For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:
Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.
If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
Sunday, July 5, 2009
Weekend Reading Links - July 5, 2009
Saturday, July 4, 2009
Understanding Goodwill
So if Joe's buys Pete's they will have to shell out $2M to buy out the current shareholders- assuming that they accept today's stock price as the purchase price. Through the two parts we see that the company's raw value (book value) is $750,000 but that it will cost $2M to purchase the company, subtraction of these two yields us $1.25M. This is the premium that Joe's will pay for the right to buy Pete's. When companies merge so too do their balance sheets so all of the assets get summed together, and so to do all of the liabilities. This makes sense, but where then does this $1.25M get assigned to? Goodwill. Making matters worse, what if the company that was being bought had stock with a massively inflated price to book, this would drive up the goodwill even further and as such the assets of the business- essentially rewarding the buying company for making a foolish decision.
To understand a balance sheet requires that we understand every line item, what each means, and how it can be manipulated. Today we are going to look at the line item for Goodwill.Goodwill Definition
Goodwill is one of the most commonly misunderstood line items in the balance sheet, I once met a junior investor who thought that Goodwill was the amount of money that the company had donated to charitable organizations. This unfortunately is not the case, goodwill, simply put, is the byproduct of two companies merging.How Goodwill is Calculated
Examples are always easy ways of explaining so lets assume we have two businesses Giant Joe's Grocery and Pete's Corner Market. If Joe's wanted to buy Pete's they must first determine what Pete's is worth. If Pete's were to close their doors, pay off all debt and sell off all of their assets (trucks, stores etc.) We would arrive at the following assessment of the business:
Showing up at Pete's with $750,000 isn't going to get you the company though. The company is owned by its shareholders so you need to buy the shares; so what does that cost us:Pete's Joes's Assets $2,000,000 $4,000,000 Goodwill $0 $0 Total Assets $2,000,000 $4,000,000 Total Liabilities $1,250,000 $1,750,000 Assets - Liability $750,000 $2,250,000 Pete's Joes's Outstanding Shares 1000000 1000000 Cost Per Share $2 $4 Shareholder Equity $2,000,000 $4,000,000
So the consolidated balance sheet of our new business would look like this:Pete's Joes's Consolidated Assets $2,000,000 $4,000,000 $6,000,000 Goodwill $0 $0 $1,250,000 Total Assets $2,000,000 $4,000,000 $7,250,000 Total Liabilities $1,250,000 $1,750,000 $3,000,000 Assets - Liability $750,000 $2,250,000 $4,250,000 Assets/Liabilities Ratio 1.60 2.29 2.42 The problem with Goodwill
As you can see goodwill gets included as an asset in the business, lumped together with more tangible things like real estate, trucks, inventory etc. But is goodwill really an asset? If times were hard could you sell off goodwill to raise money?
Even more interesting is what happens to the Asset/ Liability Ratio after the merger. See the above table and compare the ratios for the two companies before the merger, and then their combined ratio after the merger. As a result of the merger the combination has generated a business that has an even better debt ratio than each did in isolation, and yet nothing has fundamentally changed.How you can sidestep this issue
Recalculate any of the ratios that use balance sheet and subtract out the goodwill portions, then compare the two, the truth is somewhere between. This is common practice for bond rating agencies and should most certainly play a role in your own analysis too.
This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
Friday, July 3, 2009
Bemis Co (BMS) Stock Analysis
Bemis Company, Inc. manufactures and sells flexible packaging products and pressure sensitive materials primarily in the United States, Canada, Mexico, South America, Europe, and the Asia Pacific. The company operates in two segments, Flexible Packaging and Pressure Sensitive Materials. The company is member of the S&P 500 and was a recent addition to the S&P Dividend Aristocrats index. This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
Bemis Company has paid dividends annually since 1922 and quarterly since 1931 and consistently increased payments to common shareholders every year for 26 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 5.30% to its shareholders. The stock has lost over one third from its all-time high in 2007.
The company has managed to deliver a 4.70% average annual increase in its EPS between 1999 and 2008. Analysts are expecting flat EPS of $1.60 for 2009 and a slight increase to $1.75 by 2010. Bemis has not been able to increase profitability since 2004, as its earnings per share have remained flat. One bright statistic is that cash flow per share has increase from $2.88 in 2004 to $3.26 in 2008.
The Return on Equity has decreased over the past decade from 16% in 1999 to 11.50% in 2008. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time. 
Annual dividends have increased by an average of 7.5 % annually since 1999, which is higher than the growth in EPS. If earnings per share remain flat, future dividend growth would be far from spectacular.
A 7 % growth in dividends translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1988, Bemis Co has actually managed to double its dividend payment every seven years on average.
The dividend payout ratio is currently above 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. If earnings remain flat and the company doesn’t start any cost cutting initiatives, future dividend growth could be jeopardized.
Currently Bemis Co is trading at 15.50 times earnings and yields 3.70%. It does seem that Bemis Co is attractively valued at the moment based on yield and price/earnings mutliple. The flat earnings, decreasing returns on equity and rising dividend payout ratio make this stock a hold, not a buy. I would only add to existing position there if I owned it or initiate a small position in Bemis if the stock drops below $18.
Full Disclosure: None
Relevant Articles:
- Eli Lilly (LLY) Dividend Stock Analysis
- Clorox (CLX) Dividend Stock Analysis
- Why do I like Dividend Aristocrats?
- 3M (MMM) Dividend Stock Analysis
Thursday, July 2, 2009
Which High Do You Prefer?
Do you prefer a company with high profitability, high revenue, high income, high dividends, high market share, high cash flow, etc. Aren’t all these highs depicting a good picture about any given company’s state of business? We can find an answer to this in the concept of value investing i.e. wide moat and under pricing. These are the two key ingredients for value investing. Here, the concept of wide moat and under pricing is in the context of its business environment or competition. It is a relative term. Similarly, when we think about any given company’s financial metric, we need to look at it in relative terms. High profitability or high income, or high EPS growth rate as a standalone does not provide a true picture.
We can get a true picture by looking for consistency. Two simple statistical measures of average and standard deviation can help us measure consistency. A standard deviation that is narrow and lower than average is a good observation. The table below shows some examples of randomly selected financial metric for few companies.
For a given financial metric, when we compare the company’s current performance with historical averages (and standard deviation) is provides some insights into which direction the company is heading into. For example, decreasing operating margins and increasing payout factors are signs of trouble; highly varying metric with many ups and downs is also likely sign of trouble, etc.
SYY is showing consistent performance with narrower standard deviations that are lower than averages.
I don’t like to get high. Companies that continue to strike balance in their year over year performances are the ones that provide long term sustainable returns.
This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
Wednesday, July 1, 2009
Profits Are Profits
When companies report earnings, analysts will often focus on how profit expectations were met, rather than what those numbers are. For example, even if a company beats earnings expectations, if revenues came in lower than expected, this is often viewed as a bearish sign. Similarly, earnings misses accompanied by higher revenues are often considered positive. However, this line of thinking sorely underestimates the value of a flexible cost structure.
After all, if profit expectations were beaten while revenue came in lower than expected, this means that costs were likely much lower than expected. A company that can control its costs is a company that can outlast its competitors when revenues unexpectedly fall, as they often do in recessions.
Furthermore, higher revenues and in-line earnings suggest that margins have degraded. This could be a sign that the company has had to offer incentives to customers in order to move products. Instead, investors should look for companies that have the ability to reduce or increase costs depending on revenues. This leads to higher predictability and therefore higher accuracy in determining whether a margin of safety exists.
As an example, consider Goodfellow (GDL), a stock we have discussed on this site as a potential value investment. In its most recent quarterly results ended May 31st, revenues dipped by about 15% from year-ago levels. Yet the company showed profits of 24 cents per share versus 20 cents one year ago. How did it do this? By paying down debt (and therefore reducing interest costs) and by slashing operating expenses: gross margin actually increased which is very rare when revenues decline, as fixed costs are spread out across fewer sold units.
One thing to keep in mind, however, is that revenues are more difficult (for managements) to manipulate than costs. However, manipulating revenues is far from unheard of, and as long as the assumptions used to calculate costs are reasonable, the arguments in this article still hold.
For a discussion on various points to consider when analyzing a company's cost structure, see here.
This article was written by Saj Karsan who regularly writes for Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
Tuesday, June 30, 2009
Happy Birthday DIV-Net!
Today marks DIV-Net's one year anniversary. It all began on June 30, 2008 with this post: Dividend Investing + Value Investing = Superior Returns, which continues to ring true. Over the last year we have have added many new Members and Associate Members.
Dividend and Value investing continues to see growth with more online sites/blogs added each week. DIV-Net has seen steady growth over the past year with over 400 RSS subscribers. You have our heartfelt thanks for allowing us to spend a little time with you each day. We look forward to the upcoming year and the prospects it brings!
If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
Monday, June 29, 2009
Stock Analysis: United Technologies Corp. (UTX)
Linked here is a detailed quantitative analysis of United Technologies Corp. (UTX). It is important to note that this is the first week of using my updated analysis model, so you will see some changes from earlier analyses. Below are some highlights from the above linked analysis:
Company Description: United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
UTX is trading at a discount to 1.), 2.) and 3.) above. Since UTX's tangible book value is not meaningful, a Graham number can not be calculated. UTX is trading at a 29.5% discount to its calculated fair value of $73.14. UTX earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
UTX earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. UTX earned a Star as a result of its most recent Debt to Total Capital being less than 45%. UTX earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. UTX has paid a cash dividend to shareholders every year since 1936 and has increased its dividend payments for 17 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
UTX earned a Star in this section for its NPV MMA Diff. of the $6,624. This amount is in excess of the $1,800 target I look for in a stock that has increased dividends as long as UTX has. If UTX grows its dividend at 15.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. UTX earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Other: UTX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. Over the last ten years, UTX has shown steady growth in both earnings and dividends. UTX has a strong balance sheet with 38% debt to total capital and an excellent free cash flow payout of 29%. UTX should benefit from large backlogs at Airbus and Boeing, moderate demand for global infrastructure, and strong demand for military helicopters. Future risks could include a prolonged downturn in U.S. residential housing market, slowing of growth in commercial construction markets, and prolonged global recession.
Conclusion: UTX earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks UTX as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $82.70 before UTX's NPV MMA Differential fell to the $1,800 that I like to see for a stock with 17 consecutive years of dividend increases. At that price the stock would yield 1.86%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,800 NPV MMA Differential, the calculated rate is 10.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. UTX has a risk rating of 1.50 which classifies it as a low risk stock.
UTX is trading below its buy price of $73.14 and its 2.99% dividend yield is consistent with the 3.00% minimum that I am currently looking for. I would be very comfortable adding to my position at this price as my allocation allows. For additional information, including the stock's dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
As noted above, this is the first week of using my updated analysis model, so you will see some problems or error, be sure to let me know.
Full Disclosure: At the time of this writing, I was long in UTX (3.2% of my Income Portfolio).
What are your thoughts on UTX?
Recent Stock Analyses:
This article was written by Dividends4Life. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
Sunday, June 28, 2009
Weekend Reading Links - June 28, 2009
For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:
Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.
If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
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