29 'Overdue' Dividend Increases: Streaks In Jeopardy [View article]
David,
I'm assuming that the 11.1% you calculated is to explain the similar probability in Robert Keyfitz's figure http://bit.ly/YfBnjj
Whereas 2 out of 18 is not alarming for the 50th year, the percentages for earlier are more troublesome. For example, a literal interpretation of RK's figure would be that ~20% of all companies in the CCC-list froze their dividends within the 5th to 9th year of issuing a dividend, and ~6% cut it.
RAS' site currently shows somewhere between 261-396 companies in this block of time http://bit.ly/rCDtjJ Furthermore, RK's figure would suggest that roughly half of a group of ~64 companies could cut or freeze their dividends around the 25th year.
I would expect that any company surviving the earlier years without a freeze or cut would be those with maturing business models better able to adapt to changing times (save the slowing rate of dividend increases).
Thus, the questions that come to mind are: (1) In which sectors and subsectors are the largest numbers of freezers and cutters, in each time frame studied? (2) Did certain external events have a more severe on companies in certain sectors than others?
I suspect we'll conclude what DVK mentioned below, about the early years tallied and the Great Depression. I wonder, though, if the "youthful" DGI companies were more likely to cut during this period than companies in or associated with the financial sector.
29 'Overdue' Dividend Increases: Streaks In Jeopardy [View article]
"I value a proven dividend champion more than a dividend challenger."
I agree. We have evidence in this article of one company that has continued to pay dividends, whether overdue or not, even though it is a hardship for that company, that company being PBI.
It only takes one to know it's done so, however small that "1" is in the grand scheme of things, the odds are increased.
++++++++++++++++++++++... How's that for an academic comment of no meaningful value : - )
Regardless Of The Non-Traded REIT Noise, Defense Always Wins [View article]
Brad,
Since you have taken to using Fast Graphs to support your statements, you should include the forecast which, at the current price shows the estimated 5 year total annual return to be ~ 4.8%, less than the distribution. FFO growth is estimated to be only 4%/year.
It’s obvious to many, if not all, that you deliberately chose to omit mention of the forecast. This readership is smarter and more astute than you think.
I remind you that your credibility is yours to lose.
++++++++++++++++++++++... It does not feel good to take anyone on. But more of any readership needs to help those who may be naïve by posting opposing views.
Regardless Of The Non-Traded REIT Noise, Defense Always Wins [View article]
Brad,
This is one of the best articles you've written.
I liked it a lot .... except for the recommendation to buy O, regardless of price. Rethink what you wrote and, if you come up with the same conclusion again, try rethinking it again after a good night's sleep.
Or, try another angle. Explain why O is at FV or undervalued at today's price (not tomorrow's price, not at next year's price, but today's price).
++++++++++++++++++++++... Alas, O looks expensive, because of the price. Simply said, it's slam mediocre at today's price. O-O-O Yeah Baby!
Dips And Pullbacks: Opportunities Or Sucker Punches? [View article]
Mike,
I see every decision not to sell as a buy decision. However, I don't see buying a company while its price is tanking as catching a falling knife if the purchase is made after the company is carefully researched and one derived a fair valued price ... even if the price declines after the purchase.
As we all tend to say but also tend to forget when a purchase is under water: "Value is what we get, price is what we pay."
As you say, it's "General Freakin' Electric"! I owned it before the crash, held on, and am still holding on. When it tanked, all I cared about was whether the company could survive its financing arm.
The mistake I made with INTC was not buying more when it traded around $12. I simply held on. I like this company a lot. I admit to not understanding the techno-babble anyone talks about (chipwise) but I do understand INTC from another perspective: I do not believe the nonsense about powerful computers becoming less relevant. Rather, I see increasingly more powerful phones and tablets as serving a new parallel market alongside much more powerful laptops, desktops, and mainframes.
I think the question before us today relates to whether INTC will continue to derive most of its income from products coming out of R&D, or whether an increasingly larger percentage of revenue will be derived from a foundry model. My bet is the former but, if I'm wrong, the risk is to earnings growth, hence slower growing capital appreciation and dividend income, not INTC's existence or relevance.
I own full positions in both. I don't look at price movement because I'm in for the long haul. I tend to read articles that affect their businesses and about what they're doing.
As is always the case, if either announced a drop in earnings or cut their dividend, the price will have downward adjusted before I read about it.
But, that would be my fate if even if I slept on a pull-out sofa bed at investor relations.
The world's economies are still in a recovery mode. Pick good companies (I think you did), and be patient.
++++++++++++++++++++++... And, yes. A correction is coming, because there are always corrections. Nothing goes up forever. I have no idea when or how severe other than that the higher anything goes, the farther it falls.
"I realize that I will be paying tax on the dividends in this account, I was wondering what your thoughts (or anyone's) would be regarding a plan like this to have some discretionary income on the side that I can touch before the age of 59.5?"
Eagle,
The bulk of my assets are in a taxable account and real estate, not my IRA. My taxable account is larger than my IRA. Both have nearly identical holdings of dividend stocks, so my dividend income in my taxable account is larger than in my IRA.
I reasoned a long time ago that, even if my IRA to meets all my retirement needs, the time will come when the rate of the minimum required distribution is higher than my ability to replenish any year's withdrawal in order to meet the following year's withdrawal, even in nominal dollars. That's when dividends from the taxable account will be particularly useful. Yes, I did cheat along the way but never publicly admit to it : - )
Until you need to tap the dividend income in a taxable account, you can use the dividends in the taxable account to pay the taxes due on dividends from that account, and the capital gains in that account to pay the taxes due on capital gains in that account.
I don't mind paying taxes on dividends or capital gains. Sure, I'd rather pay lower taxes but, given no choice, I'm happier having taxable income than no income.
Of all of Chuck's articles, I think one of the very best is this one: http://bit.ly/NlAQcn
It will show you why spending your dividends will not reduce the capital growth returns on carefully chosen dividend-growth stocks in your taxable account. That said, during an accumulation phase, your results would be very different if the dividend stocks you buy grow earnings at a low rate (such as a utility), and you spent the dividends.
A taxable account serves another important purpose. It's there for emergencies. For this reason, it's best to withdraw as little of the dividends before the age of 59.5 (and, in fact, until well into retirement) as possible, unless you need the money.
I have a very simple rule: Cash = good; no cash = bad
Thank you for introducing me to the "On Balance Volume" indicator. It's a useful, simpler indicator to use as a proxy for the detail found in bar charts. In fact, it seems ideal to look for bullish and bearish divergence signals.
On this topic, it seems to me that whereas there is no bullish divergent signal on the BBL chart, selling is lightening up which might be signaling a floor.
Ironically, I suspect a chartist might say that a bearish divergent signal is forming on the chart you used for PG ... which, if correct, portends a price decline especially because support is waning.
I offer these interpretations not to be argumentative, but as an opposite point of view to illustrate why, as an investor, I am likely to have a hard time using such indicators. However, I think you're spot on about volume, and that these indicators can be very useful.
Of all the indicators, the only two I've used in the past are the MACD and RSI indicators. But, I've used them very simply, the RSI only as an indicator as to whether over the 14 day period prior to the position to buy or sell a position, price has moved very aggressively so as to be greatly overbought or oversold at that moment in time, and the MACD to get a sense about how radically oversold or overbought a position can be at a moment in time. If so, then waiting one or two days might meaningfully improve the purchase or sale price (perhaps by as much as 1-2% after a correction).
By these measures, having decided to buy BBL, it was a clear buy last week (even if the price trends lower).
Your writeup about "The Tape Tells All" is a keeper, an article I plan to read from time to time and to share with others. Practically speaking, it's more my nature to first make a decision about whether I want to own a position for the long haul, and then buy at a price that will likely give me an acceptable total return over the long haul. I tend to focus more on the meanings of "acceptable" and "long" than "price" but also realize that the tools you use can help, tools I often forget to use.
On a related note, what interests me more is the degree to which the volumes we see (large or small) are the workings of market makers, short selling and coverage, and machines rather than buying and selling by "institutions" (whomever and whatever they are because some of these institutions are nothing more than a front for market makers employed by institutions trading for their own accounts; i.e., orders placed in the name of a bank or brokerage house in segregated accounts whereby the specialist becomes both an investor and dealer).
As the story goes, in an interview with Lucky Luciano after he visited the stock exchange and learned about specialists, he said:
"A terrible thing happened. I realized I’d joined the wrong mob.”
You're right. The 75% income test is a subset of the 95% income test. What I wrote was wrong about the possibility of failing the 95% test but passing the 75% test..
What I focused on is that a REIT can pass the 95% test if at least 95% of the REIT’s gross income for the taxable year is derived from items that meet the 75% income test. The 75% test opens the door for income to be derived from sources such as gains from the sale or other disposition of real property, and income and gain derived from foreclosed property.
To my way of thinking, one can possibly use the degrees of separation of FG metrics for clues that more and more cash for the distribution may not be derived from rental income (or from interest on debt obligations secured by mortgages, etc.) but, rather, are from "non-core" sources of income.
I second and third northhill24's comment that your instablog article on "Buy Low, Sell High" should be an article, and an editor's pick at that. Why is it hiding in an instablog? It's one clearest, most lucid articles on the topic around. Anyone would understand it. Thank you for another wonderful teaching aid.
I have a question. Is it possible to tell when smart money is about ready to move out or to move back in before either happens? I ask because there should be a way to figure out about when a specialist is done accumulating or selling the book.
Maybe your answer would be useful if explained in the context of a chart for BBL, where the spikes in volume are screaming “look at me, look at me.” It seems to be a decent example of a company that has been thrown around a lot price wise, and I imagine is being played with (i.e., high beta isn’t just a function of commodity prices and currency valuations).
I am long BBL and believe that the total annual return will be over 15% some time 3-5 years out from today. So, BBL is an example where I happily accept volatility and don't care much about entry price.
Thanks for writing another great article for the arsenal, one that will be especially useful to my nephew whom I trying to tutor about investing. I plan to walk him through many of your articles, and demonstrate FG for him using several stocks of his choosing. Great, great tool to think with.
Picking up on your comments with Be Here Now, I have a question about the “income valuation line.” How do each of you use it to gauge if a price appears to be at FV or not?
I think about it the following way: The “income valuation line” is the more important one for assessing how close a REIT (or MLP) is to FV. But, when the income line is materially below the FFO line, it's a sign to me that more and more cash for the distribution comes from sources (such as ROC) that do not pass the “95-percent income test” but might pass the “75-percent income test” (i.e., which includes gains from the sale or other disposition of real property, and income and gain derived from foreclosed property).
I tend to look to see if the income valuation is very close to the FFO line. In fact, in a perfect steady-state world where the income is sufficient to carry the company without expansion, the income line should be above the FFO (and an AFFO line, were it used) because expenses are not added back to the calculation of FFO, and the income line used by FG shows revenue before expenses.
I made a few observations on several REITs that are consistent with this thinking. Using OHI as the first example, when the income valuation, FFO, and valuation growth rate lines are removed from the graph (so only operating earnings are shown), price tracks operating earnings perfectly. But, something telling also happens, being that the 5 year forecast drops from 10.2% to 2.8% while the estimated FFO growth over the next 5 years is 4% on that same graph (mindful that the current distribution is 6.4%).
This leads to the conclusion that the business is not viable unless one or more of the following happens: (1) there is a reduction in the distribution; (2) additional capital is raised for investment at returns higher than the cost of capital; (3) properties are sold; and/or (4) leases are renewed at materially higher rents.
Interestingly, on a 15 year graph of Realty Income (O), there were several periods when the income line was very close to or materially *above* the FFO line - and these periods coincide with O’s price being noticeably above the normal P/FFO ratio (so, it seems that the market rewarded O with a higher share price at these times).
Contrast these periods with today’s price in a low interest rate environment when O’s price is in outer space yet it’s the FFO line that is well above the income line. In fact, on this 15 year graph, and on a 5 year graph, the price has been well above both lines since 2010 and the estimated 5 year return is only 4.8%. I think O is meaningfully overvalued.
Facebook's War On Google: Ads, Apps, Search And Beyond [View article]
Matt,
IBM isn't easy to predict, unless one relies strictly on past performance and believes what IBM says. Of IBM's product mix, I personally see "Next Generation Data Center and Cloud Computing" as a generic equivalent to what every other company says it's doing, so the value to IBM may be as a loss-leader for higher end services. I also don't know what to make of the "Systems and Technology" which sells servers, information storage systems, and point-of-sale retail systems. See Value Line's description, below.
I think we can bet on something else, that IBM's brand will ensure it's always at the table when something big needs to be done. On that basis, I should think that the upward trend of the past is a reliable indicator of a future upward trend.
Using Value Line's forecast out to 2017, and because IBM is now at a high (yesterday's close was ~ 212.08), it makes sense to estimate that the total annual return to 2017 could be as low of 7% if bought today at $212: http://bit.ly/eMzHyX
IBM's average PE has trended lower from about 18 (the average of the past 15 years) to an average PE of 13 for the past 3 years. Thus, the market seems to think IBM is no longer the big growth story it once was. Most importantly, over the past 10 years, IBM's PE has almost never been above 15. According to Standard & Poor's Capital IQ, the estimated 5 year earnings growth is about 10%.
Based on my back of the envelope analysis, I'd wait to buy IBM at a pullback to $190-195 and expect about 10%/year to 2017/8. Will there be a pullback? Hard to tell how much if any, but 5% discount to $200 is reasonable because of the recent behavior of the entire market..
IBM has a history of aiming high and surpassing its goals. It beat its 2010 objective of earning $10-$11 a share by one year, in spite of last year’s negative effect of the economic downturn on revenues. The plan now is to earn $20 a share by 2015 and generate $100 billion of cash, 70% of which IBM intends to return to shareholders in the form of stock buybacks or dividends.
The company is focusing on four areas where it believes it can generate $20 billion of revenue between now and 2015. The first is Growth Markets, which includes over 20 developing nations, where an emerging middle class is necessitating improvements in areas like transportation and healthcare. The second, Analytics, involves identifying patterns in data, as in human genomics, security, and marketing. IBM has opened seven analytic services centers around the world. The third area, Next Generation Data Center and Cloud Computing involves helping customers use software and services to adapt to new ways of computing, including providing services over the Internet. The final initiative, which the company calls Smarter Planet, aims to use information technology to solve problems, initially in nine industries, including the automotive, chemicals and petroleum, and medical sectors.
Under the strategic plan, revenue growth (including the contribution from future acquisitions) is expected to add $3.05 to earnings per share by 2015; improvements in productivity and the product mix will add $2.80 to 2015 share net; and stock repurchases will boost earnings by another $2.80 a share by mid- decade.
Although achieving sustained mid-single-digit revenue growth may be difficult, new products, including IBM’s new System z mainframe computer, should help. Some of the above initiatives will entail acquisitions, and IBM envisions spending $20 billion over the next five years for this purpose. Strong finances should support acquisitions and new product development. In late 2010, the company had over $11 billion of cash on its balance sheet, over two-thirds in the U.S. In addition, IBM is not as leveraged as it appears, with all but $5.5 billion of its debt supporting its financing business. (The nonfinancing debt-to-capital ratio was only 22% ).
Even if IBM doesn’t quite reach its ambitious $20-a-share goal by 2015, we think the stock has moderate, well-defined total return potential over the pull to mid-decade, underpinned by about average appreciation in the share price over that span and better-than-average dividend growth. It is also ranked 1 (Highest) for Safety, and is suitable for conservative investors.
Facebook's War On Google: Ads, Apps, Search And Beyond [View article]
Matt,
This is a beautifully written article (why am I not surprised?), with lots of thought about the direction all the big players can take.
My 2 cents:
I think Google is one of the most spectacular companies of all time. I have never been able to figure out fair value so I never bought it.
Facebook will be around for a very long time, but only because its model is entrenched as the most viable example of that type of company. FB is useful for those wanting to make money off invading people's privacy. I wonder why anyone with a working brain would want to use it.
Ironically, everything that makes Google great also sets the company up for very serious competition that can more easily topple GOOG than FB.
But, GOOG's future is in the brilliance of its experimental pipeline. Almost all of it is good and, because it's diversified and robust, not everything being played with needs to work for GOOG to remain successful and grow. GOOG's pipeline can change the world we live in.
I can't think of anything about FB that I respect or admire. If FB ceased to exist, the world would not be noticeably worse off. To me, FB is a groundless cemetery with unlimited storage space to perpetually house people's egos, a place where corporations can take advantage of these open caskets to connect dots between family and friends and make money off these relationships no differently than a funeral home or cemetery does when looking for new business.
To Sell Or Not To Sell - That Is The Question [View article]
"Does the positive effect of rising real estate prices and rents offset the negative effect of rising interest rates for REITs?"
Chump,
I think not, but it depends on the particular REIT.
For example, those with long-leased tenants may not have adequate inflation clause protection, some may. Whereas some REITs may own their properties, the rise in real estate prices does them no good unless they "sell the goose (building) that lays the golden egg (rents)."
In OHI's case, they have idle capacity but there is no way for me to tell if the vacancy rates are roughly 14-15% per building, or if 14-15% of their buildings are empty. If the latter, they can sell the empty buildings and redeploy capital or return it to shareholders as a ROC. The topic of vacancies has my knickers in a twist. See here: http://bit.ly/WTihQu And here: http://bit.ly/TkeHLT
In the case of DLR, some of their properties may be single-use and not suitable for a new tenant once the current tenant leaves (or fails to renew). The question remains as to what happens to these buildings. I just don't know, but my thinking about issues are: (1) they may not be in a desirable location or (2) immediately suited to the needs of a new tenant unless they are modified. I made related commented on DLR in a different thread. See here: http://bit.ly/160G4z2
More to the point, when rates rise, investors will search for a higher percent distribution than when rates are low. In a new interest rate environment, the cost of capital for new investment by all REITs will be higher. So, will REITs increase their distributions when the cost of new capital also increases, or will share prices will downward adjust?
It's instructive to think about 5 year diluted FFO/share growth projections.
There is one unalterable truth to me that will never change. I am not humanly capable of keeping an eye out for changes in interest rates and getting out before change happens. I am not programmed that way. I would rather wait to get in after a correction when there is more clarity. I don't care about an extra 3-4% on a yield (distribution) from a REIT when the risk of losing capital is so realistic, and the percent loss much higher than that extra 3-4%.
To Sell Or Not To Sell - That Is The Question [View article]
Bob,
Thank you for the suggestion to review DLR,HCN,NNN,NHI,SKT and OHI.
Of these, today I evaluated DLR, HCN, and OHI because I already spent considerable time studying their businesses, markets, and various factors that could impact them positively or negatively. My analysis lead me to conclude that these three REITs are materially overvalued at today’s prices.
I am less concerned about bear markets because they come about for many reasons, some of which have no affect on certain businesses. Of greater concern to me is the exceptional rise in prices of dividend paying equities, of which REITs can serve as the poster child. I believe there will be a correction within the next 1-3 years (tied to rising interest rates), at which time prices of many REITs will revert to fairer values.
I read your articles and think you’ve done a great job. I want to point out that you had the smarts to enter into many positions before I knew what a REIT was : - )
++++++++++++++++++++++... Chump,
Thanks for the link to your analysis on Health care REITs. Although it was done back in November, the story hasn’t changed much except for, perhaps, OHI which was about $21.50 when you bought it, and $28 today. It was a good buy at $21.50, especially because the yield was around 8% (but for good reason).
I actually owned OHI around that time but sold because I was troubled by certain aspects of OHI’s business, in particular that OHI’s occupancy rate are surprisingly low, and I saw OHI as being particularly vulnerable to reductions in rent coverage because of its business mix. I questioned Brad Thomas about my concerns in two different comment threads (in which Richjoy and I had a good exchange of ideas). Brad never followed through with answers to either of us. I sold. Preservation of capital is as important to me as dividend income, and I hadn't yet bought into issues regarding the stability of OHI's business.
To Sell Or Not To Sell - That Is The Question [View article]
Chump,
I hope the price you chose is sufficiently below today's price because, in my view, O is highly overvalued.
According to FAST Graphs, were you to buy it at $44.44/share (today's price), your 5 year annualized TOTAL return would be a 4.8%/year. That turns out to be the distribution at today's yield of 4.9%.
And, that's the nominal return.
I tried to find a FV for O using other methods. Whatever I did (all of which was thrown into the trash and, thankfully, out of my mind), I concluded that the price needs to undergo a material correction for it to regain my interest.
As I have other issues with O (and REITs in general in today's interest environment), I might take another look in a few years, after interest rates have risen. I don't care about *O's* 4.9% dividend because I do believe O's future increases will be paltry over the next few years (right or wrong, I think low single digits).
Just one person's opinion, FWIW.
++++++++++++++++++++++... There ya' go. Two divine interventions in one day : - )
29 'Overdue' Dividend Increases: Streaks In Jeopardy [View article]
I'm assuming that the 11.1% you calculated is to explain the similar probability in Robert Keyfitz's figure http://bit.ly/YfBnjj
Whereas 2 out of 18 is not alarming for the 50th year, the percentages for earlier are more troublesome. For example, a literal interpretation of RK's figure would be that ~20% of all companies in the CCC-list froze their dividends within the 5th to 9th year of issuing a dividend, and ~6% cut it.
RAS' site currently shows somewhere between 261-396 companies in this block of time http://bit.ly/rCDtjJ Furthermore, RK's figure would suggest that roughly half of a group of ~64 companies could cut or freeze their dividends around the 25th year.
I would expect that any company surviving the earlier years without a freeze or cut would be those with maturing business models better able to adapt to changing times (save the slowing rate of dividend increases).
Thus, the questions that come to mind are:
(1) In which sectors and subsectors are the largest numbers of freezers and cutters, in each time frame studied?
(2) Did certain external events have a more severe on companies in certain sectors than others?
I suspect we'll conclude what DVK mentioned below, about the early years tallied and the Great Depression. I wonder, though, if the "youthful" DGI companies were more likely to cut during this period than companies in or associated with the financial sector.
29 'Overdue' Dividend Increases: Streaks In Jeopardy [View article]
I agree. We have evidence in this article of one company that has continued to pay dividends, whether overdue or not, even though it is a hardship for that company, that company being PBI.
It only takes one to know it's done so, however small that "1" is in the grand scheme of things, the odds are increased.
++++++++++++++++++++++...
How's that for an academic comment of no meaningful value : - )
Regardless Of The Non-Traded REIT Noise, Defense Always Wins [View article]
Since you have taken to using Fast Graphs to support your statements, you should include the forecast which, at the current price shows the estimated 5 year total annual return to be ~ 4.8%, less than the distribution. FFO growth is estimated to be only 4%/year.
It’s obvious to many, if not all, that you deliberately chose to omit mention of the forecast. This readership is smarter and more astute than you think.
I remind you that your credibility is yours to lose.
++++++++++++++++++++++...
It does not feel good to take anyone on. But more of any readership needs to help those who may be naïve by posting opposing views.
Regardless Of The Non-Traded REIT Noise, Defense Always Wins [View article]
This is one of the best articles you've written.
I liked it a lot .... except for the recommendation to buy O, regardless of price. Rethink what you wrote and, if you come up with the same conclusion again, try rethinking it again after a good night's sleep.
Or, try another angle. Explain why O is at FV or undervalued at today's price (not tomorrow's price, not at next year's price, but today's price).
++++++++++++++++++++++...
Alas, O looks expensive, because of the price. Simply said, it's slam mediocre at today's price. O-O-O Yeah Baby!
Dips And Pullbacks: Opportunities Or Sucker Punches? [View article]
I see every decision not to sell as a buy decision. However, I don't see buying a company while its price is tanking as catching a falling knife if the purchase is made after the company is carefully researched and one derived a fair valued price ... even if the price declines after the purchase.
As we all tend to say but also tend to forget when a purchase is under water: "Value is what we get, price is what we pay."
As you say, it's "General Freakin' Electric"! I owned it before the crash, held on, and am still holding on. When it tanked, all I cared about was whether the company could survive its financing arm.
The mistake I made with INTC was not buying more when it traded around $12. I simply held on. I like this company a lot. I admit to not understanding the techno-babble anyone talks about (chipwise) but I do understand INTC from another perspective: I do not believe the nonsense about powerful computers becoming less relevant. Rather, I see increasingly more powerful phones and tablets as serving a new parallel market alongside much more powerful laptops, desktops, and mainframes.
I think the question before us today relates to whether INTC will continue to derive most of its income from products coming out of R&D, or whether an increasingly larger percentage of revenue will be derived from a foundry model. My bet is the former but, if I'm wrong, the risk is to earnings growth, hence slower growing capital appreciation and dividend income, not INTC's existence or relevance.
Ashraf Eassa wrote a good top down about INTC. http://seekingalpha.co...
I own full positions in both. I don't look at price movement because I'm in for the long haul. I tend to read articles that affect their businesses and about what they're doing.
As is always the case, if either announced a drop in earnings or cut their dividend, the price will have downward adjusted before I read about it.
But, that would be my fate if even if I slept on a pull-out sofa bed at investor relations.
The world's economies are still in a recovery mode. Pick good companies (I think you did), and be patient.
++++++++++++++++++++++...
And, yes. A correction is coming, because there are always corrections. Nothing goes up forever. I have no idea when or how severe other than that the higher anything goes, the farther it falls.
Why Accomplished Dividend Growth Investors Can Ignore Price Volatility [View article]
Eagle,
The bulk of my assets are in a taxable account and real estate, not my IRA. My taxable account is larger than my IRA. Both have nearly identical holdings of dividend stocks, so my dividend income in my taxable account is larger than in my IRA.
I reasoned a long time ago that, even if my IRA to meets all my retirement needs, the time will come when the rate of the minimum required distribution is higher than my ability to replenish any year's withdrawal in order to meet the following year's withdrawal, even in nominal dollars. That's when dividends from the taxable account will be particularly useful. Yes, I did cheat along the way but never publicly admit to it : - )
Until you need to tap the dividend income in a taxable account, you can use the dividends in the taxable account to pay the taxes due on dividends from that account, and the capital gains in that account to pay the taxes due on capital gains in that account.
I don't mind paying taxes on dividends or capital gains. Sure, I'd rather pay lower taxes but, given no choice, I'm happier having taxable income than no income.
Of all of Chuck's articles, I think one of the very best is this one: http://bit.ly/NlAQcn
It will show you why spending your dividends will not reduce the capital growth returns on carefully chosen dividend-growth stocks in your taxable account. That said, during an accumulation phase, your results would be very different if the dividend stocks you buy grow earnings at a low rate (such as a utility), and you spent the dividends.
A taxable account serves another important purpose. It's there for emergencies. For this reason, it's best to withdraw as little of the dividends before the age of 59.5 (and, in fact, until well into retirement) as possible, unless you need the money.
I have a very simple rule: Cash = good; no cash = bad
Why Accomplished Dividend Growth Investors Can Ignore Price Volatility [View article]
Thank you for introducing me to the "On Balance Volume" indicator. It's a useful, simpler indicator to use as a proxy for the detail found in bar charts. In fact, it seems ideal to look for bullish and bearish divergence signals.
On this topic, it seems to me that whereas there is no bullish divergent signal on the BBL chart, selling is lightening up which might be signaling a floor.
Ironically, I suspect a chartist might say that a bearish divergent signal is forming on the chart you used for PG ... which, if correct, portends a price decline especially because support is waning.
I offer these interpretations not to be argumentative, but as an opposite point of view to illustrate why, as an investor, I am likely to have a hard time using such indicators. However, I think you're spot on about volume, and that these indicators can be very useful.
Of all the indicators, the only two I've used in the past are the MACD and RSI indicators. But, I've used them very simply, the RSI only as an indicator as to whether over the 14 day period prior to the position to buy or sell a position, price has moved very aggressively so as to be greatly overbought or oversold at that moment in time, and the MACD to get a sense about how radically oversold or overbought a position can be at a moment in time. If so, then waiting one or two days might meaningfully improve the purchase or sale price (perhaps by as much as 1-2% after a correction).
By these measures, having decided to buy BBL, it was a clear buy last week (even if the price trends lower).
Your writeup about "The Tape Tells All" is a keeper, an article I plan to read from time to time and to share with others. Practically speaking, it's more my nature to first make a decision about whether I want to own a position for the long haul, and then buy at a price that will likely give me an acceptable total return over the long haul. I tend to focus more on the meanings of "acceptable" and "long" than "price" but also realize that the tools you use can help, tools I often forget to use.
On a related note, what interests me more is the degree to which the volumes we see (large or small) are the workings of market makers, short selling and coverage, and machines rather than buying and selling by "institutions" (whomever and whatever they are because some of these institutions are nothing more than a front for market makers employed by institutions trading for their own accounts; i.e., orders placed in the name of a bank or brokerage house in segregated accounts whereby the specialist becomes both an investor and dealer).
As the story goes, in an interview with Lucky Luciano after he visited the stock exchange and learned about specialists, he said:
"A terrible thing happened. I realized I’d joined the wrong mob.”
Why Accomplished Dividend Growth Investors Can Ignore Price Volatility [View article]
You're right. The 75% income test is a subset of the 95% income test. What I wrote was wrong about the possibility of failing the 95% test but passing the 75% test..
What I focused on is that a REIT can pass the 95% test if at least 95% of the REIT’s gross income for the taxable year is derived from items that meet the 75% income test. The 75% test opens the door for income to be derived from sources such as gains from the sale or other disposition of real property, and income and gain derived from foreclosed property.
To my way of thinking, one can possibly use the degrees of separation of FG metrics for clues that more and more cash for the distribution may not be derived from rental income (or from interest on debt obligations secured by mortgages, etc.) but, rather, are from "non-core" sources of income.
Why Accomplished Dividend Growth Investors Can Ignore Price Volatility [View article]
I second and third northhill24's comment that your instablog article on "Buy Low, Sell High" should be an article, and an editor's pick at that. Why is it hiding in an instablog? It's one clearest, most lucid articles on the topic around. Anyone would understand it. Thank you for another wonderful teaching aid.
I have a question. Is it possible to tell when smart money is about ready to move out or to move back in before either happens? I ask because there should be a way to figure out about when a specialist is done accumulating or selling the book.
Maybe your answer would be useful if explained in the context of a chart for BBL, where the spikes in volume are screaming “look at me, look at me.” It seems to be a decent example of a company that has been thrown around a lot price wise, and I imagine is being played with (i.e., high beta isn’t just a function of commodity prices and currency valuations).
http://bit.ly/168MBrB
I am long BBL and believe that the total annual return will be over 15% some time 3-5 years out from today. So, BBL is an example where I happily accept volatility and don't care much about entry price.
Provided it's low : - )
Why Accomplished Dividend Growth Investors Can Ignore Price Volatility [View article]
Thanks for writing another great article for the arsenal, one that will be especially useful to my nephew whom I trying to tutor about investing. I plan to walk him through many of your articles, and demonstrate FG for him using several stocks of his choosing. Great, great tool to think with.
Picking up on your comments with Be Here Now, I have a question about the “income valuation line.” How do each of you use it to gauge if a price appears to be at FV or not?
I think about it the following way: The “income valuation line” is the more important one for assessing how close a REIT (or MLP) is to FV. But, when the income line is materially below the FFO line, it's a sign to me that more and more cash for the distribution comes from sources (such as ROC) that do not pass the “95-percent income test” but might pass the “75-percent income test” (i.e., which includes gains from the sale or other disposition of real property, and income and gain derived from foreclosed property).
I tend to look to see if the income valuation is very close to the FFO line. In fact, in a perfect steady-state world where the income is sufficient to carry the company without expansion, the income line should be above the FFO (and an AFFO line, were it used) because expenses are not added back to the calculation of FFO, and the income line used by FG shows revenue before expenses.
I made a few observations on several REITs that are consistent with this thinking. Using OHI as the first example, when the income valuation, FFO, and valuation growth rate lines are removed from the graph (so only operating earnings are shown), price tracks operating earnings perfectly. But, something telling also happens, being that the 5 year forecast drops from 10.2% to 2.8% while the estimated FFO growth over the next 5 years is 4% on that same graph (mindful that the current distribution is 6.4%).
This leads to the conclusion that the business is not viable unless one or more of the following happens: (1) there is a reduction in the distribution; (2) additional capital is raised for investment at returns higher than the cost of capital; (3) properties are sold; and/or (4) leases are renewed at materially higher rents.
Interestingly, on a 15 year graph of Realty Income (O), there were several periods when the income line was very close to or materially *above* the FFO line - and these periods coincide with O’s price being noticeably above the normal P/FFO ratio (so, it seems that the market rewarded O with a higher share price at these times).
Contrast these periods with today’s price in a low interest rate environment when O’s price is in outer space yet it’s the FFO line that is well above the income line. In fact, on this 15 year graph, and on a 5 year graph, the price has been well above both lines since 2010 and the estimated 5 year return is only 4.8%. I think O is meaningfully overvalued.
Do you both agree?
Facebook's War On Google: Ads, Apps, Search And Beyond [View article]
IBM isn't easy to predict, unless one relies strictly on past performance and believes what IBM says. Of IBM's product mix, I personally see "Next Generation Data Center and Cloud Computing" as a generic equivalent to what every other company says it's doing, so the value to IBM may be as a loss-leader for higher end services. I also don't know what to make of the "Systems and Technology" which sells servers, information storage systems, and point-of-sale retail systems. See Value Line's description, below.
I think we can bet on something else, that IBM's brand will ensure it's always at the table when something big needs to be done. On that basis, I should think that the upward trend of the past is a reliable indicator of a future upward trend.
Using Value Line's forecast out to 2017, and because IBM is now at a high (yesterday's close was ~ 212.08), it makes sense to estimate that the total annual return to 2017 could be as low of 7% if bought today at $212: http://bit.ly/eMzHyX
IBM's average PE has trended lower from about 18 (the average of the past 15 years) to an average PE of 13 for the past 3 years. Thus, the market seems to think IBM is no longer the big growth story it once was. Most importantly, over the past 10 years, IBM's PE has almost never been above 15. According to Standard & Poor's Capital IQ, the estimated 5 year earnings growth is about 10%.
Based on my back of the envelope analysis, I'd wait to buy IBM at a pullback to $190-195 and expect about 10%/year to 2017/8. Will there be a pullback? Hard to tell how much if any, but 5% discount to $200 is reasonable because of the recent behavior of the entire market..
Said another way: How the h*ll do I know? : - )
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From Value Line: http://bit.ly/Y6L0Ra
IBM has a history of aiming high and surpassing its goals. It beat its 2010 objective of earning $10-$11 a share by one year, in spite of last year’s negative effect of the economic downturn on revenues. The plan now is to earn $20 a share by 2015 and generate $100 billion of cash, 70% of which IBM intends to return to shareholders in the form of stock buybacks or dividends.
The company is focusing on four areas where it believes it can generate $20 billion of revenue between now and 2015. The first is Growth Markets, which includes over 20 developing nations, where an emerging middle class is necessitating improvements in areas like transportation and healthcare. The second, Analytics, involves identifying patterns in data, as in human genomics, security, and marketing. IBM has opened seven analytic services centers around the world. The third area, Next Generation Data Center and Cloud Computing involves helping customers use software and services to adapt to new ways of computing, including providing services over the Internet. The final initiative, which the company calls Smarter Planet, aims to use information technology to solve problems, initially in nine industries, including the automotive, chemicals and petroleum, and medical sectors.
Under the strategic plan, revenue growth (including the contribution from future acquisitions) is expected to add $3.05 to earnings per share by 2015; improvements in productivity and the product mix will add $2.80 to 2015 share net; and stock repurchases will boost earnings by another $2.80 a share by mid- decade.
Although achieving sustained mid-single-digit revenue growth may be difficult, new products, including IBM’s new System z mainframe computer, should help. Some of the above initiatives will entail acquisitions, and IBM envisions spending $20 billion over the next five years for this purpose. Strong finances should support acquisitions and new product development. In late 2010, the company had over $11 billion of cash on its balance sheet, over two-thirds in the U.S. In addition, IBM is not as leveraged as it appears, with all but $5.5 billion of its debt supporting its financing business. (The nonfinancing debt-to-capital ratio was only 22% ).
Even if IBM doesn’t quite reach its ambitious $20-a-share goal by 2015, we think the stock has moderate, well-defined total return potential over the pull to mid-decade, underpinned by about average appreciation in the share price over that span and better-than-average dividend growth. It is also ranked 1 (Highest) for Safety, and is suitable for conservative investors.
Facebook's War On Google: Ads, Apps, Search And Beyond [View article]
This is a beautifully written article (why am I not surprised?), with lots of thought about the direction all the big players can take.
My 2 cents:
I think Google is one of the most spectacular companies of all time. I have never been able to figure out fair value so I never bought it.
Facebook will be around for a very long time, but only because its model is entrenched as the most viable example of that type of company. FB is useful for those wanting to make money off invading people's privacy. I wonder why anyone with a working brain would want to use it.
Ironically, everything that makes Google great also sets the company up for very serious competition that can more easily topple GOOG than FB.
But, GOOG's future is in the brilliance of its experimental pipeline. Almost all of it is good and, because it's diversified and robust, not everything being played with needs to work for GOOG to remain successful and grow. GOOG's pipeline can change the world we live in.
I can't think of anything about FB that I respect or admire. If FB ceased to exist, the world would not be noticeably worse off. To me, FB is a groundless cemetery with unlimited storage space to perpetually house people's egos, a place where corporations can take advantage of these open caskets to connect dots between family and friends and make money off these relationships no differently than a funeral home or cemetery does when looking for new business.
There ya' go.
To Sell Or Not To Sell - That Is The Question [View article]
Chump,
I think not, but it depends on the particular REIT.
For example, those with long-leased tenants may not have adequate inflation clause protection, some may. Whereas some REITs may own their properties, the rise in real estate prices does them no good unless they "sell the goose (building) that lays the golden egg (rents)."
In OHI's case, they have idle capacity but there is no way for me to tell if the vacancy rates are roughly 14-15% per building, or if 14-15% of their buildings are empty. If the latter, they can sell the empty buildings and redeploy capital or return it to shareholders as a ROC. The topic of vacancies has my knickers in a twist. See here: http://bit.ly/WTihQu And here: http://bit.ly/TkeHLT
In the case of DLR, some of their properties may be single-use and not suitable for a new tenant once the current tenant leaves (or fails to renew). The question remains as to what happens to these buildings. I just don't know, but my thinking about issues are: (1) they may not be in a desirable location or (2) immediately suited to the needs of a new tenant unless they are modified. I made related commented on DLR in a different thread. See here: http://bit.ly/160G4z2
More to the point, when rates rise, investors will search for a higher percent distribution than when rates are low. In a new interest rate environment, the cost of capital for new investment by all REITs will be higher. So, will REITs increase their distributions when the cost of new capital also increases, or will share prices will downward adjust?
It's instructive to think about 5 year diluted FFO/share growth projections.
There is one unalterable truth to me that will never change. I am not humanly capable of keeping an eye out for changes in interest rates and getting out before change happens. I am not programmed that way. I would rather wait to get in after a correction when there is more clarity. I don't care about an extra 3-4% on a yield (distribution) from a REIT when the risk of losing capital is so realistic, and the percent loss much higher than that extra 3-4%.
To Sell Or Not To Sell - That Is The Question [View article]
Thank you for the suggestion to review DLR,HCN,NNN,NHI,SKT and OHI.
Of these, today I evaluated DLR, HCN, and OHI because I already spent considerable time studying their businesses, markets, and various factors that could impact them positively or negatively. My analysis lead me to conclude that these three REITs are materially overvalued at today’s prices.
I am less concerned about bear markets because they come about for many reasons, some of which have no affect on certain businesses. Of greater concern to me is the exceptional rise in prices of dividend paying equities, of which REITs can serve as the poster child. I believe there will be a correction within the next 1-3 years (tied to rising interest rates), at which time prices of many REITs will revert to fairer values.
I read your articles and think you’ve done a great job. I want to point out that you had the smarts to enter into many positions before I knew what a REIT was : - )
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Chump,
Thanks for the link to your analysis on Health care REITs. Although it was done back in November, the story hasn’t changed much except for, perhaps, OHI which was about $21.50 when you bought it, and $28 today. It was a good buy at $21.50, especially because the yield was around 8% (but for good reason).
I actually owned OHI around that time but sold because I was troubled by certain aspects of OHI’s business, in particular that OHI’s occupancy rate are surprisingly low, and I saw OHI as being particularly vulnerable to reductions in rent coverage because of its business mix. I questioned Brad Thomas about my concerns in two different comment threads (in which Richjoy and I had a good exchange of ideas). Brad never followed through with answers to either of us. I sold. Preservation of capital is as important to me as dividend income, and I hadn't yet bought into issues regarding the stability of OHI's business.
BTW, your blog is great.
To Sell Or Not To Sell - That Is The Question [View article]
I hope the price you chose is sufficiently below today's price because, in my view, O is highly overvalued.
According to FAST Graphs, were you to buy it at $44.44/share (today's price), your 5 year annualized TOTAL return would be a 4.8%/year. That turns out to be the distribution at today's yield of 4.9%.
And, that's the nominal return.
I tried to find a FV for O using other methods. Whatever I did (all of which was thrown into the trash and, thankfully, out of my mind), I concluded that the price needs to undergo a material correction for it to regain my interest.
As I have other issues with O (and REITs in general in today's interest environment), I might take another look in a few years, after interest rates have risen. I don't care about *O's* 4.9% dividend because I do believe O's future increases will be paltry over the next few years (right or wrong, I think low single digits).
Just one person's opinion, FWIW.
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There ya' go. Two divine interventions in one day : - )