Happy Valentine’s Day. The gift today is learning so you can do actions which can reward your spouse, family and extended family.

Tobacco stocks over 20 years gave investors a total return of more than 1,800% making it the best performing stocks in the S&P 500.

According to David Berman the lessons all investors can learn are:

An unpopular stock is not a bad stock.

Similar to most people you likely have a opinion on smoking – good or bad. The objective in investing is to look at results. Through diversification, consolidation with rivals and steady price increases, tobacco companies have done very well. Altria reported a profit of nearly $5.8 billion in 2016 up from $4.2 billion in 2011. The current goal is to increase profits 7 to 9% a year.

Valuation matters

Amazon trades at a price to earnings ratio of 348%, Altria trades at 22.6 times profit. If and when the market goes down which stock will be affect more?

Dividends rule

Investors stick with tobacco stocks for the dividends: Altria has increased its dividends 51 times in 48 years and the quarterly payout has doubled since 2009.

Brands are moats

It is inexpensive to produce cigarettes, however it is very expensive to market them. Government regulations make it hard for newcomers. This means cigarette buyers keep buying the same brand.

Long term performance is what matters

There is always a short term negative about cigarettes. If the large tobacco companies have managed to deal with a $200 billion fine over 25 years and keep profitable, then the other concerns are important short term concerns but not long term which allows for continuing outstanding returns for the shareholders.

Linking to dividend paying stocks, cigarette companies are ideal because they fit into types of companies you are looking for to hold long term. Consistently profitable, able to raise prices, government helps to keep competition out and established companies are the go to. There are other companies in other industries that can fit the bill, but tobacco stocks are easy fit.

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

 

If you watch the Game of Thrones, you notice the plot lines and you may wonder where do the writers get their information to write? One place is likely The Children of Henry VIII written by Alison Weir, published by Ballantine Book, London, UK, 1996. The story starts with Henry VIII is a catholic, marries a women whose brother sits on the Spanish crown and is Pope. Henry wants a boy to have his family rule England, he tries but a girl is born – Mary. They try again a few miscarries and no more children. What is Henry to do? try again with another lady but who will give them permission? The sister’s brother – no. Henry breaks away from the church and tries with another lady and Elizabeth is born. He continues to try but no male and the divorce goes through. On his 4th wife a son is born and the dynasty can continue. Henry dies 10 years later and then the fun starts.

The protestants are in power and the Catholics want it back, the uncle assumes responsibility as the boy is only 10 years old. The uncle who is protestant plays off the negatives of being Catholic while he robs the treasury and takes former Catholic properties. The boy actually believes in the new religion which is good until he dies.

The next in line for power is Mary who is Catholic. After regaining the throne – she throws the protestants out and rules as a Catholic. The protestants who were thrown out still want power and when Mary dies put in Elizabeth I who rules England.

In between the family is the power struggle and in all power struggles everyone does the SWOT Strengths, Weaknesses, Opportunities, and Threats analysis. Religion is thrown in to rouse the masses who do not understand they are being used to gain or keep power in one family or another.

Linking to dividend paying stocks, it is wonderful if the shares you own are widely held and power is changed through a responsible and even manner. Watching or reading about power struggles is fascinating stuff, but it only matters to you if they will buy you out or increase the dividends as the fight goes on. Leave it to the books or magazines not your investments.

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

With government sometimes it does things which help industry, sometimes it does things which do not help industry. It really depends, prior to going to Davos, President Trump signed a regulation to place tariffs on imported solar panels. At the moment, 99% or thereabouts of solar panels are made in China. The President did this action to try to encourage US based solar manufacturers a better playing field or raise costs of imports allows the non imports to be priced in the same ballpark. The Solar Energy Association thinks it is counterproductive to raise rates on solar energy because they generate electricity which means the utilities do not have to burn fossil fuels.

Other association people do not believe the impact will be great because suppliers anticipated the tariffs and prices rose. The tariff is less severe than what the industry had was expecting which essentially means little changes.

The President has pushed the line America First so the solar industry regulators react to do something but not too extreme because the options just do not exist and even with the higher tariffs no manufacturer is going into business. The regulator maintained the existing 30% renewable energy tax credit, the recently tax bill recently cut corporate taxes and enhanced depreciation of solar investments. In reality the status quo will be maintained.

Linking to dividend paying stocks, as an investor you want the status quo to be maintained so your investments continue to earn profit and pay dividends. As a citizen you want reasonable opportunity in the marketplace understanding supply chains change over time. In this case of the solar panels, the government did something but not too much to change existing structures.

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

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.