Friday, October 2, 2015
Thursday, January 31, 2013
-Seven Year EPS Growth Rate: 8.6%
-Seven Year Dividend Growth Rate: 13.3%
-Current Dividend Yield: 1.08%
-Balance Sheet Strength: Strong
Price to Free Cash Flow: 24
Price to Book: 3.5
Return on Equity: 15%
(Chart Source: DividendMonk.com)
Earnings and Dividends
(Chart Source: DividendMonk.com)
For the fiscal years 2010, 2011, and 2012, Costco brought in a total of approximately $5.2 billion in free cash flow. Over the same period, the company spent under $1.2 billion on dividends, $1.8 on net share buybacks, and under $1 billion on acquisitions. The company has reduced its share count by a bit over 10% over the last seven years, which isn’t a very large amount due the consistently robust valuation of the stock.
|Year||Warehouses||Gold Star Members||Business Members|
|2012||622||26.736 million||6.442 million|
|2011||592||25.028 million||6.352 million|
|2010||540||22.539 million||5.789 million|
|2009||527||21.445 million||5.719 million|
|2008||512||20.181 million||5.594 million|
|2007||488||18.619 million||5.401 million|
Each year in this snapshot, as well as in many previous years, Costco increased their number of warehouses, and saw an increase in both gold star members and business members. As of the most recent report, Coscto has 622 warehouses as of the end of their fiscal year 2012.
Two Points for Bullishness
Conclusion and Valuation
You can see my dividend portfolio here.
- Searching for Hidden Dividend Stars
- Target Corporation (TGT) Dividend Stock Analysis
- Wal-Mart Stores (WMT) Dividend Stock Analysis 2012
- A record 22 companies boost dividend payouts
Thursday, September 10, 2009
Making stock picks is never easy, but we are now ready to make another one. Manulife has been in the news for the past few weeks, mainly for negative reasons. On August 6th, it took markets by surprise by announcing a 50% cut to its quarterly dividend, from .26$ to .13$, starting with this year’s September 21st dividend. It is a surprise in the sense that few had expected such a drastic measure. Most investors are aware that Manulife, like many other insurance companies, has been hit very hard by the recent financial crisis. This move will save the company $800 million, in order to recover its historical stability from what has now become a vulnerable financial situation. Naturally, investors did not appreciate the move and the stock price dropped very quickly. This might be an opportunity to get a solid stock at a decent price, for many investors. While in the past we have warned about investing in financials, we believe they are now back on the right track.
Manulife's CEO said: "While we recognize the importance of a cash dividend to many of our common shareholders, we believe that retaining more of our earnings is the most effective means of building capital while still providing an attractive yield for our shareholders who will benefit as we deploy our capital for growth." Most companies would deliver a similar message when dropping their dividend but I do believe that the more positive news is that Manulife did not wait too long to make this move. The company's stock is down 42% over 2 years because of bad hedging decisions that have been very costly.
Big buys, like Jarislowsky Fraser (who holds 49.5 million shares), have already confirmed they would be buying more shares as they deem the drop as exaggerated. "I don't like dividend cuts, but it was the prudent thing". One question, of course, is if you'd prefer investing in an insurance company like Manulife that has already dropped its dividend yield or perhaps take a chance on the banks. They continue to do their best to keep up their dividend yields yet it is still unclear if they will be able to do so.
Personally, I'd go ahead and buy Manulife, the stock seems poised to recover, eventually. Even now, its dividend yield of about 2,4% is not bad considering the current market. For the next 12 months, the estimated earnings per share are 1.244 (according to Bloomberg) so even its current valuation should warrant a purchase of the stock.
What do you think? Agree with the purchase of MFC with a medium to long term time objective?
Full Disclosure: None
- Six things I learned from the financial crisis
Tuesday, August 18, 2009
With the release of Berkshire Hathaway's 13-F filing, you can see that a new addition has been made to the holdings of Berkshire Hathaway.
1.2million shares of Becton Dickinson & Co (BDX) were added which totals $86.6 mil but compared to his total portfolio and other holdings, it is a very small position. This initial position is half the size of when Berkshire first added Eaton Corp (ETN) which again leads me to think that it was a subsidiary making the purchase as Buffett is known to go big first time around.
I previously went over BDX briefly while going through the 40 Best Stocks to Retire on and noted that the company...
...has consistently produced plenty of FCF but FCF growth has been minimal, very good CROIC of 15%, steady growth in shareholders equity/book value, stable rising margins, debt to equity is consistently dropping, sales has been increasing. - Best Stocks for Retirement
Whoever made the purchase, BDX looks to be a typical Buffett type company. Long history or consistent performance with results to match.
[caption id="attachment_2136" align="alignnone" width="433" caption="BDX Spider Graph"][/caption]
Becton, Dickinson and Company (BDX) is a medical technology company that operates through three business segments: BD Medical, BD Diagnostics, and BD Biosciences.
- BD Medical: offers syringes, needles, monitoring systems, drug delivery systems, blades, scalpels and thermometers
- BD Diagnostics: microbiology products, specimen collection products, specimen management systems, diagnostic instruments and consulting services
- BD Biosciences: flow cytometry systems for cell analysis, monoclonal antibodies for biomedical research, molecular biology products for the study of genes and their functions, cell growth and screening products and labware products
The company generates more than half of its revenues from international operations which will help to diversify income but swings in foreign currency can impact top line results. But remember, it's the bottom line that is most important.
Financial Statement Analysis
Running through the numbers I see the following:
- Gross, operating and net margins have been steadily increasing even in a recessionary environment
- A dividend aristocrat which has increased dividends for 36 years
- FCF positive for more than 10 years
- Inventory turnover consistent but since margins have increased, leads to higher efficiency and profit
- ROA and ROE increasing steadily
- Reduced debt
- Very low capitalization ratio which shows how leveraged the company is with debt
- Has plenty of FCF to pay down debt rather than issue stock or seek loans
- CROIC is very steady at 17% which means that the company makes 17c off every $1 of cash invested
- Converts 12c of every dollar in sales to FCF. BDX is a FCF machine.
- Excellent management
DCF Intrinsic Value Estimate
The assumptions are as following for the DCF model:
- With the level of consistency and outstanding numbers a 9% discount rate is used
- 10% growth rate which is just a little under the FCF growth but looks to be the rate of growth the company has displayed according to the graph below. After all price follows value which means I can reverse engineer the DCF to find the growth rate.
- 50% margin of safety but don't feel it has to be so big for BDX
With a couple of assumptions you can see from the graph below that BDX has been trading close to its intrinsic value until September 2008 when the markets crashed. It's probably the biggest drop and difference its had so far.
Intrinsic value comes out to $87.
[caption id="attachment_2139" align="alignnone" width="500" caption="BDX Price vs Value Graph"][/caption]
(Click on the image to view the PDF version of the stock analysis and graphs.)
Benjamin Graham Formula Valuation
BDX top line growth is just as good as its bottom line. By looking at multiple years and comparing them in a staggered fashion and then looking at the mean to smooth out cycles and one time bad years still shows a historical EPS growth rate of 17%. My calculated 17% is actually fairly close with Yahoo or Reuters past 5 yr growth rate of 16%.
This is a little too high by my standards for future growth in a mature company which is why I lowered it down to 10%.
This gives a fair value of $111.
Competitor and Peer Analysis
Probably the simplest way to value a company.
If you look at the 7th page of the stock analysis report that I posted, you will see that BDX side by side with 5 competitors and the numbers show that BDX is slightly cheaper than its competitors.
BDX current PE of 13.86 is lower than peers with less revenue and lower metrics. Seems like 15 or 16 is what BDX would be trading at if priced correctly.
- PE 15 = $72
- PE 16 = $76
From the valuations we looked at, BDX looks to be worth somewhere between $72 - $111 but I believe the range would be more towards $76-$90.
Becton Dickinson looks to be a very typical Buffett type company selling at a discount to its intrinsic value.
This article was featured on Carnival of Personal Finance - History of College Football Edition
- Berkshire Hathaway’s portfolio changes for 2Q 2009
- Best Big Companies for the Long Term
- Warren Buffett – The Ultimate Dividend Investor
- Why do I like Dividend Aristocrats?
Saturday, June 6, 2009
New Jersey's Cooperative Extension Services (operated out of Rutgers University) offer a great online quiz that will calculate your level of investment risk tolerance. If you don't like that one, you can take a look at Yahoo's free calculator. Still not happy? Merrill Lynch has their own. And there are others. Many others.
And all of the calculators attempt to do the same thing--they want to tell you how much risk you're comfortable taking in your financial planning. Obviously, that's a tough nut to crack. We don't really have a standard unit of measurement for risk, after all. So, what you end up with is a numerical score that corresponds with a few sentences describing the way the calculator believes you feel about risk and money.
Is that valuable information? For some people, it might be. There are undoubtedly a few folks out there who aren't big fans of introspection who've never considered whether they're devil-may-care or risk aversive. Those horoscope-like explanations of what the results mean might give people a slightly better sense of what their feeling really mean in some senses.
In those ways, you could consider the risk assessment tools valuable. They also have some potential value if you find that your attitudes about risk are in direct conflict with your optimal personal finance objectives (more on that later).
Even though there is some value in calculating your risk tolerance, you shouldn't fool yourself into believing this information is truly mighty. Don't make the common mistake of assuming that your comfort level should dictate your resource management.
That's right, the argument that you should only invest at a risk level compatible with your own comfort level is wrong, wrong, wrong. If you're tolerance for risk is out of whack (in either direction), you don't necessarily need to change your investment pattern. You need to adjust your attitude instead.
That argument assumes an optimized investment plan, of course. The argument is quite simple. You should be following the best possible system to reach your financial objectives. If you are using that system and your personal sense of risk tolerance runs contrary to it, you need to change your attitude, not your plan.
Not everyone agrees with that. Statements like, "Your risk tolerance should determine a suitable asset allocation that is right for you" are common. There's a belief out there that you shouldn't invest if the move makes you uncomfortable.
That's a backwards perspective, though. You should be focused on developing a plan of action that will meet your needs and objectives. If you can do that while staying in your psychological "comfort zone", that's great. If, however, it moves you into uncomfortable territory, you need to change the dimensions of that "comfort zone".
Otherwise, you're setting yourself up for a long-term failure. If you need to undertake a certain level of risk to reach your goals, anything short of that is going result in you falling short of those goals. If the plan is sound and the strategy is workable, you should be at least somewhat comfortable in knowing you're doing the right thing. If you don't feel that way, it's time to either (a) persuade yourself to start or (b) prepare to be nervous for a while.
InvestorGuide.com lays out the argument:
We need to remember that it is not only our personal risk tolerance that we want to consider, but we also want to ask ourselves, "What is the appropriate risk to take?"
Asking how you feel about something is wonderful. Letting the answer dictate your personal finance strategy, however, isn't. Instead, you should be making decisions based on your own financial interests.
If you don't have a good plan and you're living on a personal finance roller coaster, it's fine to take stock of your comfort level and to act accordingly. If you're following the kind of smart plan you need to get ahead, however, your comfort level needs to take a backseat.
- Diversifying into small and mid cap dividend stocks
- Dividend Investing vs Trading
- My Dividend Growth Plan - Diversification
- Don’t chase High Yielding Stocks Blindly
Tuesday, May 26, 2009
In long-term dividend investing, one needs to control risk in many areas. Risk comes in many forms: selecting unsound companies; purchasing companies whose dividends are in peril; creating a portfolio that is insufficiently diversified; and so on.
Two important areas of risk to a long-term dividend strategy are the initial yield and expected growth rate of the dividend itself.
If you start out with too low a yield, it will take many years for the dividend to grow to where it provides a worthwhile return on your original investment. On the other hand, if you start out with too high a yield, it may well be that the dividend is unsustainable and in peril.
If the company typically increases its dividend at too slow a rate, again the dividend will take too long to grow into a desirable return. On the other hand, if you anticipate too fast a growth rate, the company may not achieve it.Plotting these two characteristics against each other--initial yield and anticipated dividend growth rate--gives us a diagram of the "sweet spot" in dividend investing.
On this diagram, the left (vertical) axis represents the dividend’s likely growth rate. It ranges from very slow (say less than 3 percent per year) to very high (say 20 percent per year or more). The bottom (horizontal axis) represents the initial dividend yield, from very low (less than one percent) to very high (greater than 10 percent).
The red area represents four places you don’t normally want to be. Here’s why:
The left edge of the chart is where the stock’s yield is simply too low to be attractive. I seek initial yields of 3 percent or more. Fortunately, because of the long bear market, a lot of quality stocks that formerly would not have cleared this hurdle now offer yields over 3%.
The lower edge is where dividend growth is too slow. Generally seek a growth rate of at least 4 to 5 percent per year. Even in this slow economy, many quality dividend companies have increased their dividends in 2009 by attractive amounts. Examples would be Abbott Labs (ABT, 11%); Coca-Cola (KO, 8%); Chubb (CB, 6%), Procter & Gamble (PG, 10%), Colgate-Palmolive (CL, 10%), and PepsiCo (PEP, 6%).
The top edge is labeled “Growth Traps.” This is where the dividend’s growth rate is probably unsustainable because it is too high. It’s a “trap,” because a high dividend growth rate is usually an attractive quality in a dividend stock. But when the growth rate is too fast, it usually cannot be continued. The very high growth rate may be a red flag that the company is over-extended in its dividend policy and will need to pull back. The risk in stocks with a high dividend growth history is that continuation of a very high rate of dividend growth is unlikely. Many value investors (including Warren Buffett) consider annual earnings growth of 15 percent to be about the maximum sustainable for long time periods.
The right edge is labeled “Yield Traps.” Again, a high yield is a good thing, up to a point. But extremely high yields often point to a problem. The reason the yield is very high is probably because the stock’s price cratered. While that could simply be the byproduct of the bear market of 2007-2009, it could also be a reflection that the company is in serious difficulty and will need to cut its dividend soon. In 2008 and early 2009, we have seen this time and again, especially among financial firms. It should go without saying that the very finest dividend stocks suitable for a long-term dividend strategy are not in danger of cutting their dividends.
The green area in the middle is the sweet spot: Initial dividend yields of between about 3% and 9%, combined with dividend growth rates of about 4% to 17%. Those are generally sustainable numbers, and it is where we will find most of the best dividend stocks for long-term investing.
- 10 by 10: A New Way to Look at Yield and Dividend Growth
- Yield on Cost Matters
- The Dividend Edge
- My Dividend Growth Plan - Strategy
Tuesday, May 12, 2009
LCA Vision (LCAV) is a provider of laser vision corrective surgeries. Demand for these non-essential, expensive surgeries is strongly correlated to levels of consumer confidence. As one can imagine, this correlation has resulted in the number of surgeries performed this year to be slashed in half as compared to last year. Combined with the fact that the company's cost structure is fairly rigid (medical/laser equipment, service locations and staff still have to be present even if not used to capacity!), and the prospects for this company look grim.
This business model would make most investors head for the exits at economic times like these. For investors who look to buy businesses rather than stocks, however, this company still hassome value. And it is precisely because most investors headed for the exits that value investors were able to buy into this company for far less than it is worth.
When we last looked at LCAV, it traded with a market cap of $64 million, despite the fact that it had $56 million in cash alone! When looked at from the point of view of a buyer of an entire business (as value investors like to do), one was essentially paying $8 million to purchase a business that had earned an average of $15 million in net income the last four years. Yes, it had lost $7 million in the last quarter, but management was closing unprofitable locations, reducing capital expenditures, and believed to have cut expenses such that the company's cash flow would break even in 2009.
Since the stock's low just two months ago, the stock is up some 250%! Investors who avoided the herd mentality, and instead focused on buying businesses selling for below their worth were handsomely rewarded.
At Barel Karsan , we try to find and discuss businesses that are undervalued. If this topic interests you, consider subscribing to the Barel Karsan feed .
- Value Investing is all about finding market inefficiencies
- Taking Stock in Coca-Cola (KO):
- Dividend Investing Resources
- 40 Value Stocks that Graham Would Buy
Thursday, April 23, 2009
In the current market, small caps are not the only companies that are undervalued or mispriced. Although the markets have risen substantially from its lows there are still bargains to be had, especially if your focus is on buying for the long run. Late last year, Forbes released their platinum 400 best big companies and 200 best small companies which is a fantastic source of finding undervalued bargains. Take for example the following companies which were reviewed and estimated on Dec 11, 2008.
Blue Nile (NILE)
- Price on Dec 11: $27.84
- Estimate price: $32
- Current price: $36.88
Jos. A. Bank Clothiers (JOSB)
- Price on Dec 11: $26.15
- Estimate price: $44
- Current price: $36.61
- Price on Dec 11: $4.39
- Estimate price: $15
- Current price: $12.24
FactSet Research Systems (FDS)
- Price on Dec 11: $38.36
- Estimate price: $44
- Current price: $48.22
These are small to mid cap size companies so the price difference is to be expected, but todays market also has created many of the same opportunities within the large cap universe.
Forbes Best Big 400 Companies Screen
- Immediately exclude financials (don’t understand or know how to value them)
- Run the companies through the investing spreadsheet with the PE as the growth rate, but capped at 15% except for some special cases. The selected companies shall exhibit;
- Positive, consistent and growing cash flows.
- Consistent margins. Fluctuating/decreasing margins over several years will not be accepted unless the other criterias are outstanding.
- Above average returns from capital investments (CROIC, ROE, ROA)
- Strong balance sheet
- Companies should have at least 5 years of operating history
- The companies that make the cut will have to be reviewed individually
As I was going through each of the first 25 companies, I noticed there were many capital intensive companies with high debt loads. This is because Forbes ranked the companies based on ROE where having a high debt load can play a significant role.
Also, the spreads between the current price and estimated price were much smaller as a percentage as these companies are heavily followed and more likely to trade closer to its fair value.
Going through the first 25 businesses has produced 7 candidates for further analysis. They are:
- Apple (AAPL)
- Great company. Need I say more?
- Estimated fair value: $160
- Hug Group Inc (HUBG)
- Consistent margins, reduced debt, increased FCF/debt. Bottom line margins have not dropped too much.
- Estimated fair value: $25-$43
- Monsanto (MON)
- Strong profits in recession, increased margins significantly, metrics are up.
- Estimated fair value: $100
- Cliffs Natural Resources (CLF)
- Mining and natural resources is cyclical. FCF +ve past several years and margins increased. Good margin of safety but unpredictable. Cheap price could factor in the unpredictability.
- Estimated fair value: $53-$60
- Google (GOOG)
- Great company. Need I say more? Incredible numbers.
- Estimated fair value: $390-600 (Difficult to tell with GOOG)
- Occidental Petroleum Corp (OXY)
- Oil company but FCF +ve for past 10 years, numbers and margins are excellent for this company.
- Estimated fair value: $87
- Nucor (NUE)
- Excellent company and numbers but big drop in last year margins.
- Estimated fair value: $60
Full List of 25 Companies
Forbes 400 best big companies undervalued and cheap stocks
No positions in any stocks mentioned
Thursday, April 16, 2009
In an "efficient market", all stocks are fairly priced by the market. If the US stock markets are efficient, and many finance industry professionals believe this to be the case, one cannot generate index-beating returns except through luck. However, if we were in an efficient market, it seems hard to believe that stock prices for even the most stable of companies should fluctuate so drastically from year to year and even from week to week. Yet that is exactly what happens.
Consider Best Buy (BBY), a US-based multi-national electronics retailer. It has generated consistent returns year after year, and has a low debt to equity ratio resulting in minimal financial risk. Yet it's stock price has fluctuated dramatically, offering astute investors the opportunity to achieve enormous returns.
Below is a chart depicting Best Buy's annual return on invested capital (ROIC) contrasted with its stock price:
While ROIC has been predictable and consistently range bound for the last several years, the stock price has been anything but. It seems hard to believe that the market is efficiently pricing this security when its price can fluctuate wildly in relatively short periods of time while the company itself generates predictable earnings on capital. For example, if the company is worth X amount in early 2000, how does it become worth just one quarter of this amount 3 months later, and then three times this amount six months after that?
More recently, three months ago the market valued Best Buy at $7 billion, but now values it at $16 billion! Investors who recognized the mispricing have seen returns of over 100% in a 3 month period!
We've also seen other examples of this phenomenon: we've looked at graphs illustrating wild fluctuations in the historical P/E ratios of Coke and Walgreen, for example, which have allowed value investors to buy in at tremendous discounts.
Value investors willing to put psychological bias aside and instead invest at the height of the market's fear can indeed achieve above average returns. If this topic interests you, consider subscribing to the Barel Karsan feed.
Disclosure: Author owns a long position in BBY
Thursday, March 26, 2009
In today's environment, "fee transparency" is the mantra for all kinds of financial products. Unfortunately, it’s been slow in coming to variable annuities.
Some real progress has been made with simple, transparent, low-cost products. But until greater consumer value is widespread, here's a primer on how to peel away the layers of an annuity's fees so you can weigh the benefits of what you’re getting against what you’re paying.
Generally, variable annuity owners are subject to two levels of fees: insurance-related fees from the issuing insurance company, and fees charged for the underlying investment options inside the VA. Most of these fees are asset-based—so the more you invest and the more your account value grows, the more you pay in fees. Other fees are driven by a transaction or time period, like annual service charges or additional trading fees.
PEELING BACK INSURANCE CHARGES
Most variable annuities get criticized for the insurance-related fees that drive costs up and performance down. On the typical VA, these combined insurance charges average 1.35% per year according to Morningstar.1 Here's what to look for:
Mortality and Expense (M&E): Most, but not all, annuity issuers assess M&E charges. According to Morningstar, this asset-based charge averages roughly 1.2%.1 For most annuities, this fee covers the basic death benefit guarantee, the promise that annual insurance charges won't increase, and the ability to annuitize at a guaranteed lifetime payout option down the road at the rates specified in the contract.
Because this is an asset-based fee, these costs increase as your investment grows. For a $100,000 annuity, the owner may pay around $1,200 in M&E fees; for a $250,000 annuity, the owner pays around $3,000.
With the growing popularity of ETFs in recent years, and with capital gains taxes at an all time low, to some investors this kind of M&E may seem like a high price to pay for a tax-deferred VA. So if tax-deferral is one of your objectives, it may benefit you to look for low-cost, or flat-insurance fee VAs.
Death Benefit Riders: All variable annuities have basic death benefit protection: a guaranteed return of the current account value or some portion of the initial premium if the annuity owner dies before payments begin. Now, though, more than 90% of all annuities offer an optional enhanced death benefit through the purchase of a death benefit rider.2
So if you added this rider for an extra 50 basis points a year on a $500,000 annuity, it would cost an extra $2,500 a year on top of the $6,000 M&E. Now both of those annual fees are chipping away at the returns of the underlying funds. If you’re insurable, a term life policy may be more cost-effective.
Living Benefit Riders: Many annuities also offer options that guarantee an enriched income stream in the future—but at a price. Annual fees for these riders typically cost an additional 1% to 3% per year or more.2
Here's another thing to consider. While annuities grow tax-deferred, annuity income benefits are taxable. So that enhanced benefit has a bigger tax bite. If you are looking to lock in additional future income, tax-free bonds may be a better alternative—providing more tax-advantaged income in the future, without annual fees.
Surrender Charges: Most typical VAs will pay a sales rep a commission of 5% to 7%, or more. Then to ensure that the issuing company can recoup their commission, these VAs impose a surrender charge. The surrender charge is an asset-based fee that may start as high as 7%, but will decrease to 0% over the course of the surrender period, which is typically the first 5 to 7 years of your contract. The surrender charge helps the issuing company to defray the commissions paid to its salesperson if the annuity does not stay on the books—and it can keep you locked in for years, unless you are willing to pay this penalty. Be sure to check your contract to find out whether surrender charges apply.
“No-Load” VAs do not pay a commission to a salesperson, so they do not have a surrender period or a surrender charge.
Annual Policy Fees. Many VAs charge a nominal policy fee, such as $25 a year. One more item that adds to your costs.
EVALUATING INVESTMENT FEES
Inside your variable annuity, you will find a selection of underlying funds, also known as sub-accounts or investment options. These underlying funds will charge annual asset-based fees which may vary widely—averaging from 0.6% for basic money market funds to 2.3% for bear market domestic stock funds.2
The annual fees charged for your underlying funds cover the cost of professional third-party money management—such as fundamental research, ongoing monitoring and allocation rebalancing. These annual fees may also include 12b-1 fees, which may pay for marketing and distribution.
Some companies allow free, unlimited trading of funds. Some will limit the number of free trades in a year by assessing a transaction-based fee. While a transaction fee may not be an issue if you are practicing a buy and hold strategy, it may be very costly if your variable annuity assets are actively managed. So be sure to know the trading policies of your annuity carrier.
WHAT YOUR STATEMENT DOESN’T STATE
Here's a little-known fact: Fees are not explicitly reported on variable annuity statements. All you will see is performance after fees have been deducted. So there's no annual reminder of what you are paying for, or what it costs you in terms of performance.
The best way to deconstruct the fees for any variable annuity is to read the prospectus. Then, ask yourself or your financial advisor these three key questions:
1) Does the annuity's long-term tax deferral match your financial objective?
2) Do death benefit and living benefit riders offer worthwhile guarantees--at a good value?
3) If a change is warranted, have your surrender charges expired?
The Bottom Line: The right variable annuity can still offer an attractive value for many investors, and can maximize the power of tax-deferral to help you accumulate more and reach your retirement goals faster—but only if it's not bogged down with excessive fees.
Laurence P. Greenberg is President and CEO of Jefferson National, which developed Monument Advisor, the first flat insurance fee variable annuity. See the impact fees and charges may actually have on your savings by taking the challenge at http://www.annuityrescuecenter.com/. For more information or to receive a prospectus, visit http://www.jeffnat.com/ or call 1-866-WHY-FLAT (866-949-3528).
1 Morningstar® data as of 12/31/07.
2 2007 Annuity Fact Book, National Association of Variable Annuities.
- Yield on Cost Matters
- Dividend Investing Resources
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- When to sell my dividend stocks?
- Best CD Rates
Thursday, March 5, 2009
It is always quite a dilemma isn’t it? No matter if you are a politician or a company executive, you are faced with this crucial decision once things start to go wrong. Which one? Telling the truth or painting a more interesting picture of the situation. So you think this is an obvious choice? Not so I would say.
I always find it interesting that citizens think it is always in our best interest to tell the truth about the financial situation. Of course in theory it sounds so obvious. But there are so many examples. Take General Motors (GM). I think every single planet in North America (and many other parts of the world) know they are in a major danger of going bankrupt and that they need a massive intervention by the US Federal Government. Will it happen? Who knows really? But if you are buying a car, don’t you think that could come into play when deciding about buying one brand as opposed to another? Wouldn’t you think for a second that you might have more problems with your warranty for example? And so it does become self-fulfilling in a way. GM is in trouble, it announced to everyone that it could face bankruptcy without help. Because of that, the few that are buying cars right now are mostly staying away from GM creating an even bigger problem for the executives and the government. How long can it go? Probably not very long unless the government takes out the uncertainty about what will happen in GM’s future. Want numbers? Toyota has suffered a 32% decrease in sales this January in the US market. Terrible isn’t it? But GM has suffered an even bigger loss with a number about 50% lower than in 2008!!! Let’s not remember that in the US, GM and Toyota (TM) have a similar market share.
I think the same applies to financial markets in general. We all know that we rely on a system based on trust. Trust that the US dollar and other currencies is worth something. Trust that the government will provide services but also trust that our banks, despite having very little liquid assets, will be able to provide liquidity when needed. But with the banking crisis that has been ongoing for over a year now, it is that exact confidence that is under attack. What would happen if consumers started doubting that their banks could give them back their money? Sure, the FDIC insures deposits in the US, but we all know it is in theory possible for the FDIC and the entire system to collapse.
And so the US government had a tough challenge in my opinion. On one hand, you do not want to worry the citizens or generate any panic that could become self-fulfilling, but on the other hand, how do you convince citizens that Wall Street requires a $800 billions bail-out if you do not explain how dire and serious the situation is? Probably the best way is the one that has just happened. Bring in a president that inspires so much confidence that citizens will trust him when he tells them it is necessary and that it must pass. That is probably the best thing that could have happened and probably the way it should be.
Ask for answers and explanations, but always know that it is potentially better to have Americans not waking up to news about a possible system collapse. We’ll never know for sure what happened but when Lehman Brothers and a few others collapsed, a major part of it was rumors about their liquidity problems generating margin calls that in turn created more liquidity issues, and so on… do we really want to risk that happening with an entire system?
- The future for US Auto Stocks
- Taking Stock in Coca-Cola (KO):
- Dividend Yields for major US indexes
- The Demise of the Newspaper Industry
Monday, January 12, 2009
When you first examine Coca-Cola (KO) there is an immediate emotional response many individuals have to their product(s). Love it or hate it; the products of this company are consumed on a daily basis globally to the tune of nearly 1.5 billion times. To put this in some perspective that's the equivalent of 25% of the global population consuming a minimum of one product sold by the Coca-Cola Company each and every day.
This is the brand power on a massive scale with a strong domestic history in North America dating back to 1886. Globally Coca-Cola products are sold in over 200 countries and the company is the "largest manufacturer, distributor and marketer of non-alcoholic beverage concentrates and syrups in the world." The company sells four of the top five carbonated brands around the world (Coca-Cola, Diet Coke, Sprite & Fanta), owns or licenses an additional 450 brands and possesses the largest beverage distribution system on the planet.
Coca-Cola operates in distinct global structures currently organized in the following regions:
- Latin America
- North America
- Bottling Investments
The company in the face of such global competition has done an excellent job of concentrating on my Value Rule of doing what you do best. The company has not expanded operations into food or alternative products instead deciding to focus nearly exclusively on sparking and still beverages. This concentration on beverages and syrups for drink consumption allows the company to operate from a much lower cost structure which I will touch on later in depth.
From a quality control perspective the company holds ownership in 75% of all production, bottling and distribution operations in their global supply chain representing equity positions in 46 of its unconsolidated bottling operators. This is a significant strength for the company as it enables management to maintain tight control of operations, quality control, efficiencies in production & distribution and prevents operating risks from various disruptive elements. When you manage so many brands globally worth billions of dollars your focus on control should always be very high and sustained. It would cost too much for KO to operate independently in so many global markets and partners (majority or minority owned) allow the company to maintain oversight on important aspects of their business while not absorbing the entirety of costs. Specifically any equity investment in production and distribution operations ensures the company maintains control and protects its intellectual property such as product recipes or product development research.
The global economy has shown clear evidence of contraction coming out of 2008 and any global business can anticipate a slowing of growth in a number of markets. Concerns for KO exist currently in North America, Great Britain, Germany, India, Japan and Philippines for various economic or logistical reasons. Competitive factors always need to be accurately addressed when analyzing a company and there certainly is no shortage of global or domestic competition for the market share of Coca-Cola products. Competitive factors play a very important role in how the company executes pricing, advertising, sales, promotional programs, product innovation, production efficiencies, packaging technology, vending equipment, brand development and trademark protection.
KO has direct exposure to bottling and distribution operations of its products because of equity stakes in these businesses that are responsible for bringing their products to market. One major concern of late has been the increasing material costs and energy in the production and bottling process. The largest core cost for the company is nutritive & non-nutritive sweeteners such as high fructose corn syrup, sucrose, aspartame, acesulfame potassium, saccharin and sucrolose. These products are found in high concentrations in Coca-Cola products and recent high corn prices, while down in recent months, and have led to increased costs in raw materials required for production. Energy is needed not only to ship product to market but a large amount of heat is needed in the production process to appropriately dissolve the large amounts of sweeteners placed into the company's syrup products.
A significant threat to the company is the extent to which Coca-Cola operates globally in over 200 countries. In each country the company operates within there are abundant government regulations or restrictions on product safety, product composition and competition. Governments, regardless of their composition, tend to be unpredictable in making rational decisions at times and this can adversely affect a business that has plans for expansion but is met by political resistance. It would not be uncommon for any government (local or regional) to adjust current laws or regulations to better protect national interests or competitive issues relating to their own domestic brands. The recent issue taken by The Food & Drug Administration (FDA) on Coca-Cola's new Diet Coke Plus demonstrates the oversight and resistance that the company can encounter when attempting to develop and market new products.Availability of key infrastructure is a current concern of mine, most specifically in India, where production, distribution and energy requirements are providing barriers to growth of the company's operations. In order for the company to meet food and safety, operating standards and distribution schedules in various markets the company requires the proper infrastructure in order to deliver market demand. Building domestic infrastructure is beyond the financial capacity of Coca-Cola in these markets so product either needs to be shipped farther distances into new markets or not offered due to complications of such limited logistics. With such a concentrated focus on the Chinese market I feel many investors have missed the clear barriers to entry that KO faces in many other emerging economies.
Coca-Cola battles this lack of available infrastructure with a focus on brand development in emerging consumer markets and establishing a very strong emotional response to their products. They sponsor large sports events, become integrated in communities through charitable events and spend large amounts of money on effective advertising. Once the brand has been successfully entrenched into a market domestic competition and governments have found it very difficult to place restrictions on their growth or to motivate change in consumer perceptions.
In recent years public initiatives have been created to restrict the sale and distribution of Coca-Cola and PepsiCo products within schools citing the concern for the recent and significant increases in obesity of young children. Some municipalities, school boards or governments have successfully implemented bans on dispensing machines in schools, but others have found strong resistance from school boards who receive lucrative donations to their sports teams, social programs or for new equipment as part of a negotiated partnership with one of the large corporations. The focus here, ethics aside, for the companies is their clear interest in funding social programs for brand development with the initiative to create lifelong loyalty to their brands and products by impressionable youth and create habit forming behaviours.
There are also a high number of serious economic, technological and social threats to the growth and profitability of KO. Each of the following items I've cited as a major concern for the company and are being handled adequately using a variety of methods by management:
- The increasing trends in health awareness are here to stay and KO has been proactive with increased product development and advertising of brands such as Diet Coke and Fanta as well as the recent successful launch of their Zero products (Coke Zero, Sprite Zero).
- Fresh water continues to be a concern as availability; prices and resources come under increased pressure in developing economies and markets. The health of consumers is a top concern of the company when they examine a market and spend considerable expense securing and treating water used in their products either directly or indirectly in the manufacturing process.
- With the global economy likely to contract into 2009 growth and expansion into emerging markets may be more difficult than the company had previously targeted. This may put pressure on marketing budgets, but will likely lead to consolidation in the industry as smaller companies with high quality brands don't have access to credit/financing or aren't able to service high levels of internal debt.
- Foreign currency and interest rates are major factors in the profitability of the company. Management balances the risk of operating in so many countries by hedging their exposure with derivatives. KO hedges operations up to 36 months in advance with most derivative instruments expiring within 24 months or less of their creation. While financial derivatives have been a toxic element to many businesses in the recent credit environment hedges held by the company help buffer cashflow from international operations from the significant volatility in the valuation of foreign currencies.
- Unions and collective bargaining agreements (CBA) will always be a concern in any unionized environment. With 75% of sales outside of North America the company is well positioned to balance disruptions to operations in domestic markets. One part of owning equity stakes in bottling operations is to ensure that KO has a vested interest in how employees are treated to avoid such conflicts.
While we think of juice in North America as a product not associated with large-scale sales; juice products in China are an established and fast growing segment of the beverage market. Juice is actually a more profitable product from a margin perspective and the Minute Maid brand is a key complimentary product to the established Huiyuan brands in the Chinese market. KO has been looking for growth vehicles to support stronger domestic growth in China and local bottling partners between the two companies make a strategic fit. The deal is anticipated to close in early 2009 and be accretive to earnings within three years. The obvious threat to this deal is that it is conditional of Chinese regulatory approval but currently no problems with that process have been publicized or speculated upon.
While conducting additional research on the company I found a Virtual Vending Machine that was fun to gain a sense of the Coca-Cola brands offered globally by the company. With a supply chain valued at over $50B US it's easy to gain a sense of just how global this company is in all aspects of their businesses.
One key concern I always maintain with any company is a keen evaluation of their management. Executives are not only responsible for the daily operations of a company, but also establishing the corporate culture and expectations of how an organization expects to do business. No company grows to the size and scale of operations that Coca-Cola has without an extraordinary vision of where the company is going, how it will get there and a group of effective leaders to pave the way. In my evaluation of management, which I encourage all investors to do on their own, I've found very clear objectives and strategic priorities from management on where they expect the business to grow, operate and execute. The core competencies of the company are defined as consumer marketing, commercial leadership and franchise leadership which is clearly evident when you evaluate the company from a number of perspectives.
There was a recent transition in leadership at the company when Neville Isdell stepped down as CEO and Muhtar Kent assumed the role as new CEO. Muhtar Kent has been with the company since 1978, comes from a strong background in marketing and has a strong history of participating in the global operations of the company in many capacities. The transition between the two managers was smooth and without incidence which is something I always carry as a litmus test for preserving corporate culture and maintaining a pulse on the business.
In the spreadsheets provided I've listed the past five years of critical data for the company
Whenever I look through the operating numbers of a company I'm looking to evaluate three main items:
- A consistent theme of performance
- Conservative fiscal management
- Emerging trends that hold the potential to influence the company either positively or negatively in the future
I've accumulated various data on Coca-Cola and organized it in a spreadsheet very similar to my presentation of Taking Stock in COST. While each companies spreadsheet in my SA data will differ slightly based on their unique industry my focus will often concentrate on margins, return on equity, debt levels, book value growth, increases in costs and dividends. Remember that as a prospective owner in the business I want to investigate information that directly impacts my returns, my financial stake in the business and potential for future returns.
First on the list for examination are revenues and cost of goods sold (COGS). Revenue is income that the company receives from the sale of a good or service and COGS is the direct cost of producing that product or service.
Coca-Cola has successfully reported a profit over the past twenty years, but I want to evaluate the relationship and trend between revenues and COGS. This is important because I want to identify if one side of the equation is changing in any drastic manner relative to the other. The 20-year average for increases in revenues has been 7.12% and the increase in COGS has been 6.45%. This is positive in my view because I can see an established trend where overall revenues are increasing at a faster rate than overall costs. If these numbers were reversed (6.45% for revenues & 7.12% for COGS) I would be very concerned because it demonstrates that costs are increasing at a faster rate than revenues and that is not sustainable for any business. These trends affect the profit growth of a company and as a shareholder I may be concerned that management isn't doing a good enough job of managing their cost structure. Taking the past five years (a smaller snapshot) I get an average increase in revenues of 8.42% and average increase in costs of 8.36%. The margin between the two is smaller, but the trend remains intact.
Margins are one of the first calculations I ever determine when I've decided to look at a company in greater depth. There are two types of margins I want to identify and examine: gross margins and profit margins.
When we examine gross margins for KO we see a very healthy average of 63.85% on a historical basis. This means for every $1.00 the company receives in revenue they retain nearly $0.64 after direct production costs. Profit margins for KO are 17.46% and for every dollar the company receives in revenue they retain a profit of over $0.17.
This is a much higher gross & profit margin than many other businesses and is a direct effect of the type of business Coca-Cola conducts. They sell higher margin products around the world and do so because their costs are relatively low and brand loyalty is very high. We can clearly see variations in each margin category through different time periods where profit and gross margins fluctuated in relation to different economic periods. One thing to notice is whenever they dropped relative to the historical average they subsequently rebounded shortly after with increases in the margins.
SGAE as % of net sales is another category I always focus on that provides insights into how management is managing their own spending and not just that of the corporation. SGAE stands for "Selling, General and Administrative Expenses" and tracks the spending of non-core expenses that aren't linked to the production or operating process. Management may be great at minimizing costs and boasting a fat gross margin, but I want to focus on the question: Can they control the spending that directly impacts the profit margins their company achieves?
Readers will notice a stark contrast in SGAE versus my previous stock analyses with KO reporting its average SGAE as % of net sales of over 40%. This means that non-core production costs are 40% of total revenues! Normally this should be an alarm bell going off for any prospective investor, but we first need to put this number into the proper context. We can see that the historical trend has fallen over the past few years, but 38% is still a relatively high number in 2007.
We first need to identify that Coca-Cola's business is much different than other businesses. Although they have low production costs and significant gross margins, they spend a lot of money on advertising promoting their products around the world. KO didn't become the biggest and wealthiest brand in the world by restricting spending on promotion of their products and this commitment to effective advertising has led to sales increasing globally for the past twenty years. KO also operates in a variety of challenging markets where they may be focusing on conservation of market share for mature products and heavy spending for promoting new innovative products that are fuelling future sales growth.
To really put this into the proper perspective we need to compare margins to a company in the same industry: PepsiCo (PEP)
Coca-Cola has a simple business model to understand and this benefits an individual investor who wants to focus on fundamentals. They sell carbonated & still beverages and syrups for consumption around the world, have a dominant brand image in hundreds of products, own stakes in nearly all their bottling operations, possess strong brand loyalty, are expanding into new markets with conservative acquisitions and focus on doing what they do best.
The company is profitable and by a large margin because they keep costs low and focus on maintaining very high margins. Despite slower sales growth than their main competitor (PEP) their growth of expenses has been lower resulting in revenue growth outpacing expense growth and this too is by a wider margin than PEP.
The company has made accretive acquisitions by not overpaying and continues to focus on growth of products domestically (Coke Zero) and abroad (Huiyuan Juice Group Limited). Although they've had a change of management the new CEO steps into a role that the company has adequately prepared him for as seen by his past leadership roles.
I've found that there are times when focusing on the simplest facts of a business result in some of the best businesses to invest in over the long-term. An individual who drinks one Coca-Cola product today is likely to drink another one tomorrow and again in the near future. A Coke tastes the same at 9am in the morning as it does at 5pm in the evening regardless of if those two drinks are consumed in opposite parts of the world and this creates the perpetual demand that the company has enjoyed for so many decades.
One of the most distinct and sustainable competitive advantages held in the world today is possessed by Coca-Cola. It's not a patent, a manufacturing process or real estate; it's the products, brands and operating structure that allow Coca-Cola to operate at a much more cost effective position than their global competition.
I don't want to discount that there are significant long-term threats due to an increase in health awareness and the short-term global economic dynamics. Management has done an admirable job diversifying their product portfolio to more health conscious brands and the one wonderful thing about a lower cost structure and significantly higher margins is that as a company you are well protected to weather any significant storm. While I never advocate that a company compete on price higher margins provide Coca-Cola with an adequate buffer to cushion any economic volatility so that the bottom line of the business is minimally affected.
(Disclosure: I own shares of Coca-Cola (KO), Kraft Food (KFT) and IGM Financial (IGM) at the time of this post).
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