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Tim McAleenan Jr.  

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  • The No. 1 Stock In The World - Part 1 [View article]
    The fact that Realty Income survived the 2008-2009 recession is not proof that the underlying business is nearly indestructible. Instead, it suggests that Realty Income shareholders have been blessed with a long string of sound management that takes prudent risks. It does not suggest that Realty Income has the ability to withstand exceptional abuse to the empire.

    When Johnson & Johnson had the Tylenol scare and had a long string of management recalls, the earnings per share grew and the dividend went up. That hinted at strong underlying brands, despite management blunders.

    If we learned that Procter & Gamble executives had been diluting the Tide brand with excessive water above what the label stated, that would be a manageable crisis. Gillette razor sales are going to hum along just fine because the average customer isn't thinking "This razor blade comes from the same people that were messing with the detergent." The collection of brands are a margin of safety.

    Real estate does not encompass this margin of safety. If Realty Income got caught screwing over tenants somehow, or if management used excessive leverage, shareholders would be in a lot of trouble. There's no brand there to save the day.

    This doesn't mean you shouldn't own Realty Income. I own Benjamin Franklin Resources, and the main reason why I own the stock is exceptional management. But I don't pretend that the mutual fund offerings are so strong that they could overcome management blunders. If they claim to charge 1.0% fees to client accounts and get caught siphoning off 1.5%, or if the funds perform disastrously during the next recession, I would expect to be hurt. I don't avoid stocks that need great management and have it, but I also acknowledge that bad management will sink me.

    I could easily wreck Realty Income if you put me in charge and ordered me to bankrupt the company. I'd expand into new areas by taking on low-credit quality tenants with sketchy histories and rely on them to fund the dividend. I'd borrow up to maximum bank capabilities to fund the expansions of such a tenant base. And I'd adopt short-sighted policies that charge tenants high fees and I would be an uncommunicative landlord. If you channel your inner Irene Rosenfeld, you could destroy the company. All with a smile on your face.

    You couldn't destroy Nestle that easily. The Board has a set maximum debt policy that the company doesn't go near (it's like a constitutional amendment for balanced budgets). Swiss Accounting is more conservative than American accounting, so Swiss candy factories have more extended lives than you'd initially think. Milk and cookies will forever be a part of the human experience. And Switzerland companies remain fully functioning during international wars.

    People get caught up on the foreign tax credits, but they never acknowledge this: If you are a complete know-nothing and do not seek to lower your tax bill and you choose to surrender 35% of every annual Nestle tax payment, you still will have compounded your wealth by 12% annually over the past quarter century even if you were only collecting 65% of each dividend payment. So you're not exactly screwed if you fumble through the taxes. Maybe that's how you gain an edge in 2015: Be willing to fill out a few tax credit documents that everyone else is too lazy to bother with and ignores.

    When you buy Nestle stock, you own a slice of all the Purina pet food sold in the world. Beneful. Fancy Feast. Friskies. All of those.

    You own 30% of the L'Oreal brands. Ralph Lauren. Giorgio Armani. Maybelline. You get a piece of all of that.

    Even random candies like Gobstobbers, Runts, Nerds, Laffy Taffy, Sweet Tarts, Bottle Caps. All yours.

    They even have a chocolate division to rival Hershey. You get your hands on Kit Kat, Crunch, Rolo, Goober, Cookie Crisp, and Rolo.

    You get your hands in the highly lucrative coffee market--Nescafe, Coffee Mate, Nespresso, and Taster's Choice.

    You make 1,500% margins giving people water by selling things like Pellegrino, Poland Spring, Nestea, Perrier, and Pure Life.

    They are the Dreyer and Drumstick ice cream brands. Hot Pockets and Stouffers from the microwave aisle. I could go on, but I'm honestly quitting because I am tired of just scratching the surface of what Nestle owns. That kind of international brand strength could let you take a fifty-year Rip Van Winkle nap and wake up with a vast fortune of Nestle wealth. That kind of high probability doesn't exist when you buy a well-run real estate company that has a long history of conservative management. I like relying on high-quality people to run things, but I don't pretend that will go on forever. Consumer brands have a perpetual life that is not comparable to relying on high-integrity and conservative people to always occupy the executive suite.

    If a moron took over Nestle, I'd think "Okay, I might compound at 6% to 8% for a while." If the worst executive you can imagine took over Realty Income, 100% shareholder wipeout becomes a distinct possibility. That's what happens to poor executives in real estate--you go bankrupt. What do you get with severe mismanagement in the consumer sector? Sara Lee. Glacial compounding, but no wipeout.
    May 26, 2015. 07:04 PM | 21 Likes Like |Link to Comment
  • The No. 1 Stock In The World - Part 1 [View article]
    Interesting. The one I wouldn't choose is Realty Income. With any real estate investment, you will always be at the mercy of sound management. Real estate investments can't handle the same level of abuse that great brands can. Overleverage the balance sheet, wait for a deep recession where tenants stop paying, and whaboom, your equity is wiped out.

    It doesn't mean that Realty Income doesn't belong in a portfolio--it just means idiots can bankrupt you easier (whereas at a place like Mondelez, idiots will only keep net profits treading water for an extended period of time.)

    The reason why I didn't choose Apple or Gilead is because of their reliance on a single product. Your destiny is tied to phones and a Hep C treatment with those, and that raises the risk profile when a single product makes up half of your revenue.

    I would think that a Coca-Cola, Johnson & Johnson, Procter & Gamble, Nestle, and Exxon portfolio would be pretty darn strong pillar stocks that could survive virtually all economic conditions, and it's mostly academic trying to parse the difference between those five. Own all of them and see what happens.
    May 26, 2015. 02:59 PM | 18 Likes Like |Link to Comment
  • Lessons Learned From The Grand Canyon [View article]
    Dave, I enjoyed this post. I think one of the lessons from your investing life that goes unnoticed is that you have been willing to accept low dividend yields in the pursuit of higher growth.

    Just look at those returns from Colgate-Palmolive. It trounces just about everything, and has been paying dividends since the 1800s. That's a heck of an intersection between growth and quality.

    But I think income investors can easily neglect a stock like Colgate because there is always something yielding higher that also falls within that zone of "high quality."

    But huge capital gains are given up by neglecting a low initial yield stock like Colgate. Imagine if corporate bonds pivoted towards their historic rate of 7.2%. Someone could easily turn a huge Colgate position built up over the decades into a diversified corporate bond portfolio that pays out $15,000 per month. Not a bad way to dance off the earth.

    Or, hell, after three decades of adding to a stock like Colgate, you'd probably have enough income to live off from the dividends alone.

    I think your willingness to be unconventional and take on those blue-chip names with lower starting yields is something that makes your approach worthy of emulation, and I hope other readers take note of your wisdom on this.
    May 23, 2015. 10:05 AM | 2 Likes Like |Link to Comment
  • Retired Dividend Investors Are Deluded By Yield On Cost [View article]
    If I opened a restaurant, I would be very interested in whether I grew $50,000 annual profits to $150,000 annual profits over the course of X years. I would be less concerned about the valuation of the restaurant unless I intended to sell. I extend the same logic to businesses that trade in the public markets.

    "Being an investor has made me a better businessman, and being a businessman has made me a better investor."
    Apr 27, 2015. 12:01 PM | 4 Likes Like |Link to Comment
  • Why 3M Shareholders Keep Building Wealth Each Decade [View article]
    Hi Illuminati. I guess this one didn't do it for you.

    I gave it my best, and I'm satisfied with it.

    Apr 21, 2015. 03:59 PM | 9 Likes Like |Link to Comment
  • WSJ: GE in talks to sell commercial lending business [View news story]
    Who says "making the system more stable" is the objective of either party? Usually, people and businesses enter contracts because they believe it is in their own interest to do so.

    General Electric thinks it can grow profits faster without a lumbering finance arm that needs to be well capitalized, and Wells Fargo thinks it can extract good profits out of GE's assets (remember these are the same assets that catapulted GE's growth in the early 2000s).

    Wells Fargo has a good track record of growing profits while maintaining the capitalization required by the Fed, whereas GE tends to view the requirements as too onerous.

    In short, you're asking the wrong question. No one enters deals to make systems more stable--they do it to further their own interests. The real answer is that Wells Fargo thinks it can be profitable enough even with the current stability requirements regulated by the US government, whereas GE sees those same assets as less lucrative and less risky than their industrial divisions.
    Apr 20, 2015. 01:33 PM | 8 Likes Like |Link to Comment
  • General Electric: What A 15% Higher Price Means For Returns [View article]
    Great post, Eli. I'm in full agreement.
    Apr 15, 2015. 11:35 AM | Likes Like |Link to Comment
  • Kraft, Heinz announce merger [View news story]
    Definitely a terrible day for some Kraft employees. Some of the layoffs and cuts that affect quality of life will be substantial. It's going to be a much harder world for day-to-day employees so that shareholders can get an extra nickel in dividends. The investment side of the equation, however, looks much more attractive than the humanitarian side. I imagine Kraft Heinz will make much more money for shareholders over the coming years than a standalone Kraft would have.
    Mar 25, 2015. 11:35 PM | 2 Likes Like |Link to Comment
  • The Advantages Of Finding Dividend Growth Early [View article]
    Funfun, I think we all know the party don't start until you arrive.
    Mar 22, 2015. 01:10 PM | 17 Likes Like |Link to Comment
  • The Dividend Growth 50... Plus 113 More [View article]
    Some early Wednesday afternoon thoughts:

    1. A commenter noted that some non-dividend growth investors own a stock or two that does not pay a dividend. He saw this as a sign of a bubble. That is not my interpretation. In my case, I saw certain REITs and utilities trading at high P/E ratios or high P/FFO ratios and I found it wise to avoid them given my belief in: (1) eventual P/E reversion to the mean, and (2) they have low growth rates which make the experience of paying an overvalued price more problematic because you don't have the salve of 8%, 10%, 12% profit growth to boost fair value in the short term.

    2. Those who criticize dividend growth investors for bringing a six-pack to the Gilead Sciences party have a point. During every year from 1987 through 2011, Gilead could be purchased for under $20 per share (and most of those years, much lower than even that). At a minimum, those investors have seen their shares quintuple. The ability to rack up those kinds of gains quickly is gone...earnings have grown at 41.5% annually for the past ten years--I'd own the Brooklyn Bridge by now if I thought it would do that going forward.

    But still, those of us investing in Gilead now have an advantage that those who have come before didn't have: Certainty. And yes, we have paid a much higher price to get that certainty. But now we can see that Gilead is making more than $11 billion per year in net profit, has $6.3 billion in cash, spends $3.1 billion doing research and development for future growth, and offers intrigue through Sovaldi for those that want to enjoy the patent duration ride. Even though Gilead's future growth will be slower than its past, it still offers more wealth for a long-term buy and holder than buying an overvalued REIT, utility, or material company.

    (3) These lists permit me the opportunity to spot my own errors (perhaps an unexpected benefit of contributing to this!)... I'm not sure what I was thinking excluding Disney and Nike, for instance. They own their niche, and have growth rates above 10%.

    (4) This list is a very helpful starting place for someone wanting to wrestle control of their own life and take their long-term financial security into their own hands. Imagine a 0% turnover portfolio that consisted of these stocks bought and held over the coming decades. Even with a few flameouts, can you imagine anyone experiencing financial ruin with these recommendations? I can't because these products are essential to our daily life, and as long as humanity prevails, we will use electricity, drink water, eat food, bathe, engage in commerce, and so on. These stocks strike at the gut of civilization, and provide value for their owners year after year (even if their prices offer no such short-term predictability).

    (5) On a personal level, I am thankful to Mike for including me in this list among people I deeply respect, though I have never met. On a broader level, I am thankful that Mike floats this information onto the internet so that someone new to investing or seeking refinement can have an intelligent reference point that provides them the knowledge to mix with actions so that they can realize their goals.

    Paul Meyer once said: "Productivity is never an accident. It is always the result of a commitment to excellence, intelligent planning, and focused effort." By living below one's means and deliberately acquiring shares of oil refineries, soda giants, cleaning solutions, snack and meat companies, water utilities, health and medical companies, industrial conglomerates, and the occasional niche company, someone can find themselves leading a highly productive life, both through their chosen profession and their passive holdings. A loud thank you to Mike for providing the roadmap.
    Feb 11, 2015. 12:21 PM | 31 Likes Like |Link to Comment
  • Mama Said There Would Be Days Like These [View article]
    +1 on the Van Morrison reference.

    -1 if you had The Shirelles in mind.
    Feb 5, 2015. 10:33 AM | 5 Likes Like |Link to Comment
  • Selling Guidelines For Self Directed Investors [View article]
    Chowder, I find your item #6 to be the most important. When a company fundamentally changes, that is obviously a time for review ("When the facts change, I change my mind; what do you do, sir?").

    I wonder how many investors apply the horns and halo effect to their stock selections, choosing to see no bad things in companies they own and recognize no good things in companies that formerly burned them or got passed up?

    I think you are absolutely correct to note that successful investing involves eliminating emotions, or at least harnessing them, and in that respect, Seeking Alpha is lucky to have you around as you teach others how to become more thorough and disciplined investors.

    Thank you.
    Jan 7, 2015. 06:46 AM | 10 Likes Like |Link to Comment
  • A Demonstration Of How Dividend Growth Investing Outperforms [View article]
    And then ask them about those millions of dollars in Eastman Chemical shares that got spun off in 1994 that gets neglected by practically everyone trying to make the "dividend investors have 100% of their portfolio in Kodak stock" argument.
    Dec 29, 2014. 08:39 PM | 17 Likes Like |Link to Comment
  • Recent Buy: The Walt Disney Co. [View article]
    I have a strong emotional and logical reaction to Seeking Alpha commenters that criticize someone for the amount of money that they are investing at a particular time.

    In the 23rd Chapter of "To Kill A Mockingbird", Atticus Finch says: ""As you grow older, you'll see white men cheat black men every day of your life, but let me tell you something and don't you forget it—whenever a white man does that to a black man, no matter who he is, how rich he is, or how fine a family he comes from, that white man is trash." I would update that quote to this context by saying that any affluent man that criticizes another for being of lesser means is also, in that moment, acting like trash.

    I have a great respect for anyone that is trying to improve his lot in life, and chooses to combine grit and intelligence to execute that plan. Jason's posts provide us with a regular peek into that quest for higher ground, and I have the highest respect for the arc of someone's life that went from having nothing to having something.

    And now, for the logical part of my response: People write on Seeking Alpha to discuss ideas and strategies for improving one's wealth. The same successful idea that increases wealth five-fold over twenty years will just as readily turn $10 million into $50 million as it will turn $5,000 into $25,000. The amount of capital does not reflect the percentage gain returns offered by a particular investment, and I hope that you possess the wisdom to evaluate the legitimacy of individual arguments without getting distracted by the context that is irrelevant.

    Oh, and Jason, nice article.
    Dec 5, 2014. 11:33 PM | 84 Likes Like |Link to Comment
  • Some heavy hitters eye Coca-Cola [View news story]
    The gutting out of American business will continue as long as shareholders continue their hyper-active focus on the next quarterly result and think nothing of selling out an ownership position for 30% to 50% premiums, the long-term employment effects of the home country be damned.

    The $70 per share buyout of Anheuser-Busch in 2008 was merely Act I.
    Nov 20, 2014. 11:38 AM | 15 Likes Like |Link to Comment