I seem to remember a company in recent memory that was growing like crazy, and then another company came along and stole a huge chunk of it business. Was that RIMM and AAPL, except AAPL was stealing market share from RIMM? I'm not currently convinced AAPL can demonstrate the innovation necessary for continued growth.
I agree with many of the points in this article. I like to follow the big gainers and losers every day on Google Finance just in case a company I like or know a little bit has a bad day. When I saw COH down 15% on 12% international growth, and flat sales in North America, I quickly asked a few female friends on their opinion of the brand. Most gave at least a thumbs up to it, and I didn't need to know anything else. Long COH
Beware The False God Of The Dividend [View article]
Briar In regards to your comment that currently many dividend companies are overvalued, I would agree whole-heartedly. It is tough to find companies who are growing earnings at a rate that would justify mid-20's P/Es, like Hershey, Church and Dwight, Brown-Forman and Procter & Gamble. At the same time, many of these companies have demonstrated the ability to grow earnings consistently over time.
That being said, I want to find companies that can grow earnings consistently and are underappreciated in the market in my opinion.
For example, AFLAC (which I own) is the unquestioned leader in supplemental health insurance and trades at a single-digit PE. It has grown book , value (which is after dividend payments) by 9% annually versus share price growth of 6%. When you compare the total share price returns, you see book value has grown ~130%, while share price has grown ~75%. It does not make sense why this company trades at such a deep discount, especially given the fact that as recently as 2011 it traded at 10.5 times earnings where it now trades for 8.7. Oh, by the way, its annual dividend payment has increased 435%, or 18% annually.
A polar opposite example is EZCorp, which I also unfortunately own. It has shown an ability to buy up pawn stores and build its own year after year, and in spite of not meeting earnings this year, still continues to post mid-double digit earnings gains. It trades at a single digit-PE mostly due to the fact that investors worry Congress will restrict pay-day lending which is roughly 20% of EZCorp's revenue. I honestly kind of regret purchasing EZCorp in spite of my confidence in its earnings growth, because shareholders do not have voting power. All voting shares are allocated to one person, who also conveniently receives generous compensation for providing "consulting" services to the company.
Mr. Buffett also gloats in his shareholder letters about several of his companies such as See's Candies which generates significant cash flow without a need to reinvest most of it in the business. That sounds like the type of company that also would be able to pay a significant dividend, like Coca-Cola, which Buffett also conveniently owns.
Buffett always talks about companies that require low capital reinvestment, so that he can use that cash to invest in other businesses.
In no way would I or any poster on this forum try to compare ourselves to Buffett, but it does appear that Dividend Growth Investors look for companies that tend to have lower capital expenditures than the average company, and can pay those excess earnings out in dividends.
Admittedly, DG Investors probably shut themselves off from GARP-type companies which can reinvest in their business at high rates of return and do not pay dividends. But those cases are relatively rare and difficult to get at a good price.
I think of companies like Chipotle and Panera which currently have been experiencing significant multiple compression, but are still growing rapidly as examples of companies which resemble McDonald's in its infancy. They are priced quite expensively now, but as their multiples further compress towards the 17-20 region, and growth opportunities diminish, it would not at all surprise me to see these companies eventually pay a dividend.
I have tracked Briar's comments through Greg's predecessor article to this one, and your comments in response to his seem unfair. You previously characterized him as attacking Dividend company investors, but I think we miss the point of this forum if you see Briar's intent as something malicious.
As Briar points out with several poignant quotes, it is incumbent upon each of us to think critically about the things we believe and be open to new ideas and arguments. If we cease to do so, we cease to learn.
Let's keep the comments to polite disagreement backed up with factual arguments. If any poster cannot provide that, I suggest they do more research and write/comment when they do.
Beware The False God Of The Dividend [View article]
Briar,
The counterfactual you are referring to is what rate the companies could reinvest their cash at had they held on to it.
While the 10-K's and to a lesser extent 10-Q's give me a window into a company's performance, it is safe to say the company's management knows what profitable opportunities exist for a company better than you or I do.
If management does not see profitable opportunities, then I appreciate them giving me the option to reinvest the dividend income I receive how I choose, even if I reinvest in that company.
It seems unlikely that these companies which have continued to grow despite paying out dividends for decades could achieve higher returns by investing in completely new businesses without taking on significant risk. They do what they do well, be it make soda, create medical devices, process paychecks, you name it. If they cannot find profitable opportunities, it is their financial responsibility to allow their shareholders to pursue superior returns elsewhere.
3 Reasons Not To Flee Dividend Stocks [View article]
I believe that some of these folks are merely selling before the end of the year to lock in their realized gains at the lower tax rate, but will be back in the same stocks in January, regardless of the tax rate.
There was an article here on SA recently, and the title eludes me, showing the effect of one tax increase in the 80's. There was a large sell-off in Nov/Dec. and a huge run in January. I would not be surprised to see this again.
Dividend Stocks That Might Surprise You [View article]
Richard,
Great article. I was just looking at some of these companies last night. I haven't looked at NKE in a while due to its high P/E and after looking again think it may be fairly priced. I would add 3M (MMM) to your list, as the company has maintained terrific tangible book value growth above and beyond what its price suggests.
In regard to your first comment, perhaps a more accurate phrasing would be to say if both book value and price are skyrocketing, then there may be less value in that stock than a company showing great book value growth without corresponding stock price appreciation.
In regard to your second comment, you are absolutely right that not every situation that fits my descriptions screams buy, but situations such as these warrant further research. I could certainly see in an industry, say the soda industry, where balance sheets don't accurately reflect the value of companies' intangible assets, that P/B ratios would be higher than other industries on average. So, if the situation you described were to occur, then yes there is a possibility that would be a screaming buy.
Perhaps you missed the plausible notion that purchasing targeted equities may hedge exposure to real-life exposures. Another that comes to mind are the companies Hasbro(HAS) and Mattel (MAT). If you are expecting a child, you will probably be buying toys for the next several years, which these manufactures will mostl likely profit from. Your expense on toys will plausibly increase the profit of these companies, and if you own some of their stock, a portion of that expense will be returned with these companies dividends in addition to any capital gains you may realize.
Tim, I think you're right not to be worried about BF.B's ROE dropping 4 percentage points, especially if you break it down using DuPont. Net Margin is in line with historical trends, as is its Asset Turnover. The only noticeable change is BF.B's reduced financial leverage from 2.7 to 1.7 over the last decade. Another minor component of ROE, tax rate, also has not fluctuated to a great extent over the last decade.
2 Case Studies In Taking Advantage Of Wall Street's Earnings Estimate Game [View article]
Kendall500, Thanks for the comment. At the time I submitted this article, the numbers were current. I also structured this article to highlight the fact that earnings estimates and the market's reaction to them can sometimes be overdone.
Now, regarding your claims that margins are falling, expenses are increasing, customers are leaving, and the industry is moving away from mirrors, I find those to be highly unlikely.
The below link shows that Gentex's margins (both gross and operating) have been consistently strong, at roughly 35% and 20%.
As for losing customers, 15% revenue gains don't really point to material customer losses YOY, so I'm confused by that claim as well.
Finally, I think the point you make about the industry moving away from mirrors is potentially valid, as the advent of cameras could at some point cut into the demand for mirrors. However, the Department of Transportation continues to mandate side and rear view mirrors in all passenger and commercial vehicles, so until regulations begin to move against the mirror industry, I feel pretty confident that mirrors will be around.
Apple Is Not Worth $460 [View article]
Was that RIMM and AAPL, except AAPL was stealing market share from RIMM? I'm not currently convinced AAPL can demonstrate the innovation necessary for continued growth.
Don't Give Up On Coach Just Yet [View article]
Beware The False God Of The Dividend [View article]
In regards to your comment that currently many dividend companies are overvalued, I would agree whole-heartedly. It is tough to find companies who are growing earnings at a rate that would justify mid-20's P/Es, like Hershey, Church and Dwight, Brown-Forman and Procter & Gamble. At the same time, many of these companies have demonstrated the ability to grow earnings consistently over time.
That being said, I want to find companies that can grow earnings consistently and are underappreciated in the market in my opinion.
For example, AFLAC (which I own) is the unquestioned leader in supplemental health insurance and trades at a single-digit PE. It has grown book , value (which is after dividend payments) by 9% annually versus share price growth of 6%. When you compare the total share price returns, you see book value has grown ~130%, while share price has grown ~75%. It does not make sense why this company trades at such a deep discount, especially given the fact that as recently as 2011 it traded at 10.5 times earnings where it now trades for 8.7.
Oh, by the way, its annual dividend payment has increased 435%, or 18% annually.
A polar opposite example is EZCorp, which I also unfortunately own. It has shown an ability to buy up pawn stores and build its own year after year, and in spite of not meeting earnings this year, still continues to post mid-double digit earnings gains. It trades at a single digit-PE mostly due to the fact that investors worry Congress will restrict pay-day lending which is roughly 20% of EZCorp's revenue. I honestly kind of regret purchasing EZCorp in spite of my confidence in its earnings growth, because shareholders do not have voting power. All voting shares are allocated to one person, who also conveniently receives generous compensation for providing "consulting" services to the company.
Live and learn. I'm still young
The Real False God Of Dividends [View article]
Buffett always talks about companies that require low capital reinvestment, so that he can use that cash to invest in other businesses.
In no way would I or any poster on this forum try to compare ourselves to Buffett, but it does appear that Dividend Growth Investors look for companies that tend to have lower capital expenditures than the average company, and can pay those excess earnings out in dividends.
Admittedly, DG Investors probably shut themselves off from GARP-type companies which can reinvest in their business at high rates of return and do not pay dividends. But those cases are relatively rare and difficult to get at a good price.
I think of companies like Chipotle and Panera which currently have been experiencing significant multiple compression, but are still growing rapidly as examples of companies which resemble McDonald's in its infancy. They are priced quite expensively now, but as their multiples further compress towards the 17-20 region, and growth opportunities diminish, it would not at all surprise me to see these companies eventually pay a dividend.
Groupo Aeroportuario del Pacifico: Fly Me Down Mexico Way [View article]
I am interested in this company as an example of a wide-moat, monopoly company.
How do you think it compares to another Latin American airport stock, OMAB?
The Real False God Of Dividends [View article]
I have tracked Briar's comments through Greg's predecessor article to this one, and your comments in response to his seem unfair. You previously characterized him as attacking Dividend company investors, but I think we miss the point of this forum if you see Briar's intent as something malicious.
As Briar points out with several poignant quotes, it is incumbent upon each of us to think critically about the things we believe and be open to new ideas and arguments. If we cease to do so, we cease to learn.
Let's keep the comments to polite disagreement backed up with factual arguments. If any poster cannot provide that, I suggest they do more research and write/comment when they do.
Beware The False God Of The Dividend [View article]
The counterfactual you are referring to is what rate the companies could reinvest their cash at had they held on to it.
While the 10-K's and to a lesser extent 10-Q's give me a window into a company's performance, it is safe to say the company's management knows what profitable opportunities exist for a company better than you or I do.
If management does not see profitable opportunities, then I appreciate them giving me the option to reinvest the dividend income I receive how I choose, even if I reinvest in that company.
It seems unlikely that these companies which have continued to grow despite paying out dividends for decades could achieve higher returns by investing in completely new businesses without taking on significant risk. They do what they do well, be it make soda, create medical devices, process paychecks, you name it. If they cannot find profitable opportunities, it is their financial responsibility to allow their shareholders to pursue superior returns elsewhere.
3 Reasons Not To Flee Dividend Stocks [View article]
There was an article here on SA recently, and the title eludes me, showing the effect of one tax increase in the 80's. There was a large sell-off in Nov/Dec. and a huge run in January. I would not be surprised to see this again.
Dividend Stocks That Might Surprise You [View article]
Great article. I was just looking at some of these companies last night. I haven't looked at NKE in a while due to its high P/E and after looking again think it may be fairly priced. I would add 3M (MMM) to your list, as the company has maintained terrific tangible book value growth above and beyond what its price suggests.
Follow Buffett: Look At Book Value [View article]
Thank you for your comment.
In regard to your first comment, perhaps a more accurate phrasing would be to say if both book value and price are skyrocketing, then there may be less value in that stock than a company showing great book value growth without corresponding stock price appreciation.
In regard to your second comment, you are absolutely right that not every situation that fits my descriptions screams buy, but situations such as these warrant further research. I could certainly see in an industry, say the soda industry, where balance sheets don't accurately reflect the value of companies' intangible assets, that P/B ratios would be higher than other industries on average. So, if the situation you described were to occur, then yes there is a possibility that would be a screaming buy.
2 Case Studies In Taking Advantage Of Wall Street's Earnings Estimate Game [View article]
2 Case Studies In Taking Advantage Of Wall Street's Earnings Estimate Game [View article]
Hedging Your Life Exposures [View article]
Perhaps you missed the plausible notion that purchasing targeted equities may hedge exposure to real-life exposures. Another that comes to mind are the companies Hasbro(HAS) and Mattel (MAT). If you are expecting a child, you will probably be buying toys for the next several years, which these manufactures will mostl likely profit from. Your expense on toys will plausibly increase the profit of these companies, and if you own some of their stock, a portion of that expense will be returned with these companies dividends in addition to any capital gains you may realize.
Don't Buy Brown Forman Today [View article]
I think you're right not to be worried about BF.B's ROE dropping 4 percentage points, especially if you break it down using DuPont. Net Margin is in line with historical trends, as is its Asset Turnover. The only noticeable change is BF.B's reduced financial leverage from 2.7 to 1.7 over the last decade. Another minor component of ROE, tax rate, also has not fluctuated to a great extent over the last decade.
2 Case Studies In Taking Advantage Of Wall Street's Earnings Estimate Game [View article]
Thanks for the comment. At the time I submitted this article, the numbers were current. I also structured this article to highlight the fact that earnings estimates and the market's reaction to them can sometimes be overdone.
Now, regarding your claims that margins are falling, expenses are increasing, customers are leaving, and the industry is moving away from mirrors, I find those to be highly unlikely.
The below link shows that Gentex's margins (both gross and operating) have been consistently strong, at roughly 35% and 20%.
http://bit.ly/RT1B9C
As for losing customers, 15% revenue gains don't really point to material customer losses YOY, so I'm confused by that claim as well.
Finally, I think the point you make about the industry moving away from mirrors is potentially valid, as the advent of cameras could at some point cut into the demand for mirrors. However, the Department of Transportation continues to mandate side and rear view mirrors in all passenger and commercial vehicles, so until regulations begin to move against the mirror industry, I feel pretty confident that mirrors will be around.