BRK.B

Avoid Dividend Double Whammies By Using the Dividend Cushion!

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By Brian Nelson, CFA I think a lot of investors sell themselves short. Of course you want a strong and growing dividend, but analysis shouldn’t stop there. One of the most important things you could ever do is evaluate just how strong that dividend truly is via the Dividend Cushion ratio, a metric that measures a company’s dividend coverage via future free cash flow generation with consideration of its balance sheet health. For example, how valuable would it have been to know that Kinder Morgan (KMI), ConocoPhillips (COP), and BHP Billiton (BHP) were going to cut their dividends…in advance of them doing so? Our membership knew these cuts were probable long before anyone else because they paid attention to each … Read more

You Can Change Your Mind!

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By Brian Nelson, CFA It looks like the energy master limited partnership (AMLP, AMZ) space has been catching a bid the past few days. It’s so important, however, to keep things in perspective, and the best way to do so is to look at an intermediate-term chart of the group, which remains under considerable stress, “Bye Bye Energy MLPs, Part II (Jan 2016)” The market wants some of the most beaten down equities to rally, including Energy Transfer Equity (ETE) and Energy Transfer Partners (ETP), which have fallen devastatingly from their respective peaks of $35 and near-$70 per share, respectively. If you’re not looking at charts, you’re leaving a lot of free information on the table. Energy master limited partnerships, … Read more

Railroad Merger Talks

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Canadian Pacific (CP) is back on the hunt for consolidation. After regulators shot down a proposed deal for CSX (CSX) last year, the firm is reportedly in preliminary talks with Norfolk Southern (NSC) concerning a merger that could be worth more than $24 billion. The fact that there are so few railroad operators in the US suggests that a deal will be very difficult to get past regulators, and if a deal does in fact get done, it will likely be the last of its size in the industry. The two companies have complimentary cargo markets and little geographical overlap, in our birds’ eye view of their respective route networks. Norfolk Southern generates 22% of its revenue in intermodal shipments, … Read more

Surveying the Aerospace Arena

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The reasons for liking commercial aerospace, or constituents involved in the production of commercial aircraft, are many and varied. The liberalization of air travel between global point-to-point markets has facilitated expansion in not only leisure travel but also business travel between countries. The advent of the low-cost-carrier model in the likes of Southwest (LUV) and others just like it around the globe has made air travel affordable to those that it once had “priced out.” The growing middle class in developing countries has paved the foundation for continued passenger growth, something that should be expected for decades to come. The collapse in jet fuel costs has made the global airline industry, or those involved in the transporting of people from … Read more

Video: Are Economic Moats Priced Into Stock Prices? — You Bet They Are

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President of Equity Research Brian Nelson debunks the myth that the economic moat is not included in stock prices. Length: ~8 minutes. Tickerized for firms in the Morningstar Wide Moat ETF (MOAT), as of October 14, 2015. Brian Nelson, CFA: This is Brian Nelson from Valuentum Securities. I wanted to talk about an important concept and answer an important question. Is Warren Buffet’s economic moat priced into stock prices? Before I answer that question, I think we need to define a couple things. Return on invested capital is a measure of a business’ performance. It’s calculated as earnings before interest divided by net new investment, which is a measure of return on new invested capital. So what is the return the … Read more

Asset Managers: Capital Retention In the Name of Capital Preservation

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In recent years, the operating theme for many asset managers has shifted to capital preservation, particularly in their efforts to serve the large and growing number of baby boomers and commercial clients managing pensions. This is a reasonably expected change when considering that many investors lost a significant amount of capital during the Financial Crisis, many of which are still recovering. The ramifications of the credit crunch have led to requirements for increased transparency and regulatory compliance, adding structural costs to the asset-management business model, but this is only one side of the coin. The volume of investable assets is set to increase to a whopping $102 trillion by 2020 from ~$64 trillion today, fueled by an increase in the … Read more

5 High-Yielding Strong Dividend Growth Stocks for the Long Haul

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We’ve never been more concerned about the financial health of dividend growth investors. Perhaps we’re partly to blame for some of the excitement surrounding the strategy that has taken many corners of the web by storm, but we continue to believe it is important for investors to strive to understand the strategy’s fundamental fallacies, which can’t be talked about enough as a means of helping investors understand key risks.   For those new to dividend growth investing, part of the strategy centers on identifying stocks that pay dividends that are poised to increase over the long haul, generating in time a yield (a payout) that is a) sufficient on the cost and b) sufficient to generate an adequate income in retirement … Read more

The “Fully Invested” Argument May Only Make Sense…

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…if stock market indices always go up over the long haul. Speaking the obvious… We often receive questions from new members about why we have such large (30%+) cash positions in both newsletter portfolios. Some believe it to be a mistake because they have been taught that “timing the market” and/or assessing overall market valuations is a fool’s errand. For most all investors, it is generally accepted that staying “fully-invested” is a good idea. But let’s take the recent example of Warren Buffett’s Berkshire Hathaway (BRK.A) buying Precision Castparts (PCP). The latter is certainly not a new company, having been around since the late 1940s, and Buffett has admittedly known about the metal bender for some time. So, then, why … Read more

Buffett Planning to Scoop Up a Valuentum Favorite

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We’re hearing that Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) is nearing a deal to buy one of our favorite commercial aerospace suppliers and former Best Ideas Newsletter holding Precision Castparts (PCP). We’ve always been fans of Precision Castparts and believe its management team is one of the best in all of the industrial sector. This was likely something that convinced the Oracle that Precision Castparts was right for the Berkshire portfolio. As we’ve yet to hear specific deal terms, we believe Berkshire can pay up to $34 billion in equity value, or ~$240 per share and still make this deal work from an economic-value standpoint. Precision Castparts’ shares closed at ~$194 each Friday. We expect aerospace suppliers to catch a … Read more

Torn on Procter & Gamble

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Image Source: Phil Manker When Procter & Gamble (PG) first reported its calendar fourth-quarter 2014 results in January, we came out on the stock suggesting investors need not panic. When we rolled the model forward (what this means), however, our team was left scratching our heads. We ended up cutting our fair value estimate on P&G’s shares to $74 from $84, and we felt we were even being generous to get to the mid-$70s with that estimate. We’re torn. We love the strength of Procter & Gamble’s core brands (especially Pampers, Tide, and Gillette), its dividend track record, and its robust free cash flow, but its valuation has become out of line – mostly due to a reset of its … Read more