google Drive Spreadsheet that tracks this project can be found here …
Disclosure: I do maintain long positions in AXP in my own personal Fixed Income account at a cost average of $87.98. I hold no other positions in AXP. No businesses that I am associated with, to my knowledge, has any position in AXP, long or short, at this time.