The Dividend Matters

Why dividends (especially when reinvested) are a much bigger deal than some realize...

Reinvested dividends actually make up almost the entire total return in the long run. This Barron's article points out:

Since 1929, $ 100 invested in the S&P 500 would be worth $117,774. Out of that $117,774 only $4,989, or 4.2%, came from capital appreciation. That means 95.8% of the total return was dividends and the reinvestment of those dividends.

Here's a more recent example.

Today, Coca-Cola pays $ 1.76/share in dividends...roughly half what it earns. 25 years ago it was selling at ~$ 2.90/share. What probably looked like a modest dividend back in 1985 has grown to what is now a roughly 60% annualized dividend on the $ 2.90/share an investor paid back then. So every two years the rate of cash dividends being received by a 1985 buy-and-hold investor exceeds the amount originally paid for the stock.

That dividend, of course, should continue to grow.

If those future dividends are reinvested, 25 years from now that original $ 2.90/share price paid is likely to seem like a small fraction of an afterthought.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Buffett: Regenerative Capacity of Capitalism

Warren Buffett thinks the "normal regenerative capacity of American capitalism" trumps fiscal and monetary policy in the long run. From this CNBC article:

"...we had many recessions in the history of this country when nobody even heard of fiscal policy or monetary policy. The country always comes back.

There are 309 million people out there that are trying to improve their lot in life. And we've got a system that allows them to do it. It doesn't allow things to get changed overnight, though. And...it's important to have the right monetary policy. It's important for-- to have the right fiscal policy. But it's nowhere near as important as just the normal regenerative capacity of American capitalism." - Warren Buffett

Some seem to underestimate (or ignore) the factors that allow our economic system to recover from the excesses and imbalances that inevitably occur from time to time.

Check out the complete article.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

The Public-Utility Function

There are some comments of note by Michael Lewitt on the financial system in this Barron's article:

Among other things, he says that the financial system and its public-utility function has not been favored enough.

He argues for a balance more in favor of that function.

The reason? For society and our economy, capital is the lifeblood.

I'm realistic about whether the most logical financial system changes will happen.

Entrenched interests will, understandably, resist reigning in some of their speculative but highly profitable activities.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

John Bogle: Capitalism & Casinoism

An interview with John Bogle on CNBC.

In the interview, Bogle is asked how he defines capitalism now:

"The only way I can define capitalism right now is casinoism!"

"The rampant trading that goes on is just foolish and creates no value for both the buyer and seller combined."

"...if you can avoid getting sucked into this vortex you will actually do better than if you did get sucked into it. Wherever the stock market is a decade from now, it's not going to have anything to do with the stupidity of today or tomorrow."

Later  in the interview he was asked about the oft-repeated phrase that "buy and hold is dead".

His response: "I say they don't understand. It's dumb."

Check out the full  interview.

Adam

HT: Gaurang Sathaye

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Peter Lynch: Temperament vs Intelligence

"Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether." - Peter Lynch

Munger: Changing the Power Source

More from the University of Michigan interview with Charlie Munger. In this part of the interview he talks about the idea of "Changing the power source for mankind in a really massive way."

Charlie's not a fan of Al Gore.

Excerpts:

"If you asked what I would do if I were the benevolent despot of the United States. I would have the biggest infrastructure program you ever saw to go to power from renewable sources."

"The idea of rapidly going to the sun basically and creating a vast infrastructure that will do it is a thoroughly sound idea. And we now know how to do everything that we need to know how to do. And I think the country would get behind it."

Munger thinks the country should concentrate its intellectual and financial capital on a vast program to develop an alternative energy infrastructure.

"...we had a chance to turn our lemon into lemonade and we still have it. If I were running the world I'd be playing that card hard."

"I think it would be a net plus if we were plainly doing the right thing if we borrowed the money and created the infrastructure. I think when we just borrow the money and shovel it at people it's dangerous but I think it is less dangerous when there is something really meritorious you're doing with the money."

"I think all of this stuff is coming, I just wish it had come faster with more rationality.

I think we have been distracted a lot by people who bleeded about their own things. I'm not sure somebody as technologically ignorant as Al Gore is entitled to speak on the subject. I think you should have punched your ticket in a few better places before you open your mouth."

Interestingly, Munger wants us as a country to invest big in something that happens to be environmentally friendly yet he comes at it from a completely different point of view. An emphasis less on the environmental benefits but instead the social and economic benefits.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Buffett: The 'Disguised Bond'

In this 2001 Fortune article, Warren Buffett elaborates on how he never knows what any stock will do in a short time frame like 2-3 years.

This is at least mildly interesting since the average holding period for stocks from the early 1930s to late 1970s was 4-8 years. Then in the 1980s it dropped below that range and now has fallen to more like 6 months. Much less than than the time frame Buffett thinks it's possible to reliably know how a stock will perform.

Buffett also essentially says that it's not necessary to know what a stock is going to do in the short run to be successful in investing. Forecasting near-term movements may be impossible, but it is possible figure out, within a range, what a stock is likely to be worth over the longer term.

He also explains why a basket of stocks like the Dow, for example, can be thought of as a 'disguised bond'.

From the article:

"Let me explain what I mean by...'disguised bond.' A bond, as most of you know, comes with a certain maturity and with a string of little coupons. A 6% bond, for example, pays a 3% coupon every six months.

A stock, in contrast, is a financial instrument that has a claim on future distributions made by a given business, whether they are paid out as dividends or to repurchase stock or to settle up after sale or liquidation. These payments are in effect 'coupons.' The set of owners getting them will change as shareholders come and go. But the financial outcome for the business' owners as a whole will be determined by the size and timing of these coupons. Estimating those particulars is what investment analysis is all about."

Buffett then adds, at least when it comes to individual stocks, the real challenging part is figuring out what those 'coupons' are going to be.

Considering this challenge, the fact that so many market participants focus on the short-term -- what James Montier calls the "investment equivalent of attention deficit hyperactivity disorder" -- seems like a rather unfortunate use of time and energy.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Salesforce.com's Valuation

The list of stocks with price to earnings of 50x and higher has become pretty long. One example among many is Salesforce.com (CRM).

The market value of Salesforce.com at the recent ~$ 123/share is $ 16 billion.

In the fiscal year ended January 2010 Salesforce.com earned just over $ 80 million.

In the first 2 quarters of this fiscal year the company earned $ 32.5 million.

They are growing revenues and earnings fast and expected to earn ~$ 150-160 million in the fiscal year ended January 2011.

Let's assume Salesforce.com will successfully execute 800% earnings growth in the next 3-4 years and the stock price stays the same. Even if that aggressive assumption becomes real, Salesforce.com's price to earnings multiple would actually still be higher than that of Apple (AAPL) right now.
(Apple is actually a moving target considering its own growth.)

Using the most recent 4 quarters of earnings for both companies:

AAPL: Price $ 283/share, Market Cap $ 259 billion, Earnings: $ 12.23 billion, PE = 21

CRM: Price, $ 123/share, Market Cap $ 16 billion, Earnings $ 73.6 million, PE = 217

So clearly even the 800% growth isn't enough.

I mention Apple, not to compare the two businesses (clearly they are very different), only to give that Salesforce.com valuation some perspective.* Having said that, it seems that some stocks with valuations like Salesforce.com have a tendency to go from what already seems expensive to even more so.

In many instances, the high flyers are transformational businesses with a great story. Some do actually end up justifying the seemingly high valuations in the long run.** I'm not smart enough to get that right very often so, in my case, the losses would almost surely be offset by the gains. It's very likely quite a few folks know how to effectively invest this way but I'm not one of them. Just a completely different game. For me, finding businesses with proven durable competitive advantages and buying them when there is a significant margin of safety is what works.

Salesforce.com may be the making of a great franchise. I've no doubt that there is a great story behind it. The question is:

What are you willing to pay for promise versus what's proven?

Adam

Long position in AAPL

* I'm not a huge proponent of Apple's stock but it looks even cheaper if you take into account the $ 50/share of net cash and marketable securities (nearly 18% of the Apple's market value) it has on the balance sheet. Salesforce.com has less than 2% cash as a percent of market value. In fact, as long-term investments, I happen to be no fan of most tech stocks unless the price compared to a conservative estimate of intrinsic value represents a very substantial margin of safety (i.e. very little has to go right). With too many tech stocks, the problem is that it seems nearly impossible -- using reasonable assumptions -- to create even a very rough estimate of intrinsic value. The range of future outcomes is often just too wide. What today looks like sound core economics often gets destroyed by technological shifts as well as new, very capable, competitors who emerge, sometimes, seemingly out of nowhere. In contrast, the very best businesses have plain durable advantages and a technological/competitive landscape that changes little. When it does change, more often than not, it occurs in a manageable manner; it occurs in a way that the core economics aren't severely damaged.

** Though often the valuations of these businesses disconnect from any kind of likely future economic reality.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Large Cap Tech

Here's a Barron's article on how one analyst, Tavis McCourt of Morgan Keegan, thinks tech companies should allocate the enormous cash they have on their balance sheets. In addition to excellent FCF, many tech companies have cash on the balance sheet equal to 1/5 or more of total market capitalization.

McCourt recommends boosting the dividend payout ratio to as much as 70% of earnings.

Not sure if that makes sense but valuations are attractive. Some of these are selling at 10x earnings or less. If technology CEO's do end up effectively allocating their excess capital, near recent prices, there seems to be very good risk/reward with some of the companies listed in the article.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Grantham: "Decline in Standards"

From Jeremy Grantham's Summer Essays:

"...how little our side of the industry did to move its business to the more ethical firms and to make a fuss about conflicted or unethical behavior. Had a number of us moved our business, we might have slowed or even stopped the 30-year slide in conflicted, unethical behavior that we have experienced. I, for one, regret the modest nature of our moves. We all could have done more. We have tolerated a pretty nasty decline in standards. Shame on us." - Jeremy Grantham

Grantham tells it like it is.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.