Dividend Sleuth

Long only, value, growth at reasonable price, dividend income
Dividend Sleuth
Long only, value, growth at reasonable price, dividend income
Contributor since: 2012
Company: Board of superannuate homes
I could see dollars migrating yesterday from HCP and WPC to O and NNN.
Thanks for a fair, concise assessment, Brad.
Thank you for your response, whitegold33. You have a good temperament for investing! All the best to you!
Thank you, SDS, for helping me clarify my thinking about the process of stock study. All investors "screen" stocks. Some do it methodically and some do it by choosing from a pre-selected group of stocks (such as the S&P 500, or David Fish's "CCC" universe). Some do it anecdotally, such as when a friend mentions that he or she has bought a particular stock, or when one reads an article about a stock on Seeking Alpha and decides to buy it.
I think of my checklist as a tool for winnowing, or narrowing, the vast universe of stock possibilities. Each step in the checklist is an opportunity for a company to be eliminated from consideration, although it is not automatic. Sometimes I'm willing to make an exception about credit rating, such as when I bought Enviva (EVA) when it was a new issue. Right now, given the chaotic nature of markets, I'm limiting new holdings to an A- or better credit rating.
There are many other factors to consider, which is why I go down the checklist to investigate further. I'm confident there are many worthwhile candidates for purchase within the universe that meets the criteria I seek for credit rating, dividend growth, prospects for earnings growth, etc.
You helped me by saying "credit agencies indeed worry about debt...." I consult the credit rating because I, too, worry about debt. Excessive debt was a major problem I encountered with several investments during 2008-09. As Lowell Miller says in his book, the credit agencies provide investors with a shortcut by doing some of the evaluative work for us. As the movie The Big Short has made clear, the ratings agencies are not perfect, but for me a company's credit rating is, simply, a place to start the filtering process. Have a great day. It looks like this may be a good day to buy!
RGB, thank you for an excellent, concise summary. WPC is one of my oldest and best performers and at times it has been my largest holding. For the reasons you cited, I have sold all but my core, original shares (with a $23.99 cost basis) that have produced lots of dividends since July, 2009. I would add two pieces of the puzzle which may help newcomers understand the present situation. Mr. Carey began his business career internationally (particularly with an early venture in Australia) as an investment partner with, and manager for, high net worth individuals. So, WPC's international perspective and investment management business were both in place before the company decided to operate as a REIT.
From a "side comment" at their most recent Analyst Day event, I was given the impression that this "pivot" is to prevent a government challenge to their REIT status. It wasn't clearly spelled out, but a comment by one of their executives seemed to imply that the possible pivot was in response to regulator concerns rather than a company idea.
I reduced my portfolio's WPC allocation because of their relatively low credit rating, which is BBB. This compares to BBB+ for Realty Income (O), National Retail Properties (NNN), and HCP Inc (HCP). BBB is still considered "investment grade" (BBB- or better), but in light of our economic uncertainties, I'm trying to move up the credit rating ladder a bit. I do not know if S&P has rated WPC a notch lower than O and NNN because they have found a niche for partnering with non-investment grade tenants. I'm satisfied with their due diligence, which you ably described, so I have no major concerns. I'm aware that in a recession, the "counter-party risk" has to be re-assessed, and there are more unknowns as one moves down the credit ladder.
Like many investors, I was content (apart from their BBB rating) for the company to continue with their REIT + investment management business + business development subsidiary (their newest venture). If the pivot occurs, my "best case" scenario is that the remaining US REIT entity would receive a favorable nod from S&P and move up a notch to BBB+.
WPC's recent drop in share price tempts me to double down while we wait.
Thanks, texasbucks, for your comment. That's a helpful, boots-on-the-ground insight.
Thank you. SDS, for your helpful comment. Indeed, different services sometimes calculate data in different ways. I mentioned this relative to EPS, which seems to be the one metric with the most variance. I tend to use the checklist as a "big picture" tool rather than a precise, surgical instrument. There is some built-in overlap, which forces me to consider more than one option for EPS, as an example.
I think your credit rating question is whether there is a correlation between credit rating and a company's dividend policy. My main concern is for the health of the company. If a company cannot be counted on to pay its debts, my hunch is that the dividend is in jeopardy. There is not a direct correlation because a company with a high credit rating may not have dividends as a priority. As a dividend investor, I like a margin of safety. So, I'm not adding any more companies with a credit rating of less than A-, and as opportunities occur, I will trim or sell those in the portfolio with less than a BBB+ rating.
Thanks, Dennis. Wise words, indeed!
Good question, Robert. I seem to have accumulated a collection of those lately. The QCOM "accident" took place this way: earnings and cash flow disappointment, questions about the company's growth potential, and weakness in the tech sector. This was enhanced by QCOM's growing focus of increasing dividends and share buybacks. That would be my testimony in traffic court. :-)
My pleasure, Nigel. You're right about the writer learning a great deal! Thanks for your comment. Have a great day!
"As to my prediction of where the market will go? Honestly, I don't know now."
What? No Fibonacci sequences? No Bollinger Bands? No Stochastic Oscillator? No AFC Super Bowl thesis? No Gomer Pyle slap two fingers against a table method? Not even a Ground Hog Day forecast!
Come on, Ian. This is the stock market! You need to at least appear to know, even if you don't.
:-)
Montrachet, thank you for your comment. I hadn't considered the VC landscape. So, I'm now in the Fortress Gorilla Club. Cheers! :-)
Thank you, scoots. This is helpful information for anyone contemplating an investment in QCOM. I've looked at it numerous times in the past, mostly when it was a growth stock rather than a dividend stock. You are echoing Guy Adami's view that QCOM can't get out of its own way. I have felt that way about other stocks in the past, such as JNJ, PG, WMT and IBM. I am hopeful, though not necessarily optimistic, about QCOM. Perhaps my expectations as an income investor are less strenuous than those who invested years ago when the focus was primarily on capital appreciation. We'll see how it turns out. As always, I welcome your insights about how to improve the checklist. Have a great day!
Ike, thank you for reading and for sharing your experience. Thanks also for the Bloomberg link.
I totally agree that every investment is a decision about the future. The purpose of my modest effort is to try to form an understanding of a company's operation in order to make an assessment of its future prospects.
We all come from where we've been, and I learned to study stocks in the early 1980s by using a tool called the Stock Selection Guide, which was developed by the (then) National Association of Investment Clubs, now BetterInvesting.org. One looked at 10 years of data to form an opinion about a possible high and low price over the next 5 years. I have never found a short cut that bypasses some historical research. One comment from a previous article said my process is "backward looking." I understand what that reader was trying to say, and I believe you are echoing it. Perhaps it is overkill, but sometimes after I have sifted through a dozen or more points on a "checklist," I will find an important piece of data that gives me an insight into the future. For me, studying a stock is like a doctor asking the patient some questions to find out what's going on and how it will impact the future.
I don't disagree with you at all and your point is well taken about points 11 and 19. It just takes me awhile to get a handle on a company's business model.
You bring important insights to the conversation. I see this is your second SA comment. Please continue to engage. I appreciate your perspective.
Thank you, Frankj78. It helps me to know that it was easy to follow. Have a great day!
Thanks, Rose. Generally. I have avoided tech stocks, so this is a bit out of character for me. We'll see how it goes. I hope all is well with you!
Thanks for reading and responding, Craig. You've raised good questions. I'm not sure how finviz arrived at the 31.16 P/CF ratio. This would imply a cash flow figure of around $1.41. I should have added a sentence there to say that FAST Graphs shows a P/CF of 10.8. When you hold the cursor over the 10.8 figure, a "drop down" box appears that explains it is a blended price/cash flow that is "based upon a weighted average of the most recent actual value and the closest forecast value."
When I calculate the price/cash flow, I get $44/$3.36, or 13.1.
QCOM's fiscal year ends September 30, and as for the drop in FY 2015 free cash flow, here's QCOM's 11/4/15 press release that announced FY 2015 results: http://bit.ly/1TPbnYc.
Revenues were down 5% from FY 2014. Operating income was down 23%. Net income was down 34%. Diluted EPS were down 31%. Operating cash flow was down 38%.
QCOM took a $975 million charge ($.58 per share) in a settlement regarding China's anti-monopoly law, a $142 million impairment charge ($.08 per share) related to a display business, a $190 million restructuring charge ($.09 per share) related to their Strategic Realignment Plan, and a $950 million prepayment to secure a long term commitment from a supplier. These items total $2.257 billion, which may account for the 2015 down numbers.
FAST Graphs estimates 2016 free cash flow to be $5.40 per share (a 61% increase over FY 2015 cash flow of $3.36), and 2016 basic earnings to be $4.10 (a 26% increase over FY 2015 basic earnings--also $3.36).
Thank you, razorcalls. My purpose in describing this process is to help investors--particularly those new to stock study--find some basic principles and tools to augment common sense. The resources we need to make a good decision are available to us via the Internet, and many of them are free. If I can help investors wade through the vast array of information through a relatively simple checklist, it will be worth the effort.
Decisions will always involve multiple "moving parts," and are laced with nuance and the art of interpretation. The decision to buy isn't always easy, but there's no reason for the average investor to be intimidated by the process.
It helps to have lots of curiosity, to enjoy putting puzzles together and to enjoy Columbo, Matlock, Perry Mason or Agatha Christie's Poirot. Each stock study is an investigation that reveals unique factors. This one had an interesting twist. Somehow, I missed QCOM's March, 2015 decision to "lever-up" the company. If I had known that piece of information early in the process, it's likely that I would not have embarked on the study. I want to be open-minded about their decision. The dividend appears to be relatively safe and there seems to be enough "margin of error," should my calculations prove to be too optimistic.
Thank you, Bahamas. It's helpful to hear your perspective as a former shareholder. A corporation's culture is a crucial element its success, or lack thereof. We'll be watching.
Thanks, Bob. I appreciate your counsel!
Thank you, mikesdca. Usually it takes me awhile to learn how to use all the special features on an appliance, and that's true for FAST Graphs. I appreciate the heads-up about the 10-year line. I'll check that out. One positive aspect of QCOM is their clarity of intent about returning money to shareholders. I don't have a good track record for calling bottoms, but I'm always content with a relatively good value (if that's what we've found).
You're welcome, MWD. Thanks for reading and responding.
Thanks, Patrick. I see your point about the cash flow graph. I looked at it and saved it on my computer, but I didn't notice the strong correlation between price and cash flow over time. Thanks for pointing that out.
In my investment club days, we always came up with an "upside/downside" ratio. If a stock had a 3-to-1 ratio, it was considered a good candidate for purchase. Even if I lowered the possible high price and the possible low price by substantial amounts, QCOM would be in the buy range. I think the same verdict would be given when studying historic earnings per share or cash flow.
By any measure, QCOM is cheap relative to its history. That, in itself, doesn't make it a good candidate for purchase, of course. The critical question is whether management can get QCOM back on a growth track and can restore earnings momentum. If they can do that, QCOM is an incredible investment at these levels. If not, I'll think about that tomorrow. :-)
Thank you, Hardog. I hope you find it useful.
Okay, Bob, here's some bedtime reading for you:
WALL STREET AND THE FINANCIAL CRISIS:
Anatomy of a Financial Collapse
MAJORITY AND MINORITY STAFF REPORT
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
UNITED STATES SENATE
Pages 264-267 are particularly relevant.
http://1.usa.gov/xAn2qm
You know I'm working hard to improve the overall credit rating of my portfolio. But, my wife asked me when we left the movie The Big Short, "Does it make sense to give that much credence to the credit agencies?"
Bob, I found this at Wikipedia (http://bit.ly/1NYG8lW):
On July 10, 2007, in "an unprecedented move", Moody's downgraded 399 subprime mortgage-backed securities that had been issued the year before. Three months later, it downgraded another 2506 tranches ($33.4 billion). By the end of the crisis, Moody's downgraded 83% of all the 2006 Aaa mortgage backed security tranches and all of the Baa tranches. [27][28]
27. The Financial Crisis Inquiry Report (PDF). National Commission on the Causes of the Financial and Economic Crisis in the United States. 2011. pp. 221–2.
28. "1 AFGI070708.ppt Subprime Crisis: Timeline of Rating Agency Actions Excerpted from a July 2008 AFGI Report" (PDF). Retrieved 25 July 2013.
Thanks, Brandon. I thought the timing was odd, too, given the worst oil bear market in quite a few years. Maybe they are anticipating "lower for longer" and the possibility of more impairment charges. Maybe they see more potential deals like their recently announced purchase of Continuum Energy. I would like to think a potential buyer for Enable has approached them, but if so, I think they would have simply announced a deal rather than floating the possibility of a spinoff.
Thanks for your article, Brandon. What is your take on the possible sale or spinoff of Enable?
http://bit.ly/1Q0mVla
The "Dividend Income Market." Well said. Excellent illustrations via FAST Graphs. Thank you!
Thanks for a fair analysis. I see DOV as relatively undervalued, and while I agree it may become more undervalued, I find it attractive as a long term holding.
Thanks, Caleb, for a good article. I hope you'll become a frequent contributor. As for 218's comment, I'll share what I mentioned in a comment to Brad's article: It sounds like there may have been a disagreement about future compensation which had "immediate" consequences.
Thank you, Brad. Very helpful information. It sounds like there may have been a disagreement about future compensation, which had "immediate" consequences.