Bob Johnson

Portfolio strategy, dividend growth investing, mining
Bob Johnson
Portfolio strategy, dividend growth investing, mining
Contributor since: 2011
David, I'm a happy camper with KMP. You've created quite a reference library on the Kinder companies, and I'll dig into the details when I have more time. Meanwhile, the money keeps coming in. Best, Bob J
Thanks, Old Guy. Every investor has different goals, finds different aspects of a stock attractive and has different fears. Happily, there's a wealth of choices in the stock market. Best, Bob J
Anthony, A very reasonable explanation. Thank you. Bob J
Anthony,
Thank you for the informative article.
I noted that you used the phrase "low risk" several times. However, you state, "Every fund is different, but generally, +/- 90% of the investments are loans with B, BB or BBB credit quality." In the financial world, those grades are not considered "low risk", but disparagingly are sometimes referred to as junk grades. While it may be true that the funds mitigate risk through diversity and their expensive due diligence, these funds do not consist of high quality, often called investment grade, securities. These would begin with AAA and go through AA and to BBB+, depending on which of the three rating systems is used.
I don't believe you intended to mislead and I think I know what your were trying to say. However, I believe the use of terms could be confusing to some. I also believe that the fact that it is a levered fund adds to the risk in some circumstances.
I hold LIQ and JNK.
Best regards,
Bob J
Iron Ore Price Crashes Through $90 - 6/17/2014
"Benchmark iron ore fell more than 2% on Thursday to fresh lows last seen September 7, 2012.
According to data from the The Steel Index, the import price of 62% iron ore fines at China's Tianjin port was pegged at $89.00 per tonne, down $1.90 on the day and the first time below $90 in 22 months." http://bit.ly/1jvGEKh
On June 16, 2014 the Iraq issues have been cooking for a couple of weeks, and BPT is up to $99. How much of the oil on the planet is in safe places? COP should benefit too.
Kevin Kaiser is a reckless and irresponsible young man. Ignore him.
Best,
Bob J
Thanks silver.
I truly value your thoughtful and well researched comments.
Best,
Bob J
Silver,
@Tack,
In my considered opinion, Vale did well in years past because 1.) the price of iron ore was much higher; 2.) the competitors were not as productive and efficient as they are now.
Today, with a much lower IO price, about $100 and perhaps headed lower, Vale is not competitive. They are now lagging their competitors in production costs, RIO the lowest at $20/ton. Vale provides a decreasing share of the total IO production as today's production is split roughly into thirds between VALE, RIO and BHP.
Vale was the leader and a profitable company in different times under different circumstances. Those times are gone, lost in the past. In these competitive times of low commodity prices, the burden of having the bureaucratic and corrupt government of Brazil around Vale's neck weighs heavily. The cost of being more distant from China than Western Australia remains. The past glory of the miner will not return.
The winning competitive culture of Rio Tinto under Sam Walsh and the thoughtful, disciplined but flexible, leadership of BHP Billiton CEO Andrew Mackenzie drive their firms to their current successes, and their competitive nature assures it will continue into the future.
Best regards,
Bob J
I really object to being accused of any kind of bias and bigotry. "I know at the base of many Iron Ore bashing articles is an anti-Chinese sentiment."
I have some Mainland China visa stamps in my passport, probably more recent than yours. I have also been to Hong Kong many times. In addition, I am married to an Asian woman.
Tack,
Sorry, I could have added more detail.
Rate of Return, in this case, is what is returned to the investor for his investment. Internal rate of return is usually abbreviated IRR, and as I am sure you know is an entirely different thing.
The Rate of Return, ROR, is what the investor gains over a period of time on an annualized basis. The Total Rate of Return, is price appreciation plus dividends paid. All of the numbers for that comment were taken from F.A.S.T. Graphs which allows you to set different numbers of years for consideration, and displays price appreciation, dividends paid and Total ROR for the period. In addition, it displays the annual increase or decrease in dividend growth for each year.
Best regards,
Bob J
Chuck,
Thank you for another stimulating article.
In reflecting on the groups of stocks you presented I availed myself David Fish's CCC spreadsheet and jotted down the 5 year beta of each stock in the first three groups of stocks.
My observation is as follows:
7 stocks showing little or no stress, average beta 0.59
8 stocks showing moderate stress, average beta 0.96
5 stocks showing substantial stress, average beta 1.18
I find the observation of hard data very interesting and sometimes very useful. However, I offer no conclusions based on this observation but only suggest it might be of value to ponder it.
Best regards,
Bob J
silver,
Companies have to continually redefine themselves as times change. Mining companies historically and at the present take forays into additional ventures to become more completely vertically integrated or to add diversity to their portfolio of revenue sources.
Southern Copper, SCCO, is largely owned by a holding company which owns several railroads in Mexico as well as a construction business. Some other major miners own or have owned transportation resources and these include Vale with both railroads and ships. BHP is a part owner and developer of ports.
In diversifying their portfolios, miners often branch into other areas of natural resources. Freeport-McMoRan Copper and Gold, FCX, is back in the energy business. Being purely a copper miner is about as dangerous as being purely and iron ore miner, as the current situation in Indonesia is evidence of. I believe that some miners, including Vale, have been in the forestry business and also the owner operator of pulp and paper mills.
Glencore, formerly Glencore-Xsastra, defines itself as being a large integrated natural resources company. They are involved in Metals and Minerals, which includes the mining of copper, zinc, nickel and aluminum, as well as the smelting, refining and warehousing of these products. As a byproduct of the zinc mining and refining, they are also a manufacturer of sulphuric acid. They are involved in Energy Products, primarily oil and coal and their storage and freight facilities. Glencore's third area is agricultural products. This includes the production, handling and storage of grains, ois and oil seeds, cotton and sugar. In all, they deal in 90 commodities.
Mining companies often seem to be in the process of diversification and acquisition or conversely, the process of divesting of non-core assets.
The important thing, as you so clearly point out, is performance over time. There are price statistics, as you quote and also Total Rate of Return, ROR, figures for various periods, 15, 10 and 5 years. We will also cite the 2 year Dividend Growth Rate, DGR. This is an indicator of how the shareholders have been treated recently
VALE
15 year ROR, 19.3%
10 year ROR, 7.4%
5 year ROR, -20.1%
2 year DGR, -25.0%
RIO
15 year ROR, 9.9%
10 year ROR, 3.5%
5 year ROR, -6.7%
2 year DGR, 19.0%
BHP/BBL
15 year ROR, 13.3%
10 year ROR, 10.5%
5 year ROR, -4.3%
2 year DGR, 7.5%
BHP/BBL alone has a policy of continually increasing dividends and has done so for 11 consecutive years.
In the past 10 years, BHP/BBL has had 10 dividend increases. In the past 10 years, RIO has had 7 increases and 3 decreases and VALE has had 7 increases and 3 decreases.
By these important measures, BHP/BBL has been the steadiest performer and the strongest performer overall for the past 5 years. RIO had a weaker 5 year ROR, but is running a close second. Vale has clearly been the worst performer for the past 5 years, with a 5 year ROR of -20.1% and a 2 year DGR of -25.0%.
Vale's strong reputation, based on the company it was 15 or 20 years ago, still influences some investors. However, they would be wise to look at the facts concerning more recent performance, as shown in your stock price numbers and the 5 year ROR and 2 year DGR figures above.
Best regards,
Bob J
Interesting article, but lacking some of the usual financial figures.
PEG Ratio 5-Year, -0.10
Return on Equity, -50
EPS TTM, -6.4
EPS next year, -2.79
Not a pretty picture.
Best regards,
Bob J
Paul,
And to think I was going to sell my COP which I bought at $58!
Excellent, thorough and fascinating article.
You just earned a follower.
Best regards,
Bob J
red99car,
This article might interest you. It was released yesterday, 6/13 by Motley Fool Australia. http://bit.ly/1kzyvE9
Best regards,
Bob J
formerly crew, 97C ('57 Chevy), Class C stock, 1961-1962
1Great,
Your question is a very good one. Vale has promoted itself as #1 for a very long time as have the sell-side analysts. This once-true position as the leading iron producer has been sliding away for several years. It currently has a slight edge in volume, and unquestionably has some of the richest ore sources on the planet.
Vale has become second rate because of its recent inaction concerning productivity. No doubt this is a result of the burden of being under the influence of a political bureaucracy, which is corrupt.
Formerly the low cost producer, that profitable honor now goes to Rio Tinto, whose CEO, Sam Walsh, has made great productivity gains in the past year and who has announced that Rio now has the lowest production costs in the industry at $20/tonne. Most of the up to date facts regarding Vale are available at http://bit.ly/1kzwXKp
My personal opinion is that number four producer, Fortescue, may be in trouble before the iron ore glut is over. This is owing to lack of the efficiencies of scale and the higher productivity of the larger firms, and is exacerbated by its high debt level. In addition, I would rank BHP as higher than Vale on productivity, profits and predictability... with 11 consecutive years of dividend increases, compared to Vale's stunning losses, declining stock prices and dividend cuts. Therefore, perhaps it is more accurate to name Vale as third rate.
I hold BHP and, by the way 1Great, I read your profile. I also hold RY, BNS and BCE and write on Canadian banks and telecoms as well as mining and portfolio strategy.
Best regards,
Bob J
silver,
So true. But no one else in the industry has 11 consecutive years of dividend increases, the diversity of BHP or the large scalable resources in stable countries.
Compared to other sectors, mining has not done well in the past several years. However, I believe your investment in BHP is safe and sound, and the minerals in the ground managed by them are a terrific long term hedge against inflation, while yielding nearly 4%. In addition, the average annual rate of return on BHP for the past 12 years is 15.3%, and the 10 year average dividend growth rate is 25%.
I am very happy with my investment in BHP, even though other stocks have had more dramatic price run-ups, especially if bought in the past 5 years. BHP has treated me well and may make my grandchildren rich.
Stay the course.
Best regards,
Bob J
7707,
I certainly did speak of long-term profitability and return on equity and illustrated and reported on shareholder value and share price.
3 year annual revenue CAGR, -9.63
3 year stock price, -25.58/year
ROE, current, -0.75
ROE 2012-2013, 1.19
Net income TTM, -127.08M
EPS past 5 years, -51.50
EPS estimate next year, -1.57
These numbers are exactly what was reported in the article in various tables of data.
"Morgan Stanley cuts its iron ore price estimate for this year and foresees a further drop in 2015, as a seaborne surplus grows faster than expected and the level of cost support at Chinese producers declines.
Prices are expected to average $105/ton this year vs. $118 forecast in May and $135 in 2013, and average ~$90/ton in 2015, 21% below an earlier estimate." Bloomberg, 6/12/2014. Cited above with link in a comment by me.
How's this for logic: if Vale can't turn a profit with IO prices at $135/tonne, how well are they going to do with prices at $105/tonne this year and $90/tonne in 2015.
Add to this that Rio has improved efficiencies and capacity tremendously in the past year. Vale is a year behind them in efficiency and Rio Tinto CEO, Sam Walsh, says his cost is $20/tonne, the lowest in the industry.
Longer term, industry predictions are that IO prices will not bottom until 2016, and that the supply surplus will continue through about 2018.
Review the facts, "just the facts" as reported in the article. Too often we are swayed by sell side analysts and unknowingly buy into company propaganda. In addition, there is a historic mythology about the firm, created in different times, which is no longer useful.
Don't let out of date ideas cost you money.
Best regards,
Bob J
Dale,
Congratulations on a great article and a well earned editors pick.
I concur with many points. I especially agree that is smart to own some assets which are not highly correlated to the major US indexes. Bonds are the classic example, and cash works too. Other strategies can include small cap stocks, international equity holdings and alternative investments such as royalty trusts, MLPs and real estate. I have some of each and have recently added to my bond holdings. In the last 6 months, LQD is up almost 4% (what interest rate increase?), and JNK (somewhat stock like in movement) about 2.5%.
Keep up the good work, Dale.
Best regards,
Bob J
Shangha,
I believe that Vale does indeed make pellets, and currently has a joint venture with Rio in an operation. Are we talking about a different market for pellets? Isn't most pellet production marketed to the Americas where natural gas is cheap and to Europe?
The rocks from the Carajas region in the Amazon Basin average 67% iron, the highest in the world. This is their strongest advantage.
Best regards,
Bob J
Colin,
Thank you for the interesting article on Australian & New Zealand Banking Group.
The strategy of the bank sounds a little like that of Bank of Nova Scotia (BNS), a holding of mine which is one of the Big 5 Canadian banks.
The stock of the bank is not listed on a major exchange in the US, but rather trades OTC, that is, over the counter, as ANZBY. This greatly decreases the coverage of the bank by major US data reporting services, Yahoo Finance, etc., and is more likely to cost a small buyer or seller a premium than a more liquid listed issue.
For a possible US based buyer, there are at least two other issues. First, there is currency risk, inherent in any foreign issue. Your comments? Second, Australia taxes dividends to foreigners, unless those dividends have been fully franked. The status concerning that?
I note that NYSE listed Westpac Banking Corporation, WBK, which I hold, has tracked ANZBY very closely for the past one year period. That firms pays a fully franked dividend at a slightly higher rate, 5.2%, rather than the 4.86% dividend of ANZ Bank.
I am sure you would agree that both of these banks are sound investments. However, for the US investor, this one at least, it makes more sense to own WBK.
Best regards,
Bob J
silver,
Please see my response to a similar question above from Slowly Learning.
Best regards,
Bob J
Cash McCall,
I have included a comment to you at @Cash McCall in my comment to jenksjr below.
Bob J
jenksjr,
Perhaps this news will help you understand the realities of the current, and intermediate, iron ore prices.
@Cash McCall
I take umbrage with the remarks saying "you are wrong", "Iron ore prices are normalizing from a shortage situation six years ago." Your malicious remarks such as "Your article was propaganda and flatly misleading" are uncalled for. Those remarks are clearly refuted by facts. I invite you to take your hostilities elsewhere.
"Iron ore price outlook cut by Morgan Stanley, miners lower premarket
SA – 8:28 AM Thursday 6/12/2014
• Morgan Stanley cuts its iron ore price estimate for this year and foresees a further drop in 2015, as a seaborne surplus grows faster than expected and the level of cost support at Chinese producers declines.
• Prices are expected to average $105/ton this year vs. $118 forecast in May and $135 in 2013, and average ~$90/ton in 2015, 21% below an earlier estimate.
• Iron ore has dropped below $92 for the first time since 2012 as mining companies boost output, betting that rising exports to China would more than offset lower prices.
• RIO -2.9%, CLF -2.8%, VALE -1.3%, BHP -1.2%, MT -1.2% premarket."
I invite you to read this news release/article in its entirety, posted this morning at 7:45 by Bloomberg. http://bloom.bg/1iqIzj7
Hey, Old Guy,
I'm an old guy too and I know exactly how you feel. Maybe you will find this article helpful. http://seekingalpha.co...
Best regards,
Bob J
I cringe every time I see CLX on a list like this. I find their level of debt too high and also the payout ratio too high. Currently, they are also overpriced with a P/E of over 21.
David,
I appreciate the thoughtful article, and it made me not only think, but do a little research.
I believe the current P/E of the S&P 500 is about 19.5
"Current S&P 500 PE Ratio: 19.47 -0.00 (-0.02%)
4:31 pm EDT, Tue Jun 10
Mean: 15.51
Median: 14.55
Min: 5.31 (Dec 1917)
Max: 123.79 (May 2009)
Price to earnings ratio, based on trailing twelve month “as reported” earnings."
http://www.multpl.com
To me, that indicates the market is a little overpriced. Regardless, the market will act like the market, and for whatever reasons there will no doubt be a correction.
"Stay the course". Famous words from John Bogle are now part of the Vanguard mantra. The only problem I have applying that directive to many of todays investors, is that they may not be on the right course, certainly not one that Bogle would approve of.
I believe that many investors are now in 100% equities. In addition, many are invested very heavily in S&P firms, mostly large cap stocks, all American issues. This makes these investors the most susceptible to a correction in the market. Their portfolios are unbuffered by the stabilizing power of bonds and the diversity of international holdings. Bogle never advocated that.
I believe it is prudent to unhook one's portfolio of investments from the narrowness of the cap weighted major indexes. What I believe is prudent is what I have been doing with my portfolio since the beginning of this year. I now have more diversity and more bond holdings and today my daily gains and losses do not correlate closely with the major indexes.
I know not what the future will bring but am better prepared for the eventual and inevitable corrections and market swings than I was a year ago.
Keep us thinking, David.
Best regards,
Bob J
adecinvestor,
Your points are noted.
Best regards,
Bob J
Palladium,
Thanks for the comment.
Perhaps you are a "newb" not a "noob".
"Newbs are those who are new to some task and are very beginner at it, possibly a little overconfident about it, but they are willing to learn and fix their errors to move out of that stage. n00bs, on the other hand, know little and have no will to learn any more." For a very complete definition, several pages, you might look at the Urban Dictionary. http://bit.ly/1qtagNe
Coming attractions: Wait until Chinese officialdom finds out that a number of different borrowers are using the same pile of red dirt as collateral for loans. Joking, of course. And no, it is not true that the copper scandal will be 10 times as large. Nor is it a fact that China is going to sell all its US Treasuries and buy Africa. Just a lot of idle speculation, undoubtedly by n00bs.
I encourage you to keep up your research and your thoughtful questions. At the end of the day the insights you gain will prove to be an important factor in your investing success.
Best regards,
Bob J
Brian,
I appreciate your comment.
I agree that there are some enticing quantitative metrics. How to factor those into valuation, in light of very ragged earnings and dividend performance, is difficult.
One thing you can count on, I believe, is that Vale isn't going to go out of business or be bought out in a hostile takeover. The government of Brazil with its Golden Shares and ties to the Brazilian pension fund and Banking system assure that.
Two other things you can count on: Brazil will remain further away from Asia than Australia is, at least $10 a tonne further away. Second, Vale's involvement with the Brazilian government will always mean that there are politicized aspects of Vale's management, some will work at cross purposes to corporate profits.
I do not look further ahead than 3 years for payback on an investment. The residual returns are very uncertain after that, and discounted to today's value are small. Projections by the mining companies indicate very soft iron prices for 2015, 2016 and 2017. Therefore, I see no turnaround for Vale within my investment horizon.
I do not pay too much attention to the stream of projections for IO prices and company profits by the sell side analysts. They seem to be ever changing. When I see a headline that says "Citibank sees IO prices for 2015 at $xxx", or "JPM finds profit ahead for Vale and maintains a Hold on the stock...", or ":Goldman says that...", I take little notice. I understand the mixed motivations of investment bankers.
If one chooses to look further than three years ahead for value, I believe that an appropriate purchase price, considering the risks involved and the discounted value of 2018, 2019, 2010 earnings, should be less, perhaps much less, than a $12 selling price. I will qualify that by saying looking that far ahead for returns is not something I do, or know a whole lot about.
Consider, I have been told that the amount of gold on the entire planet would fit into an Olympic sized swimming pool. Whether that is a fact or not, we can agree that gold is scarce. Iron, on the other hand, makes up 5% of the crust of the earth. Does anyone know how much high grade ore will be found in Africa during the next few years?
Thank you also for the complement. I hope that my contributions add to the body of knowledge available at Seeking Alpha and provoke thoughtful deliberation. I strive to be accurate and conscientious in my articles and responses to comments. I am often right when I offer opinions, but certainly not always. Therefore, I respect those with well considered opposing views.
Best regards,
Bob J
Silver,
You don't make the most elegant choice of words but your point is clear and aligns with the facts presented.
Best regards,
Bob J
Slowly,
Yes, I do. Not only is BBL the most diverse but their major assets are in low risk countries. They seem adaptable and will continue to adapt. They have a depth of good management and have excellent business practices.
That said, Rio Tinto has had a remarkable turn around under the leadership of Sam Walsh. However, some of their assets are in high risk locations like Mongolia and African countries.
I am a long term holder of BHP Billiton and own BBL, the London registered stock of the dual listed company. This has tax advantages, for me at least, over the Melbourne, Australia registered BHP.
BBL has a progressive dividend policy, and it is their stated intent to increase dividends on an annual basis, and at worst, not cut them. They have increased their dividend for 11 consecutive years.
Best regards,
Bob J