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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

 

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

The criteria he used was:

market capitalization – higher the better

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

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

Debt to equity ratio less than that of the sector median

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

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

AT&T                    248.848          4.26                     63.58          57.54                         0.8                     4.75

Pfizer                    207.081          3.51                     44.44           44.44                        0.94                  3.51

Phillips 66             41.357         3.19                      43.83             43.83                       0.41                   3.19

Exxon Mobil       352.796         3.53                      68.18             68.18                       0.23                  3.53

Valero Energy      25.922         4.27                     43.72             43.72                       0.42                  4.27

Abbott Labs          60.446         2.53                     42.28             42.28                      0.56                  2.53

Carnival Corp       35.658          1.87                     37.33              20.08                   0.48                    3.01

Accenture               92.688        1.99                     37.64             37.64                     0.01                   1.99

General Dynamics 46.451       0.96                     30.37             12.76                     0.43                   2.00

Honeywell               87.713        1.02                       32.94            15.33                     0.83                   2.06

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

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

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.