Stock Analysis: Dover Corp (DOV)

Linked here is a PDF copy of my detailed analysis of Dover Corp (DOV) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Dover Corp. manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

DOV is trading at a discount to 1.) and 3.) above. Since DOV's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, DOV is trading at a 25.6% discount. DOV earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

DOV earned two Stars in this section for 3.) and 4.) above. DOV has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 53 consecutive years. It's one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

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:

1. NPV MMA Diff.
2. Years to >MMA

DOV earned one Star in this section for 1.) above. The NPV MMA Diff. of the $4,650 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as DOV has. If DOV grows its dividend at 7.6% per year, it will take 5 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: DOV is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. I would place DOV in the more risky category since it operates different businesses as stand-alone entities and its exposure to cyclical end markets. DOV continues to improve its ability to generate strong free cash flow as a result of discontinuing 20 low-margin, capital-intensive businesses over the past two years, and replacing them with 17 new high-margin/steady-growth operations. Risks include weaker industrial, energy and electronics markets; along with value-diminishing acquisitions.

Conclusion: DOV earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks DOV as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined a share price of $26.10 would result in a NPV MMA Diff. around the $3,000 level that I like to see. At that price DOV would yield 3.45%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 6.4%. This dividend growth rate is below the 7.6% used in this analysis, thus providing a small margin of safety.

As of the October 24, 2008 close, DOV was trading at $26.27, slighty above my $26.10 Buy Below price. If I were looking to initiate a position in DOV, I would do so on dips below $26.10.

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.

Full Disclosure: At the time of this writing, I had no position in DOV (0.0% of my Income Portfolio) .

What are your thoughts on DOV?


Recent Stock Analyses:

• Stock Analysis: CenturyTel Inc [CTL]
  
• Stock Analysis: Manulife Financial Corp [MFC]
• Stock Analysis: Intel Corporation [INTC]
• Stock Analysis: Illinois Tool Works Inc [ITW]
• More Stock Analyses

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Word of Wisdom - Part II

I just finished reading The Great Wall Street Scandal, by Leonard Gross and Raymond L. Dirks. This was another book I mentioned in one of my two Mother Lode posts back in August.

This is an account of the scandal at Equity Funding in the early 1970’s, which was one of the largest frauds until recent ones this decade eclipsed it. There was one passage he wrote that made an impression on me:

“Equity Funding stands as an indictment of an investment system that deceives and mocks the individual. As that system exists today, the individual cannot operate on a rational theory of value unless he is willing to brave the crowd. His only choice is to follow. Don’t bother about what a company does; care only about what it shows. Don’t think of a stock purchase as an investment; think of it as a trading unit someone will buy after you do. Your buyer will operate that way, because everyone operates that way. As long as you get in at the right price, it doesn’t matter what the values are, because no one pays attention to them.”

This was written in 1974, but it occurred to me that this attitude and culture is more prevalent today than back then. We have learned nothing.

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Currency & Canadian Investors

The rapid appreciation of the U.S. Dollar vs. the Canadian Dollar is currently changing the landscape for Canadian dividend investors. One month ago 1.00 U.S. Dollar = $1.03 Canadian. As of writing this now $1.00 U.S. Dollar = $1.27 in Canadian funds. This dramatic swing is attributed to a number of factors including the decline in energy and commodities, the abandonment of risk, and a flight to U.S. treasuries.

This phenomenon is affecting Canadian dividend growth investors in several ways:

1. U.S. stocks are suddenly not that cheap anymore.

One month ago buying 100 shares in JNJ at $60 cost Canadians $6,180 ($61.80/share), whereas today the same chunk costs $7,620 ($76.20/share). (an increase of 23%) So much for taking advantage of share price weakness in U.S. names.

2. Every U.S. company held has effectively raised their dividend by 23% in one month.

One month ago JNJ's 100 share dividend as paid into a Canadian's investment account would have been $47.38 Canadian. The same dividend payment would now be $58.42. That is a tangible benefit of currency fluctation.

3. On paper U.S. equities held are 23% more valuable.

Sure buffers the steep sell off in stocks that we've seen over the same period!
This has been the largest one month move in the Canadian Dollar since the 1950s.

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What Are Covered Calls?

As a DIV-Net member and passionate investor in dividend growth stocks, I tend to focus on the safer side of investing. I focus on the long term and select stocks that have a strong history of growing dividends that is often regarded as a safe form of investing. Sure it has its ups and downs (as dividend investors can attest to these days), but overall it has proven to be a very successful strategy. So then why a post about covered calls?

Interest really. I love the investment process and try to understand as many strategies as I possibly can. Therefore, I have been researching the covered call concept in the past few weeks to see if there is any place for it in my portfolio. Here is how investopedia defines covered calls:

An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

As a dividend investor, I am obviously attempting to grow the income in my portfolio. As you can see by the definition, covered calls are intended to use the long positions you hold in a particular company to generate income from other investors who buy the right to your stock if it hits a particular price. In other words, you get paid a premium for some level of risk.

Seems pretty simple at the high level. So I did some further research and identified this list of both pros and cons of investing in covered calls:

Pros:

• The seller receives the premium for selling the call - this is additional income that lowers the cost basis on the long position
  
• If the price remains below the strike price, the seller keeps the premium and the shares
  

Cons:

• If the share price rises above the options strike price, then the sellers shares are called away and the long holder does not get to enjoy that increase in share price
  
• The option seller cannot sell the long position without buying the covered call back - this reduces the ability of the investor to be nimble if the share prices drops dramatically and they want to sell the security to limit their downside loss
  
• Commissions are charged on every part of the transaction - buying the long position, selling the call option, having the stock called away - this can dramatically eat away at your returns

Overall, although covered calls are a much simpler option strategy, there is just so much to consider when employing the strategy that I am not sure I have the time to employ it, in addition to the regular management of my portfolio. If you find yourself still interested, then please check out Dividend Growth Investors' guest post on my blog here.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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Festival of Stocks # 112

Welcome to the October 27, 2008 edition of Festival of Stocks. If you aren't familiar with our blog, TheDiv-Net, we are a network of investors focused on dividend investing, value investing and a long-term buy and hold philosophy.

We encourage you to subscribe for free to our blog feed to keep up with my latest postings. Now that you are familiar with The Dividend and Value Investing Network, let’s take a look at this week’s Festival of Stock participants. If you are a blogger and you are looking to get your name out there, check out the Festival of Stocks schedule and ask George to sign you up to host this famous festival.

As for this edition there were 11 submitters that made the cut.

Here are this week’s entries:

Dividend Growth Investor presents BB&T Corporation (BBT) Stock Dividend Analysis posted at Dividend Growth Investor.

D4L presents Stock Analysis: Manulife Financial Corp (MFC) posted at Dividends4Life.

Andy presents InBev and Anheuser-Busch (BUD) Options - Arbitrage Profits from the Credit Squeeze posted at Saving to Invest.

Silicon Valley Blogger presents A Profitable Stock Sale: Sold The Bank Shares in my 401k Account posted at The Digerati Life.

Madeleine Begun Kane presents Wall Street Woes posted at Mad Kane's Humor Blog.

Dorian Wales presents How to Recognize a Bull Trap posted at The Personal Financier.

FIRE Finance presents Secure Retirement - At What Rate Should You Save For It? posted at FIRE Finance.

Declan Fallon presents How good are Bloggers at predicting the S&P? posted at Zignals blog.

Steve Alexander presents Quick Take: National Oilwell Varco (NOV) posted at MagicDiligence - The Best Magic Formula Stocks.

Enoch Ko presents Security Analysis: Chapter 2: Fundamental Elements in the Problem of Analysis. Quantitative and Qualitative Factors posted at The Wealth Accumulator.

Ripe Trade presents 401k strategy Best seasonal period posted at Ripe Trade.

*** That concludes this edition of the Festival of Stocks. Submit your blog article to the next edition of Festival of Stocks using our carnival submission form. Past posts and future hosts can be found on our Festival of Stocks index page for those of you interested in reviewing the archives. Next week’s Festival of Stocks will be at The Div-Net. The hosting schedule is booking up quick for the end of 2008. If you are interested in hosting a future edition of the Festival of Stocks, please visit the schedule to find a free slot. Then contact George with the name of your site, blog URL, email address, and the date your prefer to host.

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Attractive Stock Valuations Being Created In This Bear Market

The market decline this year has been anything but short of amazing. So far in the month of October the market is down 24.72% and down 39.24% year to date through October 24th. It seems as though investors (or maybe forced hedge fund selling) are selling anything that is a stock. Undoubtedly, the economy is going through a significant deleveraging process. However, in this environment, it appears a number of stocks are trading at levels suggesting they are going out of business. Following is a list of some stocks that are trading at single digit P/Es.

Not all of the stocks on the list pay a dividend. Additionally, before purchasing any of the stocks, an investor should evaluate the sustainability of the projected earnings. It is possible that the "E" (earnings) in the P/E ratio is overly optimistic; hence, a downward earnings revision would mean a higher P/E for the company's stock.

(click table for larger image)

Stocks mentioned:

Allegheny Technologies (ATI)
Anglo American (AAUK)
Best Buy (BBY)
Carpenter Technology (CRS)
Cnooc (CEO)
Jacobs Engineering Group (JEC)
Orient-Express Hotels (OEH)
Prudential Plc (PUK)
Rio Tinto (RTP)
Titanium Metals (TIE)
Transocean (RIG)
United States Steel (X)

Source:

Bargain Hunting ($)
Outlook Newsletter-Standard & Poor's
By: Beth Piskora, Managing Editor
October 29, 2008
http://www.outlook.standardandpoors.com/NASApp/NetAdvantage/servlet/login?url=/NASApp/NetAdvantage/index.do


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Weekend Reading Links - October 25, 2008

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

• Dividends4Life presented What Would Warren Buffett Do?
  
• The Dividend Guy presented An Update to The Dividend Guy Investment Code
  
• Dividend Growth Investor presented Dividend Aristocrats are outperforming the markets in 2008
  
• the moneygardener presented dividend stocks for a weak economy
  
• Stock Market Prognosticator presented White Mountains Insurance (WTM) Analyst Day – Q and A - Part Two
  
• The Div Guy presented Fund Manager finds value in what consumers won't give up
  
• Disciplined Approach to Investing presented S&P Decreases Expected 2008 Dividend For The S&P 500 Index
  
• Living Off Dividends & Passive Income presented Interview With Warren Buffett
  
• Old School Value presented Update: Puget Energy (PSD) Arbitrage
  
• Triaging My Way To Financial Success presented Taking Stock in COST
  
• Dividend Money presented History Is An Investors Greatest Teacher
  
• Bullish Dividends presented A Look At Canada's Top 4 Financial Services And Insurance Companies
  
• Barel Karsan presented The Panic of 2008

There are some really good articles here, please take time and read a few of them.

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New Dividend Stock Buy: Abbott Labs (ABT)

I recently purchased shares of Abbott Labs (ABT). I believe the stock is a great long term holding with a stable balance sheet, a history of dividend growth and a strong pipeline for future growth. I wish the stock would have drop more in price with the recent market downturn but it is such a solid company the stock is only down about 5% for the year.

Company Description

Abbott is a global, broad-based health care company that develops, manufactures and markets pharmaceuticals and medical products, including nutritionals, devices and diagnostics. During 2007, pharmaceuticals accounted for 57% of operating revenues, while nutritionals represented
17%, diagnostics contributed 12%, and vascular represented 6%. Sales of other products represented 8%of 2007 sales. The company employs more than 68,000 people and markets its products in more than 130 countries. The company is headquartered in north suburban Chicago.

Healthy Growth

The company recently posted strong results for the third quarter. Earnings per share of 79 cents surpassed the year-prior 67 cents and exceeded the consensus estimate by 3%. Worldwide sales jumped 17.6% on a year-over-year basis.

All of Abbott's businesses are performing exceptionally well, ahead of expectations,' said Miles D. White, chairman and chief executive officer, Abbott. 'Abbott remains well-positioned, with strong core growth franchises, including our emerging vascular business, which is rapidly becoming a significant contributor to Abbott's growth.'


ABT should increase sales at a high double-digit percentage rate over the next several years. EPS growth has been forcasted at 13% through 2010. EPS growth includes expected margin improvement, lower debt levels, a successful U.S. launch of a new drug-coated coronary stent and continued strength in sales of Humira.

Higher Estimates

The company hiked its full-year guidance 2008, and analysts followed suit. ABT increased its guidance to an adjusted earnings per share range of $3.31 - $3.33 from $3.24 - $3.28. All 10 covering analysts responded by issuing full-year forecasts of $3.32 per share, up from last week's $3.27.

Strong Dividend Income

In September, the company declared a quarterly dividend of 36 cents per share, this was the 339th consecutive quarterly dividend paid out by Abbott since 1924. ABT said the payable November 15, 2008, to shareholders of record at the close of business on October 15, 2008.

The dividend translates into a yield of 2.6%, which stands high above the yields offered by its peers as most companies within ABT's industry group offer no dividend.

Abbott stated that it increased its dividend payout for 36 consecutive years, which included a 10.8% increase earlier this year. Also, since the debut of the S&P 500 in 1957, Abbott explained that it has had the second-highest average annual return of all originally listed companies, in part because of its dividend yield.

Disclosure: The Div Guy owns shares of ABT at the time of this post.

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Warren Buffett – The Ultimate Dividend Investor

Warren Buffett is the greatest investor in America. The famous value investor topped Forbes richest individuals list in 2008, overthrowing his pal Bill Gates from Microsoft from his twelve year period of holding this title. Investors have long followed Buffett’s advice on stock selection, economic issues and his pure genius common sense and business acumen. In a previous post I highlighted the individual holdings in Buffett’s Berkshire Hathaway portfolio as of June 30, 2008. This was a timely post, as Buffett recently made some major headlines when he announced that he was buying american stocks. Before investors follow Buffett's advice, they should understand the nature of the stocks that are in the Berkshire's portfolio.

It seems to me that out of 36 holdings in BRK-A’s portfolio 12 companies are dividend aristocrats, one is a dividend champion and three are dividend achievers. Only 5 of his holdings do not play any dividends at all. One of its holdings’ business purpose (CDCO.ob) is limited to the orderly runoff or sale of its remaining assets. Based off current dividend payments for the stocks in his portfolio, Berkshire Hathaway makes $1.65 billion in dividend income per year. You could open the spreadsheet from this link as well.

I am not at all surprised that the Oracle of Omaha has almost half of his portfolio in good quality dividend growers. Most companies that have managed to increase their dividends for long periods of time are ones that have wide moats as well as excellent competitive advantages in the marketplace. Having these qualities leads to rising earnings which tend to support a steady pace of increase in dividends.

On a cautious note however, I would do my own homework before investing in any stocks that Berkshire Hathaway owns. Some of his holdings like Bank of America (BAC) recently cut their payments by 50% which prompted a massive drop in the stock.

Relevant Articles:

- Warren Buffet - The richest investor in the World
- Why do I like Dividend Aristocrats?
- Dividend Conspiracies
- Bank of America (BAC) Dividend Analysis
- Cincinnati Financial – An insurance stock to own
- Best CD Rates

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Words of Wisdom

I just finished reading Reminiscences of a Stock Operator, by Edwin Lefèvre, a book I mentioned in one of my two Mother Lode posts back in August. This is a fairly well known book, but there were two passages I wanted to point out that stuck in my head. The first was regarding bull markets in stocks:

“It made me remember a saying of the late H. H. Rogers, of the Standard Oil Company, to the effect that there were times when a man could no more help making money than he could help getting wet if he went out in a rainstorm without an umbrella.”

Oh how true as all the analysts and funds devoted to Commodity and Energy investing have now found out.

The second passage was regarding speculation and human nature:

“Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.”

There has been a lot of talk about re regulating our financial markets so the mess we are in does not repeat again. Regulators should remember the above passage and understand that human nature can’t be regulated.

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Income From Investments Update

Our non-registered investment portfolio is still solidly in the accumulation phase as we add saved funds and invest them in dividend paying stocks within Canada and the United States over time. This portfolio was opened in April of 2006, and is now a focal point of our financial future.

Our total income from investments within this portfolio currently sits at $2,321.16 Canadian dollars. This is 193.43/month and $6.36/day. I like breaking the income down into monthly and daily values which makes it easier to compare it against some of our bills and expenses. One way to think about it is that we have an extra member of our family unit who earns $6.36 per day in income, and even works on weekends. This is a 86% increase from October of last year where we were receiving $1,249/year. As of writing this our yield sits at a lofty 5.4%, and our yield on original investment is 4.2%. See the chart below for our progress since December of 2006.



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Stock Analysis: CenturyTel Inc (CTL)

Linked here is a PDF copy of my detailed analysis of CenturyTel Inc (CTL) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: CenturyTel Inc. provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CTL is trading at a discount to 1.), 2.) and 3.) above. Since CTL's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, CTL is trading at a 36.5% discount. CTL earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

CTL earned three Stars in this section for 2.), 3.) and 4.) above. With a 15.1% Dividend Growth Rate, CTL will more than double its dividend every 5 years. CTL has paid a cash dividend to shareholders every year since 1974 and has increased its dividend payments for 35 consecutive years. It's one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

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:

1. NPV MMA Diff.
2. Years to >MMA

CTL earned both of the available Stars in this section. The NPV MMA Diff. of the $808,696 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as CTL has.

Other: CTL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. In June 2008, CTL announced plans to increase its annual dividend to $2.80, from $0.27 beginning in July and to accelerate its share repurchase plans.CTL has a relatively strong balance sheet driven by the less-competitive nature of the mostly rural markets it serves. The company should see some gains through broadband, but its overall growth will be limited due to competitive pressure on voice service. Like a most utilities, CTL has felt little impact from macroeconomic concerns. Risks include a dilutive acquisition, increase in customer migration or line losses.

Conclusion: CTL earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of six Stars. Since my scale tops out at five, this quantitatively ranks CTL as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $120.00 and CTL's NPV MMA Diff. would still be around the $3,000 NPV MMA Diff. that I like to see. At that price CTL would yield 1.81%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $3,000 NPV MMA Differential I'm looking for, the calculated rate is negative since the current yield of 8.65% is well in excess of the MMA Rate of 4.61%. A dividend growth rate of 15.1% was used in this analysis.

This is an intriguing stock. With strong cash flows to support its high yield, it is a stock I will give it serious consideration to purchase when the share price is lower than my buy below price of $51.17.

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.

Full Disclosure: At the time of this writing, I had no position in CTL (0.0% of my Income Portfolio) .

What are your thoughts on CTL?


Recent Stock Analyses:

• Stock Analysis: Manulife Financial Corp [MFC]
  
• Stock Analysis: Intel Corporation [INTC]
• Stock Analysis: United Technologies Corp [UTX]
• Stock Analysis: Illinois Tool Works Inc [ITW]
  
• More Stock Analyses

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What Is The VIX Index

One market indicator that has been getting a lot of attention lately is the VIX Index (VIX). The VIX has been in the news lately since the Index has been hitting all time high levels, reaching over 81 on Thursday. The importance of the VIX has to do with the fact it is a measure of investor fear looking forward over the subsequent 30 day period.

(click chart for larger image)

According to the CBOE,

since the VIX Index introduction in 1993, VIX has been considered by many to be the world’s premier barometer of investor sentiment and market volatility. The VIX Index is an implied volatility index that measures the market’s expectation of 30-day S&P 500® volatility implicit in the prices of near-term S&P 500 options. VIX is quoted in percentage points, just like the standard deviation of a rate of return.

Additionally, one of the most interesting features of VIX, and the reason it has been called the “investor fear gauge,” is that, historically, VIX hits its highest levels during times of financial turmoil and investor fear. As markets recover and investor fear subsides, VIX levels tend to drop. This effect can be seen in the below chart in the VIX behavior isolated during the Long Term Capital Management and Russian Debt Crises in 1998.

(click chart for larger image)

An important historical aspect of the VIX is it tends to reach high levels at market bottoms. Could the current high level be signaling a market turning point looking forward. Last week's 4.7% market advance is certainly a start.

Source:

VIX (pdf)
CBOE Volatility Index White Paper
http://www.cboe.com/micro/vix/vixwhite.pdf

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Weekend Reading Links - October 18, 2008

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

• Dividends4Life presented How To Be a Better Investor During These Difficult Times
  
• The Dividend Guy presented Some Investing Rules According to Warren Buffet
  
• Dividend Growth Investor presented BB&T Corporation (BBT) Stock Dividend Analysis
  
• the moneygardener presented relax, take the longview
  
• Stock Market Prognosticator presented The Bad News On White Mountains Insurance Is Out
  
• The Div Guy presented 6 Stocks Paying Generous Dividends
  
• Disciplined Approach to Investing presented Market Timing Dangers
  
• Living Off Dividends & Passive Income presented Interview With Warren Buffett
  
• Old School Value presented Good To Be Back
  
• The Dividend Investing Blog presented The Only Thing We Have To Fear
  
• Triaging My Way To Financial Success presented The Dividend Express:
  
• Dividend Money presented Your Retirement Income Is On Sale!
  
• Bullish Dividends presented A Glance At The Big 5 Canadian Banks And Their Current Yields
  
• Barel Karsan presented Buying Stocks For Less Than What They Trade At
  

There are some really good articles here, please take time and read a few of them.

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Warren Buffet Comment in Today's New York Times

Here are some of the highlights from Warren Buffett's Op-Ed in the New York Times yesterday.

Buffett: I'm buying stocks
Berkshire Hathaway CEO gives advice on how to invest during America's money crisis.

"In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary," Buffett wrote.

But for that reason, the Berkshire CEO said, he has converted his personal portfolio almost entirely to U.S. stocks. Previously, he said he owned nothing but Treasury bonds.

Buffett said the fear surrounding the disastrous credit crisis, which has dropped stocks about 36% from their all-time highs set around this time last year, has left equities with attractive purchasing prices.

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful," said Buffett. "And most certainly, fear is now widespread, gripping even seasoned investors."

"Fears regarding the long-term prosperity of the nation's many sound companies make no sense," wrote Buffett. "Most major companies will be setting new profit records 5, 10 and 20 years from now."

"Bad news is an investor's best friend," Buffett said. "It lets you buy a slice of America's future at a marked-down price."

Some of Warren Buffett’s top stock holdings:
Coca-Cola Co (KO)
Wells Fargo & Company (WFC)
American Express Company (AXP)
Procter & Gamble Co. (PG)
Burlington Northern Santa Fe Corp. (BNI)
Johnson & Johnson (JNJ)
US Bancorp (USB)
ConocoPhillips (COP)
Bank of America Corporation (BAC)
General Electric Co. (GE)

Disclosure: The Div Guy owns shares of PG, JNJ, USB, BAC and GE at the time of this post.

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Book Review: Good to Great

Good To Great: Why Some Companies Make the Leap... and Other Don't

As a young guy interested in business and wanting to start my own, I found Good to Great interesting and the ideas, although not new, to be thought provoking. C.S. Lewis once wrote that the best teachers are the ones that are able to remind you rather than try and teach you new things. If this is true, Jim Collins has done an excellent job of reminding the reader of the necessities of what is required for a business to be great.

Although the book is not a investment book, the principles and ideas can equally be applied to investment decisions.

A group of 20 people and research spanning 5 years filtered out 11 companies from 1435 public Fortune 500 companies that had been operating for 15 years with stock price performance on par with the benchmark but then beat the market exponentially for the following 15 years. The book then provides a case for the compelling factors that all 11 companies exhibited as its stock price performance went from average to outstanding.

The selected 11 companies are Abbott Laboratories, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreen, and Wells Fargo.

On a side note, looking at the names today reveals that some of the companies lost their way significantly. Even "great" companies can fall but we all know about that.

The 5 Concepts

The 5 concepts exhibited by the researched companies are as follows.

Level 5 Leadership: Great companies have a CEO where they love what they do with determination and humility and a will to succeed. They commit to the long term vision of the company and understand the company does not revolve around them. The great companies internally promote and train great management who then continue the tradition beyond the tenure of the first "great" CEO.

First Who...Then What: People are not the most important asset of the company. The right people are and then get them in the right positions.

Control the Brutal Facts: Be brutally honest objectively. Identify your core competencies. I'm sure Lehman and Citigroup would have benefited from this.

Hedgehog Concept: Based upon an ancient Greek parable: "The fox knows many things, but the hedgehog knows one big thing."

Identify your core competency, focus on it and boil it down to a single, simple and clear concept. Those companies that never made it tend to be foxes. Disorganized and diversified beyond their means.

Culture of Discipline: Disciplined thinking leads to disciplined action. One example I thought of is how as investors, we all want to see a company cut its spending on useless things such as high quality furniture and company jets. Yet, how many people would wish that happens to their own company?

How many companies are like Google, where mostly every employee from the top all the way to the bottom love their job and what the company stands for and goes all out to achieve that purpose?

Summary

Good to Great is a well structured book that describes the 5 concepts mentioned above and looks at how each of the good to great companies portrayed such characteristics. The content is interesting not just because of the 5 concepts but the history and stories of the companies themselves provides an interesting read. People with an MBA probably would'nt find anything new, but aspiring businessmen and leaders as well as investors would do well to read it.

My Argument For Liking and Recommending the Book

As with all books there are pros and cons, but it seems this is one of those books subject to analysis and additional research and "tests" by third parties trying to disprove the thesis of the book. I assume it's because of the popularity of the book (#48 rank in Amazon) and because it is a required text in many business schools.

The main gripe that people have with the book is that the 5 key points the author highlights is far too generic to prove anything true. It is true that many companies applied or have tried to apply the same principles and ideas yet still failed, however, I don't agree with this argument, simply because I never believe that a book will be able to provide a complete and true step by step guide. That's what procedures and manuals are for.

It is also true that the qualities of successful companies are so diverse that it would be impossible to write about and satisfy anyone in 200-300 pages without being quite broad and generic. My argument to this is to relate it to great people from history. Great people are also diverse in so many ways. If you had to categorize a great person, it would be be impossible. Great people consisted of missionaries, soldiers, artists, religious leaders, inventors, scientists etc all with varying degrees of kindness, humility, bravery, publicity, intellect, skills and eloquence. I could populate a list of names from history and try to come up with a theory of why such people were considered great, but that would also require me to be "broad".

On the other hand, if you look at the people that brought disaster to countries and companies, they are always too similar. Pride, greed, selfishness and power are all qualities exhibited by such people. The same can be said for companies such as Enron, Worldcom, Tyco and now Bear Stearns, Lehman and Wamu.

Given the complexity of the task, Collins has done an excellent job.

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What Have We Learned?

Now that we are definitely in a bear market and a recession, the length of which is unknown, it’s time to examine the lessons that have we have learned from the recent financial crisis.

Smart money doesn’t exist. This is the greatest and most persistent urban legend in the history of Wall Street. This has always been one of my pet peeves – the blind rush by investors into a stock after hearing some talking head tout it on TV. How many gurus owned Lehman, Bear Stearns, AIG, Fannie, Freddie and Washington Mutual? How many “smart guys” ran these companies? This economic cycle and bear market should bury the smart money legend more than six feet under. Rest in peace. As an investor, do your own research. You will make mistakes as I have, but they will be your own and you will feel better afterward.

Risk is common sense. Everyone understands risk. It’s intuitive. You don’t need a fancy quantitative model or a doctorate from the University of Chicago to figure it out. When an individual conducts his daily activities, he considers and accepts a level of risk. Try to cross a busy interstate on foot? That’s risky, and its common sense as well. Lever up 33 to 1? Well that’s risky too, and anyone’s intuition should have told them that too.

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J&J, Safe, Solid, & Consistent

Global health care company and perennial dividend grower, Johnson & Johnson (JNJ) announced yesterday that they grew their third quarter earnings by 10.4% over 2007. Sales were up across the board and were largely driven by international efforts. Generic drugs are having a negative impact on J&J's pharmaceutical business. Johnson managed to grow consumer sales by 13% driven primarily be U.S. allergy sales (Zyrtec) and Chinese moisturizer sales (Dabao).

The company also increased its earnings guidance for full year 2008. Overall, the earnings report looked very solid, a nice reprieve from the dark day to day headlines in the market these days. JNJ is being viewed as a safe harbour from the storm lately and they are certainly living up to that billing as they continue to execute despite current conditions.

Here is a glance at J&J's recent dividend activity:

2006-$1.47
2007-$1.64
2008-$1.80

That is a compound annual growth rate of the dividend of about 11% over the last few years.

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Bear Markets Increase Yields

Anyone notice that the market has been falling? In all seriousness thought, there is a silver lining to a bear market for dividend investors who are focus on growing the income in their portfolios. It is really simple - as prices of dividend stocks fall the dividend yield of those stocks increase. At the outset this may seem like a very simple concept - the real basic of dividend investing fundamentals. So why am I wasting your time talking about it here? Because it is Let's look at a simple example.


The stock I will look at is Coca-Cola, one of the dividend stocks that I hold in my personal portfolio. Here is the company's dividend yield on June 11th and October 10th of this year - a time period that represents the price of the stock before and after this full blown bear market we are seeing right now.

Share price June 11, 2008	Dividend/Share	Dividend Yield
$57.72	$1.52	2.63%
Share price October 10, 2008	Dividend/Share	Dividend Yield
$41.50	$1.52	3.20%

As a dividend investor this is the best type of scenario we can hope for, especially those of us in the wealth accumulation period of our lives. As buyers, we are in effect getting a better yield on these companies than when prices are higher. Therefore, dividend investors actually want to see higher yields.

There is a catch though - it is imperative that investors buying individual stocks be vary cautious about the dividend stocks they are buying. The biggest risk is a company that cuts its dividend, such as we have seen with Bank of America (another one of my holdings). Before the cut BAC was showing a huge increase in yield, but not so much now. We want to invest in stable and less risky stocks with little chance of seeing a dividend cut. That is the hard part.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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Stock Analysis: Manulife Financial Corp (MFC)

Linked here is a PDF copy of my detailed analysis of Manulife Financial Corp (MFC) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Manulife Financial Corporation is a life insurance company with customers in the United States, Canada and Asia. It is the holding company of The Manufacturers Life Insurance Company and John Hancock Financial Services.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MFC is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, MFC is trading at a 21.0% discount. MFC earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

MFC earned two Stars in this section for 1.) and 2.) above. 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 (1998-2001, 1999-2002, 2000-2003, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. MFC has paid a cash dividend to shareholders every year since 2000 and has increased its dividend payments for 8 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:

1. NPV MMA Diff.
2. Years to >MMA

MFC earned both of the available Stars in this section. The NPV MMA Diff. of the $38,790 is in excess of the $10,000 minimum I look for in a stock that has increased dividends as long as MFC has. If MFC grows its dividend at 15.7% per year, it will take 3 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. MFC earned a Star since its Years to >MMA of 3 is less than 5 years.

Other: MFC is a member of the International Dividend Achievers™ Index. . Historically, MFC has demonstrated consistent earnings growth from varied products over a diversified geographic footprint. With solid fundamentals and a conservative balance sheet, MFC is one of the best run insurance companies in the industry. The integration with John Hancock has allowed MFC to gain significant market share in the U.S. With an expanding international presence, MFC is well positioned to benefit from growth in emerging markets. As a potential risk for going forward, MFC could be vulnerable to weak equity markets and appreciation of the Canadian dollar.

Conclusion: MFC earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of five Stars. This quantitatively ranks MFC as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $41.57 before MFC's NPV MMA Diff. decreases to the $10,000 NPV MMA Diff. that I like to see. At that price MFC would yield 2.32%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $10,000 NPV MMA Differential I'm looking for, the calculated rate is 10.8%. This dividend growth rate is well below the 15.7% used in this analysis.

Not only would I be very comfortable initiating a position in MFC below $29.55, I did just that last week during the market meltdown. Many thanks to my Canadian friends for introducing me to MFC!

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.

Full Disclosure: At the time of this writing, I was long in MFC (1.2% of my Income Portfolio) .

What are your thoughts on MFC?

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Wow! What A Week It Was

After this past week, many investors are asking themselves what to do now or what is in store going forward. As a follow up to my post last week on evaluating management using ROE, this post will touch on an additional management evaluation tool. Before I do that though, these are extraordinary investment times and many an investor are unsure of what to do next. Many factors will go into that ultimate decision, but I believe Warren Buffett said it best a few weeks ago:

"You know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well."

A key aspect to the success of a company and its stock price is the strength of the company's management. In fact, if this one element is missing, no matter how good a company or its competitive advantage, the lack of strong management can lead to poor company results.

In addition to evaluating the company's ROE, investors should review the company's shareholder letter that accompanies the firm's annual report. The American Association of Individual Investors recently wrote an article on elements to look for in the letter. The article notes:

The one window into a CEO's perspective and goals is the shareholder letter contained in the annual report. But upon reading one, you might find that you can't understand what the CEO is trying to say. Often, shareholder letters are riddled with jargon and glossy prose that convey no information. Six of the most popular CEO letter clichés:

• Talented people,
• Global presence,
• Market knowledge,
• Financial strength,
• Leverage competitive advantages, and
• Create significant value for our shareholders.

The article indicates investors should read the shareholder letter and circle in red the cliché phrases outlined above. If one sees more red than black, be forewarned. Once the company passes this test, there are seven criteria an investor should score. The AAII article contains more detail on each criteria, but a summary is listed below:

1. CEO Voice—Personal and Authentic: When you finish reading the shareholder letter, do you feel like you had a meeting with the CEO? Do you feel as if the CEO is talking to you?... A CEO's attitude toward shareholders can reveal how he or she runs the business—for long-term profits or short-term gain. You need to read between the lines of the letter to try to figure out what kind of "relationship" a CEO is looking for.

2. Practicing the Financial Golden Rule: Is the CEO giving you information that he would expect to receive if he were the investor?
3. Detailed and Jargon-Free Information: Is the CEO explaining complex topics in simple terms without "dumbing" down this information? Is the letter free of clichés and technical jargon?...

   The best letters provide business details in simple, but never simple-minded, language. And they explain how these investment opportunities will produce profits.
   

4. Consistent and Realistic Information: Has the CEO provided historically consistent information, especially with regard to the company's earnings? Is the CEO explaining the company's goals and how the company intends to meet its goals?...

   A CEO who wants to show that he or she is trying to be accountable to investors and other stakeholders is going to tell you about their corporate goals. Financial goals reveal the financial targets that CEOs want their companies to achieve; operating goals reveal the CEO's aspirations to improve the way the work gets done.
   

5. A Proper Accounting of Earnings: Does the CEO letter reveal an understanding of the difference between the company's cash and accounting earnings? Can you find statements of earnings in the shareholder letter and easily locate this same number on the firm's income statement in the annual report?

   Even when CEOs do report company earnings, it's often hard to figure out what they mean. You can blame part of this problem on accounting.

   Earnings can be reported at different "layers." Many CEOs choose to report their earnings in shareholder letters several layers up, typically at a level that lets them show their company's earnings in the best possible light. This is not illegal. But when companies offer these customized pro forma earnings, you'll want to examine the underlying assumptions the company is using to calculate them.

   To judge management's accounting integrity in the shareholder letter, look for:

   • Clarity in reporting the nature of non-routine write-offs that affect company earnings; and
   • Consistency in the presentation of earnings over time.
6. Balanced Strategic Sense: Does the CEO include a balanced picture of the execution of the company's strategy and its results? Are you learning about the year's business failures as well as the successes?...
   

   The topic that is most frequently cited in a shareholder letter is "corporate strategy." This should be no surprise—when we learn about a company's plans to make money from tangible assets, like plants and equipment, and intangible assets, such as patents, brand recognition and new technology—we get to the heart and soul of financial analysis.

   Many companies describe the corporate strategy as a list of action steps they intend to take. But such a list only tells you what a CEO plans to do. They don't show how these steps are being acted out in real-life situations....
   

7. CEO Values: Is the CEO describing his or her values and are these related to specific events in the company? Do you gain more understanding about how the CEO and his or her company practice these values in relation to their corporate stakeholders: employees, customers, investors, suppliers and others?

A key investor takeaway from reading the letter is whether or not you feel comfortable entrusting your investment dollars to a company's particular management. So when you receive an annual report, read the shareholder letter first.

Source:

Shareholder Letter Revelations: Can You Trust the Leadership?
American Association of Individual Investors
AAII Journal
2008
http://www.aaii.com/includes/DisplayArticle.cfm?Article_Id=2310&digit=524

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Weekend Reading Links - October 11, 2008

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

• Dividends4Life presented Seize The Opportunity: Four Value Priced Stocks
• The Dividend Guy presented Weekly Dividend Investing Roundup
  
• Dividend Growth Investor presented Top 20 one day percent decreases in Dow Jones
• the moneygardener presented recession pricing
• Stock Market Prognosticator presented Is Oil Demand Falling Off A Cliff?
• The Div Guy presented Why You Shouldn't Bail on Stocks Now
  
• Disciplined Approach to Investing presented Are Money Market Cash Levels Signaling A Market Bottom?
  
• Living Off Dividends & Passive Income presented Cramer Wins Mr Obvious Award!
  
• The Dividend Investing Blog presented Well This Is A Fine Mess
  
• Triaging My Way To Financial Success presented My Short-term Plan X
  
• Dividend Money presented Investing Tips From Charles Schwab
  
• Barel Karsan presented Analysts Improving?

There are some really good articles here, please take time and read a few of them.

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Dividend Stock Purchases: PG, JNJ and PEP

The past few weeks have been a very difficult time for most stock investors. The stock markets are down about 40% from recent highs of a year ago. I still like the stocks I hold and I have made some additional purchases this week of my favorite dividend stocks. I don't know when the markets will turn around or if there will be a recession but I know some companies will do well in any environment.

I purchased shares of some of the strongest and financially secure stocks that I feel should do well in a difficult market. The three stocks I have purchased are Procter & Gamble (PG), Johnson & Johnson (JNJ) and Pepsi (PEP). I feel these companies will continue to do well in a difficult economy. I talked to some business leaders today about their employees taking steps to cut personal excess spending and tightening budgets. They told me about employees changing their vacations plans and decreasing discretionary spending. They also said their companies were implementing hiring frees and cutting capital spending project for the foreseeable future.

Many people will stop making big ticket purchases in a economic downturn but they will still purchase consumer goods, food items and medicinal supplies. That is why I feel PG, JNJ and PEP will be great dividend stock picks for our current environment. I also just read a write up on JNJ by by Gene Marcial of BusinessWeek. Here are some highlights:

Marcial: J&J, a Healthy Defensive Play

When things get tough in the stock market, it's time to play defense—and offense. That's the strategy of savvy professional investors as the major U.S. equity indexes spiral downward.

But in the worst of times, the markets create value for those willing to pluck out the "angels" that have fallen hard. Of course, investors should always strive to pack their portfolios with defensive stocks that are of star quality even in good times—companies endowed with strong balance sheets, robust cash flows, and rising sales and profitability, with little or no debt and handsome dividends to boot.

When the market crashes, as it is bound to do—the current environment being a perfect example—investors should be prepared to snap up quality stocks like those at a huge discount.

Johnson & Johnson (JNJ), one of the world's largest and most diversified health-care companies, is one such stalwart—both a defensive and offensive play. A major force in pharmaceuticals, medical devices, and consumer products, J&J draws its strength and sustaining power from diversification. Many of its consumer products are widely known brands, including nonprescription drugs like Tylenol and Imodium A-D antidiarrheal medication, Johnson's baby line of products, and its Band-Aid line.

"J&J's diversified sales in these three sectors, along with its decentralized business model, has served it well in the past and should continue to do so in the years ahead," says Herman Saftlas, health-care analyst at Standard & Poor's, who rates the stock a strong buy.

Disclosure: The Div Guy owns shares of PG, JNJ and PEP at the time of this post.

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Philips Electronics (PHG) Stock Dividend Analysis

Koninklijke Philips Electronics N.V. operates as an electronics company with activities in healthcare, lighting, and consumer lifestyle markets worldwide. The company’s products include imaging systems, ultrasound and monitoring solutions, and healthcare informatics.

PHG is an international dividend achiever. It has been increasing its dividends for the past six consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 8.20 % to its shareholders. The stock has lost about 25% of its value so far in 2008.

At the same time company has managed to deliver a no annual increase in its earnings per share since 1999.

The return on equity fluctuated between 0% and 60% over the past decade.

Annual dividend payments have increased over the past 10 years by an average of 14.20% annually, which is much higher than the growth in earnings per share. A 14% growth in dividends translates into the dividend payment doubling almost every five years.

If we invested $100,000 in PHG on December 31, 1998 we would have been able to purchase 5671 shares (Adjusted for a 4:1 Stock Split in April 2000). In March 1999 your annual dividend income would have been $1619. If you kept reinvesting the dividends though instead of spending them, your annual dividend income would have risen to $6927 by March 2008. For a period of 10 years, your annual dividend income would have increased by 273%. If you reinvested it though, your annual dividend income would have increased by 328%.

The dividend payout remained under 50% for the majority of our study period. Currently the dividend payout ratio is at 15%. I consider a lower payout as a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

PHG does look attractively valued with its low price/earnings multiple of 8, low dividend payout ratio at 15%, as well as attractive yield at 3.00%. The main issue that I have with this stock as a dividend growth investor is that the dividend payments tend to fluctuate a lot. The flat earnings over the past decade are another red flag to consider. The main positive is that the payout ratio is so low that even if earnings were to remain flat for the next decade

Disclosure: I do not own shares of PHG

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