Sunday, February 28, 2010
We are dividend investors and lost among all the talk about dividend investing is the subject of valuation. We say that dividends are important for two reasons: 1. They have represented almost 50% of the total rate of return of stocks over the last 50 years; and 2. In many cases dividend growth is highly correlated with price growth.
Thursday, February 18, 2010
Monday, February 15, 2010
- They did business all over the world, so they were insulated from what was going on in the US or Europe.
- They had a low debt to equity ratios.
- They generated enough free cash flow to fund their working capital needs, so they did not need to be begging the banks for money. This free cash flow also gave them access to the capital markets.
- They sold products that we use every day, what I call "essential services" products.
- They were the undisputed leaders in their businesses, which allowed them to influence the competitive landscape for their whole business sector.
- They had been around long enough to establish a powerful brand, and they were extending their brands in the developing countries of the world.
- They treated their shareholders like owner-partners by paying a generous dividend.
I told my friend that these companies did not have the power to issue currency, nor field a standing army, but in an increasingly global economy, they had something better. They had created mutually beneficial relationships with billions of people the world over, who, on a daily basis, chose these "Gold Standard" companies' products and services more often than those of their competitors.
I concluded with the following. "I said I called these companies "Gold Standard" companies. I mean that literally in this way. Gold has long held the mystique, if not the reality, of being the ultimate store of value. Thus, in very difficult times when the financial system creaks and groans lots of money always goes into gold until the dust clears. But Gold's rate of return over very long periods of time has been poor, little better than inflation. The "Gold Standard" companies that I was thinking of had just as impressive a record of surviving the bad times, but had produced a compounded annual return that beat gold handily."
"Gold Standard" companies have been refined in the flames of countless tough economic times. Companies rise to the level of the "Gold Standard" not because they have survived for 25 to 50 years, but because they have grown for 25 to 50 years.
My conversation with my friend was now over a year ago, and while things have gotten better, there are still worries a plenty. But as I remind our clients often, "We are not investing in countries we are investing in companies. Companies that have been tested by time and have become more powerful because of the testing."
Sunday, February 07, 2010
Monday, February 01, 2010
- Q4 earnings are surprising to the upside, in large part because of aggressive cost cutting.
- Quarterly year over year earnings are higher for the first time in almost 2 years.
- Revenues are no longer declining, they are starting to grow modestly.
- GDP was very strong in Q4.
- Unemployment remains stubbornly high, around 10%
- The Fed is keeping the Fed Funds Rate low at 0% - 0.25%
- Dividend stocks have outperformed non-dividend stocks over the past 1, 3, & 6 months, reversing the “Survivors’ Bounce” effect of March-September.
- Dividend paying stocks have lower P/Es than the market average.
- Emerging market economies are strong; Europe is weak; US is recovering In our view, the CRUD uncertainties are a temporary issue. The fundamentals of business and the economy are headed in the right direction, and in general, valuations still favor our dividend-paying stocks. The primary remaining uncertainty with Rising Dividend stocks is just how much they will increase their dividends for 2010. We have no idea yet, but two of the earlier announcements were good omens. Praxair (PX) and CVS (CVS) Drugs each increased their 2010 dividends per share by about 13%. EPS estimates for the coming year for the S&P 500 are at $77.95, a near 25% increase over 2009. The 2011 earnings forecast is $94.56, a 21% increase. If the estimated P/E ratio for the market were to be at its long-term average of 15 at the end of this year, and expected 2011 EPS were still $94.56, the S&P 500 would be at 1418, or nearly 30% higher than today’s market close. The Committee is not predicting a 30% gain in the market. But, with fundamentals improving for the economy and businesses, we continue to believe that total returns for 2010 will be quite good. A newly added variable to the market psychology equation is President Obama’s proposed fiscal 2011 budget. His official budget proposal was made public this morning. Over the next several weeks, the Investment Policy Committee will be studying the budget’s major elements, as well as their interpretation by investors.
Randy Alsman, Editor