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  • Why We Like Campbell Soup [View article]

    Thank you for the question. Pasted below is a link to our firm's information:

    Kind regards,

    The Valuentum Team
    Sep 27, 2014. 11:24 AM | Likes Like |Link to Comment
  • What We Think Of Southern Company [View article]
    Thanks richjoy403.

    I think the key consideration is the difference between the near term and the long term when it comes to dividend analysis. Management teams and boards can do just about anything in the near term. For example, there are numerous examples of boards raising their dividends only to have to cut them in the ensuing months.

    The Dividend Cushion is a measure of risk to the dividend and a measure of capacity for future dividend increases. Southern Company's management is targeting a $0.07 per share annual increase in the dividend. This is achievable in the near term. However, just because the board can do what it wants in the near term doesn't mean the risk isn't there.

    Importantly, however, we're not expecting a dividend cut at Southern Company. We've outlined that in the article. However, because of the structure of the firm, Southern doesn't have significant capacity to keep raising the dividend, even at a 5%-8% annual rate, a pace one might expect for an entity with good dividend growth prospects. Southern's dividend growth rate is ~3%, and we'd rate that as poor to very poor. This may be fine for some investors, but when compared to other companies with mid-single-digit, high-single-digit and dougle-digit growth rates, it is ranked accordingly. Again, it is what it is. We help investors sort through stocks.

    The Dividend Cushion is completely consistent in highlighting the lack of excess cash capacity for Southern to be a top-tier dividend growth idea. For income, investors should be cognizant of the balance sheet and the dividend obligations already expected. There is tremendous value in the Dividend Cushion in this respect. Just like one has to get familiar with certain measures of valuation and how the agencies rate credits, the Dividend Cushion is similar. It speaks of the risks and excess capacity.

    Thanks again for the comment. We appreciate your thoughts, as always!

    The Valuentum Team
    Sep 26, 2014. 09:48 AM | 1 Like Like |Link to Comment
  • What We Think Of Southern Company [View article]

    Thanks for your continued contributions to our work.

    One thing we wanted to say richjoy403: do remember the dot-com bubble? Do you remember at that time when everyone started to value and evaluate companies differently? They used to say, hey, let's value on the number of clicks it gets (and not on earnings or free cash flow).

    Or perhaps you may even remember the phase in the 70s/80s, when every company changed their name to XYZ 'Tech' (adding the Tech to the name) to show how innovative they are, and why investors should apply a larger multiple to shares (because of the name). Do you remember?

    The suggestion we have is to understand that adjusting the framework is a classic no-no. When investors start ignoring traditional metrics like those in the Dividend Cushion--specifically the three items: free cash flow (CFO-capex), net balance sheet (cash less debt), and cash dividends paid--there's only trouble lurking.

    It's important to recognize the pure objectivity of the Dividend Cushion, which considers a firm's future free cash flows relative to its oncoming dividend payments (and net cash/debt position). Think of it like a PE ratio but for dividend health. No PE ratio is going to fit every company. They're different. Utilities get low PEs, while fast growing tech companies get big ones.

    But should we run out and say, this PE ratio doesn't make sense, let's change it. No. The PE ratio is derived from the stock price and earnings. It just IS. In a similar light, the Dividend Cushion IS. We know that for utilities, the ratio is going to be poor. Just like we know the PE for utilities is going to be lower than for high-growth tech companies. Just like it's important to understand why the PE ratio is lower for utilities, it is also important to understand why the Dividend Cushion ratio is lower for utilities.

    Every company generates free cash flow, and for dividend payers, a cash flow coverage measure is helpful, not only in conjunction with a dividend payout ratio, but also in assessing the future capacity for additional increases. For emphasis: every company generates free cash flows (either a source or a use). This is the one universal metric to value any asset. Accounting earnings can be manipulated, top-line growth rates enhanced, but cash is cash. It is not clicks on a website or a change in the name. It is cash. Real hard cash. And this is what investors count on.

    The Dividend Cushion ratio for Southern Company is not 0 because we think it should be. It is 0 because the firm's net cash/debt position plus its future expected free cash flows--the sum of which dividend by its future expected cash dividends (including management's estimates for $0.07 per annum growth) says it is. Just like the PE ratio for Southern Company is what it is. Investors should know why. Investors need to ask the questions why about the Dividend Cushion. In doing so, they become better investors.

    The value of the Dividend Cushion has tremendous value, and especially with utilities. There are two specific examples in utilities, which the Dividend Cushion highlighted as having severe risk of a cut: Exelon and First Energy. The Dividend Cushion has also highlighted other companies risks of being cut. The ratio is a numerical calculation based on a numerator and a denominator. Its track record is as follows:

    We're not going to change our dividend assessment to a basis on the number of clicks per site or to give a firm a higher multiple because of its name. The Dividend Cushion IS.


    Thank you for your comment.

    The Valuentum Team
    Sep 25, 2014. 03:56 PM | 2 Likes Like |Link to Comment
  • Teva: On The Auction Block? [View article]
    Well said Brendan. Thanks for the comment!

    Kind regards,

    The Valuentum Team
    Sep 24, 2014. 03:00 PM | Likes Like |Link to Comment
  • General Mills Overpaid For Annie's, But It Probably Had To [View article]
    Thanks Alex. It is fixed now.

    Kind regards,

    The Valuentum Team
    Sep 20, 2014. 03:43 PM | Likes Like |Link to Comment
  • How A Dividend Growth Investor Can Cope With Risk [View article]

    Thank you for the comment. It's important to separate the economics of business analysis from that of personal investment returns.

    In business, analysis ROIC is the most important measure of a firm's ability to use invested capital to generate returns. The more economic value created, the higher the equity value of the firm. Equity value is linked to equity price in this regard.

    The application of the discounted cash-flow model is not about precision but executing it appropriately to identify outliers and arriving at a reasonable fair value estimate. It's important to understand the discounting mechanism within the discounted cash-flow modeling framework. Cash flows 50 years from now are heavily discounted due to both the time value of money and the underlying forecasting risk.

    The time value of money is perhaps a concept that may be worth digging into. A firm's value will always be worth the present value of its future free cash flows under any business model across any sector. If someone tries to tell you that valuation is not important, tell that person to give you a $1 and you'll give him $0.50 in value. Valuation is always the most important consideration.

    Thanks for the comment!

    The Valuentum Team
    Sep 20, 2014. 11:24 AM | Likes Like |Link to Comment
  • How A Dividend Growth Investor Can Cope With Risk [View article]

    Thank you for the article. The emphasis on probability analysis is welcome. Each stock has a future free cash flow stream that is relatively uncertain. Under different scenarios, the future free cash flow stream creates a cone of probable fair values . When the share price is at the low end of this fair value range, the risk/reward is tilted in the investors' favor. This is the heart of the Valuentum process.

    It is very important that you've mentioned that historical data is only as good as it is used to inform the future . Historical dividend growth rates, historical earnings growth rates are all backward looking. A forward- looking discounted cash flow model is the most appropriate way to capture an intrinsic value estimate. A PE has its shortfalls because it does not consider wealth or liabilities on the balance sheet. In part, this is why PEs vary for similar companies with similar growth rates and competitive profiles. Varying levels of capex also impact the PE. Remember, the PE is a shortcut and should only be used with an understanding of its pitfalls, which are many.

    There is a significant problem with using return on equity. First, evaluate the well -documented DuPont equation. The third term is assets/equity, a form of leverage. In this light, companies can take on financial leverage and more risk to boost ROE. This is not operational improvement and offers very little insight to the quality of a firms operations. At Valuentum, we use ROIC, which corrects for this dynamic. ROA is also inferior due to the presence of non-core cash in the denominator .

    Kind regards,

    The Valuentum Team
    Sep 20, 2014. 09:41 AM | Likes Like |Link to Comment
  • What Is Risk For A Dividend Growth Investor? [View article]

    Thank you for writing this article. Thinking about value as a range of probable outcomes remains central to the Valuentum methodology, as in Marks' paper. Buffett's 'approximately right, precisely wrong ' centers on the core of the application and margin of safety bands with the Valuentum process.

    The key risk that you are missing is the very real possibility that in 3-5 years , interest rate hikes will make dividend paying stocks significantly less attractive. The higher interest rate also translates into a higher discount rate in the valuation process, providing further support for lower valuations.

    The risk that interest rates will not rise is the risk that is driving the reward in dividend paying stocks. Unfortunately, market participants aren't factoring in this risk appropriately, and we will likely see a fall out in dividend paying stocks once interest rates on low risk income vehicles become more attractive.

    As we saw in AGNC, NLY, and SDRL, the income investor claims to not care about price volatility, but they often find themselves pulling the sell trigger once any concern about the dividend surfaces.

    The Valuentum Team
    Sep 20, 2014. 01:44 AM | 1 Like Like |Link to Comment
  • Boy, Were We Wrong About Yahoo [View article]
    Hi all,

    Our initiation report on Alibaba (BABA) is now available on our website. FV = $104 per share. Thank you all for reading!

    Kind regards,

    The Valuentum Team
    Sep 19, 2014. 12:02 PM | Likes Like |Link to Comment
  • Why Dresser-Rand's Shares Are Cheap [View article]
    Thanks so much Holthusen!

    Kind regards,

    The Valuentum Team
    Sep 19, 2014. 09:57 AM | Likes Like |Link to Comment
  • Calculating Facebook's Intrinsic Value Is Not Insurmountable [View article]

    Thank you kindly for the comment!


    The Valuentum Team
    Sep 15, 2014. 04:42 PM | Likes Like |Link to Comment
  • Calculating Facebook's Intrinsic Value Is Not Insurmountable [View article]
    Hi Justin,

    Here's an excerpt from a recent article we wrote about '5 Questions Advisors Should Ask When Interviewing Fund Managers":

    Can you explain the difference between ROA, ROE, and ROIC?

    "What you are looking for in the answer is a response that goes into the pitfalls of using return on assets (ROA) and return on equity (ROE) as a measure of a firm’s ability to generate value for shareholders.

    Ideally, you’d want to hear a response that says ROA is muddied by the inclusion of non-operating cash in the denominator and that ROE is impacted by leverage (assets divided by equity). The very best of fund managers will refer to the DuPont (DD) equation in explaining that the third term when breaking apart ROE is leverage. The best answer may explain how some firms can hide deteriorating profitability (net income divided by sales) and asset turns (sales divided by assets) by taking on more and more debt to bolster ROE.

    What you want is an answer that says ROIC is the best measure of a firm’s ability to generate economic value for shareholders. The very best answer will include a response that says return on new invested capital (RONIC) is the most informative measure of a company’s ability to continue to generate economic value for shareholders. RONIC is calculated by taking NOPLAT (net operating profit less adjusted taxes) divided by net new investment (capital expenditures less depreciation adjusted for working capital).

    Be wary of fund managers that just rely on ROE and ROA. These measures provide some information about the return potential of a company, but they have their pitfalls. Every fund manager should know about them."

    Thank you for reading!

    Kind regards,

    The Valuentum Team
    Sep 15, 2014. 04:41 PM | 1 Like Like |Link to Comment
  • Evaluating Accenture's Economic Value Creation And Fair Value [View article]
    Hi bookzeller,

    All of our analysis is available at your convenience on our website:

    Thanks for your interest!

    The Valuentum Team
    Sep 14, 2014. 07:31 PM | Likes Like |Link to Comment
  • The Market Fully Appreciates Seadrill's Execution [View article]
    Just closing the loop on this comment chain. Seadrill has fallen considerably since this article was published. Thank you all for reading!

    The Valuentum Team
    Sep 13, 2014. 12:05 PM | Likes Like |Link to Comment
  • The Market Fully Appreciates Seadrill's Execution [View article]

    You may have missed this in the article: "We're not saying the dividend is going to get cut at this time, but as was displayed in the financial crisis, the firm's over-leverage can be a recipe for disaster (when shares dropped from nearly $37 to $6 and change). When it comes to dividend growth investing, we don't ignore the capital risks."

    Thanks for reading!

    The Valuentum Team
    Sep 13, 2014. 12:03 PM | Likes Like |Link to Comment