Dividend Growth Points the Way to Prosperity
Monday July 28, 12:00 pm ET
In the midst of another earnings season, we are yet again reminded of the many ways to measure a company's recent success (or lack thereof). It's all about earnings, at least that's what's typically reported first.
I'm not trying to denigrate earnings as a metric, but the variety of methods used (basic EPS, diluted EPS, EPS from continuing operations, the list goes on), can be confusing to investors. Even the analysts don't always agree what the most appropriate measure is.
Beyond that, it is clear that earnings can lie -- and I'm not even referring to fraud, but rather legal methods company's can use to make the results look better, at least in the short term.
Dividends, however, don't lie. I do acknowledge however, that David Einhorn has made a compelling case that this may not be true in the case of Allied Capital , but that's another story.
Dividends must be paid in cash, and cannot be manipulated the way earnings can. What you see is what you get. A company cannot declare a $.25 dividend and pay out $.15, nor can it decide to pay it out in the form of excess inventory instead of cash.
The downside, however, is that companies that run into performance trouble can cut their dividend, or eliminate it altogether. In some of these cases, the punishment (i.e. a declining stock price) is severe, and it might have been better had the company never committed to a dividend policy in the first place.
With that as a backdrop, I am a big believer that dividend growth can be an excellent indicator of true company health, performance and a confident management team. This is not about yield, but rather rapid and perennial growth in what a company is willing to return to its shareholders.
In a way, this is self-policing as companies must keep their payout ratios low enough to allow for reinvested capital, and room for further growth.
The intent here is not to suggest this is the only way to truly measure company health or growth, but rather one method that can be applied to dividend-paying companies. We recently screened for dividend growers meeting the following criteria.
(As always, with any stock screen, further research on each individual company is paramount):
• Market cap between $500 million and $10 billion. (This is intended to identify smaller companies which might have room for further growth.)
• A payout ratio less than 30%. (Payout ratios that are too high are not sustainable, and may lead to dividend cuts or eliminations.)
• Total debt-to-equity less than 30%. (Too much debt can constrain a company's ability to pay dividends.)
• Consecutive increases in dividends for at least seven years. (This demonstrates both a strong track record, and management's intent.)
• Five-year dividend growth rate at least 10%. (This indicates rapid increases in dividends paid.)
• All industries except financials. (I am skittish on financials at this point.)
Stock picking is part science, part art, part luck, part tuition, and always uncertain - "not precisely knowing."
Because of these inherent subjective elements, success investing depends on understanding our emotional reactions to the market and its participants. Buried in these emotional reactions are both investment errors and investment strengths that remain mostly unconscious unless we devote substantial energy to unearthing them and then leveraging what we learn about ourselves into profitable decision-making
Investing is like gardening. You will reap what you sow if you stay the course through the harsh seasons
By CHRISTOPHER TAN
IT was Monday (yes, just two days ago) and I was really stressed. I wasam due for an article submission for this column but I hadve absolutely no idea what I was going to write. I mean, I have been writing for years now, what have I not written that you don't already know?
And as you know, there hasn't been much good news about the world economy and financial markets lately. Sub-prime blow-ups, rising oil prices, inflation fuelled by rising commodity prices, writing down of losses by banks and the latest - the collapse of IndyMac and the trouble fumes fanning at Fannie Mae and Freddie Mac, the ailing mortgage giants in the US.
How can I encourage you at this time of great difficulty? And then I remembered this story.
Chance was a man who had grown to middle age living in a solitary room in a rich man's mansion, bereft of contact with other human beings. He had two all-consuming interests: watching television and tending to the garden outside his room.
When the mansion's owner died, Chance wandered out on his first foray into the world. He was hit by the limousine of a powerful industrialist who was an adviser to the president.
When he was rushed to the industrialist's estate for medical care, he identified himself only as 'Chance the gardener'. In the confusion, his name quickly became 'Chauncey Gardiner'. When the president visited the industrialist, the recuperating Chance sat in on the meeting. The economy was slumping; America's blue-chip corporations were under stress; the stock market was crashing. Unexpectedly, Chance was asked for his advice.
Chance shrank. He stared at the carpet. Finally, he spoke: 'In a garden,' he said, 'growth has its season. There are spring and summer, but there are also fall and winter. And then spring and summer again. As long as the roots are not severed, all is well and all will be well.'
He slowly raised his eyes, and saw that the president seemed quietly pleased - indeed, delighted - by his response.
'I must admit, Mr. Gardiner, that is one of the most refreshing and optimistic statements I have heard in a very, very long time. Many of us forget that nature and society are one. Like nature, our economic system remains, in the long run, stable and rational, and that's why we must not fear to be at its mercy.... we welcome the inevitable seasons of nature, yet we are upset by the seasons of our economy! How foolish of us.'
That was a brief summary of the early chapters of Jerzy Kosinki's novel Being There, retold by John Bogle, the founder of Vanguard. A simple truth about nature and yet there is so much that we can learn from it: 'Growth has it season. There are spring and summer, but there are also fall and winter. And then spring and summer again. As long as the roots are not severed, all is well and all will be well.'
Do you believe in the resilience of the human race? We are after all the most powerful living things created by God. Do you believe in the sustenance of trade and enterprise? I am sure you will agree that we all have needs that can only be fully satisfied through products and services created and sold by corporations. If you believe, then our economic roots are not severed and all is well and all will be well. We have hope in the investments that we have made in these companies.
Yes, sometimes, it will be a more barren autumn, a colder winter. At other times, it may be a verdant spring or a hotter summer, but our economies will continue to grow, just like how it has grown in past decades (see Figure 1). We only need to believe that growth has its season and we must be prepared to ride out the seasons of life and stay invested in the long term.
In investing, know that time is your friend. Plant the seed of growth in the garden and in due season, you will reap what you sow. Impulse is your enemy, react to your fears and dig out the seeds before the season is over and you may never see the fruit.
Most importantly, stay the course. Let the uncertain years roll by, and face the future with faith. Do not let short-term fluctuations, fear, greed and news that have no meaning at all to your long term investing affect your judgment. The world markets too have their season but in the longer term will always grow, because their roots have remained strong and intact (see Figure 2).
This article is short, not because I have nothing more to write, but because I hope in its simplicity, it has given you the courage to remain invested and optimistic towards your dreams.
Let me end with our story's character, Chance's final words of wisdom:
'I know the garden very well. I have worked in it all my life.... Everything in it will grow strong in due course. And there is plenty of room in it for new trees and new flowers of all kinds. If you love your garden, you don't mind working in it, and waiting. Then in the proper season you will surely see it flourish.'
My stress is finally gone.
Christopher Tan is the CEO of Providend, Singapore's sole fee-only independent private wealth management firm.
With Crude oil hitting record high and CRUDE palm oil (CPO) futures prices on Bursa Malaysia Derivatives Bhd ended higher yesterday as crude oil price hit a record high of US$145 (US$1 = RM3.27) a barrel, dealers said. The high oil price was lending support to the global vegetable oil market, including palm oil, they said.
One of the dealers said that improved palm oil stocks and weak exports for the first 10 days of July held back gains as investors questioned when overseas orders would improve.
GAR looked interesting. Technically, GAR is well supported at 0.785 and hope it don't break on Monday due to bad market sentiment reacting to DOW.
Another important observation is that rate of fall in STI in sympathy with DOW has diminished and somewhat not quite coupled to DOW fall (See chart 1)
Stand Firm When Your Shares Take a Hit
Monday July 7, 1:00 pm ET
ByArne Alsin, RealMoney.com Contributor
This is Part 1 of a two-part article.
Get inside the mind of the average investor, and you're in for wild and crazy ride. Metaphors like "the glass is half-full" or "the glass is half-empty" don't apply -- they're too tame. When the glass is brimming to overflowing, investors see it as empty. And when the glass is empty, investors cradle it with care so they don't spill the contents.
The up-is-down, down-is-up mind-set of the typical investor is evident in this example: An investor figures that Whirlpool is worth $120 per share. (Note: My calculations indicate a higher value.) The investor pays $90 per share for the stock and happily imagines taking a $30 profit when the price eventually migrates to fair value. Then the investor watches the stock quote fall from $90 to $80 to $70, and then to $60. The price drop is proof, to this investor, that he made a mistake. So he sells the stock. It's a dumb move. If there is no long-term impairment to Whirlpool's value, it's dumb to sell the stock just because the price quote has dropped.
Investors make dumb moves in the stock market with regularity. It's not because of a lack of intelligence, a lack of effort or a lack of attention. The proximate cause of dumb moves is a lack of understanding. You can't play a game of strategy if you don't understand the game.
Here is a foundational formula for investing in the stock market. Investors suffer significant capital destruction when they act in contravention to this rule. Memorize it. Imprint it into your memory. It might prevent you from making a dumb move in the market.
Here's the short version: Absent a material change to the business, as price declines, risk declines, and your anticipated rate of return increases.
Here's the longer version, applied to the Whirlpool example above: Absent a material change to the business (there has been no impairment to Whirlpool's value), as price declines (the price drops from $90 to $60), risk declines (risk declines because the gap between price and value increases), and your anticipated rate of return increases (selling Whirlpool is dumb, because your capital increases 100% if you hold the stock from a $60 quote until you can get full value, or $120).
To understand the formula better, let's take it apart, piece by piece:
Absent a material change to the business...
When there is a material change to the business, sufficient to impair the underlying value, the formula does not apply. Here are a few examples of a material change: a permanent loss of market share, product obsolescence and a reduction of profit expectations over the long term.
The current imbroglio surrounding financial companies is a material change, and it requires a valuation adjustment. For example, owners of Citigroup , Lehman Brothers and Washington Mutual , among many others, have suffered equity dilution while, at the same, time, billions of dollars of assets have disappeared from their balance sheets.
What about the recession? Does a recession constitute a material change, sufficient to warrant a diminished business valuation? The answer is, generally, no. A cyclical pullback in the economy does not affect the long-term value of most businesses. That's because smart analysts already factor cyclical pullbacks into their valuation analysis.
The fact that Whirlpool is struggling with a cyclical decline in demand is no big surprise. Not only is the current cycle not a surprise, but skilled analysts will build at least one more difficult cycle into their model for the next 10 years.
As price declines...
If your neighbor offers you one-half of the value for your car, you'll probably laugh it off.
If a stranger parades into your family-owned business and offers you one-half of value, you might roll your eyes or shake your head. You might even be offended. That's because you see these offers for what they are: nonsense.
When it comes to stock quotes, though, otherwise rational, sentient beings take on a wild and crazy mind-set. If you are like most investors, after you pay $90 for Whirlpool stock, the stock quote suddenly carries great meaning for you. It can make your day or it can ruin your day. Even if you don't sell the stock when the price drops, you'll tell your spouse: "We've lost one-third of our money on Whirlpool."
Here's the reality: There is no difference between your neighbor's offer for your car, the stranger's offer for your family-owned business and Whirlpool's stock quote. Each is an offer for your property. Each is an offer you don't have to accept. The offers are not based on a careful appraisal of value. They're just offers.
After your neighbor's offer, you aren't going to say, "I lost one-half of my car value today." And after you hear the stranger's offer, you won't announce: "One-half of our family business value disappeared today."
Do you know why you will not say these things? Because they are not true. It would be a dumb to accept a one-half of value offer for your car and for your family business. A lousy offer is a lousy offer.
And that's all it is.
Look for part two of this column next week, when I'll complete the discussion of the rule above.
Keppel Corp wins US$405 mln Scorpion contract
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SINGAPORE - Singapore rig-builder Keppel Corp said on Monday that its unit Keppel FELS has won a contract from Norway's Scorpion Offshore to build a deepwater semi-submersible rig worth US$405 million.
Upon its completion in the fourth quarter of 2011, the rig will be chartered by Scorpion to Brazilian national oil company Petrobras for a period of six years, Keppel said in a statement. -- REUTERS
How the Rich Spend Their Time: Stressed by Robert Frank Friday, July 4, 2008 provided by
Leisure class gives way to workaholic elite scrambling to maintain their place in life
Being rich used to get you into the leisure class. Money meant freedom -- from work, money worries, household chores and screaming kids (via boarding school).
Now, however, the wealthy seem to be as besieged as ever. The leisure class has given way to what I call the workaholic wealthy -- an elite of BlackBerry-crazed, network-obsessed, peripatetic travelers who have to keep scrambling to maintain their place in life.
More from WSJ.com:
• How the Rich Would Fare Under Obama, McCain
• Private Jets Come Under Attack
• Rich Investors Dumped Real Estate in 2007
According to research by Daniel Kahneman, the Nobel Prize-winning behavioral economist, quoted in an article in the Washington Post, "being wealthy is often a powerful predictor that people spend less time doing pleasurable things and more time doing compulsory things and feeling stressed."
People who make less than $20,000 a year, for instance, spent more than a third of their time in passive leisure, like kicking back and watching TV. By contrast, those making more than $100,000 a year (I would call them affluent, not wealthy), spent less than a fifth of their time in passive leisure. "The richest people spent nearly twice as much time as the poorest people in leisure activities that were structured and often stressful -- shopping, child care and exercise."
In short, stereotypes about the leisure class no longer hold true. "In reality," Mr. Kahneman and his colleagues wrote in a paper they published in the journal Science, "they should think of spending a lot more time working and commuting and a lot less time engaged in passive leisure."
Definitions are key here. Personally, I wouldn't classify exercise as compulsory or stressful. And the true rich ($10 million or more), may be exceeding their less-wealthy peers in true indolence. But my experience suggests that the rich are as stressed and un-relaxed as the merely affluent.
Why? Globalization and competition are probably the big reasons. People with top jobs and businesses -- i.e., the wealthy -- have to work harder than ever to remain competitive. Big investors also have to work more in ever-more-complicated financial markets to maintain their dinosaur-size nest eggs. Add to that the increasing complexity of life at the top -- constant requests for money, overseeing wealth managers, lawyers and household staff -- and the good life becomes its own management job.
Maybe being rich isn't as relaxing as it seems.
* * *
Affluent Brits Want 'Memorable Meals'
One of the biggest trends in the high-end economy these days is "experience." Cars, boats, planes, homes and other traditional status goods have become commonplace for the Richistan crowd. What the wealthy really want today is a unique experience, such as a trip, a class and a conversation with top thinkers.
A new study by American Express of their U.K. Centurion card holders (read: titanium-toting superrich) found that "self-fulfillment and learning" is the second-most-important priority for high-end vacationers. Number one was "value for money."
It also found that 46% of the wealthy plan to spend more in 2008 on new learning experiences. That exceeded planned spending on technology products, home furnishings, charities and fashion.
Gastro luxury is a top subsector of the new experience economy: A whopping 85% of the Centurion card holders plan to travel abroad for a memorable meal. Memorable doesn't necessarily mean expensive: It could be the roasted duck breast at Arpege in Paris or the apricot-smoked duck from a beloved food stall in Beijing.
More than three-quarters of the card holders plan to hire a personal chef in the future, while a surprisingly high 40% plan to grow their own food and rear livestock. Billionaires rearing their own pigs: Now that's an experience.
Of course, Americans lean more toward basic bling than the Brits. But the same fondness for feeding the mind, body and spirit seems to be taking hold here. As Guy Salter, deputy chairman of British luxury-brands firm Walpole, says in the report, "We are seeing the growth in what could be termed a new aristocracy. Their emphasis on the home and family, on personal fulfillment and the environment are all testament to this new way of thinking."
* * *
Superyacht Market Remains Strong
A new Superyachting Index shows that the top end of the yachting market is still holding firm -- at least for now.
The index, which is compiled by the Luxury Institute and Camper & Nicholsons International -- the yacht broker and charter company -- found that new orders for yachts over 40 meters are up 18% in 2008. There were 254 new orders for yachts longer than 40 meters last year, up from 134 in 2005.
The report also puts into perspective the astounding growth rate over the past decade for jumbo yachts. In 1997, there were just 241 yachts of 24 meters or more under construction around the world. Last year, there were 916 such boats being built.
The average price for motor-yachts longer than 30 meters was $10.3 million in 2007. The average price for sailing yachts of the same length was $9 million (although, to the dismay of traditionalists, sailing yachts now make up a tiny fraction of the large yacht market).
Ironically, the biggest constraint to the industry's growth isn't the economy -- it's staffing. The report says that about 25,000 crewmembers are necessary for today's fleet of superyachts, but only about 15,000 currently work aboard yachts. Shortages of captains and engineers, it notes, are especially acute.
All of this sounds encouraging. And the superyacht market likely won't face the same crash it experienced in previous downturns, since it's so global. Just a decade ago, the vast majority of big boats were being purchased by Americans and Europeans. Now, Russian, Indian and Middle Eastern buyers are fueling the market.
Still, after talking with several yacht brokers about the market, I believe the market -- at least in the U.S. -- is poised for a slowdown. A year ago, buyers could order a new boat knowing that, in the worst case, they could flip it for a quick profit. Now they're more hesitant.
"With the American market especially, people are waiting for more certainty in financial markets before make a big decision," said Jonathan Beckett, CEO of Burgess.
Either way, The Wealth Report will be sure to check back with the Superyacht Index in a few months.
I am 61 yrs old uncle living in HDB heartland who has achieved financial independence @ 56 and retired @ 60 from full-time job as employee.
Single household income since 1995 with three children. Eldest son and daughter are now working and youngest son still in his 2nd year uni in SUTD.
I have been doing long-term investing and short-term trading in Singapore stock market only since Jan 2000 so I am that Panda or Koala in the investment world; but I am still surviving well in the wild.
I am now executing my Three Taps solution model to maintain sustainable retirement income for life till 2038.
Last updated: 3 Sep 2017
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