Archive for the ‘Stock Studies’ Category
Sunday, June 1st, 2008 |
Welcome to readers from The Street.com and the Kirk Report. Please take a moment to visit our About Page to see why we love dividend stocks and subscribe to our blog using the Subscribe Form on the right side of the page.
I am a huge proponent of buying the best dividend paying stocks when they are value priced. However, if you aren’t sure about picking an individual stock and you still want to reap the rewards of Dividends, check out this list of some different Dividend Exchange Traded Funds (ETF’s).
The Vanguard Dividend Appreciation Fund (AMEX: VIG) is a one of the cheapest dividend ETFs, with an expense ratio of 0.26%. Some rivals charge as much as 0.60%. But fees aren’t everything here. VIG’s current yield — slightly less than 1.77% — is on the low side, as is its total return of roughly 7% since its inception in late April 2006.
VIG is benchmarked to the Mergent Dividend Achievers Select Index, a subset of the Mergent Dividend Achievers Index — a market-cap-weighted index of stocks with a consistent history of increasing dividends. Its holdings are highly concentrated in three sectors: consumer staples at 23%, financials at 20%, and industrials at 17% of assets. The top five stock holdings include Johnson & Johnson, GE, ExxonMobil, AIG, and IBM, each representing roughly 4% of assets.
Among other ETFs focusing on high-yielding equities, the iShares Dow Jones Select Dividend (NYSE: DVY), the first dividend ETF, has gathered more than $7 billion in assets. It invests in 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. Total Market Index.
First Trust Morningstar Dividend Leaders (AMEX: FDL) invests in the top 100 stocks of the Morningstar Dividend Leaders Index. These are the index’s highest-yielding stocks, ranked by the consistency with which they pay dividends and the ability to sustain those dividends going forward. Three securities — Citigroup, Bank of America, and Altria — together make up more than one-fourth of the fund.
State Street SPDR Dividend (AMEX: SDY) invests in the 50 highest dividend-yielding S&P Composite 1500 constituents. This index tracks equities that have consistently increased dividends every year for at least 25 years. Investing in these long-term dividend-paying stocks reduces the risk that the fund’s holdings will cut their dividends.
For Dividend Daredevils
More adventurous investors might consider the Claymore/Zacks Yield Hog ETF (AMEX: CVY), which aims to double the yield of other dividend-paying ETFs. The fund invests in high-yield securities such as preferred shares, master limited partnerships, closed-end funds, American Depository Receipts, and Real Estate Investment Trusts. It’s a riskier play, since the holdings don’t all have a long history of regular, stable dividends.
Paying the piper
Tax law changes in 2003 lowered the tax on most dividends to 15%, making dividend-paying stocks more appealing. This law is set to expire at the end of 2008, and if it does, dividend-paying stocks may become less desirable.
Courtesy of Motley Fool
Posted in Investor Education, Stock Studies | 2 Comments »
Saturday, May 17th, 2008 |
Once in while a non-dividend paying stock crosses my radar and I just can’t ignore it. Such is the case with this week’s analysis of Capstone Mining (CS.TO).
Capstone Mining is a well run company that reopened and operates a single copper (with zinc, lead and silver) mine in Mexico which has recently more than doubled its production. The results of this production increase were starting to be evidenced in the financial statements last fall, but this spring and summer should produce even higher numbers because of the increased price of copper.
The Major Highlights of Capstone Mining
- Capstone continued its share buyback plan and purchased an additional 219,900 common shares on the open market at an average price of CDN$2.78.
The shares have been returned to treasury and canceled under its normal course issuer bid.
- At March 31, 2008, Capstone had working capital of $56 million and no bank debt. In addition, the fair market value of Capstone’s share ownership of Silverstone Resources Corp. is approximately $65 million, which is not included in working capital.
- Copper production during the quarter was 6.0 million lbs compared with 2.8 million lbs for the three months ended February 28, 2007.
- Record operating profit of $15.9 million or $0.20 per share.
As you will see further on in this analysis, Capstone’s management have pulled out all of the stops in making this a very profitable long-term investment for shareholders. Certainly, nobody knows what the future holds for copper prices and while the immediate future looks bright, Capstone’s management is focused on keeping the mine profitable for many years to come. So, how do they make sure that their shareholders are rewarded…they tackle the future right now!
Capstone Has Hedged Their Bets
CS hedges 20% of their copper production with forward contracts … in simple language, for each year until 2011, they have already sold 20% of their copper at an average price of $3.18. They do this to cover the majority of their production costs.
This is critical to mines because it means that if copper prices dive, they will be guaranteed to generate enough cash flow to stay open. It is really just an insurance policy for shareholders.
Capstone is obligated to report the difference in value of these future contracts to the current market price (called a mark to market calculation) in their income statement as a non-cash item. So here’s how that works.
For 2008, they have forward contracts to sell 7 million pounds of copper at an average price of $3.38/lb. The math for the contract reads … 7,000,000 lbs x $3.38/lb = $23.7 mil. Now, at the end of the last quarter, on March 31/08 the price for copper that day was $3.84/lb. The value of that 7 mil pounds of copper at that price would be 7,000,000 lbs. x $3.84/lb = $26.9 mil.
Soooooo…for this year’s forward contracts alone the loss on paper is $26.9 mil - $23.7 mil = $3.2 mil. Add to that by the other 3 years that they have forward contracts for and you end up with about $12 million in recorded NON-CASH losses that they have to record in this quarter.
What We Must Understand
Capstone did not actually “lose” any of that money. They simply lost the $12 million worth of additional profit that they could have made over the next 4 years if they had not pre-sold 7 million pounds for each of the next 4 years. What the report tells us is that for those future sales, they could have made an extra $12 million over the next 4 years If, and this is big “if” Copper prices remain at or above $3.84/lb.
We must also remember that those forward contracts only represent 20% of their production … so the other 80% will be sold at market price.
You Still With me?
OK, so for those of you who are real keeners here’s how the future is calculated.
Contracts have already been brought into the income report at a value of $3.84/lb. Therefore, any future variation in price will work off of that price. So, even though the real price of the contracts average $3.18/lb, the next report will calculate a gain/loss based on the already calculated price of $3.84/lb.
Therefore, if Capstone just keeps the contracts that they already have, which on paper now reads as a value of 28 mil lbs (4 yrs x 7 mil lbs/yr) valued at $3.84/lb, and copper goes down $.10/lb by the end of next quarter on June 30. In this case, their income report would show a profit of 28,000,000 x $.10/lb = $2.8 mil. Basically, they will have gained back some of their “non-cash” loss from this quarter. If copper continues to rise, they will report another loss of potential.
So you see, the loss they have to report this quarter is not a real loss. It’s a loss of potential assuming that the price of copper is $3.84 when they actually sell those 7 million pounds each year to fulfill those contracts.
Bottom line … the real Operating Profit (which does not account for the forward contracts or future possible income tax) … is $15.9 mil … or $.20/share for the first quarter of this year.
Now for the real keener keeners…
Let’s assume for a bit, that copper prices drop in the next 3 quarters. CS sells 80% of their copper at market price so they will be generating less revenue. However, as we’ve seen from the calculations above, when the price of copper drops, those forward contracts report an increase in value from one quarter to the next. So these gains will help offset the drop in production copper sales. This is how hedging smooths the fluctuation in commodity prices for the producer.
At a quarterly profit of $.20/share, the annual earnings could easily be $.60-.80/share. That’s an EPS of 4x-6x.
Generating Their Own Cash Flow
Capstone has also made certain that they are getting the most bang for their buck with regard to their silver production. This may be the smartest move that a mining company has ever pulled off in terms of generating cash flow. You see they spun off a silver producing company, of which they still own 20% of and are selling their silver production to them. Here is an excerpt from another article that explains the situation rather well.
Silver mining companies receive much higher multiples (e.g. P/E ratios) than base metal mining companies (e.g. 20 to 1 vs 5 to 1). Capstone has leveraged this by selling its silver production to Silverstone Resources (SST.V). SST.V is a company which Capstone spun-off and IPOed and which should ultimately receive the ratios of a silver producer. Capstone has 23 million shares of SST.V. SST.V is reputed to be undervalued relative to comparable companies and to have a considerable growth coming.
A huge consideration is that cold hard cash and shares in Silverstone (SST), another undervalued company, make up 45% of their market share price!
Other Considerations
Besides their solid production, cash, profitability, and their ownership of 20% of SST, CS will benefit from higher copper prices which showed a surge testing the $4.00 level. Remember, CS has already presold 20-25% off their next four years’ production at $3.18, but the other 75-80% is going to benefit from market surges. Plus, from the volume action of late, it looks like CS is still utilizing that massive mound of cash by buying their own stocks back to further strengthen their share value.
You know you are on to something when management says this during their conference call:
[With regard to cash on hand]…”We would love to purchase another mine if we could find one as profitable as our own”.
I would venture to guess that this means they will continue to buy back their own shares until they find a profitable investment elsewhere. This is certainly not a bad decision for a mining company.
Honestly, I have not seen a company managed so intently with shareholders in mind for a long time. Capstone could have easily gone out and bought another mine that was not as lucrative because they have too much cash, but they didn’t. This is prudent management and it is refreshing to see.
Full Disclosure: The author does have a position in Capstone Mining (CS.TO).
Posted in Investment News, Stock Studies | 4 Comments »
Saturday, April 5th, 2008 |
Here is why you must start buying dividend paying stocks now!
It has long been a strategy of mine to invest in high quality Dividend Growth Stocks as a for retirement and I’m about to show you why you should do the same!
The beauty about this strategy is that it is not rocket science and that everyone can understand the basic principles behind it. I’m not promoting trickery or complex technical mumbo jumbo, just good old fashioned common sense with a side of logic.
The Stock Market Crash Scare Tactic
I’m sure that we have all heard that the baby boomer generation is aging and entering into retirement. We have also been told that all of these individuals are going to make a mass exit out of the stock market, causing the greatest stock market crash that we have ever known.
Some so called “Gurus” have suggested that the aging demographic is going to cause havoc with the markets by selling all of their stocks to fund their retirement.
Is This Possible?
In theory, the outlined scenario could be possible if all of the baby boomer’s withdrew their money from the stock market at the same time. But, as we know, the boomer generation lasts for a couple of decades…they were not all born in the same year! And even if they were, not everyone can or will remove their equity from the markets at the same time.
Therefore, we can clearly see that this scenario is highly unlikely.
But Aren’t All of The Baby Boomers Going to Buy Bonds?
While conventional wisdom dictates that fixed income (bonds) should comprise a larger portion of ones portfolio as they near retirement, it might not be as simple as black and white these days.
For instance, as time goes by the life expectancy of retirees becomes longer and longer. This means that a retiree will need to make their nest egg last for several more years than they my have previously thought.
Therefore, the retiree will need to take on additional risk in order receive higher returns in order to ensure that they do not deplete their principal prior to death. Taking on more risk means investing in more equities (stocks) gaining capital growth in their portfolio to fund a longer retirement.
So Why Should I Buy Dividend Paying Stocks?
The reason we must invest in dividend paying stocks now is because they will be the investment of choice to fund the retirement of Baby Boomers.
You see, dividend paying stocks have the potential for both capital gain and income production. Not only that, these investors will be looking for stocks that have a track record of increasing dividends…giving them yet another hedge against inflation. This combination, as explained earlier, will be necessary to fund the lengthening retirement that comes with a greater life expectancy.
If we combine this factor with today’s low interest rate environment, we can see that fixed income instruments (with the exception of TIPS) such as bonds and CD’s provide little, if any, protection against inflation.
Factor that in with the fact that historically, dividend paying stocks have outperformed non-dividend paying stocks.
So what do I do now?
In order to provide potential capital growth, income, and protection against the erosion of purchasing power, we must buy the best dividend growth stocks and hold them for a very long time. Read How To Choose Dividend Growth Stocks.
Even if you are young, the generation of retirees that are looking for this 3-part combination of shareholder yield to fund their retirement will start to accumulate shares in high quality, dividend growing, blue chip companies in order to fund a long retirement and help to hedge against inflation.
The accumulation of these stocks will, of course, drive up the share price which means big profits for you!
The Closing
You see, it doesn’t take rocket science to see what is going on. I’m certainly not leading the charge with this idea.
Get out there and search for some great companies that grow their dividends year after year. You won’t get rich overnight, but the strategy works.
Remember to always do your due diligence and as Charles Kirk reminded me, don’t buy a stock just for the dividend!
Posted in Stock Studies | 13 Comments »
Thursday, April 3rd, 2008 |
Where To Start Your Research
Start out by reviewing the Dividend Aristocrats or Dividend Achievers lists to identify a broad category of stocks that have consistent dividend growth.
Once you have identified a list of stocks using the dividend achievers list, it is time to narrow it down to a few of the best dividend growth stocks.
Sector Selection
A general rule of thumb for dividend growth investors is to select one or two stocks in different sectors, such as insurance, utilities, financials, telecom, etc., with the highest dividend yield and a recent dividend increase.
Many dividend growth investors will require that the dividend increase be within the past year, the more recent the better. Dividend growth investors are of the philosophy that an increase in a company’s dividend means that the company is healthy and its future prospects are solid. Therefore, the amount that the dividend is increased should also be taken into consideration.
Dividend Growth Rate
The amount that a dividend is increased on a year to year basis is called the dividend growth rate. The philosophy of dividend investors is that the higher the dividend growth rate, the higher the prospect for the stock to increase in value.
For instance, Sun Life Financial (SLF) has a dividend growth rate of approximately 20% over the past 5 years. Over that same time, the stock has doubled in value from $20.00 per share to over $40.00 per share. If you had purchased Sun Life Financial 5 years ago at $20.00 per share, with the current dividend rate of $1.07, your yield on the purchase price would be 5.4%.
Not only would one be receiving these healthy dividends this year, but one could reasonably expect to get a 20% raise next year!
This is the basis of dividend growth investing; to produce consistent and inflation hedged income.
Due to the fact that the dividend growth rate can play such a significant factor in the future value and income potential of the stock, it is suggested that the investor find a middle ground when choosing stocks for a dividend growth portfolio.
The middle ground should consist of:
1.) A reasonable current yield, compared to its peers and itself historically.
2.) A recent dividend increase combined with increased earnings
3.) A high dividend growth rate compared to the industry.
Stocks selected from Mergent’s Dividend Achievers that display these factors should provide a great starting point to a dividend growth portfolio.
I’d be happy to hear any comments or questions regarding this strategy and I hope to have more detailed information up here in the near future.
P.S. - I hate excuses, but things are hectic around here as my wife is officially 10 months pregnant! Please accept my apologies for the slow article posting rate.
Posted in Stock Studies | 20 Comments »
Tuesday, February 5th, 2008 |
One of my favorite Canadian companies that isn’t involved in the financial sector is Shoppers Drug Mart (SC.TO).
Shoppers recently announced that 4th Quarter profit jumped 16% over last year and followed that up with a dividend increase of 34.4% to boot.
Recent Reports
While some thought that a mild cold and flue season this past fall would hurt sales, the numbers proved otherwise and Shoppers bounced off a 52-week low in the morning session to finish up over 4% on the day.
I recently talked about trying to recession proof a portfolio and that is something that is typically an issue with retail stocks. That said, I wondered how Shoppers was positioned to battle a recession from the United States, should th effects leak into Canada. This is what Shoppers’ CEO, Jurgen Schreiber, said on the issue:
“We have a significant amount of categories which are relatively independent from recessions,” he said, naming the pharmacy and over-the-counter medications, as well as cosmetics.
Shoppers Drug Mart will hold its own as defensive stock with a Beta of 0.54, making it about half as volatile as the market. And as one Analyst reported, they are sticking to what they know they can do well.
“They are in a business that is fairly resistant to any economic troubles,” said Aman Budhwar, senior investment analyst at AIC, whose fund holds more than 1 per cent of Shoppers’ outstanding shares. “The economic picture hasn’t impacted them as much as some other retailers. The company continues to do what they’ve done well in the past – they’re not trying anything fancy.”
The company also provides a dividend yield that is double the industry standard, while maintaining a relatively low payout ratio of ~27%. A higher than average dividend yield, coupled with a relatively low payout ratio should enable Shoppers to consistently create shareholder value while continuing to expand the company.
The Chart
The technical picture for Shoppers Drug Mart isn’t exactly pretty. However, if you were waiting for a good chance to purchase an initial position in this stock then now might be as good a time as any.
There appears to be some long-term support at around $48.00; a price that held up with some strong volume support as shown in the chart below.
Long term buy and hold investors may see some upside resistance between $51.00 and $53.00, but most analysts are showing a target price well above that range given the recent performance of the company and the hefty plans for expansion.
I mentioned a few weeks ago about going shopping on the 52-week low list and these are the types of deals that you should be looking for. Assuming you require this type of stock to balance out your portfolio allocation.
What’s on your shopping list?
Posted in Stock Studies | 1 Comment »
Wednesday, January 30th, 2008 |
If you are looking to “recession proof” your portfolio, then look no further than TransCanada Pipeline (TRP). Throughout this post, evidence of a strong strong stock for a defensive portfolio will be discussed.
After some thorough research, I believe that TransCanada’s earnings, cash flow and growth are not likely to be impacted by a recession and the recent downturn in stock price offers us an excellent buying opportunity.
TransCanada’s business is essentially recession-proof for a few key reasons:
- Its earnings and cash flow are earned through cost-of-service arrangements, contracts and other required services.
- The company is led by a very strong management team that maintains a financially conservative discipline.
- TransCanada is in its best financial position in recent years, with a superior debt rating of “A”, the strongest balance sheet in over a decade (55% debt at September 30/2007) and over $2.5 billion of annual cash flow (>$1.5 billion post dividends and Capital Spending)
TransCanada offers an outstanding valuation at this time. The stock is currently within 6% of its 52-week low and boasts huge dividend yield for a pipeline 3.70%.
The dividend payout ratio is sitting at a respectable 63% and the company has grown its dividend at a steady rate of 7.3%. The ROI is right on the industry average at 5.07% and the Return on Equity (ROE) is well above the average for the industry at 13.00%.
The chart shows support at $37.00, which also coincides with the 50-Day Moving Average support. These two factors make an entry at around $37.00 a very attractive proposition.
Still Not Convinced
How about adding the recently announced quarterly dividend of $0.36 per common share, a six per cent increase over the $0.34 per share paid in each of the previous four quarters. The dividend is payable on April 30, 2008 to shareholders of record at the close of business on March 31, 2008.
What are your favorite “recession proof” stocks?
Posted in Stock Studies | 1 Comment »
Sunday, January 27th, 2008 |
Dividend paying stocks can be an investor’s best friend, especially in times of turbulent and unpredictable markets. A predictable and growing dividend rate is a sign of a strong and company who’s management has faith in the future prospects of the organization. These companies are also usually well known to investors and are typically referred to as Blue Chip Stocks.
While these Blue Chip Stocks are usually very stable companies with solid balance sheets and strong brand names, they also tend to trade at a premium to some of their competitors whose company may be just as solid and whose financial prospects are also strong, but they make lack the “Blue Chip Brand”.
In this article we are looking for solid dividend paying companies that may not have the mass appeal of the general markets. As dividend investors, we may know about these companies, but the general investing public might never have heard of them. The feature of being relatively unknown is what makes these dividend payers attractive. This lack of popularity among the general public gives us the ability to invest in a strong company before it gets to be well known. For instance, an investment in Southern Peru Copper (PCU) before it leaked that Warren Buffet was loading up on shares is a great example of this strategy.
Let’s take a look at 5 Unknown Dividend Plays
- Medtronic (MDT) - Excellent Dividend Growth Rate
Medtronic develops, manufactures and markets medical devices for all types of conditions and diseases. Although the current dividend yield isn’t exceptionally high, the divdend growth rate has been excellent seeing the dividend double over the past 5 years.
In addition to the great dividend growth rate, I am a big fan of Medtronic’s future growth as a large player in the growing health industry looking to take care of those baby boomers!
- United Technologies (UTX) - Another Excellent Dividend Grower
Like Medtronic, when looking at United Technologies we must focus on the dividend growth rate and what that means to our future yield on a current purchase. The UTX dividend has doubled over the past 4 years and if that continues, we could see a dividend rate of $2.12, giving us well over a 3.15% yield on today’s price.
While that dividend yield might not sound great now, this list is meant to be a watch list that will provide us with some great companies to buy when they are out of favor or when the market corrects.
United Technologies provides products and services worldwide under well known brand names such as Carrier (Heating and cooling), Otis (elevator), as well as Aerospace and Aircraft products and services.
- Westpac Banking (WBK) - 4.70% Yield and Increasing Yearly
Like many other players in the Financial Services sector, Westpac provides a healthy dividend yield. However, this Australian bank also provides potential for future growth and a dominant brand in its marketplace. What makes this dividend play even better is its track record for increasing the dividend year after year!
- Manulife Financial (MFC) - Blue Chip Canadian Insurance Provider
Manulife is an excellent dividend growth stock that has doubled its dividend over the past 5 years. The company also has very specific strategies for penetrating the Asian markets, which could indicate a huge boost in future growth. Manulife provides various forms of insurance and wealth management products for customers in Canada, the United States and Asia.
- France Telecom (FTE) - Former Government Monopoly Expanding
This former government controlled monopoly is expanding into Africa and has been buying mobile licenses and acquiring smaller companies in emerging markets. Along with expansion, cost controls were cited as an area of concentration by management as a way to increase profits.
With a dividend yield over 4.5% and future prospects that look strong, France Telecom is a Dividend Money keeper!
These 5 Dividend stocks should keep you busy doing your due diligence, but there are plenty of others out there beyond the United States and North American borders that may just prove to be some of your greatest investments!
Be sure to read the basics on Dividend Investing and How to Choose the Best Dividend Growth Stocks in order to get you headed in the right direction!
Do you have any favorite “unknown” stocks that you would like to share?
Posted in Stock Studies | 4 Comments »
Wednesday, January 23rd, 2008 |
Yes, you read that headline right! (and no, the crazy markets don’t have me on some wacky buzz)
Potash Corp. (POT) has been under heavy selling pressure of late and I think that the current share price is unjustified and here is the research to back it up!
- Potash Corp. has recently announced its intention to buyback shares of the company to the tune of 5% of the outstanding stock at the prevailing market prices over the course of the next year. This leads me to believe that company management belives the shares are undervalued at this time.
“We have a long history of using our strong cash flow to create value for our shareholders,” said Potash Corp. President and Chief Executive Officer Bill Doyle. “We believe there is no better assets in our industry than the ones held by our own company. We have tremendous potential today and in the years ahead, with expected increasing global demand, rising prices for our products and the unique capability to capitalize in this environment. Reinvesting in our own company positions us well to maximize long-term value for our shareholders.”
- The company also announced a quarterly dividend payment of $0.10 per share.
- It was also announced that delivered prices for standard potash in S.E. Asia will increase from $425/tonne to $525/tonne in Q2/2008. The increase is slightly higher than the $75/tonne expected which means more profits for Potash Corp.
- According to this chart, the stock is trading near a support level at $110.00.
What does this mean?
- POT’s net realized price could increase to $385/tonne by 2009.
- POT’s shares are significantly undervalued given its outlook for higher potash prices, the willingness of the company to aggressively buy back shares and tight fertilizer market conditions.
- There appears to be buying support at the $110.00 level, which may give us an ideal entry point for this stock.
The S.E. Asia price announcement is consistent with analyst’s potash price outlook. In addition, analyst discussions with industry participants suggest that potash inventory levels at customer/distributor warehouses may be at historically low levels.
Based on these fundamentals, this sharp decline in Potash Corp’s share price appears vastly unjustified and presents us with a valuable buying opportunity.
UPDATE: 01/24/2008 - Looks like I called this one as POT is trading up over 10.0% this morning!
Posted in Stock Studies | 4 Comments »
