On August 28, Berkshire Hathaway became the largest shareholder of Bank of America by exercising its right to acquire 700 million shares. The warrants gave Berkshire the ability to buy the shares at $7.14 a share and they are now trading at $23.58.

The warrants were issued coming out of the 2008 recession when Bank of America had bought Countrywide Financial one of the biggest issuers of subprime mortgages. After the company failed (billions were written off) the shares were low and Berkshire stepped in to offer confidence in Bank of America. The management cleaned up the balance sheets and has raised its dividend. Berkshire will collect $336 million in dividends from B of A.

In addition to the 6.6 % holding in B of A; Berkshire Hathaway group holds 10% of Wells Fargo; and since one of the deputy portfolio managers is on the board of JP Morgan Chase Reuters deduced it has a large holding in the company.

Linking to dividend paying stocks, the recession although very painful to millions of people is the greatest way to achieve wealth through time and patience. The key is doing your homework and knowing which companies have the best opportunities to stay in business and grow when somewhat normal times come back. In the case of Mr. Buffett he tripled his investment in 4 years and through the dividends the cost of holding the shares will be less every year. These opportunities are much easier in the recession or downturn, but the important thing is you need to be prepared so when it happens or when you can see the light at the end of the tunnel, it is time to buy and hold and reap the benefits.

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

 

At the end of August, it was announced two giants in China were merging or increasing vertical integration of miner Shenhua Group with electricity producer China Guodian. David Fickling of Bloomberg News wrote a column with his thoughts on what direction the new company called Guoneng Investment Group is going to be pursue.

The coal miner Shenhua Group sold 400 million metric tons of coal last year (or 2/3’s of the amount of coal used to generate electricity in the US) and owns a railway to transport the coal from the mines in the Shaanxi coal belt to the ports on the Pacific Ocean. For the past decade Shenhua has posted net margins of greater than 10%.

At present Shenhua sells overwhelmingly to external customers for it tends to buy 85 million tons for its power stations. Now the equation will be changed, for Guodian needs 200 million tons and will be Guoneng best customer. One of the best methods to increase margins is to sell to its generators at something close to cost prices and focus on the trading business.

The risk to the world coal markets is Guoneng may use more of its lower-quality products (coal) and sell its higher quality coal. The difference is heating values of 5,500 kcal/kg. The higher the coal is beyond the 5,500 the more expensive it is and the term clean burning coal comes into effect. In Australia, Glencore purchased a stake in Yancoal has over 6,500kcal/kg.

Linking to dividend paying stocks, in general investors like vertically integrated companies from the mine to the railway to the electricity plant to millions of customers. The problem is the millions of customers some will feel they are paying more than they should be. If the company can keep the balance right and the regulators are not too soft but consistent in return on investment margins, then as an investor the stock would be one to buy and hold for a long time.

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

In every industry, the players try to grow and once they have done what they can inside their natural boundaries they begin to look to grow by mergers. In the electricity distribution business, the path to success is to build through acquisitions. In mid August Andrew Willis wrote a column which asks who will be the next target? As a dividend investor, this is a space which you are easily driven to because utilities are regulated by governments which keeps the players well capitalized and can easily pay dividends. In the past year and a half Canadian companies have spent $170 billion on US companies because the only way they can grow is south of the border and in the broader sense the issues of supplying gas or electricity is the same whether in Canada or the US.

Mr. Willis focused on Vectren which is based in Indiana and has over a million customers and has a $5.5 billion market capitalization. A Bloomberg report stated Vectren had hired financial advisors after receiving an unsolicited offer. It should be noted in 2014 electrical utilities were acquired at a 10 times EBITDA while recent deals are at 11.4 times (or more expensive). For gas utilities rose from 12 times to 13.2 times. Earlier this year Warren Buffett’s Berkshire Hathaway bid for Oncor at $9 billion and was topped by a bid by Sempra Energy for $9.45 billion.

Linking to dividend paying stocks, if you are going to buy in this field, first buy for the dividends and the long term the companies can continue to deliver energy to their customers. If it happens, the company is bid on, you will either take shares in the new company or look for alternatives.

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

In August, Lowe’s reported lower than expected quarterly earnings and warned of slower growth in profit margins. Sruthi Ramakrisnan writing for Reuters noted the US housing market in general has soared, which should have translated for Lowe’s to earn more money. However, Lowe’s will spend more money on marketing and staffing to take advantage of a robust home improvement market.

Lowe’s biggest competition is Home Depot and Home Depot shares are up over 10% while Lowe’s are only slightly higher over the year. In the home renovation business there are two major markets – the do it yourself or the professional contractor. Lowe’s is trailing Home Depot in both. Going forward, Lowe’s intends to offer more promotions to woo professional contractors from Home Depot. Lowe’s is still a large company as their net income rose 21.4% to $1.42 billion or $1.68 a share. Lowe’s net sales climbed 6.8% to $19.50 billion.

Linking to dividend paying stocks, every company has a cycle and there is more home renovations in the spring and summer months. If you choose a retail stock you can go into your local company and check it out – how are they doing on sales? lots of people in the store and buying? How well the stock does is linked to the alternative. In this case Home Depot is the leader and even though Lowe’s increased net sales and net profits, Home Depot was doing better. There are always possiblities something can change.

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

 

Around August 20th, the US Federal Trade Commission cleared the way for Amazon to buy Whole Foods. The Associated Press noted the FTC had reviewed whether the deal would substantially lessen competition or consitutued an unfair method of competition and opted not to pursue its investigation further.

Shareholders had voted earlier to agree to the merger and Whole Foods technically belonged to Amazon. The FTC could have done something for to break up Whole Foods or to have Amazon guarantee a level of competition for the terms substantially lessen comptettion are used. Those terms mean different things to competitiors and the general public who shops at Whole Foods.

Linking to dividend paying companies, all dividend paying companies hire lobbyinst or have links to regulators just in case something similar to a takeover or potential takeover happens. Part of being a successful company is to ensure government barriers which help your company does not help the competition. Otherwise, dividend companies embrace the status quo and often times so does govenment institutions.

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

If you are one of the 100 million people that pay Amazon to be a prime member, you know the scope of Amazon. If you have a Facebook account, you will know the scope of Facebook. If you look across the Pacific Ocean and the billion plus market of China two companies dominate the landscape – Alibaba Group Holding and Tencent Holdings. According to Paul Mozur of the New York Times News Service, both the Chinese Internet companies are worth $400 billion. Amazon and Facebook are worth over $470 billion, should the Chinese companies be worth more? should the stock go higher to match the US ones?

In all things investing, everything is relative. If you are going to buy shares is one better than another? no one knows until you buy the shares. If others agree, the value goes up, if not then eventually you will need to find an alternative. Alibaba and Tencent cater to the day to day entertainment, shopping and spending habits of China’s middle class and sales are pushing profits up. For Alibaba first quarter profit rose 94% to $2.2 billion as sales continue to increase. Sales on e-commerce went up 56%

Part of the increase was from Alibaba makes money from vendors by charging them advertising on its platforms, last year Alibaba increased its fees. Will that continue? Alibaba has diversified into entertainment and cloud computing. Alibaba is trying to have more US vendors to sell to the Chinese foreign goods.

Alibaba owns Ant Financial which transfers money and has made a bid to buy MoneyGram which is based in the US.

Linking to dividend paying stocks, sometimes there is a reason why similar companies have lower valuations, even though they look the same. One reason is institutional buying, companies find it easier to own more of Amazon and Facebook, rather than Alibaba and Tencent (yes there are biases on Wall Street), however over time Wall Street is looking for sustainable growth and earning large profits and eventually similar companies will be valued in the same fashion. Either Amazon and Facebook come down or Alibaba and Tencent go up in value.

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

 

Prior to the election of Donald Trump as President there was another vote which for shadowed his victory – Brexit. The United Kingdom or Britain had been in the European Common Market for 40 years and needed to vote on to stay or leave. One can imagine after 40 years – every institution would prefer the to stay and continue as policies or rules have been changed to reflect the union. One of the biggest reasons the City or downtown London had experienced growth is the financial industry – there is a rule which says all European transactions would be taxed similarly wherever they are done – London having the advantage of English language, although all languages are spoken in London, attracted the US companies to it. The US banks attracted the rest of the world’s banks. The rule will be changed now that England has decided to leave the European Union.

One of many books written about the election is Unleashing Demons by Craig Oliver published by Hodder & Stoughton, London, 2016. Mr. Oliver was the Communications Director for Prime Minister David Cameron which means he had an inside seat for the Brexit vote. The book flows in that fashion, you are a fly on the wall and listening on the Stay side. Fortunately in a democracy whatever the voters decide is the right course of action and if the politicians do not like it, they can step down and have others implement. There were many reasons to vote to stay and to leave. The most pressing to vote stay is economic – soon England will be outside the European Markets or not have very easy access which means goods be sent to Europe will be more expensive and goods coming in will be more expensive. In many forms, things will change. If a business or a community or caters to a local market, maybe they will not see much difference. The biggest issue on the leave side was immigration – with a common market people from England could work anywhere in Europe and people in Europe could work in England. In the lives of people, some people you like more than others.

From the perspective of the Stay Campaign, the Remain Campaign would make numbers and issues up, not based on facts or reality. Those numbers and issues helped by social media stuck, so there was an element of truth to them, but not facts. Some people brought up points that may have happened, could have happened long ago but they were issues and in politics both sides have similar type of issues. It was thought on the Remain side, in one example a county were there was an automobile manufacturing plant which was sending most of its vehicles to Europe, people would know that and vote their pocket book. The county voted to leave. Why? no one really knows but they did.

Linking to dividend paying stocks, often times dividend paying stocks because they have the ability of credit, they can do takeovers or mergers with other companies. Stories will be told on both sides, but with stocks as long as the opposition receives what they consider adequate compensation or enough money, the merger will go through. It often takes time before a merger can be worked through and some stories will be true and some will not be.

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

About a month ago, Jean-Didier LaPointe of Inovestor Inc published a chart for stocks with high sustainable dividends among US companies. Mr. LaPointe used the program called StockPointer.

The criteria he used was:

A minimum market capitalization of $ 10 billion.  (larger sized companies)

A return on capital of 10% or higher

Positive free cash-flow to capital ratio. The ratio gives a sense of how the company uses the invested capital to generate free cash flows. Positive is good, 5% or above excellent.

A dividend payout of 100% or lower.  (is it sustainable)

A dividend yield of 2% or higher

A positive dividend growth rate for the 1,2,3, and 4 years horizon

Increasing earnings per share over 12 months.

Company              Mkt Cap      R/C   FCF/      Div      1 Yr Div       4 Yr Div   Div

($B)                       Cap %   Yield   Gr Rate        Gr Rat      Payout

Pfizer                     198.01       11.8    3.7          3.85     6.8               7.6           90

Paychex                   19.49       12.9  13.4         3.69     9.5                8.9           80

AbbVie                 112.59         15.5     4.1         3.62     12.2            20.0           61

Philip Morris       178.43        25.5     5.2         3.62     2.0               5.2            92

Invesco                    13.83       10.5     2.4          3.41     3.7               11.1          51

Kellogg                    23.75        19.8      2.5         3.14     4.0                 4.3          95

Intel                         168.55      12.3     5.4          3.04      5.3                4.0           39

P&G                         232.92       10.1     8.3          3.02      1.5                4.2           71

T Rowe Price            19.90       29.6     17.7        2.75     4.7                 11.4        38

Unilever                 170.93        21.4      13.0        2.64    17.1               n/a          57

Reckitt Benckiser   68.34         14.5      12.1        2.03     4.7                 n/a          44

Linking to dividend paying stocks, charts similar to this allows you to narrow your field and choose alternatives. Ideally when you look at the list you will not know every company name or industry it is in. That is good, because we all have biases to how we earn a living or what we work at. The great thing about the lists is you can look at over industries and determine what is their competitive advantage and go from there. There are always alternatives, most of us are bias to one sector or another.

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

 

 

 

As individuals and investors, there is a desire to try to understand different viewpoints and if it directly relates to making money, is there something to be gained? In US politics President Trump either believes or leans to believing conspiracies theories (and he is the President of the government). While those with a cynical eye find it hard to justify every conspiracy (even though all have some level of truth among the theories, some such as the JFK single bullet theory seem to have more truth about them) many of the conspiracies seem to be out there.

A couple of years ago, Jonathan Kay wrote a book called Among the Truthers published by HarperCollins Publishers, New York, 2011 in an effort to understand who and why Truthers are. In turns out the vast majority are the average daily folks who use the knowledge found on the internet and are able to present their ideas. Some ideas are great, some are out there, and in a free country all ideas are good. Similar in the investing world some ideas are great, some are out there but ideas are welcomed. Every once in a while, you will hear or see someone who has a magic system to beat the market, in reality the easy way to beat the system is to buy an index fund and hold it for years. The index fund will trend upwards because the index makers discard the dogs and replace them with stars every 6 months and thus over the years the index goes up. If you can regularly sell the worse performing stocks and replace them with stars, then over the long run you will make money.

Linking to dividend paying stocks, another tried and true method is over the long term buy profitable companies which does three things. One profitable companies stocks fluctuate but generally they stay go up over the years; Two the number one rule in investing is try not to lose money – even if the market fluctuates profitable companies tend to move in an upward direction over the long term; and three even as the market fluctuates it is good to receive money on a regular basis or a dividend. Similarly to the world of truthers, where people spend endless hours on their theories, it is good to have ideas and spend time on them. It is good to have ideas – some will be great, some will not be and hopefully somewhere you will learn which is which. In investing, the idea is not to lose money so that should help you in figuring out what a good idea is and is the time is ripe for it to make money for you.

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