In the manufacturing of vehicles, the companies have to look forward because it takes time to retool a plant to churn out vehicles to meet customers demand. According to Nick Carey and Joseph White of Reuters, GM recently reported in expects sales in 2018 to be similar to 2017, but the big year will be 2019. The average American consumer continues to buy pickups, SUVs and crossovers and by 2019 those vehicles will have been retooled so they will produce higher margins for GM.

The higher margins come from increased production of higher priced 4 door crew cab trucks and expanded sales of luxury truck models. The Denali line of trucks with an average price of $55,600 is higher than Mercedes Benz and Cadillac.

GM will increase investments in electric models (the auto industry believes 95% of vehicles selling by 2025 will be internal combustion and by 2030 electrical vehicles rises to over 10%.)

GM did not have billions of money offshore so will be giving employees bonuses other than the normal profits sharing pay formulas.

If you own a GM product and it is slow selling, GM will quickly replace slow selling sedans.

Linking to dividend paying stocks, in the 1900’s what happened in Detroit first with Ford and then GM had a large affect on the national economy. The car companies are still important, but as robots replace humans the affect on states and cities to have an auto plant in their community is lessened. There would still be large interest, but not nearly as much as Amazon had for its new headquarters. The world changes and investors must change with it. Autos and the industry are still important but it is easy to have alternatives. Keep the old companies, but watch the risk reward equation.

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

 

In mid January, Apple which has $252 billion in bank accounts outside of the US, announced it had plans to bring back the cash to the US. In an article by Alex Webb and Mark Gurman of Bloomberg News, Apple noted due to the lower tax rate, it would still pay $38 billion in taxes. In addition Apple re-announced plans to spend money on new campus for 20,000 jobs, data centers and possibly manufacturing.

The new tax lowers the rate cash will taxed at to 15.5%, less liquid assets at 8% and companies can pay the treasury over 8 years. Apple had the largest offshore reserves on any American company. Apple which traditionally sources near 100% of its manufacturing outside the US, will be spending up between $1 and 5 billion in the US to be considered American made.

Linking to dividend paying stocks, the passing of the US tax cut was a gift to companies similar to Apple for the large tech companies were selling and keeping their funds offshore or outside of the US. While you can debate whether it is good for the US economy or not, it is definitely good for the companies. As investor you need to see if Apple has an extra $200 billion in cash it needs to do something with it – higher dividends, stock buybacks, research and development, mergers, etc. The first two will benefit you if you own the stock directly or through funds that hold large shares of Apple. Given the company has in excess of $200 billion to use, this means the risk reward for you is lower and Apple remains a multi year hold.

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

In Britain the name Carillion means construction and all over England you will see the name. Carillion started as a construction company and gradually built up to be a service company and construction company. The company was in a growth mode and felt it could do everything it wanted to. The reality was service contracts with the government means the government pays and it is steady income but many contracts called for large cash outlays upfront. The difference was debt. In addition, the company took on too many unprofitable contracts, in English terms they were building a Rolls-Royce but only getting to paid to build a Mini.

In 2016, Carillion had a net debt of $978 million, six months later the debt doubled and together with a half billion pension deficit means the company is going to be liquidated. There was good news, last September they had a plan, but the debt only went from bad to worse. An explanation was the company was in so many businesses, there were too many layers of management resulting in complete lack of line of sight accountability. The company was hampered by insufficient transparency and overinflated group overhead and a business with no sense of what to prioritize and how.

Its main construction division struggled with 4 major projects and did not monitor its accounts receivable so no money was being collected, or the need for more debt.

Linking to dividend paying stocks, growth is wonderful unless it is financed by debt. Debt is terrific if it can be paid, the rules which make life easier at the individual level also make sense at the corporate level. Collect more money than you pay out, operate at profit then the company can weather storms. If not, bankruptcy is on the horizon.

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

 

In mid January, Wells Fargo the biggest bank in California reported its 4th quarter earnings. The cloud over the generally profitable bank is legal expenses and expected pay outs over the mortgages and sales practices. For a number of years, the President of the Bank believed customer should own at least 10 products, even if they did not need them. Many people were given the products, very few were asked if they wanted or needed the services. The result is the bank’s expense ratio topped 60 cents on the dollar and needed to be reduced.

The bank is trying to slash $4 billion in costs or striving for efficiencies. The Efficiency ratio as reported by Reuters is revenue divided by expenses was 76 cents on the dollar. Wells Fargo has a target of 55 to 59 cents.

Wells Fargo is primarily a US lender and will not benefit from the tax cut on bringing back revenues to the US, they will benefit from the cut in corporate rate.

Linking to dividend paying stocks, if Wells Fargo can lower its expense ratios, then the stock should perform closer to the average of its group. For many years it was above average performer and the new tax cut will give it a boost.

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

In mid January, JPMorgan Chase beat Wall Street’s 4th quarter earnings expectations. The bank is the biggest bank by assets and although this year had to do one time charges, next year is expected to save billions of dollars in the tax cut from 35 to 21%. The company as reported by Sweta Singh and David Henry of Reuters hopes more companies will borrow more, do more mergers and acquisitions (M&A) and boost revenues for the bank. The bank expects the tax savings will boost profits for it and then it can increase dividends and stock buybacks.

The company is not expecting to bring back money into the country because it has capital and liquidity requirements. Net revenue rose 4.6% to $25.45 billion which was higher than $25.15 billion. If JPMorgan’s reported under the new tax code, if it has similar results earnings per share (EPS) would have been 17.5% higher.

Linking to dividend paying stocks, the tax cut gave a gift to the largest corporations and while it could be argued that it was foolish, as an investor you need to ensure you are going to take advantage of the gift. There are good ETFs to buy the largest US banks which are low fee and will move up as the banks report higher earnings as they pay less tax.

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

In all industry there is a benchmark stock, examine it to see the trends in the industry and how is it doing. If you want to know about phones and music check Apple; you will still need to do additional research but knowing how Apple is doing will tell you things about that industry. One of the upcoming fields is Artificial Intelligence or AI and every day we seem to hear more about it. According to Scott Barlow, he believes the benchmark stock of AI is Nvidia. The company is a semiconductor manufacturer specializing in graphics processing units (GPS) to handle visual data and currently the majority of revenue comes from the video game industry. Remember the video game industry generates more revenues than movies, to be a leader means the company is big.

Citigroup analysts believe AI will grow from $8 billion to $47 billion by 2020. At the moment the purest play is Nvidia. Whether you own the stock or not, it is worth putting on your list to understand. The stock is up 125% in the past 3 years and 58.8% of revenues comes from the gaming industry. The other part of the company is what Mr. Barlow believes is important.

At present the Data Center generates 12% of revenues (this is the big data analysis aspect of the company) and auto is 7% of revenues. If you believe automobiles will be self driving Nvidia will be a big reason for the success.

Mr. Barlow points out 3D printing was supposed to be a big profit area, but it is not.  Maybe AI will be the be all and maybe it will not be. If it is Nvidia will play a significant role.

Linking to dividend paying stocks, every industry has a benchmark for you to determine what is good or not so good. We all look for them and for new industries we need help in determining what is good and where to begin. Whatever you earn your income, you will or should quickly learn the benchmarks in your industry. A classic example in the banking industry is the loan loss ratio – is it rising or falling? Ideally AI can help with that.

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

 

President Trump cut corporate taxes from 355 to 21% and cut the cost to bring back money or repatriated cash from outside the US to 15%. For many large companies, this will mean the next two years profits will rise without doing anything differently than they are today. After two years, regular market forces will be of primarily concern. The strategy is how to take advantage of the extra money corporations will receive? Analysts are trying to figure out where the easiest place to park your money and receive the low hanging fruit?

In 2004, 79% of the money went into stock buybacks and 15% went into dividend increases. The numbers will change a bit but many analysts are comfortable with the 70% range of stock buybacks.

Scott Clayton of TSI Network did a chart which helps you to determine where should look:

Company          Mkt Cap   1 Yr Total  Foreign Cash   Foreign Cash   Dividend   Dividend

$bil         Return %   Holding            Per Share         Yiel    Sustainability

P&G                    231.00        8.4                15.0                    5.91                 3.1             Highest

Microsoft           680.6         40.2              132.1                 17.12                 1.9             Highest

Apple                  886.8          46.3             252.3                 49.60                 1.4             Highest

Coca-Cola            197             12.3              24.9                    5.84                 3.2             Above Avg

Cicso Systems      196.2          31.4             69.1                   13.98                2.9             Above Avg

Amgen                  133.1         15.2               38.9                  53.58                2.9           Above Avg

Pepsi                     167.9          15.2               17.5                 12.31                2.7            Above Avg

Oracle                   203.1           26.2              58.5                 14.13               1.6              Above Avg

Gilead Science     102                4.9              32.40               24.80                2.6              Above Avg

Total                                                              $640.7 Billion

Tech giants Apple, Microsoft, Cisco and Oracle have $512 billion in overseas bank accounts. What will they do with the money?

Linking to dividend paying stocks, every once in a while comes a gift or low hanging fruit, if you do not own the tech companies individually, you need to own them in a ETF fund or fund which you like and you can hold because the money is likely to come back into the US and the Boards will have to do something with it. Earning a better than average return with low risk is a great thing.

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

 

 

 

The changes in corporate tax from 35% to 21% plus the decrease of tax on money held outside the US to 15% affect companies differently.  The first part of the changes is companies will report lower earnings, but if they manage to do nothing differently and end up with the same market share, their profits will be up 15%. In the economic texts or basic books about economics that is not taught, because it is a one-off or bonus to the company.

The biggest private sector employer in the US is Wal-mart and most people have visited and shopped there for 90% of Americans live within 10 miles of one of the 4,700 stores.  It is hard not to shop there. In mid January, Wal-mart as reported by Nandita Rose of Reuters Wal-mart is raising the minimum wage in the stores. Wal-Mart employs 2.2 million people globally with more than 1.5 million in the US and global revenue was nearly $500 billion.

Their explanation for the increase was due to the tax code changes, but it reality it is because there is a tight market for low wage workers. Wal-Mart has traditionally paid the bulk of its workers (in the store) at the lowest rate mandated by the state. Initially people apply to work there, but because it hard to meet the bills, Wal-Mart has a high turnover of people. One method to keep people is raise the pay. If someone is at the lowest rate, they likely have another job and once that other job offers more hours, the lower wage company suffers. Edward Jones analyst Brian Yarborough said, given how low unemployment is, Wal-Mart was expected to hike wages, the tax bill made it easier.

Retailers in general have one of the highest effective rates because most of their operations are within the US. It should be noted with 4,700 stores, Wal-Mart constantly adjusts their stores and recently closed 63 Sam’s Clubs.  Wal-Mart is expected to save billions from the tax cut.

Linking to dividend paying stocks, while we all hope the company is a good citizen both from a corporate point of view and paying their employees, Wal-Mart has traditionally been a better company to own than work for. It is a place where many shop for low prices – many of the products come from China (and the President does not seem to connect the trade imbalance with Wal-Mart bringing in manufactured goods).  The model for Wal-Mart because it has and continues to work is something to be studied and learned from but do not buy the platitudes of how it values its workers.

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

 

If you are reasonably normal person, you will like snacks. Sometimes you eat them too much or think you do, but they often seem to go with events or watching TV to make it better. Recently was in the library and pick up a book about A Canadian Food History guide to Snacks written by Janis Thiessen published by the University of Manitoba Press, Winnipeg, Manitoba, 2017. Similar to many people who read the book, most of the snacks discussed were never eaten but listing to older people they remember old snacks they use to eat. Not sure if generation X will remember the difference between the Mars bar or the Hershey’s bar but many years ago there were regional snack makers.

In the book, the author included both the food history and the labor history – what was it like to work there? How were the products made and sold? In reality, although the industry is dominated by giant corporations who recently have been buying the natural food snack the industry has not changed. The distribution systems have changed – the history was there were more shops and the sales representative job was not just to show product but also teach how to display and strengthen the individual store. There are many stores which still exist but most of them are now chain convenience stores. The old days most of the stores were independent and could make a choice of whether to carry a product or not. Many of us now go into chain grocery stores to do most of our grocery shopping which changes the distribution channels and methods.

In the book, many og the companies have disappeared partly because of competition, partly because to stay in business a profit must be made and partly because the larger companies have more clout and sometimes they will source their products through 3rd party companies and sometimes they will buy manufacturing plants to service their needs. The  companies still must make a profit to stay in business.

Linking to dividend paying stocks, as people we all need to eat and every once in while somebody cooks a little better than everybody else. The idea forms either to stay small and local or expand to regional or national levels. The expansion takes different skill sets and different expectations. In also means different forms of competition, typically as a dividend buyer we tend to favor established companies – the big ones which have many advantages before them and their job is to execute. It is great if you have memories of different services, but ask yourself did they make money?

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