Dividend Growth Stocks May Be Overrated Investments [View article]
Many criticize Buffett-style buy-and-hold investing and say if it was so easy, everyone would do it. The problem is that inactivity is interpreted as not doing anything by most investment managers.
My favorite Munger quote:
"Investing is where you find a few great companies and then sit on your ass".
Dividend Growth Stocks May Be Overrated Investments [View article]
Nice article, but I prefer dividend growth stocks for 2 reasons.
1) As long as you don't overpay, you should get the same or better return as a static 7% yield stock. If you bought PEP recently at $63 (14x P/E), you should get 3% yield plus 8-9% capital growth assuming PEP stays at that low 14x as mgmt expects high single-digit EPS growth. An 11-12% multi-year IRR is darn good for a safe stock.
2) Paying dividend taxes every year is leakage that hurts returns. If you hold PEP forever, you pay tax on just that 3% yield. Even if you sell in 3-5 years, you still (probably) get favorable long-term tax rates.
The key is not overpaying for dividend growth stocks.
Short Targets? 17 Large Cap Stocks With Low Cash Holdings [View article]
I own many of these companies and strongly disagree.
PM, WMT, PG have extremely consistent and strong cash flows so there is almost zero chance of any cash crunch. Even in the "great recession", FCFs held up very well.
These (along with HD) have such confidence in future FCF that they are aggressively buying back shares. These blue chips are the best risk/reward out there.
I find it hard to believe that any good investor would consider these to be good short candidates.
Why I Agree With Cramer's Call for Caution [View article]
Being contrarian is good, but the bull/bear spread took a big jump up last week as the bears dropped substantially. I think it was the newsletter survey. So being optimistic would not be contrarian.
Either way, bargains are scarce IMHO, but blue chips still offer good risk/reward.
Ford Motor Back Above 50-Day Moving Average on Analyst Upgrade [View article]
I agree, Credit Suisse is not one to listen to on F.
In the back of the research reports, the analyst must annotate their price target changes on a price chart. Over the past 3 years, the analyst consistently moved the target to almost the exact price on that day. It is truly shocking.
It often takes people time to realize that dividend growth investing is arguably the best and lowest risk way to invest.
Obviously, it depends on the time period you look at. Buying WMT or KO in 2000 at 30-50x P/E would not be a good start point for this strategy. Luckily, I think quality dividend growth companies are cheap now and should almost surely beat the S&P500 over the next 10 years. This is especially true for multinationals that benefit from a rising middle class in many emerging markets (KO/PEP, PM, NSRGY, PG etc.).
In addition, there is less of a chance to panic sell a WMT or KO on a market plunge than a typical stock, and this will likely benefit realized IRR. The tax implications of a low-turnover approach is also often overlooked.
Furthermore, for the more active among us, selling far out-of-the-money puts on dips and calls on spikes can add a few percentage points per year. Buying LEAPS when these companies drop to very low valuations is also a good idea.
In summary, it's a great time to employ a dividend growth strategy!
In addition, Buffett likes dividends from public stocks as he can reinvest at higher rates than most companies. The real kicker is that, as a company, BRK does not pay tax on dividends it receives from KO, PG etc. so there is no tax leakage.
If BRK did not have this tax advantage and he thought KO mgmt could reinvest as well as he could, Buffett would probably not want KO to pay dividends.
IRR is the annual return you expect over the projected holding period.
If you think a stock (0% div) will be at $121 in 2 years and your IRR hurdle is 10%, you can pay $100. $121/(1+.1)^2.
Alternatively, if you are buying a company with a FCF yield of 7% and think FCF will grow 3% forever, your IRR is also about 10% (7% initial FCF yield + 3% growth in FCF).
It's smart to think of them as growing perpetual bonds.
It also helps you to not overpay. The math is simple as long as you feel the firm has a sustainable moat.
For example, PEP has 2011 FCF/share of about $3.75 which is a 5.9% FCF yield (3% div yield). Assuming PEP grows FCF by 4% a year, you get an effective 10% "bond yield equivalent", some of which is paid in dividends.
I use 10% BYE as my hurdle. I realize that some people require a minimum dividend yield, but I care more about the overall BYE and that the company is reinvesting at a high return, whether via plant expansion or buying back shares at a low P/E.
If you bought KO, WMT etc. 10-years ago, you obviously overpaid using this simple BYE formula. But there seems to be many 10% BYEs available today.
"My opinion is that FCF model is useless for retail investors b.c. they don't have any say on free cash flow. "
As long as reinvested FCF ROIC is better than Ke, FCF valuation is the best measure as you benefit whether you receive it as a dividend or it is reinvested. In fact, I prefer mgmt to use FCF on high ROIC projects or share buybacks at a low P/E as there is no dividend tax "leakage". I don't like it when companies just keep it in the bank earning 1%, and WMT is not doing this.
Relative pricing is the worst model as it does not give true value. If everything is overvalued and WMT is less overvalued, that is not a ringing endorsement. Focusing on absolute valuations and IRRs keeps you out of trouble, as dot com investors and home owners can tell you.
That may be true, but even my view yields a good IRR.
I think Charlie Munger said - "focus on the downside and the upside takes care of itself". Depending on execution, WMT's 5-year IRR should be 10-20%. I am happy with 10% but hope to be pleasantly surprised.
If you are bullish, one great way to invest in WMT may be to sell Jan 2012 42.50 puts and buy a Jan 2012 52.50/57.50 call spread. This gives you a great return even if the stock has moderate appreciation.
I meant that domestic s.f. growth over the last 15 years will not be continued, which is why I was very conservative and assumed only international growth. My 2% U.S. comps also assume that WMT domestic sales growth only matches a low inflation rate.
That being said, if my conservative assumptions imply a value of $65/share, that means there is a nice margin of safety and lots of upside if management rights the ship.
I agree the last 15 year revenue growth is not a good proxy, but my assumption of 2.5% FCF growth assumes nothing but 2% inflation plus a little for international unit growth. This results in a fair value of $65.
The current $52 price implies just 0.65% perpetual FCF growth, which seems pretty dire.
If mgmt fixes the business, I do very well. If they don't and only achieve zero real revenue growth on their existing store base, I still do fine. The risk/reward is quite favorable here.
Dividend Growth Stocks May Be Overrated Investments [View article]
My favorite Munger quote:
"Investing is where you find a few great companies and then sit on your ass".
Dividend Growth Stocks May Be Overrated Investments [View article]
1) As long as you don't overpay, you should get the same or better return as a static 7% yield stock. If you bought PEP recently at $63 (14x P/E), you should get 3% yield plus 8-9% capital growth assuming PEP stays at that low 14x as mgmt expects high single-digit EPS growth. An 11-12% multi-year IRR is darn good for a safe stock.
2) Paying dividend taxes every year is leakage that hurts returns. If you hold PEP forever, you pay tax on just that 3% yield. Even if you sell in 3-5 years, you still (probably) get favorable long-term tax rates.
The key is not overpaying for dividend growth stocks.
Short Targets? 17 Large Cap Stocks With Low Cash Holdings [View article]
PM, WMT, PG have extremely consistent and strong cash flows so there is almost zero chance of any cash crunch. Even in the "great recession", FCFs held up very well.
These (along with HD) have such confidence in future FCF that they are aggressively buying back shares. These blue chips are the best risk/reward out there.
I find it hard to believe that any good investor would consider these to be good short candidates.
Why I Agree With Cramer's Call for Caution [View article]
Either way, bargains are scarce IMHO, but blue chips still offer good risk/reward.
Ford Motor Back Above 50-Day Moving Average on Analyst Upgrade [View article]
In the back of the research reports, the analyst must annotate their price target changes on a price chart. Over the past 3 years, the analyst consistently moved the target to almost the exact price on that day. It is truly shocking.
5 Dividend Stocks Worth Holding Indefinitely [View article]
Obviously, it depends on the time period you look at. Buying WMT or KO in 2000 at 30-50x P/E would not be a good start point for this strategy. Luckily, I think quality dividend growth companies are cheap now and should almost surely beat the S&P500 over the next 10 years. This is especially true for multinationals that benefit from a rising middle class in many emerging markets (KO/PEP, PM, NSRGY, PG etc.).
In addition, there is less of a chance to panic sell a WMT or KO on a market plunge than a typical stock, and this will likely benefit realized IRR. The tax implications of a low-turnover approach is also often overlooked.
Furthermore, for the more active among us, selling far out-of-the-money puts on dips and calls on spikes can add a few percentage points per year. Buying LEAPS when these companies drop to very low valuations is also a good idea.
In summary, it's a great time to employ a dividend growth strategy!
Wal-Mart Is Fairly Priced [View article]
If BRK did not have this tax advantage and he thought KO mgmt could reinvest as well as he could, Buffett would probably not want KO to pay dividends.
Wal-Mart Is Fairly Priced [View article]
If you think a stock (0% div) will be at $121 in 2 years and your IRR hurdle is 10%, you can pay $100. $121/(1+.1)^2.
Alternatively, if you are buying a company with a FCF yield of 7% and think FCF will grow 3% forever, your IRR is also about 10% (7% initial FCF yield + 3% growth in FCF).
5 Dividend Stocks Worth Holding Indefinitely [View article]
It also helps you to not overpay. The math is simple as long as you feel the firm has a sustainable moat.
For example, PEP has 2011 FCF/share of about $3.75 which is a 5.9% FCF yield (3% div yield). Assuming PEP grows FCF by 4% a year, you get an effective 10% "bond yield equivalent", some of which is paid in dividends.
I use 10% BYE as my hurdle. I realize that some people require a minimum dividend yield, but I care more about the overall BYE and that the company is reinvesting at a high return, whether via plant expansion or buying back shares at a low P/E.
If you bought KO, WMT etc. 10-years ago, you obviously overpaid using this simple BYE formula. But there seems to be many 10% BYEs available today.
Wal-Mart Is Fairly Priced [View article]
As long as reinvested FCF ROIC is better than Ke, FCF valuation is the best measure as you benefit whether you receive it as a dividend or it is reinvested. In fact, I prefer mgmt to use FCF on high ROIC projects or share buybacks at a low P/E as there is no dividend tax "leakage". I don't like it when companies just keep it in the bank earning 1%, and WMT is not doing this.
Relative pricing is the worst model as it does not give true value. If everything is overvalued and WMT is less overvalued, that is not a ringing endorsement. Focusing on absolute valuations and IRRs keeps you out of trouble, as dot com investors and home owners can tell you.
Wal-Mart Is Fairly Priced [View article]
I think Charlie Munger said - "focus on the downside and the upside takes care of itself". Depending on execution, WMT's 5-year IRR should be 10-20%. I am happy with 10% but hope to be pleasantly surprised.
If you are bullish, one great way to invest in WMT may be to sell Jan 2012 42.50 puts and buy a Jan 2012 52.50/57.50 call spread. This gives you a great return even if the stock has moderate appreciation.
Wal-Mart Repurchasing One Million Shares a Day, Remains High Conviction Long Pick [View article]
I have been using this strategy this year.
Wal-Mart Is Fairly Priced [View article]
That being said, if my conservative assumptions imply a value of $65/share, that means there is a nice margin of safety and lots of upside if management rights the ship.
Wal-Mart Repurchasing One Million Shares a Day, Remains High Conviction Long Pick [View article]
Wal-Mart Is Fairly Priced [View article]
The current $52 price implies just 0.65% perpetual FCF growth, which seems pretty dire.
If mgmt fixes the business, I do very well. If they don't and only achieve zero real revenue growth on their existing store base, I still do fine. The risk/reward is quite favorable here.