A variety of companies track investment data and occasionally they produce reports on what their systems can do. If you do not have the abilities, your broker does and it is possible to access the data. One of the companies which provides information is Thomson Reuters and Khaled Eniba produced the following charts in mid September.

He and his group looked at large cap companies providing a sustainable and consistent income stream with the potential to grow the dividends, while maintaining the versatility needed to invest in their business through production expansion, developing new products or reducing debt or really good solid companies. The criteria was:

dividend yield greater than or equal to the S&P 500 index or 2.5%

free cash flow greater than the dividend yield (operating cash flow after accounting for capital expenditures are greater than the amount needed to sustain current dividends)

price to earnings ratios less than the S&P 500 index of 20

trading price less than the average broker target price

Dividend 5 year compound average growth rate (CAGR) and Total 5 year return are for information purposes

Company               Mkt Cap  YTD  Price  Price    P/E          Div     5 Yr    FCF    5Yr Total

$  bil             % Change  Close                 Yield   CAGR  Yield   Return

AT&T                   246.449         16.4%          40.06    17.30     4.8       2.3       7.14    85.91

JPMorgan Chas 239.077          0.2             66.19     11.21      2.9       53.08    7.69   80.79

Verizon Comm  208.707        10.8            51.20     14.48     4.5         3.0       7.38   89.71

Intel                       175.804         7.9            37.16     17.94      2.8         8.8       6.7   117.36

Cisco Systems    155.545          14.2           31.02     14.69      3.4        50.9     7.99  76.64

UPS                           94.058        11.3          107.12     19.27      2.9        9.2      5.85    73.80

Royal Bank            120.707        8.9           80.76     11.77       4.1         9.0    15.23    94.17

BlackRock                59.859        8.1          367.96     19.61       2.5        16.9     3.77  124.55

Dow Chemical         59.733        3.0            53.01       8.05      3.5         23.4     5.79   86.48

BCE                             52.128        12.3           60.05   19.00      4.5         7.8      5.53    127.03

If you look at one of the companies you will see Cisco has increased its dividend 51% over the past 5 years and maintains a 40% payout ratio (not shown)

Linking to dividend paying stocks, one number to focus on with large capital stocks is total return over 5 years. The low is 76% and the high being 127% which is very good it terms of risk and keeping and increasing your wealth. While it is exciting to listen and hear about young companies, this chart shows some old established ones keep sending you dividends and are expected to do so for many more years.

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

 

 

One of the Harvard Business School Professors has thought and done work on where does growth come from in the economy? It is an very interesting question given the state of the economy and the election cycle – where promises of growth are given easily. The professor is Clayton Christensen and some of his talks are available on You Tube. There are 4 general methods which you can think about products:

1. Potential Products –  new ones to answer the question which job does it do?
2. Sustaining Products – make good products better
3. Disruptive Products – transform complicated expensive products into simple and more affordable one  (products move from very expensive to affordable by the majority of consumers)
4. Efficiency Products – same product with same customers but made less expensive or improve gross margins.

To define the terms:

Potential Products – an interesting way to look at what you buy is what job is it doing? People buy things or a brand for a reason – to fulfill a job that needs to be done. An example Mr. Christensen gave is people buying a McDonald’s milkshake in the morning. McDonald’s collects all types of metrics on what people typically will buy, but why were they buying milkshakes in the morning? After watching, interviewing customers the team with Mr. Christensen noted the job is what to do with the second hand on the commute to work? The alternative is donuts or some food group. It was discovered commuters liked the time it took to drink the milkshake, it was filling until lunch or break, it fitted nicely in the cup holder and used their hand in the morning. Note: the reason or job for the buying a milkshake in the afternoon was different than the morning.

Note: it is rare for the reason the company thinks the person buys and the reason the person buys match. Sometimes people will buy the premium price because the alternative that does not do the job is more costly in time and money.

Most jobs today are the same as yesterday however technology changes. For example ” I need to get this to there as fast as possible with perfect certainty”

Cesar – used horse and chariot

Queen Victoria used telegraph and railroad

Churchill used planes

Bush used FedEx or DHL with a tracking number for your computer.

How disruptive products change a Industry using steel as an example:

Until the 1990’s the integrated steel companies were the dominate business in the steel industry then something happened, but the writing was on the wall.

Pursuit of Profit

sheet steel   25-30% margins

structural steel  18%

angle steel          12%

rebar                     6%

When mini mills were developed they had a cost advantage because they recycled steel, however the first few years, the quality was not great. They could compete in the rebar which is mixed with concrete to hold up walls and floors of high rises, etc. The integrated companies considered rebar low margin but very price competitive business and were not disappointed to give that portion to the mini mills for they had the higher margin business and profits improved. As time goes on, new technology plus improvements allow mini mills to improve quality as soon they are taking the business of the angle steel. Once again the integrated companies do not see the mini mills as a threat and they have the higher margin business and profits are up. The process continues and by the mid 1990’s the integrated steel companies are in bankruptcy, because now mini mills quality is high and they have a built in 20% cost advantage and it cost less to step up a mini mill than a billion dollar integrated mill.

Was the writing on the wall? could they have done something about it before?

There are many other examples – the easiest for most to see is technology and cars.

Toyota – enters the US with a $2,000 car. Its quality was not great but it was inexpensive which opened up a new segment to the auto industry. The next car was built better and as people made more money they moved up to the better quality Corollas and eventually Lexus.

Main frame computers – before servers there was mainframe computers and on a sale of $2 million. the gross margin was $1.2 million. It is not surprising those companies did not want to be in the personal computing business were the costs was $2,000 and the gross margins was $200. And it was not surprising those companies did not want to be in the cell phone business where the gross margins is $80. The cell phone and personal computer industries opened up the markets and made the process simpler for all to use – they were disruptive products.

Linking to dividend paying stocks, Mr. Christensen does not have all the answers but often in our economy it is often different companies doing the disruption because similar to the steel industry example why focus on the small margin items and not focus on the larger margin products? If you focus on what you making more money on, you will enjoy higher profits given similar sales next year. It is a very tough circle, so if you see your company focusing on less items, perhaps the writing is on the wall. If your company is not investing in disruptive products, unless it has a monopoly or very wide moat it maybe time to look for alternatives even though the company’s profits are rising.

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

 

 

 

 

One of the Harvard Business School Professors has thought and done work on where does growth come from in the economy? It is an very interesting question given the state of the economy and the election cycle – where promises of growth are given easily. The professor is Clayton Christensen and some of his talks are available on You Tube. There are 4 general methods which you can think about products:

1. Potential Products –  new ones to answer the question which job does it do?
2. Sustaining Products – make good products better
3. Disruptive Products – transform complicated expensive products into simple and more affordable one  (products move from very expensive to affordable by the majority of consumers)
4. Efficiency Products – same product with same customers but made less expensive or improve gross margins.

 

Disruptive                                Sustaining                              Efficiency

Jobs                               creates                                     little growth                           eliminates

Capital                         uses                                          little                                          frees

Now you begin to see what Mr. Christensen is seeing. There is a problem in the economic system. For years, there was a balance between the companies doing all three products and jobs were being created. When the cost of capital was high, it is an easy and good decision by management to focus on sustaining and efficiency. It makes the process of bring the products to market less and the Internal Rate of Returns is higher. It also frees up capital which allows for more options, sometimes the seemingly best option is do more efficiency. From the companies financial point of view, that is good – for adding more employees not good.

Linking to dividend paying stocks, while these companies should have a longer term outlook, the reality is similar to other public companies they like short term payoffs. The sustaining and efficiency products typically show results in 1 or 2 years or relatively short term investments; the disruptive process may take 5 years. The danger without the investment into disruptive products the company may not exist in the long term. In the next blog some examples will be given.

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

 

 

 

 

 

 

 

 

For institutional investors, while they could park their money in the bank, they make a few more points buying commercial paper with short maturities. Those companies that have the highest credit ratings including banks issue paper for the short term financing. The money market has maturities less than a year and are backed by the creditworthiness of the company or government. The regulators in a bid to make the system safer is changing a 30 year rule. After October 14, institutional prime and tax-exempt funds will no longer fix share prices at a $1.00. Funds that only hold government debt will be able to maintain that level. If funds hold commercial paper, the price will be different. This means institutional money has to find new home and are chasing shorter maturities. Rather than 6 months, the maturities prior to October 14 has fallen to 10 days. The changes has meant the banks which issued commercial paper need to find another source and are using LIBOR (London interbank rate)  financing. The attract funding rates have moved upwards. The banks are making less, are they more stable?

As reported by Liz McCormick of Bloomberg News regulators try to design fail safe systems but they rarely anticipate to the degree the changes cause markets to move. Eventually things will work out, for now there is uncertainty in the marketplace.

Linking to dividend paying stocks, companies like certainty which is why all companies have lobbyists in state and federal politics. They need to watch out for changes and allow changes to happen, but not to create less consistent income. This is why things tend to happen slowly in government circles unless there is a crisis and a drive to make changes.

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

 

There is a movie about the country of Chile and a vote. The setting is a General took power and ran the country for 15 years, he was forced to have an election – to vote yes to allow him to keep power another 8 years or no to be removed from office. Over the 15 years of his leadership, to have a different viewpoint than the President and the government would likely mean jail, torture, disappearance, death or a combination of the four. The military and police ran the country, although depending on where you were in the economic area there were plenty of opportunities, just do not disagree with the leadership. Into this context was a vote, since there is a movie the No side won, the yes lost.

The story is not perfect, remember it is a movie, but what it does show is how a small group can overtake a large institution which holds all the advantages. The vote is going to take place and both sides would have 15 minutes on late night TV to push their message, what will it be? Given that the TV was controlled by the government, the other 20 hours of TV would likely have a yes bias. Given the military controlled the government, there were many things the No side could not do. Given the past history of the government, if you worked on the No side, government officials would watch you closely. The No side came up with a Happiness or Joyful message in which they said Happiness is ….. If you vote No which meant new opportunities will open up to you which under the current system are closed to you. In today’s society the underdog does have advantages – if many ways the internet has made the playing field more even. In elections, there needs to appeal to a majority and often the positive message or sincere or passionate ones resonate for lots of reasons. The task is transform it into people voting – an organized ground game is important.

Linking to dividend paying stocks, in the movie the person who ran the advertising also did advertising for soft drink companies and soap operas. In the movie, the owner of the firm was working for Yes; his chief marketing person was working for No. The organization was covered no matter the outcome of the vote. In many ways, dividend companies products are covered no matter the vote or who gets in. They have an individual bias because one party seems to be easier to work with; but either party will do for neither will tend to change the rules too much. If you have an average life – some things you will be involved with tend to have all the rules stacked against it; with dividend paying companies the rules tend to help the companies. Every once in a while, try to change the rules but monetarily benefit from companies rules favor.

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

There are number of  videos from Ray Dalio of Bridgewater Associates for he is successful hedge fund and has a 30 minute video about credit and credit cycles. He made money on the downfall of 2008 stock collapse because of his views on credit cycles. His approach to investing and life are 5 aspects:

1. Goals
2. Encountering problems
3. Diagnosis
4. Design
5. Follow through

1. Goals   – be passionate about them

2. Encountering problems – life is about encountering problems which means your life is how do you approach problems which come your way. Mr. Dalio believes all problems are a learning experience.

3. Diagnosis  – what is the root cause of the problem?

4. Design – what are you going to do about it? how are you learning from the problem because there is a very high probability you will see the problem again and need to react.

5. Follow through – if life is full of problems, and we all tend to go through cycles you will encounter problems again and you will be able to both anticipate them and deal with them.

The cycle continues throughout life.

Using the market as an example: in the market the consensus view is the price. In order to be different (this is where you make the greatest money), you maybe wrong. You must be able to or spend time and energy trying to understand alternative points of view because you maybe wrong.

You will be more wrong than right or you will mistakes. The issue is what do you learn from your mistakes. What Bridgewater tries to do is making sense of reality and try to foster independent thinking. What is ambiguous – this leads to discovery. The discovery leads to more learning which leads to mistakes and learning. The danger is not learning and The goal is not to be wrong but more right than wrong. You have to constantly ask what if I am wrong?  Why might something that is improbable be true? If it is then there will be a cause and effect.

Mr. Dalio has a 30 minute video about credit and the economic machine titled How does the economic machine work. Watch it – listen to the fed and make your decisions on what they can and can not do. You may be closer to where Mr. Dalio is thinking.

Linking to dividend paying stocks, investing in yourself and in the markets are similar. If you are constantly learning, you will approach life in a good way and in the end life is about being healthy. In terms of your investment account, the greatest wealth is built over time – when asset prices fall, you buy them for less money and wait till they go up in value to sell. The issue is what are the good buys, should you wait and what should you do; if you do not know ensure you are in dividend paying stocks to earn both income and capital gains until you have a clearer direction.

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

 

 

 

William Green is a journalist and over the years he has been able to interview and reflect on the people he has interviewed. He wrote a book called Lessons from Great Minds of Investing and on the tour, he stopped at Google Talks on Investing for a lecture. He focuses on what attributes the leaders in the investing world have and possibly you can learn from them. He uses 4 categories

1. Willingness to be Lonely
2. The Power of Humility
3. The Ability to take Pain
4. The Key to Happiness

The secret to success is the ability to stack the odds in your favor.

1. Willingness to be Lonely

The great investors love independence and freedom to do what they want to do, they are the mavericks of the industry. They understand even though the papers say the world is going to end, the world is not likely to end soon. To be successful is to find opportunities where most of the crowd (the other players) do not see. This will mean patience for everyone else is seeing something else and you are inverting what the crowd does not see. By exercising patience you jump at the a great opportunity.

2. Power of Humility

Always ask what if I am wrong? why does the crowd not see? maybe you are too far ahead of the crowd – will it catch up to your way of thinking? If you are going against the crowd you have to built in a margin of safety that you can last until the crowd catches up to your way of thinking. You maybe right in the future so try to be less stupid rather than more stupid.

3. The Ability to take Pain

The best investors have lost money on their way to the top; not everything they buy goes up in price. To be a great investor you will go through the cycles and life is a pendulum. You will need to take caution when things go well. When you lose money where do yo get your emotional balance to come back and do it again?

4. Key to Happiness

There is a myth that as soon as you accumulate enough money, you quit the rat race. Great investors have great wealth, why are they still doing investing? The reason is they love doing it and they are constantly learning. Perhaps if all jobs were like that the myth would go away.

Other comments in the Google Talk were:

Investing is asking yourself what if I am wrong? Do I have an overconcentration on what the crowd does not see? The 3 questions to ask is doubt? doubt? and doubt?  Talk to those on the other side – who see something else? what do they see?

If you can avoid the drastic downtowns and have reasonable returns you will do well.

In the world of hedge funds – much of the time is spent trying to be prepared for when something significant happens and then you know what to do with the event. If you learnt from your mistakes you will say I am doing this because ….

Linking to dividend paying stocks, as a small investor, you are not taking the risks and leverage the hedge funds take. The reality is if you avoid losing money and have reasonable returns over the years you wealth will increase. Much of hedge funds is inverting the crowds, trying to see what they are not seeing and building a large position to take advantage of the mismatch. If you stick to well established companies who have consistently raised the dividends, it may not be headline news but it will build your wealth over time.

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

 

 

 

 

 

 

A number of years ago, Warren Buffett was before an audience of high school students in Omaha, Nebraska to offer advice and do a question and answer session. The video is on You Tube and similar to many talks – the best insights come from the question and answer session.

In his opening remarks: he offered the students: his company focuses on 3 things when hiring – integrity, intelligence and energy. It is generally accepted the candidates will have the last two, the harder one is integrity, but it is a habit and everyone has the ability to constantly do. If you have it you will be able to like yourself and use your individual remarkable talent.

The second advice is as you go through life try to build up savings and avoid credit cards or use them sparingly. As an owner of company that issues credit cards, Mr. Buffett says it is a great business. If you are on the other side, if you ever get behind given the high interest rates, it is very tough to get ahead. Not impossible but your life will have fewer choices. It is better to wait till you can buy without credit.

In terms of investing:

Mr. Buffett prefers company’s that have built in moats around their businesses. This means there is a predictability of sustainability of competitive advantage. In other words, if you project into the future and ask why does this company have an advantage over the competition for the next 10 to 15 years? Mr.Buffett gave the example of chocolate bars: what is the number one selling chocolate bar for the past year? 10 years? do you think it will change?  Chewing gum has the same predictability.

If you can not determine what should be the competitive advantage in 10 years, try to directly avoid the industry.

To do the above you need discipline and you have the ability to wait until you get the price that you have determine you are willing to pay. If you can wait a couple of years, then you wait. In the meantime you build up a cash ready position.

When you buy, you swing for the fences or buy as much as possible and then wait till the market and your stock prices go up prices because of the nature of the company’s advantages.

Mr. Buffett prefers things that he understands or knows what I know and knows what I do not know. It is also called a circle of competence. It does not mean you are not interested in others things, but you know what you are good at and rely on others for what you are not good at. Note Mr. Buffett has a partner, he does not work alone.

Mr. Buffett believes in feedback – every time you buy something you write down why you are buying it? and review it every 6 months. You bought the stock to pay you consistent dividends? have they?

Remember when you buy a stock you are buying a piece of the business and similar to buying any business or assets, you need to determine if you are getting a good price. Be willing to walk away, until you do get your price.

Linking to dividend paying companies, one of the keys to Mr. Buffett’s success is he has been a large buyer when markets go down. He has the advantage of owning an insurance company which generates cash. When markets go down, Mr. Buffett can increase his holdings in companies because he has done his research which has lead to reasons the stocks expectations to go up in price. The companies are leaders in their industries? the company’s products are best, so no matter the economy it is worth buying? if there is a definite competitive advantage then the shares are expected to increase as the market goes through one of its cycles. It other words, be a big buyer of quality companies when markets go down and wait, a good piece of advice is while you wait collect the dividend.

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

 

 

 

When you are doing your homework the idea is to narrow down the list of investments and then choose among the best. In a recent column in the Globe and Mail, Jean-Didier LaPointe from StockPointer was looking from the S&P 500 companies for those companies with high economic performance, positive growth and trading below their historical multiples.

Started with the S&P 500 companies with the following criteria:

An economic performance index or EPI (return on capital divided by cost of capital) above 1.5. The rule of thumb is an EPI of 1.0 means the ability to create wealth; the higher the ratio the better it is for investors.

A return on capital (R/C) of 10% or higher

A positive net operating profit after tax (NOPAT) growth over 1 year and 2 years.

A positive economic value added growth over 1 year and 2 years

Positive free cash flow to capital. The ratio gives a sense of how well the company uses the invested capital to generate free cash flow. A positive number is good, above 5% excellent

A dividend growth rate of 5% or higher 1, 2,3, and 4 years

In using the above criteria 17 companies of the 500 meant the criteria.

Company                  EPI      R/C    NOPAT     EVA Growth     FCF/   Dividend   Anuual Div Growth

1 Yr  2Yr      1Yr     2Yr          Cap      Yield          1YR   2YR    4YR

%      %    %           %        %             %            %               %      %          %

Home Depot           2.8        24.9  60   110        63     110           16.3         2.1           20.8   22.0   23.0

Marriott Intl           2.7       24.8   60   120        85   155             18.3         1.7           23.5    21.6   25.0

Starbucks                2.6        22.2   40  110         30     88           12.4         1.4            24.6    23.9  24.1

Robert Half Intl     2.6        29.0   70  200        58  186            16.1         2.3             10.5    11.1     9.7

Sherwin Williams  2.5       21.6    80   110        71   102           17.2          1.2           23.8     19.9  18.9

Southwest Air         2.3       20.3   330  500       322 500          11.8          1.0           27.5     34.4  92.8

Hormel Foods         2.3        17.8    80   130        62    86            8.1         1.5             17.9     20.6   18.0

Lockheed Martin    2.2        15.3   100   150       61   135            7.3         2.7            10.6     12.0    14.5

UPS                             2.1        17.2   100     90      92    97            7.4         2.9            7.9       8.2      8.5

Apt Invest & Mgmt 1.9       12.8    30    150       34   204          4.1          2.8           14.6      12.3    20.4

Tractor Supply         1.9       18.4   30      80        12     45            4.0        1.2            23.5      23.6     31.6

Scripps Network Interactive; Public Storage; Lowe’s Companies; VF Corp and Target Corp were the other 6 on the list.

Linking to dividend paying stocks, every year it is easier to use whatever criteria you have to find the best companies. In this case they have high economic performance continuing with positive growth and because they are trading less their historical valuation multiples it is possible for the stocks to go higher. If you buy quality over time and continue to buy as the dividends are reinvested your wealth will increase. With the stock price go up and down, yes – however if you believe the company will continue to be a leader in its field then over the long term you will have fewer worries. The important aspect is narrow the field to quality stocks in this case the criteria started with 500 and ended with 17 or 3.4% of the total. After narrowing the field down you will have a choice for example in home renovations – is Home Depot better than Lowe’s given they are both good choices?  but it is choice of quality and that is a good place to be making decisions from.

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