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Stock Analysis: Diageo

Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine products. The company offers a range of brands, including Johnnie Walker scotch whiskies, Smirnoff vodka, Baileys Original Irish Cream liqueur, Captain Morgan rum, Jose Cuervo tequila, JeB scotch whisky, Tanqueray gin, and Guinness stout, as well as Smirnoff ready to drink products This international dividend achiever has increased distributions for over one decade.

Over the past decade this dividend growth stock has delivered an annualized total return of 9.40% to its shareholders.

The company has managed to deliver an average increase in EPS of 8.20% per year since 2000. Analysts expect Diageo to earn $4.97 per share in 2011 and $5.50 per share in 2012. This would be a nice increase from the $4.18/share the company earned in 2010. The company’s premium spirits brands have been popular with US consumers who traded up to these premium brands. The North American market accounts for 34% of the company’s sales, while emerging markets account for 33% of its sales. Emerging markets have been a bright spot, as the company has been able to achieve strong double digit growth there. The company competes based on brand loyalty and offering quality products. It’s a typical consumer play where it tries to boost organic sales while also acquiring premium brands in order to further boost its competitiveness. Cost restructurings and efficiencies are another part of Diageo’s strategy for future earnings growth as well.

The company has a high return on equity, which has remained above 33% for the latter part of the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment in US dollars has increased by 5.70% per year since 2000. A 6% growth in distributions translates into the dividend payment doubling every twelve years. With international dividend achievers, it is important to look at the history of dividend increases in the local currency, in order to avoid any confusion about the volatility of US dollar dividend payments, caused by currency fluctuations. The company’s dividend history in British pounds shows consistent pattern of distribution increases since 1998. Another fact to look for is that Diageo pays an interim and a final dividend, which are not equal in amount. In order to avoid confusion, dividend investors should look at the full year payments in order to determine whether the company is an achiever or not.


The dividend payout ratio has increased slightly over the past decade, having exceeded 50% in 2006 and 2007. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Diageo is attractively valued at 17.50 times earnings, yields 3.30% and has a sustainable dividend payout. I would continue monitoring the stock and will consider adding to a position in the stock on dips.

Full Disclosure: Long DEO


This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Dividend Yield: Royal Bank of Canada (TSE:RY, NYSE:RY)

Royal Bank of Canada logoImage via WikipediaRoyal Bank (TSE:RY, NYSE:RY) is the largest bank in Canada and consequently the largest Canadian company in terms of market value. Unlike some of its competitors, it has seen a pull back from investors in the past months and has had more exposure to international markets. It owns businesses in the U.K., the U.S and other international markets.

Its earnings come from the following markets. Its dependence on the Canadian market is much lower than I expected. It can be viewed as a good or a bad thing depending on how you want to look at the world economies for the next few years.

  • 56% Canadian
  • 3% U.S.
  • 14% Wealth Management
  • 24% Capital Markets

Fact Sheet
  • Stock Ticker: RY on both the TSX and NYSE
  • Market Cap.: 74.24B$ (CDN$)
  • P/E: 15.04
  • EPS: 3.6$
  • Dividend Yield: 3.84%
  • 52-Week Low: 48.85$
  • 52-Week High: 62.89$
  • 52-Week Range: 23.08% as of writing.
Here is RY's 1 year stock graph. Outside of its peak, 55$ seem to be the high points for the year. At 52$, it could be a good entry point.



Dividend Growth
Royal Bank has increased their dividends 15 times in the past 11 years. For the past 3 years, their dividend has been fixed at 50 cents per quarter. So in a way, RY has increased their dividends 15 times in 8 years. That's nearly 2 times per year. In 2006, RY had a 2-for-1 stock split equivalent by giving a 1-for-1 stock dividend.

The payout ratio is decent and averages to 46% for the last 5 years. It's in line with the banking sector. The only exception to the rule is Toronto Dominion with an average of 41%. Otherwise, the other banks are near 46%. If Royal Bank can bring back their payout ratio below the average in the upcoming years, it should be in a decent position to increase its dividends but I am concerned that they may increase their dividend after the other banks.

Competitors
The major competitors to Royal Bank consist of the other Canadian banking institutions. Due to the Canadian banking rules being different, I have not included other international banks including the U.S. banks. I have also not included other financial institutions not in the consumer retail sector.

CompetitorsTickerPriceMarket Cap.Yield
Toronto DominionTD.TO$73.90$64.923.30%
Bank of Nova SotiaBNS.TO$57.11$59.563.43%
Bank of MontrealBMO.TO$57.29$32.464.89%
CIBCCM.TO$78.65$30.894.42%
National BankNA.TO$68.50$11.133.85%
Laurentian BankLB.TO$48.75$1.173.20%

Here is how the top 5 banks compared to each other during the year. Royal Bank was definitely the under performer with the Bank of Montreal taking a hit recently.



Thoughts
I expect Royal Bank to increase its dividend just like the other Canadian banks will. So far, 2 o the smallest banks have increased their dividends; namely National Bank (TSE:NA) and Laurentian Bank (TSE:LB). The larger banks have been on the acquisition path and buying cheap foreign financial assets while they are still cheap.

Full Disclosure: I do not own RY but I own BNS and BMO as of writing.

Readers: Any interest in Royal Bank?

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Another Solid Quarter For Nike

Nike (NKE) came through with another great quarter this past week. The country's largest athletic shoe maker has been churning out good results year after year for the past decade. Nike dominates the market that it participates in and has been able to successfully sell its products both domestically and abroad. Let's take a closer look at Nike's results. Here are the highlights.

  • Nike’s revenue increased 10 percent to $4.8 billion.
  • Net income rose 22% over the past quarter.
  • Earnings per share came in at 94 cents per share. (6 cents higher than expectations)
  • Orders are 11% higher than they were last year.
  • Gross margins of 45.3%.
  • Nike regained its pricing power and did not have to discount products to sell inventory.
  • Fantastic balance sheet with $4.7 billion dollars in cash and just $500 million in debt.
Shares of Nike currently trade at $85 a share and the stock is getting attractive again. The stock has been on a good run with shares up nearly 35% this year. The stock was up over 40% last week but has pulled back 5%. The stock even offers a small dividend yield of 1.4% I think that Nike's fair value in the low 80's. If investors get a chance to buy at this level, they may want to take a look at Nike's shares.

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ARC Wireless Solutions (ARCW)

ARC Wireless Solutions (NASDAQ:ARCW) is a provider of wireless network components. The company has a history of losses, with an accumulated deficit now in excess of $8.5m vs total market cap of just $8.9m, but I noticed it because it trades at a 25% discount to its NCAV value (which is predominantly made up of cash and equivalents). In this situation, I investigate to see whether the poor earnings situation is enough to outweigh buying the assets at a discount.

There are several reasons why I am staying away from ARCW, but none more important than the fact that I do not believe there is a sufficient margin of safety. The company has never really made any money and it shows no interest in liquidating, so the company is lacking a clear catalyst. Instead, this could very well turn out to be a muddle-along investment that will persist in trading at a discount to NCAV. In some situations, I can look beyond this if the discount to NCAV is great enough, but 25% doesn't justify it for me.

Beyond the margin of safety, the company has also entered into some strange contracts with related companies. The CEO of the company is also a managing director of Quadrant Management Inc, which is a subsidiary of Brean Murray Carret Group ("Brean"). Brean owns 21% of ARCW. With ownership and control of the firm's CEO, there is little doubt as to the interests best being represented inside ARCW. Quadrant Management, as an activist investor, entered into a "Financial Advisory" contract with ARCW which granted Quadrant a $250k signing fee, covers all of Quadrant's out-of-pocket expenses, and then results in Quadrant being paid the greater of $250k per year or 20% of the marginal improvement in EBITDA. The sticker shock of this contract is slightly offset by the fact that the current CEO earns a nominal salary from ARCW (~$25k last year) so the fees to Quadrant are acting as the CEO's compensation. The problem I have is that I have never seen a CEO of a company earn a bonus of 20% of marginal EBITDA, and the actual CEO's compensation from Quadrant almost surely does not have the same clause (I would be happy to hear otherwise), which means that Quadrant, as the subsidiary of Brean, is earning an outsized fee for Brean's 21% ownership at the expense of the other 79% of shareholders. For me, this is a dealbreaker, as it shows the governance issues that ARCW faces and the relatively poor position of unrelated shareholders.

One other point to note is that the company has also outsourced its product sourcing and manufacturing to another related entity, Rainbow Industrial Limited (though, in this case, the company says RIL does not earn a profit from ARCW).

Talk to Frank about ARCW.

Author Disclosure: No position.

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Stock Analysis: AFLAC Incorporated (AFL)

Linked here is a detailed quantitative analysis of AFLAC Incorporated (AFL). Below are some highlights from the above linked analysis:

Company Description: Aflac Incorporated provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at worksites and help fill gaps in primary insurance coverage. Approximately 75% of revenues comes from Japan and 25% from the U.S.

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

AFL is trading at a discount to only 3.) above. The stock is trading at a 31.4% premium to its calculated fair value of $43.46. AFL did not earn any Stars in this section.

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:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

AFL 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. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. AFL 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 (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 28 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

AFL earned a Star in this section for its NPV MMA Diff. of the $2,621. This amount is in excess of the $700 target I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 15.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.4%.

Memberships and Peers: AFL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Delphi Financial Group, Inc. (DFG) with a 1.5% yield, Unum Group (UNM) with a 1.5% yield and CNO Financial Group (CNO) with a 0.0% yield.

Conclusion: AFL did not earn any Stars 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 four Stars. This quantitatively ranks AFL as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $93.51 before AFL's NPV MMA Differential decreased to the $700 minimum that I look for in a stock with 28 years of consecutive dividend increases. At that price the stock would yield 1.22%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $700 NPV MMA Differential, the calculated rate is 10.5%. This dividend growth rate is below the 16.7% used in this analysis, thus providing a margin of safety. AFL has a risk rating of 1.50 which classifies it as a low risk stock.

Operating in the the U.S. and Japan, two largest insurance markets in the world, AFL has built a tremendous low-cost distribution system. Concerns about AFLs investment portfolio, which holds European bank hybrid bonds and European sovereign debt, have eased. However, deregulation in Japan has allowed more able competitors to enter Aflac's key markets and a prolonged period of low interest rates dampen the company's prospects. AFL's is trading 31% above my fair value buy price of $43.46. It valuation, low yield and willingness to hold its dividend flat, as it did from Feb. 2009 to August 2010, will keep shares of this stock out of my portfolio. 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.

Full Disclosure: At the time of this writing, I held no position in AFL (0.0% of my Income Portfolio). See a list of all my income holdings here.

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This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Weekend Reading Links - December 26, 2010

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 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.


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Stock Analysis: Universal Corp

Universal Corporation (UVV), together with its subsidiaries, operates as a leaf tobacco merchant and processor worldwide. It engages in selecting, procuring, buying, processing, packing, storing, supplying, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products. This dividend champion has increased distributions for the past 40 consecutive years. The latest dividend increase was in November 2010, when the company raised distributions by 2.10% to 48 cents/share.

Over the past decade this dividend growth stock has delivered an annualized total return of 6.60% to its shareholders.

The company has managed to deliver an average increase in EPS of 3.70% per year since 2000. Analysts expect Universal Corporation to earn $4.60 per share in 2011.

The company’s return on equity has been on the rise since reaching a bottom in 2006. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 4.60% per year since 2000. A 5% growth in distributions translates into the dividend payment doubling every fifteen years. If we look at historical data, going as far back as 1994, we would see that Universal Corporation has actually managed to double its dividend payment every sixteen years on average.

The dividend payout ratio has increased slightly over the past decade, having exceeded 50% in 2006 and 2007. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Universal Corporation is attractively valued at 8 times earnings, yields 4.90% and has a sustainable dividend payout. I would continue monitoring the stock and will consider adding to a position in the stock on dips.

Full Disclosure: UVV

Relevant Articles:

- The case for dividend investing in retirement
- Eight Dividend Growers In the News
- Intel Corporation (INTC) Dividend Stock Analysis
- ONEOK Inc (OKE) Dividend Stock Analysis

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].




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Integrated Electrical Services, Inc (IESC) - Who are you in bed with?

When investing in a company, it is important to consider the identity of the company's other major owners and creditors. Sometimes other stakeholders have a major effect - positive or negative - on the company's operations. For example, a fellow stakeholder may act as a catalyst, launching a bid for the company or using its position on the board to push for the sale of non-core assets or for the distribution of cash. In other instances, however, the stakeholder can wield its power to the detriment of the company and other shareholders.


Consider the case of Integrated Electrical Services, Inc. (NASDAQ:IESC), a provider of electrical services, including the design, construction, maintenance and servicing of electrical, data communications and utilities systems. I first became interested in IESC when I noticed that it was trading near an all-time low and was approximately 25% below its NCAV (upon closer inspection, the inclusion of operating leases puts the price closer to 10% below NCAV). Since the company was trading so close to its NCAV, I had to consider whether the company's earnings history justified a higher price. Unfortunately, this was not the case, as the company has had a rough time for the last several years, generally unprofitable with sketchy operating cash flows (and scary declines in revenue). Shareholders who purchased in mid-2007 have now seen nearly 90% of their investment dissipate, however one investor in particular has done better for itself than the others. That investor is a private equity firm that owns nearly 60% of the company.


Normally I like when a private equity firm (especially one with activist potential) owns the bulk of a company, as these situations frequently lead to the previously described catalyst events. Unfortunately for IESC's other shareholders, this private equity firm used its control position to benefit itself at the expense of other investors. First, in 2007, IESC repaid a $53m term loan with Eton Park that was just 19 months old and on the same day took out a new $25m term loan with this private equity firm. IESC incurred a $2.1m penalty for doing so and significant legal and other transaction fees. This might be reasonable in a situation where the new term loan is at a much lower rate, but in this case, the rate increased from 10.75% to 11% per annum. So IESC paid a big penalty so that it could pay a higher interest rate (albeit on a lower principal amount) to a large shareholder.


Second, IESC in 2006 purchased $1m worth of EPV Solar Inc. from the private equity firm, then in 2008 extended an additional $2m in a convertible note with warrants to EPV. In 2009 the company restructured the debt, and in 2010 EPV filed for bankruptcy. IESC has now written off the whole thing.


On a side note, IESC has been particularly bad at choosing investments. Rather than simply returning capital to shareholders, the company also invested as a limited partner in another private equity fund and now has associated unrealized losses. This is a red flag for value investors as companies that engage in empire building reduce the likelihood of the investor receiving capital via a dividend or share repurchase (since the company is busy engaging in empire building), and so the only return to the shareholder will be in the form of capital appreciation. In the case of empire builders, it is difficult to rely on capital appreciate as the sole return because the investor must be confident in the company's ability to successfully operate in its core area (in this case, electrical servicing) and the unrelated empire areas (in this case, private equity and start-up investments - areas the company had no expertise in!).


The lesson is that it is important to understand who you are investing alongside. The presence of a majority shareholder skews the power structure and incentives for everyone involved.


Talk to Frank about IESC


Author Disclosure: No position.


This article was written by Frank Voisin. If you enjoyed this article, please consider subscribing to my feed here.


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Tofutti Brands Inc. (TOF) - Excessive Executive Compensation

It never ceases to amaze me how often I come across small companies with executives who are paid excessive amounts for mediocre results. Almost invariably, these executives own a large (often majority) portion of the company, and so a potential investor must recognize that these levels of compensation will almost certainly persist. Potential catalysts for unlocking value are consequently minimized, so it is important for value investors to consider whether these company are value traps.

Consider Tofutti Brands Inc. (AMEX:TOF), a producer of nondairy food products for health conscious individuals and those who are lactose intolerant. The company earned $506,000 on sales of $18.6m in its most recent fiscal year, a ROE of 12%. The company paid its CEO and CFO a combined $1,086,000, more than twice the company's earnings and nearly 6% of revenues. Even worse is the fact that the CEO's salary and bonus are clearly not linked to the company's performance, as his total compensation package was steady for 2007 and 2008, despite earnings declining by 50%. It is easy to see where a potential acquiror could recognize cost synergies, as the elimination of these two compensation packages could immediately triple the company's earnings, making the current market cap seem like a bargain. Obviously, on a stand-alone basis the elimination of these two roles could not occur, however more reasonable compensation packages could easily double the company's earnings, leading to a P/E of less than 10.

Unfortunately, it is unlikely that value will be unlocked anytime soon, as the CEO and CFO together personally own 55% of the company. I consider this to be tantamount to half the shareholders receiving a dividend at the expense of the other half, and I am staying away.

Talk to Frank about Excessive Executive Compensation

Author Disclosure: No Position.

This article was written by Frank Voisin. If you enjoyed this article, please consider subscribing to my feed here.


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Market Regulations Reducing Productivity

As recently as three or four decades ago, companies in the US were wary of buying back their own shares because this could be considered illegal price manipulation. In 1982, the SEC enacted a rule that gives companies repurchasing shares safe harbour from prosecution for price manipulation, and this has been a major contributor to the growth of buybacks. But regulations restricting the flow of capital continue to hamper the productive flow of capital, as the following are among the conditions for safe harbour protection, as set forth by the SEC in Rule 10b-18:

- No repurchase is made at a price exceeding the highest current independent bid
price or the last independent sale price, whichever is higher.
- Non-block repurchase volume does not exceed 25% of the average daily trading volume for the preceding four calendar weeks

Clearly, these could be major deterrents for small companies looking to repurchase shares. Fortunately, these are not requirements; they only protect the company from charges of price manipulation. Still, these conditions likely deter many small companies from using this option for returning cash to shareholders.

Furthermore, many of the large companies listed on US exchanges are also listed on exchanges in other countries. The regulations enforcing buybacks in most other countries are much more restrictive, and therefore the US issue can suffer as a result.

For example, consider Research In Motion, a company previously discussed as a potential value purchase. RIM is listed on both Canadian and US exchanges. As its stock fell to the $40 range in the summer, management was furiously buying back shares, but had to stop too soon: Canadian-listed companies can only buy back 10% of their shares on the open market in a year. As RIM's shares recovered to $60, shareholders were not rewarded from bargain buybacks as much as they should have been; RIM now sits on $2.5 billion of cash, but management is handcuffed from buying back any more shares until July of 2011!

This issue also came up a few months ago as the dual-listed (in both Canada and the US) Quest Capital was prevented from buying back shares when it traded at a large discount to its book value, which was made up of mostly current assets. While Quest's price did eventually trade up to the company's book value, the per-share book value (and therefore, the subsequent price appreciation) would have been higher had management been allowed to buy back more shares than the regulations stipulated.

For a table outlining the buyback restrictions imposed by various countries on their exchange-listed stocks, see Table 1 at the bottom of the following paper, Survey On Open Market Purchase Regulations.

Governments around the world currently lament the large cash accounts carried on corporate balance sheets, forcing governments to spend and/or print money to keep capital flowing. At the same time, however, government regulations are keeping corporations from buying back shares, which would send cash to more productive uses and reduce the onus on governments to stabilize capital markets.

Disclosure: Author has a long position in shares of RIMM

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.


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Parlux Fragrances, Inc (PARL)

Rather than focusing on the upside, value investors are well advised to look first to the potential downside of an investment. Only upon concluding that the possibility of a permanent loss of capital is small should the focus shift. Consider Parlux Fragrances, Inc (NASDAQ:PARL), a designer, manufacturer and distributor of celebrity fragrances. PARL is a company that has been a favourite of value investors for quite some time and for good reason - it has persistently traded well below its NCAV for more than two years. The stock has had quite a run-up over the last three months, gaining 45%, but it still trades well below its NCAV. Does it still make a good investment? Let's first look at the downside potential.

Generally, a company's NCAV is a reasonable price for its minimum liquidation value, since it ignores intangibles that are not included in current assets, and usually the value of the Net PP&E will more than offset any losses on inventory liquidation and A/R defaults. In PARL's case there are a few red flags. First, its A/R balance has been increasing, and it appears to be due to its largest client, Perfumania (NASDAQ:PERF). PERF's A/R balance grew 70% this past quarter, from $10.5m to $17.7m. PERF's own operations appear to be in jeopardy, with sales and earnings in decline along with CFO (I imagine this would be a difficult thing to do when you are barely paying suppliers!). Even worse, the company is making no allowance for credit loss from its A/R balance with PERF. Let's assume for our worst-case scenario that PERF goes bankrupt and none of these receivables are collected upon (an unlikely scenario, given that PERF's debt balance is relatively low and the liquidation of its assets would hopefully cover those debts with something left over for trade creditors). If that is the case, PARL's revenues will immediately decline by approximately 25% (PERF is its largest customer) and $17.7m of its A/R would be wiped out. With PARL only marginally profitable as it is, a reduction in revenues of this level would easily lead to losses. Let's further assume for our worst case scenario that PARL is no longer a going concern (not outside the realm of possibility). In this situation, we look to PARL's adjusted liquidation value, and we see that the company would still have NCAV of approximately $2.69 (I also made an adjustment of a 50% loss on the inventory, which may be generous). This is essentially where the stock has been trading recently, so we see that in the absolute worst case scenario - liquidation - the company should be worth approximately what it is trading at today.

Now that we recognize there is little reason for the company's liquidation value to decline (after all, the company is profitable and has been growing revenues this year), we can consider the company's earnings power. Unfortunately, from a look through the company's recent SEC filings, we see that there are several reasons for ignoring EPV simply because it is not possible to accurately assess its future earnings. First, as already mentioned, the company is highly reliant on two clients - Perfumania and Macy's - which together account for nearly 50% of its revenues. As discussed in past posts, relying on past earnings to project future earnings in a situation where the loss of a single client would have massive effects is sheer speculative folly. Especially so in a situation where at least one of those major clients is performing poorly. Second, PARL is extremely reliant on certain brands it carries. It used to be highly reliant on the Guess and Paris Hilton fragrances, until Guess decided not to renew its contract, causing a 28% drop in revenues last year. Now, the company is reliant on its Paris Hilton branded products for 68% of its sales. Would you invest in a company that derives 2/3 of its revenues from the public's fickle fascination with a specific celebrity?

The end result is that the company is trading at a fair price relative to its adjusted NCAV, and that any expectation of growth beyond this amounts to speculation as to the improving fortunes of PARL, PERF and Paris Hilton together. I'll save my treble bets for the horses and wait for PARL to once again trade for a fraction of its adjusted NCAV.

Talk to Frank about PARL

Author Disclosure: No position.

This article was written by Frank Voisin. If you enjoyed this article, please consider subscribing to my feed here.


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Stock Analysis: Cincinnati Financial Corp. (CINF)

Linked here is a detailed quantitative analysis of Cincinnati Financial Corp. (CINF). Below are some highlights from the above linked analysis:

Company Description: Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.

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

CINF is trading at a discount to 2.) and 4.) above. The stock is trading at a 12.5% discount to its calculated fair value of $36.34. CINF 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:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

CINF 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. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CINF earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1954 and has increased its dividend payments for 50 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

CINF earned a Star in this section for its NPV MMA Diff. of the $618. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as CINF has. The stock's current yield of 5.% exceeds the 3.4% estimated 20-year average MMA rate.

Memberships and Peers: CINF is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Allstate Corporation (ALL) with a 2.6% yield, The Chubb Corporation (CB) with a 2.5% yield and The Travelers Companies, Inc. (TRV) with a 2.6% yield.

Conclusion: CINF 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 CINF as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $33.93 before CINF's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 50 years of consecutive dividend increases. At that price the stock would yield 4.69%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 0.2%. This dividend growth rate is below the 1.0% used in this analysis, thus providing a margin of safety. CINF has a risk rating of 1.25 which classifies it as a low risk stock.

CINF was founded by independent insurance agents in order to better service their needs by providing them preferential treatment when picking an underwriter. The company primarily sells commercial property-casualty insurance with a smaller personal lines exposure marketed through a select group of about 1,100 independent insurance agencies. Like most financial services companies, CINF has seen its share of struggles. Back in December 2009, CINF's Free Cash Flow payout was at 78%. Since then, the company has worked its FCF payout down to its present level of 47%. The company is more heavily exposed to equity risk than its peers; however management is taking steps to re-balance its investments. I will continue to add to my position in CINF when it is trading below my $36.34 buy price, and 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.

Full Disclosure: At the time of this writing, I was long in CINF (2.0% of my Income Portfolio). See a list of all my income holdings here.

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Weekend Reading Links - December 19, 2010

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 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.


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