Kinder Morgan is North America’s largest pipeline operator and is headquartered in Houston, Texas. It has a great history and its founder owns the Houston Texans football team. If you cast yourself back to December of last year the price of oil fell from close to $100 to $25 a barrel, it was a crisis for many oil companies. As a pipeline company, Kinder runs on debt to pay for the pipelines, when the price of oil fell, the debt was close to being downgraded and Kinder had to cut its dividend to ensure its credit rating did not fall. In crisis mode, Kinder had to cut costs as well as raise revenues and hope the price of oil increased. Fortunately all that has happened and Kinder Morgan is a leaner, more focused company which is profitable. In a report by Joe Carroll of Bloomberg News the shares have increased 80% which is why you need to know what the quality companies are. When they go down in price, that is the great opportunity to buy low and let your money grow at relatively low risk. Kinder is one of those success stories – an investment in January has doubled your money and it will continue to grow as investor payouts are expected to increase in the coming years.

Linking to dividend paying companies, whenever there is a commodity downturn companies shares will be effected, knowing which companies are the best of the breed or the top quality companies is your homework. It is important to know because most people have a balanced portfolio and there will be some effect from the commodity downtown. As the commodity price begins to rebound, that is the time to buy the quality companies for they  will rebound faster and you can make money with relatively low risk. The reason to buy dividend paying companies is the compounding effect over a long period of time. The ideal time to buy is when quality companies fall in price and rebound because they can turn their finances around and be a consistent profit maker.

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

IOU is one of the foundations of the credit industry and for many years that has served the world, for a short time before the world’s banks came crashing down, it seem it was I owe to somebody but who is a unknown. The simple idea is behind the book IOU – Why Everyone Owes Everyone and No One Can Pay by John Lanchester published by Penguin Books, London, 2010. Your favorite bank and other financial institutions are in the business of risk management – ideally taking in deposits and lending out the money and making a spread between the two. Many people have heard that but the reasons financial institutions can make money is leverage – they only have to keep a percentage of capital in cash or cash equivalents. The rest they can lend or the bank’s principal debt are other people’s debts to it. How well they lend is the key to their success – if people can pay back the bank churns out profits; if it gives out money poorly then some good people will have financial troubles.

In the mortgage backed crisis that lowered property prices around the world, the banks seemingly in the interest of gaining greater fees lent more and more money to those who should have never been access to credit first. In essence, the size of the no income, no assets loans grew because of an original good thing. Securitization of real estate loans to become to similar to bonds allowed the banks to make more loans is a good thing. Because people were under the assumption, property values across the world or country never fell at the same time, the loans were given triple aaa ratings. The triple aaa ratings allowed the biggest and conservative institutions to buy the bonds to get a good yield of their investment given the low interest policy of the central banks. The problem was as the quality of the mortgages was getting worse, no one ever lowered the ratings. If you examined the corporate debt aaa ratings now, you will only find a handful, back in 2007 90% of mortgage backed bonds had the ratings. You have to wonder why the others did not get it. Common sense says the percentages of very stable should be low and higher ratings for the majority. This means people knew something but as soon as they sold the bonds to someone else they did little because it was someone else’s problem – similar to the child’s game of pass something around till the clock runs out, whoever holds the item is out.

For a number of years, financial services was seen as solid and respectable, for a few years in the early 2000’s the desire was to make as much money as possible and dam the consequences. Changing regulations to allow more leverage and all was assumed to be good, all that happened is the leverage in the financial industries went up for 1 dollar deposit to 9 deposits on loan to 1 dollar in deposits to 33 on loan. What happens when a default happened? with leverage someone has to put up more capital or reduce the lending and reducing lending considering bonuses are based on it is a difficult thing to do. You can imagine if you have credit cards, the company adds three zeros to it. Some people will do little, but more will use the credit because they can and defaults will be higher.

Linking to dividend paying stocks, in all industries regulation is a key to maintaining stability. All industries have the ability to create new products and services but to maintain proper market asset values (rather than just make up a number which happened)  government regulation is important. You will hear industry talk about cutting government regulation, until the time when something goes wrong and then the industry will say well what was the government doing? It is hard to have it both ways, for dividend stocks we like government regulations which limit the competition.

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

 

There are two sides of each story the good guy (who wears a white hat) and the bad guy (who wears the black hat); in reality there are very few people that actually only wear one hat or the other, most people wear a mixture of both. Since most of us feel we are the good guys, there are not many stories about the bad guys. One book which focuses on the topic is I Wear the Black Hat – grappling with Villains real and imagined by Chuck Klosterman published by Scribner, NY, 2013.

One approach to look at the subject is through why do we think of some people as evil and could the person not be perceived as evil? It turns out the answer tend to be yes. A person similar to Machiavelli who wrote the Prince. Many people have read it, some believe this is the way politics should be. Machiavelli is associated with this idea because he wrote it down and whether he believed it or not, the mere fact that he could conceive of these strategies and write them down makes him feel evil to us.

Another example of Joe Paterno – who was one of the greatest football coaches in US College history. He will be remember for a number of things including grades matter in his program, he also will be remembered for not doing the correct thing in regards to one of his coaches. Coach Paterno’s position with Penn State and the rest of authority in the state he could have just about anything could have been done, unfortunately little was done. In this case, the villain is the person who knows the most but cares the least.

Drug dealers are generally seen as villains, but in countries where the cops are corrupt, drug dealers are seen to be living by a code which means they seen better than the corrupt police.

Everyone should know history is written by the winners, but this cliché misses a crucial detail. Over time, the winners are always the progressives. Conservativism can win the short term. but society continues to evolve and the progressives win out.

In business, being a villain can mean an advantage over your opponents. The classic football case is the Oakland Raiders owned by Al. Davis. Mr. Davis at one time was the Coach, General Manager and Owner and he drafted a particular method which made the team successful. Among the principles were draft for speed; combine a power game with a vertical, downfield passing attack; reward excessively physical play; sign players that other teams are unwilling to accept; never police off the field behavior and just win, baby.If you willing to do anything it takes to win, things can be done but you will be a villain.

Linking to dividend paying stocks, there are the good guys, the bad guys and sometimes those with the money. If may seem the only method to get the money is be a bad guy, but it turns out there is a method to stay as the good guy. Buy profitable stocks which pay a dividend so your total return goes up on a year to year basis. The bad guys often have a better year in a 10 year cycle, but there are the other 9 where you come out ahead.

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

 

 

Each sector has their different metrics to determine how profitable the company is and what to expect in the future. Today the issue is how are the banks converting a dollar of revenue into profit.

Ryan Gottschalk works for Thomson Reuters Eikon which provides news and information to companies look at Tier 1 North American banks. His criteria was:

The market capitalization of the bank would be $ 2 billion or more.

In the bank, an good method to look at its efficiency ratio which is measuring the bank’s overhead as a percentage of overall revenue. 65% is the tops with lower being better.

Another measure is the earnings efficiency – the difference between the estimated net income growth for this year divide by estimated net income from last year subtracted the estimated revenue growth for this year divided by revenue growth for last year. or net income growth minus revenue growth.

The Tier 1 capital which measures the bank’s core equity capital to total risk-weighted assets. For this list the answer has to be above 10%.

Finallly, the dividend yield is put in the chart.

Company                         Ticker       Mkt Cap    Efficiency    Net Income Growth  Tier 1  Dividend

(US Bil)       Ratio           – Revenue Growth       Cap      Yield

HomeBancShares      HOMB-Q         2.88         39.5                       6.5                         11.3         1.4

First Republic Bk           FRC-N          10.00       59.9                       6.1                        13.2         0.8

M &T  Bank                    MTB-N          18.52       57.0                      19.7                11.5          2.4

BB&T Bank                      BBT-N            28.73      58.9                       4.4                  11.9           3.0

Western Alliance          WAL-N            3.40       45.6                       3.7                   10.1            0.0

Bank of Hawaii               BOH-N           2.94        59.2                      1.5                    14.1            2.6

MB Financial                  MBFI-N          2.722      64.3                      3.4                    11.8           1.8

Royal Bank                          RY-T          89.26        53.7                     1.1                      12.2           3.9

PrivateBancorp               PYTB-Q           3.46       51.1                      1.2                     10.5           0.1

Regions Financial               RF-N          10.85        64.6                   1.6                     11.8            2.7

Huntington Bancsh        HBAN-S           7.07     64.8                   0.0                     10.6           2.8

Linking to dividend paying stocks, as long as asset values remain constant, the banks should be able to be profitable and pay dividends. Understanding the metrics of the companies you own help you to decide how long you will hold the stocks. A financial company is generally a stable part of your portfolio but individual banks can be traded for those that seem to do their job even better than the competition. In the above grouping Home Bancshares has a great efficiency rating and M&T is doing a great job turning revenues into profits. What are they doing that is so much better than the others?

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

 

 

Until such time as the public moves in mass to electric vehicles, one of the things we do if we drive the car is fill up the tank. Filling up the tank meets an oil company – now days there are fewer and fewer companies that are vertically integrated such as Exxon but there are some. Investing in oil companies also can provide relatively stable income and capital gains as they are not making any more of it. The costs to drill wells goes up, but the rewards are still be great.

Sean Puglese CFA of Wickham Investing Counsel recently looked at US oil stocks with an eye for value and safety.

To start with he and his associate Allan Meyer looked through Bloomberg for companies with a market capitalization of $ 10 billion or more. This number lowers the number of companies to be examined for market capitalization is stock price multiplied by number of shares outstanding.

Dividend yield is calculated as the projected annualized dividend payments over the next year divided by the current share price. All companies on the list must be projected to pay a dividend over the next year.

Price to Cash Flow is the current share price divided by the projected cash flow over the next year. All industries have popular metrics and this one is popular in the oil business, because of the high level of costs related to noncash items such as depreciation. The lower the number, the better the value.

EV/EBITDA is known as the takeover multiple. It is the enterprise value divided by earnings before interest, taxes, depreciation and amortization. A lower number reflects value and takeover potential

Debt to equity ratio – a smaller ratio indicates lower levels of debt. Generally a number near 100 imp   lies the ability to pay debt, lower when concerned about safety margins is better.

Company             Ticker      Market Cap       Dividend        P/CF           EV/             Debt/Equity

(US $ Bil)           Yield %                             EBITDA                %

Exxon Mobil       XOM-N       387.9                 3.24               11.64            15.59                 24.15

Chevron              CVX-N         197.5                 4.15                 8.78            12.72                 27.95

Occidental Pete OXY-N           58.1                3.98                12.05           13.76                 31.98

ConocoPhillips  COP-N           52.4                2.38                 7.11           13.15                    74.75

EOG Resources   EOG-N           45.4               0.77               15.12           18.69                  56.31

Phillips 66             PSX-N          39.3               3.38                  8.96            9.16                   37.37

Anadarko Pete     APC-N          28.5               0.45                9.17             13.41                 127.55

Pioneer Natural   PXD-N         26.0               0.05               14.82            19.04                 37.75

Valero Energy       VLO-N         22.4               5.23                  4.85             3.54                   34.12

 

Linking to dividend paying stocks, on Mr. Pugliese’s list there was 18 stocks, however you get the idea of why ExxonMobil is the a staple stock among institutions. Under the list if you started with a market capitalization of 20 billion rather than 10 billion it furthers narrows the list. There are always many choices in the marketplace and narrowing the focus to a couple will not make you a day trader, however all companies do go through cycles just as the oil companies earlier this year went down. The better ones have regained and increased the value because they make money. The lower prices was an opportunity to pick up companies, collect the dividend and allow time to increase the price of the shares, which during the lazy hot days of summer seems ideal.

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

 

In every generation there are people who the public is more interested than normal. Sometimes they are the Royal Family, for example many people wanted to know more about Princess Diana than the other Princes or Princesses. In the US, for the past 10 years the Kardshian family has never been far from the spotlight. Why does American care for this family as opposed to others? is a question Ian Halperin wrote about in the Kardashian Dynasty published by Gallery Books, NY, 2016. The foundations of the family started with a reasonably well known athlete Bruce Jenner who story transformed America in the 1976 Olympics. A number of years later, with his wife (Kris) managing his career he was brought into the spotlight. The next phase is one of his daughters Kim enjoys clubbing and the music scene – go to lunch and then to clubs with other “famous” people in the LA music and sports world. The family has 8 children and they seem to love and support one another which the public is always happy to see.

Kris is the manager of the group and when social media made it leap into our lives, she quickly learnt how to profit for it. Kim’s blog has millions of hits, on it she will direct people (some fans) to various fashion sites to buy stuff. If they do, then the fee goes up and the cycles continue. At some point, the fans know but at the moment they are not concerned – it just the way the world works. As with every celebrity, they have to try many projects to stay in front of their target market – some work, some do not. However the ones that do work will keep the companies coming back. For Kim – some TV projects did not command ratings, however a perfume line was the best selling line for the company which put it out. The reality is Kim represents a fashion for the women who buy fashion.

In the era of social media, fashion, sports, and money combining together the Kardshian women are there in the middle of it. Understanding how to make money and between all the media are “real” people making real mistakes and trying to make a life.

Linking to dividend paying stocks, if the Kardshian’s were a stock, they would have been a growth stock for the first 5 years because everyone has 15 minutes of fame, how do they have 30 minutes or 1 year or 5 years? The longer the process, as long as the organization is profitable, then the value players or dividend buyers come in to say is this sustainable. What assets can they continue to manage to continue to make money. How long it will last will depend on the ratings and that depends on people caring about them.

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

If you think about publishers of newspapers one of the names you will easily come up with is Rupert Murdoch. His News Corp owns the New York Post, Fox News, Wall Street Journal, papers in England and Australia and HarperCollins, and other media companies. How did Mr. Rupert go from an Australian publisher to a global media baron? Micheal Wolff wrote the book The Man Who Owns the News published by Random House, NY, 2008.

Weaved in the story of Mr. Murdoch and his family is their takeover of the Wall Street Journal. The paper ownership was held in trusts and for two generations it worked reasonably well. The trustees looked after the paper, the dividends satisfied the Bancroft beneficiaries. The third and fourth generation began to ask questions about the newspaper and the value of being dependent upon the media asset. These questions about control would eventually lead to the paper being sold and for a number of years, Mr. Murdoch was being prepared to buy it.

There was a number of issues which allowed Mr. Murdoch to buy the Wall Street Journal and the first is the thing that is reported in the paper – prices of stock. The bid was twice that the stock was trading at which automatically makes everyone just a little bit more anxious to sell. In the stock market if you can double your money, that is great but you need to cash out. In the case of the bid, if the bid is withdrawn what will the price fall to and when will it get back to the bid price? It is no wonder people wish to sell. Who are the alternatives to buying the company? if not them, who?

The next issue is when the markets were relatively stable, the company that owns the Wall Street Journal saw themselves as printing the quotes and offering business stories. As other companies saw the average person was somewhat interested in business stories they offered similar section. The Wall Street Journal could have been the business information source similar to Bloomberg News and quotes; but they looked down at that side of the business and left doors open. In order for the company to gain the share price which the bid was, things were going to have to change and who was going to do that?

Another issue is the trust world. trusts work well for a two generations because everyone remembers why they were set up and often who set them up. By the time the 3rd and 4th generation comes, the money is generally less and the connection to the company is more remote. If the trustees have not been consulted to what they consider to be worthwhile, then it is highly likely when higher bids come – whether they like the person or not, they will be open to bids.

In all growing companies, the President and some senior executives need to look into the future at the companies existing and have ideas about expansion. Who do we want to work with? who will work with us? where is our industry going? who is the next generation of leaders in the industry? what companies do we what to control? who can we work with? when we are at industry conferences who can we connect into?  Mr. Murdoch exercised patience to move from the bit players to the main street players to the premium players in the industry.

Linking to dividend paying stocks, when you buy these shares you hope and can get a reasonable idea of what the President and his team believe will happen in the future. You are primary interested in the dividend or ensuring the company is profitable, but how does it stay there while you own the shares is what the President will tell you. Are they caretakers or doers? What connections and what actions can they do?

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

 

 

 

If you think about publishers of newspapers one of the names you will easily come up with is Rupert Murdoch. His News Corp owns the New York Post, Fox News, Wall Street Journal, papers in England and Australia and HarperCollins, and other media companies. How did Mr. Rupert go from an Australian publisher to a global media baron? Micheal Wolff wrote the book The Man Who Owns the News published by Random House, NY, 2008.

In the newspaper business the business model is they are a penny business. You want to make your product as cheaply as you can, sell as many as possible which you do by pricing it as cheaply you can. There is no such thing as added value, no premium pricing. The business model is terrible except in you manage to kill off your competition – it is a great cash business. Every copy you sell beyond your base amount is profit.

Advertising when you have it adds to the cash and when it departs can be killer of the newspaper.

The other advantage of owning the newspaper or TV station in town is eventually the movers and shakers in the community will need to talk to you and some will become advertisers. The need to talk to you makes you an important player in the community. The reality is in most communities nothing happens without a systematic program of influence among the people with influence. Part of the program involves the media person.

When Mr. Murdoch took over the Adelaide News, his bank was National Bank of Australia, it already had dealings with another bank. Eventually Murdoch moved the account to the Commonwealth Bank of Sydney to fund his dreams. In a short time, Murdoch is one of the biggest clients as with the new relationship he has expands his media properties with bank debt. Each time has assets increased so did his bank debt, till he had enough properties to ensure the cash flow to pay his debt.

In the book, it seems Mr. Murdoch did not really have a plan to branch out to become a multi media company. It seems that because others did not like him, he did it out of spite and found methods to go around the establishment. In many ways, although owning newspapers puts you into the establishment, Mr. Murdoch did not think himself as such but he was interested in the ownership. When the book was written, Mr. Murdoch was not a connected internet person (he prefers paper) and had no internet strategy, if his businesses are to survive that needs to change.

Linking to dividend paying stocks, the growth of any company is a combination of desiring to grow and having financial resources to grow (or financing available). In many businesses the first generation has the most desire and then slowly financial managers set in to run the company as the next generation enjoys the dividends. We have seen over the past few years particularly in the media business the drastic change as we consumers have changed. From TV to desktop computer to laptop to mobile is a big change and we all have embrace some or all of it. The media companies are still trying to figure it out. Media is something that still sells to the every person, although it can be highly segmented and that is why it is interesting and also can be profitable to own.

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

 

 

 

 

When there is high volatility in the markets there is an opportunity, for a wide variety of reasons. If we use the example of oil prices, as they fell from over $100 a barrel and went down to $25 and now is trading near $50; many companies stocks and bonds went downwards. During the fall, the rating agencies would have downgraded some bonds which meant institutions holding the bonds had to sell. The price has gone to some form of normal which meant there were opportunities in the market. On Bond fund you can track is the Merrill Lynch US Fallen Angel High Yield Index.

In an article by Emma Orr of Bloomberg News, she notes the index has risen 17% this year well above normal and the experts are suggesting not to buy right now. in the example of the oil company, a company called Encana was investment grade, then a month later it was not, then it was investment grade again. There are many institutions which have in their bylaws they can not hold non investment grade or lower than A rated bonds, which is one of the reasons the price falls. Ideally they need to have AA and AAA rated bonds. Encana has bonds payable 6.5% due in 2034, the price went down to 55 cents on the dollar compared to 85 cents on the dollar, now it is properly trading at 103 cents on the dollar.

Bond companies likely made money on the trade, for Encana was not alone there were many companies that fell have since recovered.

Linking to dividend paying stocks, the reality of the stock and bond market is volatility can be your best friend to make money, if you have the ability (cash) and discipline to take advantage of it. When a commodity price falls, you need to get out or move to alternatives, as it rises you get back in and ride the increase. Owning dividend paying stocks helps ensures you have cash which you can reinvest or buy alternatives or hold cash. The lows of the market are when there is most panic, but unless the world collapses the markets will rise again. Dividend paying companies also help you figure out the alternatives to take advantage of given patience time frames.

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