Thursday, June 30, 2011

GE's CEO Needs to Raise Your Dividend (or He'll Be Fired)

One of the many benefits of buying stocks after a financial crisis is that, because of the sheer lack of money in the financial system, even traditionally stable dividend-paying companies must slash or eliminate their dividend payouts to keep their corporate balance sheets viable. Where's the benefit? The company will raise the dividend again, eventually. One such company that was forced to cut its dividend owing to the financial unpleasantness a few years back was the airline leasing company Aircastle (AYR). After paying a $0.70 dividend late December 2008, Aircastle cut its dividend to $0.10 in 2009 and has kept it there ever since---ever since Monday, that is, when the company raised its dividend by 25% to $0.125, bringing the annual dividend yield up to around 4%. Four percent is a nice yield on a company whose stock price may increase substantially as well over the next few years, especially when the dividend is raised even further.

What I find interesting is that even when AYR traded at what will probably be a generational low of around $2.80 during March of 2008, Aircastle did not eliminate its dividend. After all, what companies would ever need to lease planes again, since the world was plunging into the second Great Depression? The market was essentially pricing in bankruptcy for the company, but Aircastle didn't believe the financial media. If you had bought the stock then, not only would you have quadrupled your money (as AYR currently trades around $12.00), but you also would have locked in an annual dividend yield of roughly 14% with that ten-cent quarterly dividend on the shares you purchased during the lows. If you still owned your Spring-2008-bottom shares today, your annual yield on those shares would be nearly 18% after Monday's quarterly dividend increase to 12.5 cents per share.

Now what if we apply this strategy to other stocks? Are there stocks that will soon (within the next year or two, let's say) raise their dividends? The idea would be to buy the stock now so that the low purchase price of the stock will make our annual dividend yield higher. A stock that I own in my (nearly) permanent portfolio is General Electric (GE). Different from the appliance behemoth you may remember from the nineteen-seventies, GE is a conglomerate whose business now centers around energy infrastructure, finance, and entertainment. Before GE cut its dividend to $0.10 in 2009, the company paid a respectable $0.31. During the past year or so the company has raised its dividend three times, signaling to investors that as soon as cash on the balance sheet becomes available, GE will reward its shareholders with an increase in the quarterly dividend. The dividend stands currently at $0.15 per share, but my sense is that by the end of the year it will be significantly higher.

GE's CEO Jeff Immelt has hinted that GE Capital, the finance arm of the conglomerate, may start paying a dividend again to its parent company as early as the end of 2011, but certainly by 2012. That dividend will be added to the current 15-cent quarterly dividend. Shares of GE currently trade around the unimpressive level of $18.50. If you buy the shares around that price and the quarterly dividend rises even to $0.20, on those shares you will have an annual dividend yield of 4.3% ($0.80/$18.50). If the dividend eventually goes back to $0.31 and you bought the stock at these levels, your yield on those shares will be 6.7% ($1.24/$18.50). At that dividend yield, the stock price will also have appreciated in value to at least $35 because the increase in dividend will result from increased profits, which will move the stock price.

Finally, most money managers who hold GE currently have held it for a long time and have watched the stock plummet and the dividend all but disappear. They have held the stock because in the past GE had been a stable income-producer with its steady dividend. If that dividend doesn't rise enough to be a viable income source for investors, the pressure will be on Jeff Immelt to step down, and his replacement, having witnessed the demise of his predecessor, will increase the dividend post-haste.

Saturday, June 25, 2011

Never Underestimate a Billionaire Genius

There are a fair number of billionaire geniuses out there running companies, but few who started the company that made them billionaires and in the process made them geniuses at running their own companies. Here are a few: Warren Buffett, arguably the greatest investor of all time, of Berkshire Hathaway; Howard Schultz, who built Starbucks; and Larry Ellison from Oracle. If you bet against these billionaire geniuses over the long term, chances are you'll lose money. And although I haven't exactly lost money betting against Larry Ellison and Howard Schultz, I have, nevertheless, failed to make as much profit as I could have if I hadn't underestimated them, which I suppose is a wordy euphemism for losing money betting against them.

I started buying Starbucks (SBUX) in 2007 when it traded down to $30 from $40, after founding CEO Howard Schultz had stepped down and someone less talented had taken over for a while. It was my style of trade. A quick few points, a revision to the mean of $39 or $40, and I would be out. Then, of course, financial Armageddon and the Lehman-Bear-Citi-AIG unpleasantness occurred, and the stock bottomed at about $10 in  March 2009. Now forced to consider SBUX a long-term trade, rather than a six-month trip to the cash machine, I lied to myself (and my wife) that I had always considered SBUX a long-term holding.

The negativity against Starbucks descended during the throes of the recession. The financial media claimed that, despite Howard Schultz's return to the CEO post, no one would ever be able to afford a coffee at Starbucks again. The claim was that McDonald's McCafe would drive the SBUX shares down even lower. Yet, the stock rose off its lows, despite the taste tests in which journalists swore that McDonald's coffee was better than Starbucks', various surveys claiming the American populace agreed with the journalists, and interviews with government bureaucrats talking about a $5 cup of coffee as emblematic of American profligacy. Had Americans really mortgaged their homes to buy venti half-caf lattes?

The stock started to climb back to the mid-teens a few months after the March 2009 capitulation in the stock market. I began adding to my $30 position with new layers of SBUX shares around $18 and $19, enough to get an average purchase price in the low twenties. And consumers like me started going back to Starbucks, slowly at first, then more steadily while Howard Schultz stopped the over-expansion of stores and tried to purify what had become a diluted brand. I sold all of my SBUX shares at about $25 a little while later, thinking the quick rebound in the stock had been a little premature and hoping to take some profits and then buy again on a pull-back in a few months; however, the sell-off in the shares never came, and now, even after this summer's market swoon, SBUX shares are trading, as of Friday's close, at $37.35. What was my trading mistake? I listened to the financial media and underestimated a billionaire genius.

I am proposing a stock purchase not of Starbucks but of Oracle (ORCL). My history with ORCL shares is much shorter. (Whew!, says the weary reader.) I bought them at $18 and sold them at around $24, underestimating Larry Ellison, the billionaire founder of Oracle. The stock rose to $36 about a year after I sold them. Recently I bought Oracle again at $34. Thursday after the market closed, Oracle reported solid earnings, but the stock tanked after hours because sales of high-end computer hardware were worse than expected and because of the violent Greek crisis, etc. The stock closed at $31.14 Friday. I plan to buy it this week under $31, or, even better, with a 29-handle, if I can.

Also, I would buy Starbucks on a significant pullback, say to a price under $30, but I may be making the same mistake again by underestimating Howard Schultz in assuming such a big pullback in the shares is even plausible.

Tuesday, June 21, 2011

You Never Forget Your First (Double)

When I first started trading equities, I read an article about how special it is the first time you double your money on a trade. At the time I was skeptical that I would ever see the double in my own portfolio. But just the following week, I was researching biotechnology companies for my fledgling portfolio and fortuitously looked up at the television when there was a biotechnology analyst talking about his top picks on CNBC.

I am fairly skeptical of stock analysts' reports. Often the relationship between a company and the analysts following a stock seems a bit too close and, therefore, unseemly to me. Also, analysts as a group tend to be wrong about individual stocks, and so if most of the analysts following a stock rate it as a buy, I wonder whether the stock can go any higher with all of the cheery optimism about the stock price. Usually on such an occasion of over-optimism I would rather sell the stock than buy; yet, I do find analysts' picks to be a good place to start research on individual stocks. On this day the analyst recommended Genentech (DNA) as his top biotech pick. I had a friend who recommended Amgen (AMGN) and who already owned some shares of AMGN. I had been about to go with Amgen as my biotech choice when at the last minute, owing partly to the analyst's tip, I bought Genentech instead. Then fortune smiled upon that pick, because the following week Genentech's cancer drug Avastin showed more promise than most of the analysts had previously expected, and almost overnight the stock doubled in price. I had bought the stock at about $40, and now the stock was trading above $80. It was luck, just glorious luck. I sold.

Now I'd like you to get your first double, unless this isn't your first, in which case I'm sure you won't mind another. I suggest that you buy Bank of America (BAC), one of the world's most hated stocks. There is so much pessimism surrounding this stock that you may have gasped when you read the name. Do I mean the hated bank whose fate is tied to the deflated American housing market? Yes. Do I mean the company that was involved in the near failure of the global financial system? That's the one. Do I mean one of the evil banks that everyone hates after we bailed it out because it was too big to fail? You betcha. Lately, in addition to being hated by the investment community, the federal government has piled on with threats of strict interpretation of new regulations for banks as systemically important as Bank of America. Also, everyone is nervous about Bank of America's potential exposure to bad Greek debt. Haven't you noticed the violent Greek crisis we're going through? 


My claim is that Bank of America will double within the next three years. It may even double by the end of 2012. Here's why. I think the housing situation can't get much worse. If it does get worse, you'll have a lot more to worry about than having to wait a little longer for Bank of America to double. Also, betting on a BAC recovery is basically betting on an eventual recovery in the U.S. economy. Neither the stock market nor the jobs situation can recover without the banks lending at a healthy level, and when the banks lend at a healthy level, BAC will be your double. Currently, BAC is trading at about $10.50. The last time the stock traded at levels this low was during the first four months of 2009, when we narrowly avoided a depression. The stock should not be trading at such generational crisis levels now. We are not going back the dark days of a near-depression for a long time, if ever in my lifetime. I own many shares of BAC, and if the shares get much more depressed, I'll buy more. It's a good candidate for your first double.

Oh, so Genentech was later purchased by the European drug giant Roche; therefore, DNA no longer trades as a stock, but I shall never forget her.

Monday, June 20, 2011

The Worst Time to Buy is the Best Time to Buy

Most people are wrong about investment most of the time. A couple of years ago, if you had held on to a large diversified portfolio of stocks through the vicissitudes of the prior decade, your return had probably been about even or slightly negative. Right after the lows of the bear market a few years back I heard and read scores of people in the media dismissing stocks because of their historical lack of return. I can remember when, at the booming crescendo of a stock-market bottom, people, even smart people, even good investors, even people on the news who knew nothing about markets, told us that we might want to consider selling our stocks, even after the market had plummeted and those sellers of stocks were going to take losses, sometimes life-changing losses. I said to myself, "This must be the bottom." And, yes, I was buying stocks there at the bottom, but I already had much of my savings in my deflated portfolio and didn't have as much capital as I would have liked. That is why I am still buying today.

Even recently I've heard people dismissing stocks both in the media and in everyday interactions. Of course, those who claim that stocks are no longer a good long-term investment are horribly wrong. That stocks are so under-owned as an investment class is the best argument for holding stocks for the long run. I look for superlatives in the media, negative superlatives, and buy stocks when I hear them. You've heard the negative superlatives, like longest weekly losing streak since 2001, which almost happened this week, and crisis, like the Greek-crisis, you know the violent Greek crisis, whose footage we were forced to watch all week. Shouldn't we be nervous, very nervous as investors? After all, CNBC says we should be nervous. Shouldn't we sell?  No, we should buy. The media has been so negative lately on stocks that we must be close to some sort of near-term low, which we may revisit later this year but which I am going to exploit to earn a little money.

If the Greek crisis really is a crisis, why does it still cost me about $1.50 to buy one Euro? Perhaps Euros are so expensive because they're colorful and come in different sizes or because the smaller the denomination, the smaller the rectangle the currency is printed on; that's all truly amazing stuff, but the currency market usually doesn't get valuation wrong. And the currency market is signaling with the strength of the Euro that the Greek crisis isn't a crisis.  If I'm wrong and the market tanks because of a Greek restructuring or default, I will roll up my sleeves and buy equities, as many as the panicked traders on Wall Street will sell me.

Last week while investors nervously watched the violent Greek protests and nearly everyone interviewed on CNBC was predicting that markets would fall precipitously, I added to my portfolio. I bought Nucor (NUE), a U.S. steel-maker. In early April the stock traded at about $47.50 and now trades just under $40 on slowing global growth concerns and a perceived slower future demand for steel. Like the broader market, NUE is oversold. I have owned the stock before and traded it within a few weeks of purchasing it for a profit. My sense is that I will again be selling NUE for a profit within the next month on a bounce after Wall Street's erratic pendulum swings to the all-clear-stocks-look-cheap signal (to mix metaphors thoroughly). If the stock does not rise to the level that will give me the profit I want, I will hold it and collect a dividend yield of 3.66%.