Play to Win is a book about strategy from A. G Lafley and Roger Martin, Harvard Business Review Press, 2013. Mr. Lafley was the President of P & G for 10 years and Mr. Martin is a business educator and consultant. They believe strategy while complex, it is also simple and the important aspect is to answer 5 questions:

1. What is our winning aspiration?

2. Where will we play?

3. How will we win?

4. What capabilities must we have to do 1 to 3?

5. What management systems are required to do the above?

All the questions tie back and forth to one another which is the complex part, but they have to interlink in order to answer the questions. The reason to answer the questions is to lose less money, than the alternative.

The how and why of the questions are the reason to read the book or watch the video clips on You Tube. The answers to the questions are choices every company makes and it is important they link. For example if you define yourself as a market leader, are you? In what location are you the market leader? If you define yourself as better, better than who? better than the market leader? What distribution channels do you use and need? and the questions will keep coming based on the original choices of winning aspiration.

A wonderful example was GM had spent a couple of billion dollars are a new midsized car the Malibu, Mr. Martin asked what is a success? GM responded to better sales towards doubling it. At the time, the sales were 5% of the market with Toyota Camry as the market leader. Mr. Martin said better sales was good, but how does the new car compare to the Camry? It turned out Camry was better in 9 categories. GM went back to the drawing table spent $700 million to equal Camry. Sales were more than double. The issue is what aspiration were they trying for – to be better or be the best? Better than what? within the competitive landscape is that good enough or aim higher?

Linking to dividend paying stocks, all companies have strategies, the questions is how well they are defined and do most people in the organization understand and live them? By reading the President’s letter to the shareholders you should have an understanding of what the strategy is, if you do not then start by asking the 5 above questions.

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

At some point in the future, even though there are many reasons not to raise interest rates, they will begin to rise to what is considered more normal. At the present time, no one knows when that is because the conditions the politicians and central bankers have not been met. The politicians would like to keep rates until after they have been elected, the bankers would like to begin to raise rates, but the world economy has not stabilized yet in any of the countries. There has been improvement, not good growth. At some point in the future it is worthy of asking which dividend stocks have been raising their dividends to higher than 2.1 % (US inflation). And one person that did was Tim Shufelt (tshufelt@gobeandmail.com). The first part of any analysis is determining which tools to use and which companies do not get selected. 17 companies made the final cut, to arrive at the picks, the Dividend 5-year average growth – the cut was 20%; the 5 year average ROE (return on equity) looking at profitability in economic cycles and the cut was 15%; and the gross margin 5 year average growth which gives an indication of ability to raise prices with a minimum of 5% was used. The results were

Company                Symbol          Dividend 5-Yr  5 Year Ave     Gross Margin 5 Yr

–                                   –                Growth (%)          ROE (%)          Average Growth

Agrium Inc               AGU-T               87.2                   17.5                      5.5

Constellation Software  CSU-T          73.2                   36.2                      6.4

Potash Corp                   POT-T          57.2                   20.2                      6.3

CF Industries                     CF-N         53.4                   32.2                     10.4

Brunswick Corp                BC-N          51.6                  79.8                       17.1

Seagate Tech                  STX-Q         44.0                  57.0                      31.7

Celanese                           CE-N          37.6                  28.9                        6.4

Westlake Chemical           WLK-N        35.4                  25.1                     46.7

Magna International              MG-T       29.5                 16.3                      39.2

Cummins Inc                       CMI-T         29.0                  21.9                       6.8

Broadridge Fin Solutions        BR-N        24.6                 27.3                       5.1

KLA-Tencor                          KLAC-Q      24.6                16.7                       12.6

Ingredion                              INGR-N        23.4                16.8                      10.5

Texas Instruments                  TXN-Q        23.4                18.5                      6.9

Exco Tech                                XTC-T       22.1                15.7                      21.0

Lindsay Corp                            LNN-N       21.1                19.0                        6.5

Hees Corp                                HES-N        20.1                17.1                    15.0

The above are from Canada and the United States and show a variety of industries and many that are not included. In all analysis, the idea with dividend stocks is to lose less money and make more. Looking at your portfolio and these type of companies will give you an indication of how you are prepared for interest rate hikes.

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

The bread men are the family who built an bakery empire for many years expanded North America, Europe and Australia. The company outlined by Bread Man by Charles Davies, Key Porter Books, Toronto, 1987 are the Weston family who started with bread, moved to biscuits and for a while anything added anything that was vertically integrated with the operation. Thus the move to buy mills to mill the flour, shops or supermarkets to sell the goods and al sorts of things in between. There are many stories about how it started and grew to become a global giant however one of them illustrates a point. When Garfield Weston went to England, he found a very well entrenched food distributions system and commissioned a consultant’s report to help him navigate the business. The report highly suggested not doing what he wanted to which was to build a plant to make biscuits. Garfield was not convinced – he had all the biscuit makers marked on a map – coloured coded to determine the size – small, medium and large. He then accounted for sales volume and noticed the big seven did not control more than 60% of the business. He figured that with his methods, modern equipment there was opportunity to be had. It turned out some manufacturers had not updated their machinery; some were getting old and their sons were not interested and would want a buy out; and all the other factors. Soon Garfield was making money and became one of the big seven.

Linking to the dividend paying stocks, all markets are in play but new players unless the moat is very high and barriers to entry are legislated, any other conditions means the company has to be aware of its competitors. If the company is resting on its laurels from the past, expect in today’s marketplace for market share to be eroded and the dividend to be suspended.

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

The story is about the end of World War II in Germany, the city is in chaos, troops from Russia are in Berlin and to the victors goes the spoils. $400 million dollars in bearer bonds go missing – maybe the Russians stole them, maybe somebody else did, however the bearer bonds are missing. The important aspect to bearer bonds is they are not registered to anyone’s name – whoever has them in their possession is entitled to the interest and principal payments. In the present time, bonds moved through the financial worlds in an non issued forum. In the old days, bonds were printed and moved from one institution to another – usually the trust company. Coupons were clipped by hand and gave rise to the saying after you buy the bond all you have to do is clip the coupon. Nowdays, the overwhelming majority is electronic clipping which saves money for the trustee and the owner’s money is deposited into the account on time.

In the book History’s Greatest Fraud by Scott Stockdale. self published 2002, he explains in a land deal, one of his clients wanted to put up some bonds as collateral for the loan. The bonds were German bonds issued in 1924 due October 15, 1959 payable at 7% interest rate and can be redeemed for gold. The issuer was J.P. Morgan and Co. Remembering gold was originally set at $ 35 an ounce and since the price has floated which made the bonds very valuable. In order to accept the bonds, Mr. Stockdale asked the Bank Manager who made inquiries to Head Office who made inquires to New York.

Much has taken place since the 1976 inquiry and Mr. Stockdale ran in many who decided not to pay or redeem the bonds. The bonds were issued as part of the reconstruction of Germany after WW I, since then the world had gone through a depression, a second WW, and reasonably peaceful and normal times after the war. No one was in a position to pay and the officials in Germany were very reluctant to release their lists of serial numbers of bonds that were still outstanding. When bonds are issued, there is a trust fund to pay for the redemption of the bonds, the trust fund had disappeared over the years. Many of the bonds were payable in US dollars, rather than German marks which lead to the question of in the depths of the recession when German inflation had run wild, where had the money come from to repay the bonds. When inflation had run wild, the German government had passed a law limiting the amount of money that could be paid in foreign currency which meant it could not have redeemed the bonds in US currency.

With the court case going on, the law enforcement agencies pressured Mr. Stockdale and his businesses by trying to shut down their livelihood because if the bonds are worthless he was trying to fraud the banks with the use of worthless collateral.

Linking to dividend paying stocks, in every company’s history there is a time it has been offered bad collateral, although on the surface it seemed to be good. Due diligence takes time and although it should be easier at the present time, due diligence still takes time. Often the possible frauds are aimed at smaller businesses because it is harder to tell what is good and what is bad. The lesson to be learnt is try to stay away from fraud because every once in a while the law enforcement will target a company and it will take a great deal of resources to recover even if you are proven in court to be innocent.

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

In North America, a number of generations ago, most families lived in the rural area, now many of us live in urban areas. Although, with high speed internet, the rural areas are attracting people from the cities. The rural areas have less people which is both good and bad – it is good because you can learn who the people are, if you are a city person it can be bad because they all learn who you are. In the city, there are seemingly fewer interactions even though there is more people. If you live in one of the rural towns, ideally you would like to see a company locate and prosper in order the town survives and maybe even grows. The book Capitalism Comes to the Backcountry by Bryan Palmer, between the lines, Toronto, 1994 is about one of those rural towns – Napanee and the Goodyear Tire plant. If you look at any shopping mall parking lot you will see a variety of cars with Goodyear Tires and many will know of the Goodyear Blimp from Sporting events – flying overhead to give the overview of the event.

When any plant comes to a town, before they arrive one of the attractions of the town is access to land at low prices. Generally after the plant arrives the projections of the benefits of the plant sends prices higher for the short term, then real estate prices level off because the benefits of stability does not necessarily translate into rapid growth. Another aspect is the workplace – some companies have unions, some prefer not to have one. When Goodyear moved to Napanee, the number of people in a unionized job was very low and Goodyear closed an union plant to open a non-union plant.

With every industrial location there are government dollars to help – all there levels of government assist in plant locations – from infrastructure dollars to tax abatements to training to grants locating in “underserviced” areas. Depending on the government of the day and timing to elections, the grants, bonds or forgivable loans can and be and generally are very generous.

Linking to dividend paying companies, when these companies expand the government helps and this is when you will wear two hats – as  an investor you want your company to take advantage of every grant or government assistance possible; as a tax payer you may wonder why your company needs government money. Generally your investor side wins out. In order for your company to take advantage of every opportunity, relocating some operations to the rural area, but not too far from an urban area is good thing to do. The goodwill in the rural area will translate to stable operations for the first 10 years and if the company is a good corporate citizen even longer.

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

The next time you are at the grocery story go by the egg section and see how people buy eggs. Many people will buy eggs on a regular basis for one or more of their meals, to use in cooking as the egg is a needed ingredient. For the most part eggs come from factory farms where many chickens are in a barn and they lay eggs. The eggs are collected, sorted and go into cartons to be shipped to grocery stores. Eggs are one of the few products where before buying, people will open the cartoon to ensure all the eggs are in a ready state to be eaten. If you observe how people buy the eggs – some will take the cartoon and not look; some will take a short glance and others will carefully examine each egg in the cartoon. None of the methods is wrong for in the end the person is buying eggs.

Linking to dividend paying stocks, there are many methods to buying stocks and every year the ability to use the methods is easier for everyone. When markets reach new highs it seems everyone is right, because the market went up. When the markets are up even if you threw darts to pick the stocks and they have risen in value, whatever you did was correct, because you are invested. The trick of course is to duplicate whatever you did in the past to pick winners in the future. The easiest method to duplicate is to pick proven profitable companies which pay a dividend. When the company is profitable it should have a higher multiple of trading versus a company not making profits. because at the end of the year it will still be in business. If the company pays a dividend, you can ensure the margins it makes to pay the dividend remains a constant, if the margins are falling, there needs to be other reasons to own the company. Eventually the markets will correct themselves and it turns out profitable companies stock will fall less because how much money the company earns will be a prime reason for owning it.

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

From the book Empire of Blue Water by Stephan Talty, Three Rivers Press, NY, 2007, one of the interesting management stories is the story about the Spanish myth. Spain received great amounts of gold and silver from Mexico and Peru as they had claimed those lands for their own. There is still gold and silver mines in those countries which you can buy shares in. For 150 years Spain controlled Central America and other countries generally left them alone. During that time – Spain had a centralized system which everything was reported to Spain and little was done without the approval of superiors. For many years the system worked well, but similar to all centralized controlled systems, there was little room for creative thinking outside of Spain or in its colonies. The people who became administrators knew how to satisfy the paperwork, but not necessarily how to defend the countries. The myth of the Spanish forces and their ability to defend the area and the mines grew, and similar to myths the affect was to keep away the other European countries.

When the King of England who had ambition but no money, decided to takeover Jamaica, it turned out to be easier than one would have thought it should be. This lead to the privateers and the raids of Henry Morgan. Although Captain Morgan benefited from being an excellent captain, he also benefited from the breaking the myth of the Spanish response. One would have expected Spain would throw vast resources to protect the mines and the gold, but there were other pressing items going on. The vast resources only came at the end of the Captain Morgan’s raids and through a clever deception they were beaten. The raids at Maracaibo and Panama showed the Spanish defenses as limited at best. Part of the reason was the privates were fighting for a large share of the treasure to be taken, while the Spanish soldiers were poorly paid, equipped and trained, and why risk your life for someone else’s treasurer?  The soldiers were at the posts, but would fear the pirates reputation, and soon the pirates would leave and things would return to normal. The myth of the Spanish empire was not the reality of it. After Morgan’s last raid, England and Spain agreed to a truce where Spain would not have a monopoly over trade in the Caribbean, England would keep Jamaica and Spain sent money to England to stop the pirates from operating. (it turned out in 1692 the place where the pirates were operating from – Port Royal in Jamaica was struck by an earthquake happened off the coast sending a tsunami (large waves from the sea at the town) and the town was destroyed.

Linking to dividend paying stocks, all companies which have enjoyed success are profitable and pay a dividend build a myth around them. The myth is the moat which keeps away the competition, many times the myth matches the reality but sometimes the myth and the reality do not match. When that happens the competition begins to take away market share, and soon it is easier to do. When that happens, the myth and the reality are a mismatch and the company will be in restructuring mode. As shareholders part of your task is to ensure the reasons why you bought the shares including paying a dividend remain a fact not a myth.

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

From the book Empire of Blue Water by Stephan Talty, Three Rivers Press, NY, 2007, one of the interesting management stories is pirates were pirates for one reason – plunder or gaining the most treasure as possible. When the pirates raided a town, there was usually a fight, but in preparation for the fight the town’s treasures were hidden or most was hidden. Pirates were semi tolerated by the local population because they came in for the money and left for the town to rebuild. If you stayed alive you could rebuild and perhaps fortify the defences for the next time. This lead to different management styles of the pirates – the extreme was Francis L’Ollonais who was a great strategist, innovator, achieved results and was a complete sociopath. He enjoyed torture, killing people by beheading them and a host of other type of activities. The result of being a sociopath was the locals talked about where the treasures were, as well as giving information the pirates needed. After a short career, he was captured and dismembered because the enemies hated him so much.

Other pirates used some of L’Ollonais’ techniques but they did not enjoy the torture as much as he did. If you are fighting the opposition, one can expect some degree of breaking the law or breaking the normal traditions of the industry. If you want a short career follow L’Ollonais example. Captain Morgan learned lessons that sometimes you need to show you can follow the L’Ollonais’ example, but 99% of the time you do not need to in order to achieve results. In Captain Morgan’s raids – preparation, as much inside information as possible (Morgan used former prisoner’s insights),  confidence to always act if you have the upper hand even if you do not and daring with get you the results. Part of the inside information is learning how the opposition will or should react – what are their normal policies and procedures? How well prepared and battle ready or tested are they? Between 1663-1670 Captain Morgan 4 largest raids were on Granada, Portobelo, Maracaibo and Panama each time millions of dollars for the crown, himself and the pirates.

Linking to dividend paying stocks, one of the great attractions to the companies is they have a established market share which generates profits to pay dividends. There are always alternatives and potential changes in the marketplace. In the case of companies, remarkably few people will die from the financial battles, but there are battles nevertheless. As a shareholder you need to assure yourself the senior management and largest shareholders are not sitting back and enjoying the fruits of their past labour and continuing to maintain their market share. If they are fighting for you, as a smaller shareholder, you can sit back and enjoy the fruits of their labour.

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

When Columbus discovered Central America looking for a faster route to South Asia and the spice trade, he was more of a diplomat, than takeover artist. He established the presence for Spain and on the next round of ships Cortes and others came looking for gold, the takeover artists of the day. At the time Cortes had newer and better fighting tools (the gun), the positive value of opposition to the Incas (who treated non Incas very badly) and great ambition to find the sources of gold. In the end Cortez took over the Inca empire for Spain which resulted in the country of Spain jumping to become the most powerful country in the world. According to the book Empire of Blue Water by Stephan Talty, Three Rivers Press, NY, 2007 from the gold mines of Mexico and Peru between 1500 and 1650 approximately 180 tons of gold flowed through the official port of Seville. In addition 16,000 tons of silver came through Spain. One of the affects of this gold and silver was Spain opened a mint in Mexico, the mint produced over 2.68 billion coins and the world used the coins as common currency. The Spanish coin was called the Spanish piece of 8 and you may remember stock prices were quoted in 1/8.

As time went on, the King of Spain Phillip IV was dependent on the gold and silver to pay for the country’s bills. This was great while Spain had control of Central America and the Seas to transport the gold and silver back to Spain. However, things began to change in 1660’s, first the King of England was broke and lusted after Spain’s gold, he  decided to send the navy to takeover Jamaica. If you draw a line across the Atlantic Ocean between Central America and Spain, the line goes through Jamaica or it was a strategic asset. The British takeover of the land of Jamaica and the giving of letters of marque or letters of commission or what is now termed diplomatic immunity which gave captains and the crew the ability to behave similar to pirates, as long as the crown received 10% of the treasure. The captains of the crew similar to many people decided they were prefer not to pay taxes or commissions to any crown became pirates. One of the most important pirates of the era is Captain Henry Morgan, you may know his name from a bottle of rum.

Linking to dividend paying stocks, in this case, Spain had a monopoly on the gold and silver trade, its balance sheet as long as gold and silver came in, there was little worries outside the normal weather concerns. When the conditions changed, partly as a result of Spain not keeping pace with the potential attackers, for example one of the ships travelling back and forth was designed to carry paper work, similar to now, most accountants are not expected to shoot guns to protect the paperwork. The people on the ships were government employees, not navy fighters, but they did ensure the paperwork was done. If you go to a meeting where the company is concerned more with the paperwork than fighting off its competiton, expect the market share to fall and be prepared to sell your shares.

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