12 Random Ramblings

Every working day of our lives we get questions.  Questions about the stock and bond markets.  Questions about how natural disasters, politics, or economic and business crises will play out in the market place.

In this weekly blog we try to keep our comments narrowly focused on our dividend investment strategy.  As we were composing our most recent quarterly letter we admitted to our readers that at times we sound like a one trick pony:  our solution for every challenge and every opportunity is always -- buy and hold quality rising dividend stocks.  In the long run we know that will work.

Yet the matters we discuss and decide at our weekly investment policy meetings cover the waterfront of issues.  In this regard, heaven help us, we are like politicians because we have to have a basic understanding and a few talking points on just about everything that is going on in the world.  

We thought our readers would appreciate our short takes on a long list of issues facing our nation and the world.  Normally, when we write these blogs or our client letters, we try to offer solid proofs for our positions.  In this piece, we are not going to do that.  We are just going to give our views, without supporting arguments.  This way we can cover a wide range of issues that you may have questions about.  It is our plan to periodically offer an update to what we are calling 12 Random Ramblings from the Investment Policy Committee.

1. Stocks are undervalued by about 25%.  Energy, Industrial, and Consumer Cyclical stocks are very cheap.
2. US Government bond yields are at historic lows, but will not rise much over the next year.
3. Inflation will fall.
4. US Corporate profits will continue to surprise to the upside, driven by business in developing nations.
5. Greece is already bankrupt, but the European Union will keep the country on life support for an extended time.
6. The market has already priced in a Greek default.
7. The US economy will not fall into recession and may surprise to the upside in the fourth quarter of this year.
8. The worldwide economy will grow by at least 3%, after inflation, this year.
9. Dr. Doom, Nouriel Roubini, has signaled better times may be on the horizon for the US and the world by putting his investment advisory firm up for sale. 
10. The average dividend payout ratio for the S&P 500, which is now, under 40%, will move back toward its 80-year average of 50% over the next five years.
11. There is still a chance that Hillary Clinton will run against President Obama if his polling numbers don't improve by December.  She would likely beat any Republican, and the stock markets would rally, not because her views are so much different than Obama's, but because the economy and the markets did so well under Bill Clinton.
12. If  Roubini is selling his company, the price of gold may have already seen its highs.

Greg Donaldson, Chairman of the Investment Policy Committee

Donaldson Capital Management, LLC

Nextera Energy: A Dividend Star on The Rise

Normally we are suspicious when old-line companies take on new names.  We have too many bad memories of the collapse of many of the new-name crowd during the Tech bubble. In rare cases, we believe changes in a company's name makes good business and strategic sense.

We believe Nextera's (NEE) name change is both an improvement over their old name, FPL Group, and an important milepost of the maturing of an exciting business strategy.

NEE changed its name from FPL Group a little over a year ago.  The name FPL Group was a change from the company's original name of Florida Power and Light and became necessary when the company began expanding well beyond Florida.

But the most important reason we like the new name is because we believe NEE is truly a very different kind of power company.  Indeed, since 1989 they have increasingly taken on a "Next Era" attitude toward electric power generation.  In the above link, they state that they now produce nearly 95% of their electric power from clean or renewable sources.  They are now North America's leader in sun and wind energy.  In addition they have a long history of safely operating nuclear power plants.  In short, today Nextera is one of the nation's top clean and renewable electric power producers.  We believe they are just beginning to reap rewards for their 20+ years of investing in alternative energy sources.

Recently, we have been adding to our NEE holdings because we believe the stock has a very bright future and our Dividend Valuation Model (above) indicates the stock is approximately 20% undervalued.

Even with President Obama's pullback on more stringent EPA emissions standards, existing clean air regulations are forcing more and more electric utilities to close old, less efficient coal-fired generating plants and abandon new coal-fired plants.  The bottom line is that many Midwestern power companies are scrambling to gain access to clean and renewable energy sources, and NEE has it for sale.

Here is a short list of other reasons why we like NEE:

1. Current dividend yield is near 4%.
2. 5-year dividend annual growth of just under 8%.
3. Projected 3-5 year dividend growth of near 6%.
4. Current dividend payout ratio is near 50%, much lower than industry average of 70%.
5. Paid a dividend since 1990
6. Increased its dividend for 15 consecutive years.
7. Stock is currently selling at a PE of 12, much lower than the industry average of 15. 
8. Company operates in 26 states mainly in the growing southern region of the US.
9. One of the most forward thinking management teams in the industry. 

NEE's exposure to nuclear power may be seen by some as a negative.  However, with Southern Company's recent application to construct the first nuclear power plant built in the United States since the 1970s, we believe there is a growing belief among many investors that nuclear power will continue to be an important low cost source of electric power. 

We own NEE and have no plans to sell it.

Greece is Burning But Many Multinational Dividend-Paying Stocks Are Still Cool

CNBC.com recently quoted excerpts from one of our blogs about the great values in dividend-paying multinational corporations.  CNBC.com's article included our views along with other money managers that are saying the same thing.  Here is the link to the article: CNBC.com.

The quote used in the article was taken from a July 29 blog written by Randy Alsman, one of our senior portfolio strategists.  Here is a link to Randy's full blog: Rising Dividend Investing.

We are happy that CNBC picked up our story-line.  We believe the evidence is conclusive that global companies have a flexibility and financial power that is being completely ignored in today's stock market.  We are particularly pleased that it is CNBC that is digging into the great story of multinational dividend payers.  CNBC and its multiple media brands have a reputation of being aimed at traders and speculators, spending little time and attention on long-term value investing. In that regard, we tip our hats to CNBC.com.  They took the time to talk with some veterans in the business who have been through crises before and believe that the current level of fear in the market cannot last.

One day the panic will subside, and when it does we believe the first place investors and even traders and speculators will go is to the financially strong, multinational companies for exactly the reasons that Randy detailed in his blog.

Yet, as we write this edition of our blog, traders and speculators are abandoning stocks of all stripes and rushing into US government bonds, driving bond prices to unbelievable heights and bonds yields to depths not seen since the 1950s.  Is there a bubble under Treasury bond prices? -- you bet!

When considering that our government is borrowing 40 cents of every dollar it spends, and is so politically stalemated that the only thing legislators can agree on is TGIF (but only if G stands for goodness), the confidence speculators are bestowing on US Treasury bonds is nothing short of amazing. 

Multinational corporations possess qualities that are not being fully appreciated or valued in today's market.  That old saying about cream rising to the top is very applicable today in our judgment.

Greece is burning.  Indeed there are signs of smoke in many countries in Europe, but the earth will still be spinning when this most recent "debt spiral" winds down.  For reasons included in the long list of attributes that Randy detailed in his blog, the safest bet we know of is to stick with with what we know and what we know is good.  That is multinational corporations that pay a generous dividend.

Thanks again to CNBC.com.  To our knowledge this is the first time they have quoted us. We are honored that they included us in their story of the merits of dividend-paying companies.

We own many multinational companies that pay a generous dividend.