Thursday, November 28, 2013

Monday, November 25, 2013

Dividend Stocks hitting 52 Week Lows on a Day When the Market Inched to New All-time Highs

The Dow Jones Industrial average inched up to hit all-time highs today. Most components of the Dow are beyond fully valued. The neighborhood I live to live in are where quality stocks are within 10% of their yearly lows. I'm an anti-momentum investor who is always looking for a bargain where the market has irrationally and temporarily driven prices down. Looking at today's 52-week low list, I see some possible opportunities for the dividend investor:

Exelon - is an electric utility in the eastern and mid-western US. It is a low quality utility that has a poor history of enhancing shareholder value. The goal of management seems to be enrich themselves first, then worry about the shareholders later. Not the kind of stock a dividend investor wants to own.

CenturyLink is the third largest phone company in the US, trailing only Verizon and AT&T. CenturyLink was built from the mergers of a number of smaller telephone companies, such as Qwest and Embarq. Unless you're one of the big two, the telephone business can be challenging. CenturyLink cut it's dividend earlier in the year to use the money to pay down its hefty debt load. It is not outside the realm of possibilities that another dividend cut lies in the future. This is a marginal holding in my book that might be worth an investment were it to dip to the high $20s.

HCP Inc. is one of the premier health care REITS. This is the sweet spot of the REIT world with typically long leases and a stable tenant, hence the premium valuations of many of these companies. HCP has paid increasing dividends for 28 straight years, and is rated BBB+ by S&P. HCP has $22B in assets under management in the areas of senior housing, post-acute skilled nursing, life sciences, medical offices, and hospitals. This is a quality REIT that I'd love to pick up at even cheaper prices.

Health Care REIT is another solid health care REIT that owns 1183 properties consisting of senior housing, post-acute skilled nursing, hospitals, medical offices and life science buildings in 43 states, the UK and Canada. HCN pays out about 78% of FFO as dividends. Investors can expect modest dividend growth over the years along with modest FFO appreciation. Again, this is a REIT that is beginning to dip into the upper range of what I would consider an attractive price.

Ventas is also one of the premier health care REITS in the country. The company owns over 1470 separate properties in the areas of senior housing, skilled nursing facilities, hospitals and medical office buildings. With a market cap of around $18B, Ventas' high growth days may be behind it, but there is plenty of room for dividend growth, and share price appreciation at a more modest pace in line with a company of this size. I'd love to pick up a high quality name list Ventas at a few bucks cheaper than today and if the downdrafts in the REIT world continue I may get that opportunity.

AvalonBay Communities is an apartment REIT catering to upper end clientele. It seems to be reasonably well-run and has a premium portfolio of apartment building. But as an apartment REIT, it tends to have primarily short term leases with a lot of tenant turnover, leading to choppy, uneven earnings. For these reasons, and being a long-term shareholder, I would rarely consider investing in an apartment REIT, and will pass on this opportunity.

NameTickerCurrent PriceYieldBuy Price
HCP Inc.HCP$37.705.57%$36.50
Health Care REITHCN$57.335.34%$55.00
AvalonBay CommunitiesAVB$116.863.58%Pass

Sunday, November 24, 2013

Going Where Most Investors Fear to Tread: O and ARCP.

This past week I stepped to buy more shares of two monthly dividend paying stocks that were already in the portfolio-- Realty Income and American Realty Capital Properties, two of the largest triple-net REITS in the country. I bought 20 shares of O at an average price of $38.75 and 40 shares of ARCP for $12.95.

In a market that is definitely frothy, with the normal dividend stocks that most dividend investors like being more than fully valued, REITS have been getting pounded, with many in negative territory for the year. Only time will tell if these are bargain prices, or if the stocks will go lower, but to the long term dividend investor it doesn't really matter. And as a dividend investor, you've got to love the accelerated compounding of monthly dividends.

Realty Income is considered a blue chip REIT with a BBB+ credit rating that has a consistent history of slowly raising it's dividend year after year. Don't expect any large moves from O, but do expect a slow, steady increase in dividends and share price over the years. O currently yields approximately 5.6%, and after its mega-acquisition of ARCT has 3,866 properties in 49 states and Puerto Rico. it's top 5 tenants are Fed-Ex, Walgreens, Family Dollar Stores, LA Fitness, and AMC Theaters, with no single tenant accounting for more than 5.1% of total rent. It's occupancy rates have never fallen below 96%. 2014 FFO is forecast to be between $2.53 to $2.58.

ARCP does not have a long history of consistency like Realty Income. ARCP went public two years ago with a portfolio of 63 properties and just two tenants. ARCP has been on an acquisition binge since going public, with it's most recent merger with Cap-lease (LSE) just consummated. The proposed merger with Cole Real Estate Investments (COLE) will create the largest net-lease REIT in the US with an enterprise value of $21.5B. Post-merger, ARCP is forecasting a dividend of $1 per share. FFO earnings guidance for 2014 is in the $1.13 to $1.19 range. Nick Schorsch's aggressive acquisition strategy may pay off for investors in the long run.

If lower prices present themselves on either of these stocks, I'll use the opportunity to nibble away.

Tuesday, November 12, 2013

Is Old Tech Right for Dividend Investors

To me, technology stocks tend to be the ultimate for fad, momentum and market timer investors of all types, and not the usual shopping ground for value or dividend investors. However, old technology may be an exception to the rule. These companies have moved from their glamor growth days of adolescence to become solid middle-aged citizens making slow and steady progress. As a result, their PEs have shrunk back into value territory and their hoards of cash are now being deployed on dividends and share buybacks, something that would never even have been contemplated by these companies 10 or 15 years ago. The amount of foolish and expensive acquisitions has also slowed down now that they can no longer use an inflated stock price to pay eye-popping numbers for companies with little to no sales. Growth has slowed as well, and deflated PEs, but these companies still generate massive amounts of free cash flow.
Before I launch into my discussion and in the spirit of full disclosure, I work in the IT field and have numerous personal experiences with these companies. I’ll try not to let these experiences influence my opinions unduly, but it is hard not to form an opinion about a given company’s employees.

Microsoft is the tech company everyone loves to hate. It seems that Microsoft can do nothing right if you read the trade rags. I have a very different opinion. Microsoft has clearly been very slow in anticipating technology trends, and has been playing catch-up to its more nimble peers. You can’t argue that, whether it is search, online email, game consoles, operating systems….. they have been slow on the draw. They have also grossly overpaid for acquisitions and been forced to write down some of these investments. But unlike much of the tech press, I’d argue that Steve Balmer has actually positioned the company pretty well for the future. Windows 8.1 is actually a good operating system that is configurable enough to hide some of its most annoying features. The Surface 2 is a wonderful small form multi-purpose PC that corrects many of the short-comings of the 1st generation Surface. Office is under threat from Google Docs and LibreOffice for basic functionality, but continues to be a cash cow for the company. The Windows phone is a low cost alternative to the iPhone that, in my opinion, provides a better user interface than Android and will continue to chip away market share. Azure hosting services and SharePoint are both doing extremely well, while Bing and Xbox are lagging. Their pending acquisition of Nokia continues their metamorphosis into an Apple-like company that produces both hardware and software. I’ll add one last comment that their sales people are very easy to work with and knowledgeable about the company’s products. At $37 Microsoft is a little rich for my blood, and would prefer to pick it up under $34. I view Microsoft as a steady-eddy kind of stock in the tech sector.

Hewlett-Packard is a company that is in deep trouble and deservedly sells at a bargain price. They are on the wrong end of just about every technology trend and in their desperation have made foolish acquisition after foolish acquisition looking for a quick fix to their problems. Printers are the crown jewel or their operation, and selling printer ink refills is a very profitable business, but even their printer business is declining. In their recent quarterly report, the only sector in their business portfolio that didn’t decline was software with a 1% increase in revenue. Whether Meg Whitman can turn this company around remains to be seen, but she has at least but a stop to their streak of ridiculously overpriced acquisitions and directed access cash to stock buybacks instead. I don’t view HP as a long-term hold kind of stock, because I think their decline is almost inevitable, but they could make an interesting turnaround play for short-term money. Their sales force in my experience was inept and uninformed about their own products, and their service was spotty at best. There is not enough of a margin of safety for me to buy this low-quality stock at these prices, and I certain would not consider HP to be type of stock a dividend investor would want to hold for decades. It was a turnaround play when it hit the mid to low teens. HP isn't going out of business tomorrow, but I would think of buying unless it drifts back into the low twenties, and only then as a short-term speculation.

Oracle provides database products and services as well as a number of customizable packaged business solutions built on top of their database engine. They also sell Unix/Linux hardware through their Sun subsidiary. As a customer, the oracle database engine is a first rate offering, but Oracle as a company is truly a pain-in-the-ass to work with. Most other customers I’ve talked feel the same way, and regret their decisions to buy Oracle’s packaged business solutions. The typical customer spends a small fortune getting their business solution implemented (much more than their ever would have guessed), but are unable to switch to a different product because the costs to switch are almost as high as the costs to implement. Oracle attempts to nickel and dime their customers at every turn. I refuse to do business with them and won’t buy their stock.

Apple is still a tech darling though their stock price has come back down to earth. Apple is known for producing high-quality, but expensive products from the iPod to the iPad to the iPhone and PCs. I won’t buy their products because I can find cheaper alternatives that satisfy my needs, but that doesn’t mean I don’t admire the company. The concerns with Apple are the dependency on a few key products that if they fall out of fashion or get leapfrogged by another company could have a devastating impact. The other problem is what to do with the hoard of cash that is not benefiting the shareholders in any way sitting in the bank (oh, to have those kind of problems). Carl Icahn is trying to force Apple’s management to use this cash in a shareholder friendly way. Apple is a tech company to buy at the right price, but investors need to keep a close eye on the company. Things could turn bad for them very quickly if they are out-innovated by another company.

Cisco still owns the network. They also now own IP-phones and are entering the blade server market. Gone are the days where they paid billions of dollars for companies with no sales. Like the IBM of old, no one ever gets fired for buying Cisco. Cisco has a reputation for nickel and diming their customers, but to a lesser degree than Oracle. Cisco has become much more shareholder friendly and is a buy with a yield above 3%.

Intel was the dominant chip maker of the PC-era. They missed the boat on mobile and notepads, and are now trying to catch up and gain market share in those growing markets. Investing in Intel is a bet that their scientists can close the gap with competitors like Qualcomm. In the meantime, they have the free cash flow to support the necessary R&D investment and capital spending require to refocus their operations to devices other than the PC.

NameTickerCurrent PriceYieldBuy Price

A word of caution on investing with technology companies. It is rare that any of them can stand the test of time and the rapid pace of technology change. Investors need to closely monitor these companies and technology trends and be ready to pull the plug when it is obvious that a company has lost its technological edge, least they get stuck slowly dying company like Blackberry.

Monday, November 11, 2013

The Warren Buffett Way

Some commentary on CNBC by Robert Hagstrom, author of "The Warren Buffett Way," on Buffett's recent investments and whether the investment style is evolving over time. The investment thesis for IBM, in my opinion, is modest growth coupled with a heavy share repurchase program = an ever increasing ownership interest in a company with a shrinking share base and increasing dividends = above average returns for the investor.

Friday, November 8, 2013

REITS: An Unloved Sector for Dividend Investors

On Friday, a day when the markets were up strongly, most REITS suffered 2 – 3% losses. This is a sector that has gone from market darling to dog in less than 6 months, with many stocks down 20% or more from their highs for the year. But as value and dividend investors know: where there's heavy selling, there's potential opportunity.

With low interest rates, and a recovering real estate market, many REITS have been on a buying binge this past year that initially excited the markets and pushed up prices, but now the hangover is setting in, leaving some possible bargains to nibble away at.

The sectors I currently like in REIT-dom are health care and triple-net. With the aging of America, I expect hospitals, doctor offices, and senior care facilities to do well, and this area tends to be recession resistant and hasn't suffered from overbuilding that has hurt other areas. Triple-net REITS have historically more consistent performers than say office buildings and provided greater diversity and less tenant risk. Most triple-net REITS maintained their dividends through the most recent financial while retail and office REITS were forced to cut their dividends.

Some REITS on my watch list include:

NameTickerCurrent PriceP/FFOYieldBuy Price
Omega HealthcareOHI$31.4512.56.10%$30.00
Healthcare Trust of AmericaHTA$10.7917.95.33%$10.50
Realty IncomeO$40.0617.05.45%$39.00
American Realty Capital PropertiesARCP$12.5814.97.24%$12.50
W. P. CareyWPC$64.1415.65.36%$62.00
Medical Properties TrustMPW$12.8112.86.25%$12.50

Investors should be aware that REITS are highly leveraged investment vehicles and because they are required by law to payout a large percentage of their earnings as dividend, they usually raise money for investments through borrowing and by issuing new common or preferred shares. Quality of management is key to whether REITS will be able to grow their dividends and share price over time.

Monday, November 4, 2013

The Ten Commandments of Government

I Generally speaking, government always grows -- it never shrinks -- whether times are good or bad.

II In each area it purports to "assist", government attempts to replace individual decision-making with central planning.

III In order to implement its grand central plans and solidify its power, government must take from one citizen to give to another; this is, in effect, lawful theft.

IV No matter how many times central planning fails, the self-appointed masterminds in government assert that "this time is different" and that with only a few tweaks and more money, their delusional plans will succeed.

V Because it uses funds confiscated from taxpayers, self-restraint is no obstacle to government's ambitions.

VI Its fundamental misunderstanding of human nature notwithstanding, government must claim to grant "rights", which require it steal the labors of one citizen to give to another (such as food, shelter, employment, and health care).

VII No matter how widespread the harm it causes, government will never provide an honest and historical accounting -- a report card -- of its failures.

VIII As more individuals and families are harmed by the failures of central planning, government must find suitable scapegoats, must lie to do so, and therefore must also repress dissent.

IX In order to build its network of redistribution and grow a culture of dependency on its services, government must inevitably undermine the family unit, religion, and the notion of God-given rights in order to cow, bribe, or intimidate its citizens.

X As government grows ever more powerful, it must also become increasingly oppressive through compulsion and force. To do otherwise would mean government must shrink, and this it cannot do.

Via Zerohedge

Sunday, November 3, 2013

Two Unloved Stocks for Dividend Investors-- BP and DLR

The hardest and most profitable thing to do in investing is go against investor sentiment and buy those companies that are solid but hated by most investors. In a market that many argue is getting frothy, two opportunities stand out-- BP and Digital Realty.

BP was one of the most hated and shunned stocks after the Gulf Oil spill. This was perhaps the ideal time to buy for those with really strong stomachs, but the average investor rarely has the nerve. Now that several years have passed since the disaster, BP is beginning to regain its footing and return to normal exploration activities with a previously missing emphasis on safety. Compares to its peers, such as Exxon Mobile at 2.8%, BP yields approximately 4.9% and is selling for 8-9 times the estimate of 2014 earnings. Investors have not fared well with BP over the past decade, which saw the stock reach a high of $80 in 2007 and a low of $25 after the Deep Sea Horizon spill. However the risk/reward ration seems to be turning in favor of BP shareholders, who will be paid a handsome dividend as the marketplace slowly regains confidence in BP. As an added kicker, BP has already repurchased $3.3 billion worth of shares over the past quarter as part of its $8 billion share repurchase program. As such BP retired 2.3% of its shares outstanding over the quarter. This pace cannot continue, but shareholder friendly uses of cash through dividends and buybacks are always a well alternative to management wasting cash overpaying for merger and acquisitions.

Digital Realty is a real estate investment trust that specializes in acquiring and leasing data center space to companies who don't think it is economical to build and run data centers themselves. DLR reported earnings last week and disappointed with marketplace with a miss and downward earning guidance that saw its stock punished by a 20% drop in price. Funds From Operations (or FFO) came in at $147.4 million ($1.10 per share), down slightly from $148.9 million ($1.13 per share) in the year-ago quarter. The company said the third-quarter results included a non-cash, straight-line rent expense adjustment of 7 cents per share related to the company's leasehold interest at 111 Eighth Ave. in New York City. Analysts expectations were $1.20 a share for the quarter. DLR guided down future FFO to $4.60-$4.62 for 2013, down from previous estimates of $4.73-$4.82. A 20% drop in market seems like overkill for the miss and downward guidance. Though confidence has been shaken in DLR management, the stock still represents a bargain compared to other REITS at a yield of 6.5% and a P/FFO at around 10. I'll ride the 6.5% dividend as I wait for the stock to recovery and FFO growth to resume. The annual dividend of $3.12 leaves some room growth on a projected FFO of $4.60. At some point in the future, the market will correct its overreaction.

Quote of the Day: Milton and Rose Friedman

As the DC city council considers raising the minimum wage to help raise the standard of living of the working class people in DC to punish the low skill workers in DC and reward the unions, it is helpful to revisit the impact of wages raised by legislative fiat on those who need jobs the most to develop marketable skills.

Another set of government measures enforcing wage rates are minimum wage laws. These laws are defended as a way to help low-income people. In fact, they hurt low-income people. The source of pressure for them is demonstrated by the people who testify before Congress in favor of a higher minimum wage. They are not representatives of the poor people. They are mostly representatives of organized labor, of the AFL-CIO and other labor organizations. No member of their unions works for a wage anywhere close to the legal minimum. Despite all the rhetoric about helping the poor, they favor an ever higher minimum wage as a way to protect the members of their unions from competition.

The minimum wage law requires employers to discriminate against persons with low skills. No one describes it that way, but that is in fact what it is. Take a poorly educated teenager with little skill whose services are worth, say, only $2.00 an hour. He or she might be eager to work for that wage in order to acquire greater skills that would permit a better job. The law says that such a person may be hired only if the employer is willing to pay him or her (in 1979) $2.90 an hour. Unless an employer is willing to add 90 cents in charity to the $2.00 that the person’s services are worth, the teenager will not be employed. It has always been a mystery to us why a young person is better off unemployed from a job that would pay $2.90 an hour than employed at a job that does pay $2.00 an hour.

The high rate of unemployment among teenagers, and especially black teenagers, is both a scandal and a serious source of social unrest. Yet it is largely a result of minimum wage laws.

~ Milton and Rose Friedman, Free to Choose

Picture of the Day: Secretary Whatever

No commentary required.

The Washington Redskins Name Controversy-- Where Does it End?

Much noise has been made recently from the politically correct media over the name of the Washington Redskins. Many people consider the term Redskins to be an offensive racial slur in spite on the teams long history using the name, and George Preston Marshal's intention to honor the team's first coach in Washington, Lone Star Dietz who claimed to be part Sioux. My intention here is not to argue over the merits of the Redskin name, though many younger Native Americans refer to themselves as 'Skins, but to explore the question of where does the political correctness end for the NFL. Here's a list of teams who other groups would find offensive:

  1. Kansas City Chiefs - same issues as the Redskins.  Chiefs is a derogatory term for Native Americans.
  2. New Orleans Saints - the atheists of American who have fought hard to remove God from the classrooms, courthouses and coinage should be fighting equally hard over this name.   Besides, anyone who has been to New Orleans knows it is less than a Saintly city.
  3. New York Giants - offensive to all the vertically challenged people in the world.
  4. Green Bay Packers - anyone with an urban dictionary knows why this is offensive.
  5. Minnesota Vikings - any cultures historically victimized by Viking raids will be offended by this name.
  6. Dallas Cowboys - Native Americans, cowgirls and other non-cowboys should take exception to this.
  7. Tampa Buccaneers - any cultures victimized by pirates should take offense.
  8. Cleveland Browns - another racially offensive term.
  9. New England Patriots - too similar to the term Tea Party Patriots, which every thinking person should find offensive.
  10. Tennessee Titans - same problem as the NY Giants.
  11. Buffalo Bills - another name that should be offensive to Native Americans.
  12. San Diego Chargers -  offensive to all people who can't manage money, from shopaholics to DC politicians.
  13. Oakland Raiders - offensive to all cultures who have been victimized by raiders, including Native Americans.
I call on Roger Goodell, NFL commissioner, to yield to the political pressure and rename all of these teams in addition to the Redskins to something less offensive.

Friday, November 1, 2013

The Healthcare Mash

The Healthcare Mash

A Ghoulish and Greedy Uncle Sam