Do one really knows how the stock market will do, but looking back they can come up with great ideas. One idea is examine highly profitable companies with a low beta which then suggests the pattern will continue. In late June, Tiffana Paulrajah of Innovest Inc did that and came up with the following chart:

The criteria she used was:

Stocks in the S&P 500 with a minimum capitalization of $1 billion.

Positive change in economic value added (EVA) over 12 months. EVA measures the momentum of the wealth creating ability of the company and is the net operating profit after tax (NOPAT) minus capital charge (cost of capital times the amount of invested capital)

Positive sales change over 12 months

Positive change in net operating profit over 12 months

Minimum value of free cash flow to capital of 5%. This number will give a sense of how well the company utilizes its invested capital to generate free cash flow to pay debt or increase or maintain dividends

Beta of less than one. Searching for companies that move less than the market

A price to earnings ratio of 25

The above narrow the field from 500 to 11 companies

Company      Mkt Cap   EVA  Cost of Cap 12M Sales FCF    P/E    EPI  Beta

$ Bil                          %               Chg %       /Cap

Boeing         209.081     5190.8    10.7           3.1             9.9       23.1   1.5    1.40

Comcast       156.428   18,313        8.7          5.82            5.40      6.8   1.4    1.17

Lowe’s            81.526      2,020       9.9          3.72            9.6       21.6   1.4    1.31

LyondellBas  45.376      4,921        9.0         16.14          10.7     8.6    2.7     1.08

DXC Tech        23.932     2,777.4    7.9        222.81          30.7    13.6   1         0.92

Starbucks        78,949     2,202.7    7.6           6.79             6.5    18.5   2.4     0.63

Broadcom      117.884    15,632     8.6          20.86          11.9    10.1   2.8     0.91

Applied Mat     49.707      1,377    12.0         27.37          15.1    16.4   1.6     1.62

Sherwin-Wil     37.636      1,674     9.1         34.41             6.5    20.5   2.3     1.17

Ross Stores         32.059        981.4   9.9         10.19          17.10   22    2.3     1.08

Parker-Hannfin  22.725       141.6  10.1        21.68            5.3     22.7   1     1.42

Lam Research     29.277       805.6   11.2       42.67           17.0   15.4    1.3   1.42

O’Reilly Auto        23.276      883.9   9.8           5.21           20.0    20.8    2.6    0.94

Fiserv                     31.437     1.124    8.4           3.13           11.0    22.8    2.0   0.81

Snap-On                9.121         185.4  9.8         6.98             7.4   15.9     1.3   1.36

Acuity Brands       4.981        141.1   11.5      2.66             13.70  15.1   1.3   1.44

Linking to dividend paying stocks, with the stock market there are many choices and you need to narrow your choices. The charts help decide what is important to lessen risks. Whether you pick one of the above companies is not the issue. The issue is how do you narrow the field to pick the best companies for you, besides one that makes money. Take your time and come up with comparable choices and you may ask why would sales be similar this year? what was special about last year – if it is consistent then the choices are easier because they are all the right ones.

There are more questions than answers, till the next time – to raising questions.

 

 

One of the movies which come under critics top 5 movie list is called Citizen King and the story of Charles Foster Kane is based on a real person. In real life, Citizen Kane is based on the life of William Randolph Hearst. There are many books about him and one of them is titled The Uncrowned King – the Sensational Rise of William Randolph Hearst by Kenneth Whyte published by Random House, NY, 2008.

In the book are wonderful account of the newspapers being activist and talking larger than life roles about politics – tariffs and the McKinley Presidential race with backer Mark Hanna; the Cuban American war; and sometimes the newspapers were much better than the police in describing murders or other police investigations.

After WW I, Hearst newspapers were bringing in $100 million a year in revenues with a profit of $12 million. This was good because Mr. Hearst seem to be the one of the few people in the world that could not live off at least $10 million a year. The newspaper chain increased to 26 newspapers in 18 cities, publishing magazines such as Cosmo, Good Housekeeping, Harper’s Bazaar; a radio network, a film studio; blocks of Manhattan real estate. In addition, many people know of his California home – Hearst Castle with is 71,000 sq ft. surrounded by acres of gardens, pools and ranchland. The home is located in San Simeon between Los Angles and San Francisco.

After the 1920’s newspapers changed. They would never be so expansive, competitive and influential and thus they matured as the 20th century brought profit taking and consolidation. It also brought a change in advertising revenues. For many years, circulation was the most important revenue source, slowly advertising became more important and business managers would only need as many readers that would keep advertisers happy. The era of the aggressive, crusading, politically changed, self promoting, polarizing audience building of the warrior owner editor changed.

Linking to dividend paying stocks, by definition many of these companies will be considered more bland because they already have a lock on making profits on a regular and consistent basis. For dividend investors as long as they can do this to pay the dividend how aggressive the company is or is not helps in deciding to keep the shares for a long time. The aggressive type might be exciting to read about, but the mature company with a lock on multiple advertising rates makes for a better company to own.

There are more questions than answers, till the next time – to raising questions.

One of the movies which come under critics top 5 movie list is called Citizen King and the story of Charles Foster Kane is based on a real person. In real life, Citizen Kane is based on the life of William Randolph Hearst. There are many books about him and one of them is titled The Uncrowned King – the Sensational Rise of William Randolph Hearst by Kenneth Whyte published by Random House, NY, 2008. In the late 1890’s in the US was the era what we call ‘Robber Barrons” for the top 400 were wealthy as Barrons and most people earn their keep. Mr. Hearst’s father help find and owned shares in the big mineral finds in the west and was happy living in San Francisco. He bought the Examiner and decided to become a Senator and although said very little in the Senate worked the backrooms to help his state and state universities.

Will after dropping out of Harvard, worked on the Examiner and learned the craft of publishing. He would study other papers column sizes, which stories made the front page and why. What influences the paper could have and more importantly what caused more readership in an effort to make a profit. Similar to many people in the media world, the main action of being a newspaper person was the New York market. New York had over 50 newspaper publishing two and three times a day, 7 days a week. The center of the action was called Park Row. This small street in lower Manhattan reaching northeast from Broadway and Ann to Nassau Street and Printing House Square with its statue of Ben Franklin. City Hall was on the other side of the street. This street was convenient to City Hall, the Courts and the Post Office and all the amenities of publishing.

Hearst bought a second tier newspaper the Journal, in New York and was going to try to make it the biggest in terms of sales  and profitablility in New York. At the time, the leading publishers were Charles Dana of the Sun; Joseph Pulitzer of the World, the Times and everyone else. In 1889, The World’s was published in the Pulitzer Building which was at 16 stories and included a Dome was the tallest building in the US.  To move the Journal up to the top tier, money was invested in the content (better writing, more stories), price decrease for more pages, improvements in printing and use of color; pictures, cartoons, and many detail stories. In New York at the time, the newspapers did more detective work than the police.

Although money was very useful to buy the newspaper, to invest in capital improvement, and to cover his losses until circulation rose and advertising rates rose, It was the personal qualifications of living and breathing newspapers which made him a success. There were many examples of wealthy men buying newspapers and losing money. However all the large newspapers in New York were owned by men who were multimillionaires – Charles Dana of the Sun, Joseph Pulitzer of the World, Whitelaw Reid of the Tribune, James Bennett Jr. of the Herald. Bennett and Pulitzer both derived incomes approaching $1 million a year from their newspapers. Bennett’s income was next to Commodore Vanderbilt and William B Astor. Pulitzer netted approximately $20 million from his first 20 years at the World and his outside investments exceed the publishing revenues. This was the time when $15,000 was a princely income and most people lived off of hundreds of dollars a year.

Linking to dividend paying stocks, in the era of the robber barrons when there was not much of a middle income, it seemed easier to be wealthier because if your income reached into the thousands you were much better off than the average person. Now days it takes more than that, you need tens of thousands to feel better off than the average person. As you examining the options for the investments, the choice off comes to a few companies and sometimes buying a second tier company whose management wants to be a first tier company can be a better buy. Sometimes buying the number one or two companies with steady profits is better. The variable is to ensure management is doing what you think they should be doing.

There are more questions than answers, till the next time- to raising questions.

 

 

 

 

 

If you watch movies on Netflix or You Tube often you will watch movies with a specific genre more than others. Personally my taste runs to action movies but it can be all over the map. Most of us tend to do the same thing because we follow patterns or perhaps it is because the rest of our lives tend to be very routine – which is good.

Recently saw a movie called Deadly Impact which was released in 2010 and stars Sean Patrick Flanery and Joe Pantoliano who play a FBI agent and a bomber for hire. While all movies are designed with a story and tries to hit the correct elements to become a blockbuster, the movie did not. However it is a good movie and if you watch it you will enjoy it.

The aspect being written about is the character of Joe Pantoliano who is a bomber for hire and has been doing it for generations. He is very good because he is very meticulous or very detailed oriented. The movie is scary because he has the ability over the years to blend in, find people’s weak points and exploit them as well as not healthy regrets when he kills people. It is a job he is well paid and moves on to the next one. It takes time and energy to plan, to do the job, but similar to the average person he does leave a pattern. Eventually because he made the task personal, Joe’s character is finally taken down and the world is a better place.

Linking to dividend paying stocks, while it is not recommended you become meticulous about killing people, making a good income and over time the raising value of your stocks is a very good thing. Everyone is good at something, use your normal abilities to look differently at the markets and focus on what you know best. It is what you do, what you like to do and in every field there are opportunities.

There are more questions than answers, till the next time – to raising questions.

Central banks in the US and Europe have signaled the economic crisis of 2008 is over. Growth and sustained growth is able to be seen and the role of the Central Banks can be diminished. The Central Banks have used all the powers given to them to bring back economies to what is considered more normal – they have used 0% interest rates and larger than normal bond purchases. he signals now allow the banks to slowly but steadily raise interest rates.

In a column by Ian McGugan in the Globe and Mail, he discusses what the Central Banks are going to try to do without allowing for inflation to run up, without allowing for politicians to mess up their plans. In Europe, the Central Bank bought E$ 2.4 trillion ($3.7 trillion) in bonds. ECB President Mario Draghi wants to slow the bond purchases down and allow economies to do what they can do. The process is designed that hardly anyone notices until the process is well underway.

The big problems in Italy is the new Italian government whose economy is not returned to normal or even grown. In Europe, Germany has prospered.

In the US, the President gave a tax cut to corporations, which was designed to help stimulate growth except for the economy was close to full employment and the only thing it may do is increase inflation which increases interest rates. If interest rates go up to fast, money will move from the stock market to the bond market and mortgage rates will go up which makes it more expensive to buy a house.

If Europe decides to hold interest rates low, while the Fed increases them, investors will tend to move towards the US dollar which pushes down the Euro. In terms of exports, the US goods would be more expensive and Euro less which would frustrate the President’s America First trade agenda.

Mr. McGugan notes the iShares S&P Global Financials ETF which follows many of the global banks is lower. In addition the 10 Year US Treasury bond is a haven for investors when their is anxiety. The yield moves in opposite direction to the price and is a reliable measure of global sentiment. The yield is around 3%.

The yield curve, a measure between short and long term borrowing costs. An inverted yield curve, in which short term rates are higher than long term rates has historically been a strong signal of a recession. In mid June, the curve was flat.

This flattening of the yield curve lessens options for the Central Bank as the ability to profitability to borrow short term and lend long term is crimped.

If you add trade wars into the picture, the outlook is less than positive.

Linking to dividend paying stocks, with all investments there are trade offs and better options depending. The economy does not have defined walls but signals and then moves on to the next crisis or hopefully when governments do nothing or close to nothing. Investors continually look for signals and for dividend paying companies there is nothing better than a company saying it made a profit and can continue to pay dividends and likely raise them once again. Look at the big picture, try to understand it but make decisions based on how you see your part of the world.

There are more questions than answers, till the next time – to raising questions.

In North America we often hear the Italian economy is not doing well and a new government has been elected. The government is more anti establishment and one never knows what to expect from it. In a column by Reuters, PwC consulting believes Italian banks are set to shred E$70 billion or $107 billion in bad loans in 2018. There is in theory a strong market is to found for these bad loans. In order for the banks to be cleaned up and possibly merged to strengthen them, the bad loans have to be taken off their books. Vito Ruscigno of PwC said the volume of bad loan sales will remain healthy in years ahead… the banks have a pipeline for disposal. While banks have made great progress there is another E$ 94 billion in loans unlikely to be repaid in full. Many of these loans will go to default.

The reason why the banks wrote down loans was a favorable phase-in regime for a new accounting rule. Since the new rule, the government has changed and investors are not positive what the new government will or will not do. Investors in the bad debt expect to receive even bigger discounts for the buyers.

PwC calculates Italy’s gross soured loans totaled E$ 264 billion following disposals of E$ 64 billion which was twice the amount sold in the previous year.

Linking to dividend paying stocks, it seems whatever was loaned out in Italy during the boom is not being repaid unless there is a government guarantee it will be paid. The country’s credit is still not good. As investors you may love Italy but unless there are very, very good reasons to be there perhaps it is best to find an alternative.

There are more questions than answers, till the next time – to raising questions.

 

For a large company, unless the company is losing a great deal of money, it is very difficult to move institutional investors to vote against management proposals. It is only when an activist shareholder fights for Board seats to change that something will be done. A case in point is a Canadian company called Hudson’s Bay Co which has been a retailer for over 200 years and owns large stores in Canadian cities. The company which is owned by Richard Baker owns Hudson’s Bay, Saks Fifth Avenue, Lord & Taylor, Kaufhof in Europe and other retail sites. Mr. Baker also owns Sears but the two companies are not connected. Mr. Baker made his money in the leverage real estate operations, but the people who follow retail he is seen as a real estate investor rather than a retailer.

Mr. Baker who is one of the top 5 shareholders decided he needed to be paid $54.8 million with some of the money used for retention purposes. Close to $40 million was for share-based awards. Similar to most retailers, HBC has been undergoing vast changes including leasing the top floors of its large retail footprint in the cities to companies such as WeWork. That companies provides shared space for small and medium sized businesses. In Toronto, HBC moved goods from 100,000 sq ft to other parts of the store without reducing inventory the store carries and leased the property for $50 a sq ft which is 6 or 7 times more than it could thought it could make in the retail world.

Linking to dividend paying stocks, as investors we vote for management proposals. Most of the time we vote the way management recommends and that is good. Most of the time management knows the issues and is working to solve problems, and as long as they seem to be executing their plans, we vote for them. Once in a while there are issues such as the pay package which in HBC received 70% of the votes, while the Board of Directors vote was closer to 90% which is typical.  It is an issue but not one that will determine whether the company is profitable or not.

There are more questions than answers, till the next time – to raising questions.

One of the lowest risk to invest your money is the 10 year US Treasury bond, in mid June the interest rate was over 3%. This level is the highest it has been since 2011. The importance of the number is bond rates are moving upwards.

In the risk reward strategies which all investment professionals use, if government bonds are risk free at 3% and higher, then why should you risk your money on something not to get more than 3%. The 3% becomes a benchmark and that is good.

Reporter Dale Jackson interviewed Zachary Curry President and Portfolio Manager of Davis Rea Ltd. and he said, for older clients who rely on steady income as rates go 3.5% or 4%, it begins to make sense to switch from dividends companies to US Treasuries.

Ideally, you can keep your dividend companies because you bought quality ones which tend to grow their dividend which makes the level you are looking for closer to 5% before a major switch. If you wish to move to more US Treasuries in your portfolio try to do a ladder approach or having different maturities which can rollover. A ladder can be 1 year, 2 years, 3 years, 4  years, 5 years.

Linking to dividend paying stocks, for your investments look at your total return – stock price appreciation and dividend payments before you move out of the stocks. While owning US Treasuries is good, as stock owners you also get to watch the company to see how they are doing if you own the shares or are considering owning the shares. If you get out, when would you buy back in?

There are more questions than answers, till the next time – to raising questions.

When one country imposes a ban on imports to another country invariably there is another company which will provide the services and products, however sometimes they will get caught. In the case of ZTE which is China’s second largest telecommunications equipment maker, it was caught selling to Iran and North Korea while the US had a ban on it. That would be fine, except the company needed to buy components from US companies. The US government would not allow the sales.

ZTE according to Reuters, will pay a $1 billion fine, put $400 million in a fund in case there are other violations (there will be); they also will be changing its Board and executive teams. The agreement says all members at or above the senior VP will be removed within 30 days. They are not to be rehired along with any executives or officers tied to the wrongdoing. The US Commerce will be able to inspect their sites and improve public disclosure of their supply chain.

ZTE has paid a heavy price to do business with Iran and North Korea. The affect on the Hong Kong stock stock market was ZTE stock was down 41%

Linking to dividend paying stocks, one of the reasons it is easy to buy these stocks is for the most part governance or playing by the rules should be ingrained into the dna of the companies. The companies make profits in their areas they compete which means ethically or morally they do not have to break many laws to make money. No company is perfect but dividend paying companies tend to be closer to the gold standard.

There are more questions than answers, till the next time – to raising questions.