Normally the US Presidential election is a toss up between 2 equally good people and within reason you know what to expect. This year one of the candidates has a knack of throwing into the mix something no one expects which has meant one is less predictable than the other. When you are investing for the longer term, the less predictable although interesting is not desirable. Given much of the world’s events are less predictable what should you do?

Julie Michaels of Morningstar Group has an idea in terms of trying to find those undervalued companies with the potential to continue growing.

She started with the S&P Index, picked companies which have a dividend and the other criteria are:

forward reinvestment rate (the rate the company is expected to reinvest earnings back into their business)

forward price to earnings

earnings variability (in percentage terms around the 5 year EPS)

price to book

5 year beta against S&P 500 index

price changes from 6 months ago

Company                    Fwd      Fwd reinvest  Earn   Trailing      P/B     Beta      6M price     Div

P/E             Rate (%)      Var       ROE                                     Chg (%)       Yield %

Wyndham World      11.1             63.4            2.5        64.9         10.4      1.2        -3.9               2.9

Western Union           11.3            43.8             5.8      63.5            7.8      1.2         -1.1                3.2

AmerisourceBergen  13.9           53.1             7.2       78.0           9.6      0.7        -4.7               1.7

Rockwell Collins        15.0           26.9           2.2        35.3           5.3        0.8        -4.6              1.6

Scripps Networks     11.6             30.2           3.1        40.0          4.3         1.2         -1.1             1.6

Foot Locker                13.0             21.7           3.1         23.9          3.6         0.6          10.5           1.6

Robert Half Intl       12.6             26.8           3.2         35.8           4.8       1.0           -0.7           2.3

Northrop Grum       19.1              25.6          1.8          30.3            7.1       0.7             6.4          1.6

Aon PLC                     15.4              28.9          2.6         28.9           5.4        1.0             5.2         1.2

Torchmark                13.6              10.3          1.7          12.2            1.6         0.9          11.1         0.9

Linking to dividend paying stocks, in this example all 10 stocks are dividend paying and in Ms. Michaels chart in the Globe there were more companies. From the data, you can receive as much metrics as you want and more. There is no shortage of metrics to try to determine which stock to buy or not to buy. If you were to go through the list you could add why the industry is in favor or not, but the important aspect is they are all consistent money makers and likely will be around for many more years to come. At least your money is protected and it will accumulate through dividend payments as well as capital gains. Charts like this one is useful to narrow down your list to what is important to you.

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

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Many people have heard of Spartacus who lived in the calendar year 72 years BC, he was a slave in Rome. Roman Italy was based on strong families in the Senate, a very well trained army and millions of slaves doing the work in the fields and construction. Now days we have machines, Roman Italy had slaves. Similar to all people, some slaves were do doubt treated better than others, however there were many slave. Spartacus was an entertainer and his job was a gladiator. Gladiators fought in the forum and one or more people involved in the activity was expected to die, if they lived, they would fight another match in the coming months. For a number of months, the roar of the crowd, the fans would cheer for their favorite, but the gladiators were slaves.

Spartacus organized a breakout from his training base and were quickly joined by many other slaves (it was estimated the group grew to over a 100,000) . Spartacus went south towards Sicily but never made it, they went north through the mountain passes but never crossed the Alps which is the northern border of Italy and ended up in a battle south of where they started from. The problem with Spartacus was what did he think Rome was going to do? where did he think he was going to be able to live in peace? Rome sent a legion who underestimated the resolve of Spartacus and the people with him to be a free man. Spartacus had served in the military (knew what the military would do – how it set up camp) and together with the agility of the people he used the terrain to defeat the Legion. Over the next year, they kept legions away until Rome decided it was the time to kill all who were with Spartacus. In this instance, because the Roman commander had time on his side was able to pick and chose where he would fight and given the better tools of the military, he was able to kill Spartacus and his followers.

Linking to dividend paying stocks, many companies and people will have a reason to fight but they forget what do you think the big institution will do? rollover and sleep? or fight to the end? There are reasons in the company history of how the company achieved the size it did (no it did not have the best products, but it monopolized something – the distribution system; etc). When a company has become a dividend paying company, the expectation is it will continue and if the executives make a mistake they will be replaced by hungrier executives. Their first job is to keep the reasons why the company makes money – it monopoly? its control of the distribution? something. Your job is to understand what that is and to ensure the company is willing to fight for it.

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

Joel Peterson has a variety of jobs over the years and decided to write a book about trust because in our economy we see a lack of it. Mr. Peterson teaches at Stanford; is the Chair of JetBlue Airlines; runs some private equity positions and is an interesting speaker – you can see one of his presentations on Google Talks on You Tube.

Trust is one of those elements a free society is founded on and when done well – it elevates everyone around; when done poorly everyone feels betrayed. Therefore it involves a balance. Trust is one of those intangible elements where it takes a lifetime to build up, but can be destroyed in a single act. Then it depends on what the actors do to begin to build it up once again.

The definition of trust is seeding authority to another or giving away some control.

In many times there will be minor betrayals because we are human – the best response is to nip it in the bud or try to get to the root cause and understand why the person took the action they did. If it is a major betrayal, it will be tough to overcome; for individuals it may takes years and the only time you will be over it is when you can think of the future rather than the past.

For a company – the words and actions of the leaders must sync up. Companies all have value statements – in a crisis do the values and actions link? If they do not, the company will have major problems. If they do, the people in the company will be better. Part of communication is using the two ears, one mouth or listening to people. When you communicate – do not just communicate the good stuff, do not put a positive spin on the bad. People will see through the words – be honest, as open as possible and care about people so they can act properly. Mr. Peterson believes in the power of accountability which means give trust incrementally and measure the results. As people deliver on their actions, then you can give more trust and measure the results. In this fashion, it is good for people to played and worked on teams – you have to trust your teammates to do a good job. For management it is a continually process of who you want on the bus and who you do not want on the bus. Mr. Peterson believes leadership can be taught or learned.

Mr. Peterson gave an example of JetBlue. At one of the airports, a forced landing happened and one of the attendants got off the airplane before the passengers. One of the core values of the company is safety (its number one value). Every Monday Jet Blue sends an email to every employee and the issue on the next Monday was it asked its employees what should happen to the person that went off early? The overwhelming response was the person broke the safety value and should be dismissed. The person was let go.

Trust starts off with good character then you have to add on competency. Competency means the ability to deliver the results including the authority to act. In the case of JetBlue – Mr. Peterson often asks a training sessions do you believe the pilot is of good character. The usual answer is yes. Do you believe your mother is good character. The answer is yes. Do you believe your mother could fly the plane? The answer tends to be no. Just having good character is not enough, they have to have the ability to do the job.

Living the values is what values do you commit time, money and mental energy on? If those three things are what the company says it values are then the values are what the company says they are. If the time, money and mental energy is something different then the values of the company are different. The values of company are the values of the people who work there. One method to determine the values is ask what does winning look like?

How do you know a person should be taken off the bus? There tends to be red flags  always asking for confidential information; lack of transparency; holding information close to the chest; giving spin information; someone who never asks but always knows it all; not a team player.  What happens if you work for someone like that – Mr. Peterson believes it is very hard for people to change their values which leads to your solution of change internal jobs or move to a company which has your values.

Linking to dividend paying stocks, we trust the management will continue to act in a good measure for their company has been in operation and profitable for a number of years which allows them to pay a dividend. While we hope no major crisis will occur, they usually pop up from time to time, it is what does during the crisis which is important. If they performed to our expectations, the company will likely come out stronger and the stock is worth holding. If they did not do what their values say, it is time to look for alternatives.

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

 

 

 

What does a diversified portfolio of 10 stocks really look like? Ian Tam of Morningside Research offered an opinion. Morningside Research provides independent investment research around the world and from its data base, Ian used the following criteria:

Market cap (the larger the better)

Dividend yield – needs to be paying a dividend

Variability of earnings over 5 year period – looking for consistency of earning money

Quarterly Earnings Momentum (QEM) – the latest 4 quarters of reported earnings compared the same figure one quarter ago

the Return on Equity (ROE) which is a profitability measure

Price to book multiple ( a value based ratio)

Company        Morningside Sector       Mkt Cap   Div.    Earnings    OEM   ROE   P/B

$ Bil           Yield    Var %         %          %       Ratio

GM               Consumer Cyclical            49.044      4.8          23.1           10.5      24.1      1.2

AT&T           Communication                242.142      4.9           2.8            0.3       14.5       2.1

Cisco             Technology                       152.636       3.4            2.2           1.7        19.5       2.5

Altria             Consumer Defense        122.428      3.9             1.5            2.4    200.2     62.9

Pfizer           Healthcare                         198.286      3.7            3.4            3.4         23.2       3.3

Southern     Utilities                                 48.106     4.4            3.0            0.9         12.9       2.2

AMEX           Financial Services               55.500    2.1            2.5              2.3         24.9     2.7

GE                  Industrials                           259.696   3.2           14.9           18.9        11.0       3.1

LyondellBassell  Basic Materials            33.332    4.2           10.2          -3.4        62.7      5.7

Enterprise Prod   Energy                           56.615    6.0             7.9           -3.5       12.9       2.7

 

Linking to dividend paying stocks, the above stocks are some of the companies that power the economy every year and play important roles in their sectors. In Mr. Tam’ s research if you kept these types of companies you would have better the index fund by 3%.The fact they pay a dividend and are profitable allows them to trade at higher multiples and that is good for you.

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

 

Prior to September 8th, if you had asked what is the best US bank stock to own one of your top choices would be Wells Fargo led by President John Stumpf. The bank specializes in residential and commercial loans and more importantly did not have to write off billions of mortgages due to the mortgage back securities downfall. The bank seemingly did what was right thing for banks to do and consistently earned money for its shareholders. Then on September 8 it revealed the bank had let go five thousand people who had entered 2 million names for products and services without authorization from those 2 million people or customers. Perhaps the bonus or reason for doing it was to increase existing customers using Wells Fargo services. If you had a mortgage you were given a credit card or line of credit or something where fees could be charged, since September 8th Wells Fargo paid a fine for opening the accounts. The fallout has been the stock fell from the low 50’s to the low 40’s and senior management has been concerned about this issue for the past month and will have to deal with it for the next few quarters and new faces in the executive suite. In the banking business as well as the service business the business you are selling is trust, integrity and reliability. If the first two go – the trust and integrity then people will quickly look to alternatives and there are many. It will be a very hard sell and will need a number of new faces to regain the past trust.

Linking to dividend paying stocks, it is accepted these stocks have a long history of paying their dividends as they are profitable companies. In every business, there are areas of the business where the selling is hard and gaining market share is critical, so things happen. The difference is with dividend paying companies, they should have been through that cycle and not have to do what Wells Fargo did. The consequences means doing everything perfect for the next few years (which many institutions rarely do) and trying to regain the trust of its people. Essentially someone has to contact all its profitable customers to retain the bulk of their business with Wells Fargo. It can be a very good thing to do – if done right and there maybe some customers who will increase their business because of the reaching out. No one can predict what happened at Wells Fargo, but there is expectation the bank could come out of the woods knowing what can not be done in the future.

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

 

If you look to the sea where ships roam the world, the adventure is the romantic part and the reality is the Captain is lord and master of the ship. Given most people are good people or at least try to be good, what happens if the Captain gives out back lashes (whippings) at little too much? In the case of a ship called Hermione which belonged to the British and sailed the Caribbean Seas – the crew eventually killed the Captain and a few people the mob did not like for reasons of their own. The story is told by Dudley Pope in his book The Black Ship published by J.B. Lippincott Company, Philadelphia and New York, 1964.

To read a book such as The Black Ship is try to understand about leadership and ramifications of the actions of the crew. In the world of British navy, whom your father was often led to the ability to captain a ship. In the Navy at that time, if the Captain caught the enemies ship (Spain or France), they had a right to a percentage of the spoils and if the
Admiral gave the easiest routes to those favored captains. In the case of Hermione and her Captain Pigot, the ship (she) was given the heaviest and easiest travel routes to plunder. The problem was Captain Pigot as written by Mr. Pope was determined that his ship must appear to be the smartest in the Fleet: thus every manoeuvre had to be carried out as if the Admiral was watching. Speed and blind, unquestioning obedience: these qualities he demanded from his officers and men. He made the mistake of confusing speed with efficiency, and terrorized obedience with loyalty, he produced a ship which was not an effective fighting machine, though neither he or his boss realized it. Real leaders produce seamen who were efficient, and speed was an automatic by-product, and were blindly obedient because of absolute trust of leaders.

Once Pigot decided upon a course of action he could not change it: he pursued it to the bitter end, regardless of whether it was right or wrong. Making ill-judged and impulsive decisions and sticking to them rigidly, without a moment’s thought of their effect on the future, meant he lived in the eternal “now”; he acted his part for today without realizing that there must inevitably be a tomorrow, a time of judgement and reckoning.

Captain Pigot was obsessed with the minutiae of discipline so small-minded that he investigated the most trifling alleged failure of duty with an obsessive and terrifying thoroughness more usual in the Inquisition and Star Chamber.

Captain Pigot was not a pleasant fellow to work for particularly if he decided he did not like you and he had his scapegoats for punishment. The crew eventually rose and killed Captain Pigot, which to all of them felt relief then the other story happens. What would happen to them? They sailed into a Spanish port – many of them were thinking they would take the next merchant ship to America and be free. It was a good thing the Spanish were bringing in gold from Mexico and Peru because if you do not like bureaucracy, going to a Spanish port to get permission takes time (lots of time) for Spanish Governors were not expected to make impulsive decisions or many decisions at all. They were to consult Madrid and the volumes of books that outlined procedures to possible decision making. As the time began to move, the documents of who was on that British ship were making its way through the British Navy Headquarters and they did not like those who left their posts early and wanted their ship back. Sometimes one wonders which was more important the ship or the leaders of the revolt. It took time but the leaders of the British Navy fought a battle to get their ship back; half the crew  including the leaders of the mutiny were tracked down and hanged, the lesser members of the crew disappeared into the wilderness.

Linking to dividend paying stocks, lessons in leadership are found in all industries, very often leaders wanted loyalty from their workers without understanding it has to be a two way street and a paycheck while good is not the main reason for loyalty. It is one of those strange things, where people ask if you were a millionaire would you still work here? yet in large companies where the senior people are compensated towards a million and more they still work but yet few ask why are they still working, what motivates them?  As an investor you want your companies to earn profits and pay dividends and have the leadership motivated to continue along with all the employees working for the best of reasons.

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

 

If you think about Las Vegas, the gambling and hotels, one company dominates the top  line hotels Steve Wynn’s Wynn Resorts. Over the years, Mr. Wynn has given advice of how he has been successful in the business.

1. Love the Process – every industry has its ups and downs, if you love the industry through the cycle you will do well.
2. Do Not Be Reckless – it seems strange from a gambling house owner that his second rule is do not be reckless, however in business you need to fly with a net. In order to do that for major projects – check and recheck your fundamentals and options so that when (not if) the cycle of your industry happens you can continue to finish the project. Put in a capital structure that allows you not to bet the farm on the project.
3. Raise People’s Esteem – in business you will have people working for you, if they feel good about working for you they will be more productive. One method is to celebrate their stories – in the case of Mr. Wynn he runs hotels, what is the difference between his hotel and another one? its people. What he does is anytime someone goes beyond the call of their normal duties – it is celebrated and recognized for all employees in the lunchroom, the employee website, everywhere possible.
4. Try New Ideas – start small, but be open to new ideas, over time your business will be different.
5. Give the Best Guest Experience – Mr. Wynn is in the hotel business and gambling in one example 55% of his revenues came from gambling; the other 45% from hotel and food operations. Giving people the best guest experience allows for repeat visits.
6. Be Consistent – for both staff and guests the policy for all parts of the economic cycle is consistent good service. It is easier if the economy is doing well. people feel better, however the guests still need to be served in the down times.
7. Love What You Do – if you enjoy your work and frame it to helping the customer life is easier
8. Help Others – use your business to help people in the community
9. Stick to Simple Ideas – make the experience a WOW one consistently.
10. Create a Family – when you survey the people working for you, the reason they work is for a job, the reason they stay is …..

Linking to dividend paying stocks, Mr. Wynn gives good rules that any business can duplicate for all business have guests and employees. For Mr. Wynn it means to live those values on a daily basis and you can see or check to see if his company is doing it. For the companies you invest in – they all have customers and need repeat business and you can see if the companies are who the customers want to continue doing business with. If they are, that is good; if they are not if alternatives come in the marketplace people will gravitate towards them.

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

In the 1800’s the name Napoleon sent shivers down the spines of Europe – if you were French you had shivers of greatness. If you were another country, you had shivers of the French coming to your country. For a time Napoleon was the most powerful leader in Europe and the Louvre is a testament to his sacking of Europe and bringing treasures back to Paris. In Napoleon’s mind Paris was and should be the most powerful capital and the leaders of other countries would have residences in Paris to see him. For Royalty in Europe (most countries were run by Princes and Kings) anything that went out of Paris was brought back to their capitals. As leader of France, Napoleon saw himself better than the rest and this was reflected in his dealings with other country heads of state. As time goes on, some of the other leaders including Alexander in Russia feel snubbed and relations change. Napoleon and Alexander admired each other, and Napoleon would rather fight the British, but Russia was becoming a thorn in his side and they went to war. The story is Napoleon lost and the question is why? Some of the answers are told in the book Moscow 1812 – Napoleon’s Fatal March by Adam Zamoyski published by Harper Books, NY, 2004.

There are many different reasons why Napoleon lost including making mistakes in battles along the march to Moscow. He marched from Paris to Moscow with hundreds of thousands of troops, but did not conquer Russia. Moscow was important to the citizens of Russia, but the administration of the country was in St. Petersburg. Napoleon was friends and admirers of Alexander and did not see him as an enemy. The troops left in the spring time but were not prepared or expected to stay in November when the winter comes to Russia. War was changing from human to mechanical; thus tactics were changing. Also something was suppose to happen when Napoleon made it to Moscow and little did.

Linking to dividend paying stocks, when a great leader loses battles we wonder why? what was different? why that battle and not others? Continual learning is a good thing – in terms of Napoleon early on the march to Moscow he could have destroyed the main Russian army but waited till the next day and by that time they had retreated to live another day. He went after Moscow but should have gone for St. Petersburg, perhaps the question is what did he hope to gain in attacking Russia? or what was his clear objectives? If you can ask the questions about historical campaigns you can ask the questions about current campaigns from a commercial point of view.

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

 

Every day and quarter and year data is accumulated to measure different metrics to try to out perform the market. Ian Tam of Morningstar tried a theory which seems to work. He started with dividend companies; and tested going back to October 2006 or 10 years of testing to find if you bought these companies you would earn a return of 10% for a low risk strategy. The only time a company needed to be exchanged was if the stock fell out of top 30% of the ranked universe or the payout ratio exceeded 100%.

The criteria he used was:

market capitalization – higher the better

dividend yield relative to the sector median ( the stock’s yield minus the median yield of the sector to which the company belongs)

Dividend payout ratio relative to the sector median ( a low number is a good number)

Debt to equity ratio less than that of the sector median

Company              Mkt Cap      Yield Rel to       Payout        Payout Ratio Rel    D/E Ratio to   Div

$ bill              Sect Med.           Ratio %      to Sec Med              to Sec Med      Yield

AT&T                    248.848          4.26                     63.58          57.54                         0.8                     4.75

Pfizer                    207.081          3.51                     44.44           44.44                        0.94                  3.51

Phillips 66             41.357         3.19                      43.83             43.83                       0.41                   3.19

Exxon Mobil       352.796         3.53                      68.18             68.18                       0.23                  3.53

Valero Energy      25.922         4.27                     43.72             43.72                       0.42                  4.27

Abbott Labs          60.446         2.53                     42.28             42.28                      0.56                  2.53

Carnival Corp       35.658          1.87                     37.33              20.08                   0.48                    3.01

Accenture               92.688        1.99                     37.64             37.64                     0.01                   1.99

General Dynamics 46.451       0.96                     30.37             12.76                     0.43                   2.00

Honeywell               87.713        1.02                       32.94            15.33                     0.83                   2.06

Linking to dividend paying stocks, after you believe the company will continue to perform or continue to make money, then you need to make comparisons of the company versus others in the same sector. Then other sectors can be compared to and you can come up with a variety of recommendations. You will be accurate in expectation and receiving continuing dividends but you will not know the capital gains to be received. However if a company is profitable you know it will trade to the prevailing P/E multiples for the market. If your concern is the long term, a profitable company paying dividends over the long term is a good investment. With the above strategy, the time to get out is when the payout ratio goes too high and fortunately on the stock market there are many alternatives.

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