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Harry Domash
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Harry Domash publishes DividendDetective.com, a site specializing in high-dividend investing. He also publishes WinningInvesting.com, a free site featuring “how to” investing tutorials and other resources. His best selling book on fundamental analysis, “Fire Your Stock Analyst,”... More
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Dividend Detective
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  • Wells Fargo March Quarter

    Wells Fargo (NYSE:WFC) reported good March quarter deposit and book value growth, otherwise nothing to shout about.

    Tags: WFC
    Apr 14 2:32 PM | Link | Comment!
  • Time To Consider Preferred Stocks

    With the market looking iffy, and banks still paying next to nothing in terms of interest, this might be a good time to take another look at preferred stocks.

    You can find many preferreds paying dividends equating to 4% to 7% annual yields. Dividend yields (annual dividends divided by your cost) are analogous to bank account interest rates. However, your principal is not insured, so investing in preferreds is riskier than keeping your money in the bank.

    Although you buy and sell them the same as stocks, preferreds are more like bonds. That is, they represent debt, not ownership. Although, there are occasional exceptions, you usually buy preferreds for steady income, not for capital gains.

    About Preferreds
    Most firms issue preferreds at $25 per share, although some go for $50 or $100. The issuer sets an annual dividend (usually paid quarterly), which typically remains fixed. The "coupon rate" is the dividend yield based on the issue price. In this market, coupon rates vary from 4.5 percent to 7.5 percent, depending on the perceived financial strength of the issuing firm.

    Cumulative preferreds require issuing firms to eventually make up skipped dividends while non-cumulative preferreds don't have that requirement. However, in practice, you'll do best by avoiding preferreds issued by firms that might run into that problem rather than waiting for long-delayed cumulative dividends.

    An issuing firm can pay to have its preferreds credit-rated by agencies such as Moody's or Standard & Poor's. The ratings, a combination of letters and numbers, vary between agencies, but any rating starting with A, and three letter ratings starting with B, signal investment quality. Since issuers must pay for the ratings, many choose to skip that step. Thus, the fact that a preferred hasn't been rated doesn't necessarily mean that it isn't investment quality.

    Pick Strong Issuers
    Unlike bonds, ta firm may suspend payment of its preferred dividends without filing for bankruptcy. Thus, priority number one is to pick preferreds issued by companies unlikely to run short of cash. Doing that doesn't necessarily require digging into financial statements. Instead, a little bit of common sense goes a long way. For starters, avoid preferreds issued by firms in troubled industries. Currently, firms owning crude oil and natural gas reserves fit that description. Next, check the issuing firm's common stock trading price. Very low trading prices, say below $5 per share, warns that many investors see problems ahead. So, as a rule of thumb, stick with preferreds issued by companies with common shares trading above $10 per share.

    Calling Preferreds
    Most preferreds are "callable" meaning that the issuer has the right to call (redeem) them at the "call price," which is usually the same as the issue price. The shares can be called at any time after the "call date," which is typically five years after the issue date.

    High Premiums Cut Returns
    Just like stocks, preferred share prices vary with supply and demand. Currently, demand is high and many preferreds are trading well above their issue prices. For instance, many $25.00 preferreds are currently trading in the $26.00 to $28.00 range.

    If you pay, $27 for a $25 call price preferred, you'll lose $2 per share when it's called. Yield to call takes that loss into account and calculates your average annual return if you bought the preferred today and it were called on its call date. Obviously, it's best to minimize the premiums over call price that you pay when you buy preferreds.

    Recommended Preferreds
    Here are five preferreds currently "buy" rated on my Dividend Detective site that recently traded less than $0.50 above their call prices.

    Annaly Capital Series C (NLY-C): issue price $25.00, recent price $25.19. Not credit rated (NYSE:NR), Coupon Rate 7.625%, cumulative. Annaly, a real estate investment trust (REIT), invests in single-family, mortgage-backed securities that are guaranteed by U.S. government agencies. Its Series C preferreds would return 7.2%, on average, annually, if called on their 5/16/17 call date (Yield to Call).

    General Electric 4.875% notes (GEB): issue price $25.00, recent price $25.31. Credit rating AA+, Call Date 10/15/17, Coupon Rate 4.875%, General Electric, a conglomerate sells products ranging from jet engines, gas turbines and railroad locomotives to consumer appliances and medical equipment. Yield to 10/15/17 call date is 4.4%.

    Kimco Realty Class J (KIM-J): issue price $25.00, recent price $24.62. Credit rating BBB-, Coupon Rate 5.50%. Kimco, a REIT, develops and operates neighborhood and community shopping centers in the U.S. Yield to 7/25/17 call date is 6.2%.

    PartnerRe Series F (PRE-F): issue price $25.00, recent price $25.48. Credit rating BBB, Coupon Rate 5.875%. A major reinsurance provider based in Bermuda, PartnerRe provides property & casualty reinsurance services (insures the insurance companies) in 150 countries. Yield to 3/1/18 call date is 5.2%.

    United States Cellular 7.25% Senior Notes (UZB): issue price $25.00, recent price $25.30.Credit rating NR, Coupon Rate 7.25%. U.S. Cellular (NYSE:USM), majority owned by Telephone & Data Systems (NYSE:TDS), is the fifth largest U.S. cellular company, providing service to more than four million customers in 23 states. Yield to12/18/19 call date is 6.9%.

    Ticker Symbols Vary
    Preferreds' ticker symbols are not standardized. The symbols I've listed can be used on the MSN Money and TDAmeritrade (tdameritrade.com) websites. When you're ready to buy, enter the issuing company's name using your broker's symbol lookup function. Most sites will respond by displaying all related preferreds in addition to the firm's common stock.

    Apr 01 4:01 PM | Link | Comment!
  • Be Sure To Check Fiscal Fitness

    Regardless of which way the market is heading, you'll always do best holding financially strong stocks that won't need to raise additional cash to fund expansion. Here's why.

    Firms can raise cash either by selling more shares or by borrowing. Selling more shares increases the number of shares out, cutting earnings per share (NYSEARCA:EPS), the number used to value stocks. Adding debt increases operating costs, which also shrinks EPS.

    Here are four quick fiscal fitness checks. You can find the needed data on MSN Money (money.msn.com) as well as many other financial sites.

    To demonstrate the process, I'll check American Airlines (NASDAQ:AAL), Bloomin Brands (NASDAQ:BLMN), Cisco Systems (NASDAQ:CSCO), GoPro (NASDAQ:GPRO), Groupon (NASDAQ:GRPN), Intel (NASDAQ:INTC), JC Penney (NYSE:JCP), Sears Holdings (NASDAQ:SHLD) and Twitter (NYSE:TWTR) to demonstrate the process.

    For each of the four checks, award -1, 0, or +1 points as described below.

    Overall Debt
    The Leverage Ratio is a good overall debt measure. A ratio of one signals no debt and the higher the ratio, the higher the debt. Few firms have zero debt, so consider firms with ratios below 2.5 as low-debt, and ratios above 5.0 as high-debt. Award one point for ratios below 2.5, zero for ratios between 2.5 and 5.0, and subtract one point for ratios above 5.0.

    Here are the leverage values and point values for the nine stocks: American Airlines 21.7 = -1, Bloomin Brands 5.7 = -1, Cisco Systems 1.8 = 1, GoPro 1.4 =1, Groupon 2.9 =0, Intel 1.7 = 1, JC Penney 4.6 =0, Sears Holdings 126.4 =-1, Twitter 1.5 =1.

    Cash vs. Bills
    Next, determine whether a firm has enough cash in the bank to pay its day-to-day bills. We'll use the Quick Ratio, which compares available cash to current liabilities. Ratios above one signal excess cash, while ratios below one indicate a cash shortage. Score one point for ratios equal to or greater than 1.1, zero for ratios between 0.9 and 1.1, and subtract one for ratios below 0.9.

    American Airlines 0.7 = -1, Bloomin Brands 0.3 = -1, Cisco Systems 3.1 = 1, GoPro 2.3 =1, Groupon 0.9 = 0, Intel 1.2 = 1, JC Penney 0.3 = -1, Sears Holdings 0.1 =-1, Twitter 10.3 =1.

    Profitability
    Obviously, profitable firms are less risky than money losers. We'll check that using profitability gauge Return on Assets (ROA), which compares net income to total assets. Positive values mean positive earnings and vice versa. Score one point for ROAs above 10, zero for positive values below 10.0, and subtract one point for negative ROAs.

    American Airlines 6.7 = 0, Bloomin Brands 4.1 = 0, Cisco Systems 8.5 = 0, GoPro 16.4 =1, Groupon -3.4 = -1, Intel 12.7 =1, JC Penney -5.8 = -1, Sears Holdings -10.6 =-1, Twitter -12.9 =-1.

    Cash Flow
    Sometimes companies appear to be profitable when they actually lost money win terms of cash that flowed through their bank accounts. We can check that using operating cash flow, which is positive when cash flowed in and negative when a firm burned cash. Use the "price/cash flow ratio" and add one point for positive values and subtract one point for negative numbers. The actual values are not relevant

    American Airlines 12.8 = 1, Bloomin Brands 7.7 = 1, Cisco Systems 12.2 = 1, GoPro 50.5 =1, Groupon 6.8 = 1, Intel 7.6 =1, JC Penney -33.3 = -1, Sears Holdings -2.7 =-1, Twitter 344.8 = 1.

    Scores
    Adding up the fiscal fitness scores, we get: GoPro 4, Intel 4, Cisco Systems 3, Twitter 2, Groupon 0, American Airlines -1, Bloomin Brands -1, JC Penney -3, and Sears Holdings -4.

    Both three and four point positive scores reflect reasonably strong financials, but that doesn't necessarily mean that you'll make money owning a stock. Many other factors come into play. Consider the fiscal fitness score as another tool for your stock analysis toolbox.

    Mar 25 4:53 PM | Link | 1 Comment
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