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Timothy M. David McAleenan Jr.

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  • Dividend Buy Of The Month: Target Corp. [View article]
    Jason,

    You nailed it on Target. Will people be talking about this in 2017? 2020? 2024? Heck no. Might as well take advantage of the dislocation in price while people are overestimating the long-term effects of the breach.

    Isn't the dream to hold 91-92 high-grade dividend stocks? Might as well get paid every day for waking up.
    Feb 7 06:04 PM | 2 Likes Like |Link to Comment
  • Philip Morris International: A Great Dividend Buy Today [View article]
    The CVS move surprised me. It seemed kind of random...cigarettes contributed what, $0.10 per share to profits each year?

    And, of course, people don't necessarily only buy one item when they shop. Do people go to CVS to buy cigarettes, and end up buying a few more things? Or do they go there for the other things, and end up tacking on a pack of cigs?

    Honestly, I've never met anyone who needed cigs and then said, "Let's stop off at CVS to get some." But apparently people do--it's right there in the numbers.

    It'll be interesting to see the CVS earnings reports in the next couple of years, as well as how Walgreens chooses to respond...

    The CVS decision, though, does point to one of the main risks of tobacco investing: it takes a certain temperament to always be seeing new threats to your business model show up. You can't smoke here, you can't smoke there, you can't buy them over there, taxes going up over here, cigs placed out of sight behind the counter over there...It's all one way, directionally. You don't really see cities lowering cig taxes and permitting smoking in new locations.

    At some point, you will need "transition" products--dip, e-cigs, that kind of stuff--to replace traditional tobacco as the driving profit source. In the meantime, shareholders of companies like Philip Morris International might be collecting 10-15% compounded returns as they squeeze out the remaining years of what is still a wildly lucrative cigarette business, in which the disparity between the cost to produce and the profits generated remains enormous.
    Feb 7 12:46 PM | 1 Like Like |Link to Comment
  • Apple repurchases $14B of stock in two weeks [View news story]
    Nice use of fortnight.
    Feb 7 11:46 AM | Likes Like |Link to Comment
  • Intel Corp: Fundamental Stock Research Analysis [View article]
    I don't understand the people who try to use F.A.S.T. Graphs as a replacement for actual thought. Thinking is our greatest obligation, and I don't get why people try to outsource that responsibility.

    Just as fire can either be harnassed to keep a house warm in winter or recklessly abused to burn down a building, it depends on your skill set to determine whether you use F.A.S.T. Graphs to make enriching investment decisions, or terrible ones.

    Some people might look at Hershey around $100 on F.A.S.T. Graphs and see that it is trading at a similar valuation now compared to the year before the dotcom bubble burst, and conclude, "This is a bad idea to buy now unless I have a damn good reason why this time will be different (i.e. higher growth going forward)."

    It colors in and shades the context from which you should make decisions. If our investment portfolios are like paintings, then F.A.S.T. Graphs are like additional colors added to the basic ROY-G-BIV palette, but they are not designed to replace the painter himself.
    Feb 2 02:34 PM | 1 Like Like |Link to Comment
  • Dividend Growth Investing: Myths 16-20 [View article]
    Dave, isn't there supposed to be a limit to how many home runs you can hit in a week?

    I think only Frank Howard of the '68 Nationals stands in your way now.
    Jan 27 07:23 PM | 7 Likes Like |Link to Comment
  • Snowball Down A Hill: My Dividend Growth Portfolio 2013-2014 Report [View article]
    Dave, thanks for taking the time to share. It was a great, informative read.
    Jan 23 03:05 PM | 4 Likes Like |Link to Comment
  • My Top Investment Priority: Buy IBM Stock [View article]
    Robert, even though I disagreed with certain parts, I thought it was an excellent article. It was a very contrarian thesis, and they had the hard numbers to back it up.

    But before we etch the letters "I B M" right below "R I P" on the corporate tombstone, there are a couple of things to consider.

    First, the article notes that IBM's buyback is delivering 6.5% annual returns, while its investment in net business assets have grown at 18.1%. That disparity may not be as bad as you think, if you reach the conclusion that IBM's stock is currently undervalued and IBM's management team is good at ballparking general ranges of expected profitability for their investments.

    Let's say that someone believes, as I do, that IBM's business is worth the equivalent of $220-$235 per share. If that premise is correct, then IBM is somewhere around 20% undervalued, and the management is acting intelligently by repurchasing the stock while borrowing costs are low. When the other investors collectively recognize IBM's worth and push the price up to $220+, then suddenly the buyback will look more brilliant as it will achieve average returns of nearly 10% (as opposed to 6.5%), depending on the time the stock price reflects its true worth. That's the psychologically tough thing about buybacks--they rarely look intelligent when conducted. In fact, the more intelligent the move, perhaps the more ridiculed it will be by the investor community.

    The other thing worth considering is this: Perhaps IBM's 18.1% returns on business investments are due to the fact that IBM's management is being very selective about their capital expenditures. Perhaps that 18.1% is the product of spending discipline and restraint, and it would fall significantly if IBM invested more into business growth. It's a counter factual: we will never know what would have happened if a buyback dollar got thrown into the business instead.

    I know that liking IBM is currently unfashionable, but here is what I see: a company that is steadily increasing net business profits from its activities even without taking into account the buyback program. It made $7 billion in profits in 2003, and doubled profits by 2010 to over $14 billion. And now, profits are in the $16.5-$17.0 billion range. The buyback, though, has been the spike to the bunch because the share count gone from 1.7 billion or so to just a hare above 1.0 billion or so now. That's why I think IBM will give you percentage dividend increases that, say, you won't get from AT&T over the next decade. The current business model is "perpetually built" for 8-12% earnings per share growth, and a dividend growth rate that will slightly lag whatever that figure turns out to be.

    I think this might be a case where people are letting the current stock price dictate the sentiment. When J&J was in the $60s about a year or so ago, people were trash-talking it non-stop. With the price in the $90s, it's the darling blue-chip that deserves a spot on the mantlepiece right next to Coca-Cola, Procter & Gamble, and ExxonMobil again. The company hasn't changed, but the stock price did, and that shifted perceptions. If IBM currently traded at $225 per share, would the negative sentiment still carry the day on Wall Street? I doubt it.
    Jan 22 04:03 PM | 5 Likes Like |Link to Comment
  • Why I'm Not A Passive Investor [View article]
    Kevin, thanks for the shout out.

    Even though he disagrees with me on just about everything and mocks me publicly, I kind of like and respect Larry Swedroe. He gives a lot of hours to the Bogleheads forum without receiving compensation, and there are a lot of people out there who are more knowledgeable investors because he exists. So I consider him a net plus to the civilization.

    But I still don't think it's right to treat the S&P 500 as this magical thing with synecdochical properties representing "the market." Historically, it's been this: eight bureaucrats choose what large-cap companies go into the S&P 500, and they choose which ones leave it. It's not "the market" but rather slices of five hundred big companies chosen by those eight that are then arranged by market capitalization.

    If people want to talk about owning "the market", they'd come much closer to doing that by owning the Wilshire 5000 than the S&P 500 (historical FYI, the 5000 refers to the number of stocks that existed when it was created in 1974, but it typically holds 6,000-6,500 stocks).

    These debates are weird to have because we're often talking about the same companies. If you actively choose to buy 50 stocks and you put 2-3% of your portfolio in Exxon Mobil, you own practically as much Exxon stock as the person investing in a S&P 500 Index Fund.

    I choose to actively invest because there are some companies in the S&P 500 I'd want to own more of, and some I'd want to own less. I want more Coca-Cola stock to my name than investing through the S&P 500 would allow. I want less Alcoa to my name than the S&P 500 would demand. And by less, I mean $0.

    A lot of it comes down to personal taste, anyway. I'd find it soul-crushing to spend my life accumulating non-stop in SPY, and eventually, this boringness and lack of excitement would lead to a lower savings rate. My temperament is such that I enjoy searching out and owning individual companies. Why not do what you love, especially when it gives you money four times per year and grows thereafter?
    Jan 18 02:18 PM | 5 Likes Like |Link to Comment
  • How General Electric's Buyback Leads To 10% Annual Dividend Growth [View article]
    A lot, if not over 90%, of that can be traced to acquisitions in which GE issued stock.
    Jan 16 12:31 AM | 1 Like Like |Link to Comment
  • Why Bother Diversifying, Just Buy Berkshire Hathaway [View article]
    You ask: "And why would I expect now to be rewarded when for 15 years taking that risk has actually resulted in lower, not higher returns?"

    Because the book value is growing steadily. In the past ten years, book value at Berkshire has grown 19.0% annually according to Value Line.

    It is the price to book valuation declining that is responsible for Berkshire's subpar returns, not the business performance of Berkshire itself.

    For example, in 2004, Berkshire traded at $63 per share while having a book value of $37 per share. Trading at 1.7x book value back then placed a slight drag on Berkshire's returns.

    The business performance, measured by changes in book value, has been great over the past 10+ years. And plus, Berkshire's book value increasingly understates intrinsic value over time. I mean, GEICO's contribution to book value on the Berkshire balance sheet is minimal, but if it were ever sold or spun off, it would be worth so much more.

    In short, to answer your question about why Berkshire shareholders will be rewarded:

    (1) The unrealized value is there (in the $35 billion in cash, operating companies that have a much lower book value than intrinsic value, retained earnings by common stock investments that are not fully reflected, etc.).

    (2) the valuation is better today than it was ten years ago.

    (3) And the book value is growing faster than the changes in stock price which, as Donald Yacktman points out, is the most fertile soil for outsized gains going forward.
    Jan 15 08:29 AM | 18 Likes Like |Link to Comment
  • How General Electric's Buyback Leads To 10% Annual Dividend Growth [View article]
    The funny thing about GE’s dividend cut during the financial crisis is that it actually freed up capital to allow General Electric to recover faster and stronger than it would have if the $0.30 quarterly payout had to be maintained. Additionally, it is the presence of a high-quality executive base (that happens to get paid very well) that is largely responsible for being able to grow profits 8-12% annually despite being a monolith that brings in $146 billion in revenues. We're talking about lightbulbs, water processing, and engine construction here. This isn't like Coca-Cola where you can just twiddle your thumb and the annual growth happens automatically due to the ubiquity and brand equity of the product.

    Managerial excellence is an important ingredient in GE's long-term success, and paying people well is important to keep talent. Although it's currently fashionable to trash GE's credit division (and with the destruction it wrought in 2008-2009, I get why), it is easy to overlook the fact that the credit assets are usually quite lucrative.

    After the upcoming finance division spinoff, I have no idea which of the two securities will outperform. The risk to the credit divisions has always been overleveraging to goose returns, which is the Achilles Heel of finance stocks in general (if you are humming along in a low risk way growing 6% each year safely while your peers are growing at 11% annually, you will lose your job eventually, even if you are laying a foundation equipped to handle 2008-2009 type of situations in a way that your competitors are not).

    This "penalty for safety" is one of the worst incentive structures that exists among corporate management firms in big-name financial stocks, and it explains the difference between why I could sleep comfortably having my entire net worth in Coca-Cola, PepsiCo, Clorox, Colgate-Palmolive, and Kraft, but not Citigroup, Bank of America, and AIG. It all has to do with the amount of debt involved, and the perverse incentives facing the executives of finance-focused corporations that still prevail to this day.

    An idiot replacing Ajit Jain at Berkshire's Reinsurance Division can wreak disaster in a way that an idiot running Kraft cannot. If someone incompetent runs Kraft, the worst thing you have to deal with is a great pizza business getting sold off and undervalued stock being used to buy a British confectionary firm. That might hit your profits 10%, but you'll survive and thrive just fine in the long term.

    With finance stocks, the ultimate consequence is a swift, unanticipated total implosion because of a liquidity freeze or the collapsing tower of overleverage that can turn millions of dollars in stock ownership into $0.

    In short, GE's financial divisions are excellent wealth creators with low capital requirements when they are well managed. But the consequences of poor management are far greater for GE Credit than GE's industrial divisions.

    The dividend cut and the poor risk management of 2008 and 2009 were terrible events that retirees and income investors had to address. But you're not "sticking it" to the malfeasors by refusing to invest in the company now. The earnings and dividend growth prospects going forward are quite nice, and the price is fair.

    It's not going through your investing life with perfect justice, perceived fairness, or no harm that is the key to success. Rather, it is maintaining a cool head, acting rationally, and sizing up opportunities even after getting screwed (heck, especially after getting screwed) that will separate you from pedestrian investors that get mocked by the elite.

    If a “What is the most intelligent thing I can do right now, regardless of the past?” temperament is maintained over a long enough time with a wide enough stable of high-grade investments, the end result is that you have so much money coming in regularly that you get to live the life you want, on your own terms. Owning GE now after getting burned is just one example of that theory meeting reality.
    Jan 15 02:45 AM | 6 Likes Like |Link to Comment
  • Boeing: 50% Dividend Hike Good, Buybacks Destroy 30% Of Shareholder Value [View article]
    "If BA is $200 in three years, management is a hero."

    Couldn't a $200 per share price indicate that a stock has gone from overvalued to even more overvalued?

    However, if Boeing grows organic, sustainable profits by 75% in the next three years (and thus increases its profit baseline), then I'd be inclined to agree that the buyback was wise in retrospect.
    Jan 12 09:20 AM | Likes Like |Link to Comment
  • Stocks For 2014: Something For Everyone: Part 1 [View article]
    "Even a seasoned investor like you, with decades of experience in analyzing companies, can not significantly outperform the index..."

    Lots of problems with reaching that conclusion:

    (1) Chuck didn't say he bought them on that date, merely that he owned them on that date. His purchase prices could have been much lower, and his total returns much greater.

    (2) You're assuming that he owned them exactly equally weighted, which is probably unlikely to be the case. What if Walgreens was his largest position by far out of the group?

    (3) You assume that represents his complete portfolio, rather than just the part of the iceberg that Chuck chose to share with the public.

    Also, two years is nowhere near long enough of a time to form any conclusions about a strategy. And, even if the stats were true, beating the market by 2.5% over long periods of time would lead to extraordinarily large differences in outcome.
    Jan 11 10:00 PM | 4 Likes Like |Link to Comment
  • The Passing Of Dr. Eugene Narrett (Emmet Kodesh) [View article]
    Terrible news. I'm very sorry to hear this, and I pray that Dr. Eugene Narrett has found a permanent peace.
    Jan 6 03:57 PM | 3 Likes Like |Link to Comment
  • The Perfect Portfolio: End Of Year Review [View article]
    Dave, great read. Keep rockin' it in 2014.
    Jan 1 11:20 AM | 3 Likes Like |Link to Comment
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