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Published in: on December 28, 2011 at 10:25 am  Leave a Comment  

First look at Transocean (RIG)

Transocean is an offshore drilling company. Its fleet of 135 vessels includes drill ships, semisubmersibles, and jackups, which operate in technically demanding environments such as Brazil, Nigeria, and the North Sea. It contracts primarily with some of the largest global exploration and production companies.

DIVIDEND RECORD – Transocean paid an adjusted $0.03 quarterly dividend from 1993 – 2002.  Then it stopped all dividend payments.  Three quarters ago it started paying a $0.79 quarterly dividend.  It went from a no dividend stock to a high dividend stock instantaneously.

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Dividend: $0.79 quarterly

Dividend yield: 7.9% ($3.16 annual DIV / $39.83 share price)

Dividend payout ratio: 200% ($3.16 / $1.58 2011 adjusted EPS) or 103% ($3.16 / $3.06 eleven year average adjusted EPS)

EARNING POWER – $3.06 eleven year average adjusted earnings @ 320 million shares

(earnings adjusted for changes of capitalization)

                        EPS                   Net inc.             Shares               Adj EPS

2001                 $0.80                $254 M              315 M                $0.79

2002                 ($11.69)            ($3,732 M)        319 M                ($11.66)

2003                 $0.06                $19 M                321 M                $0.06

2004                 $0.47                $152 M              325 M                $0.48

2005                 $2.13                $716 M              339 M                $2.24

2006                 $4.28                $1,385 M           325 M                $4.33

2007                 $14.14              $3,131 M           222 M                $9.78

2008                 $13.09              $4,202 M           321 M                $13.13

2009                 $9.84                $3,181 M           321 M                $9.94

2010                 $2.99                $961 M              320 M                $3.00

2011 E              $1.09                $504 M              320 M                $1.58

———————————————————————————–

2011 Q1            $0.40                $309 M              320 M                $0.97

2011 Q2            $0.53                $154 M              320 M                $0.48

2011 Q3            ($0.19)             ($71 M)             320 M                ($0.22)

2011 Q4            $0.35 E*            $112 M              320 M                $0.35

* Q4 2011 earnings estimates comes from Reuters.com

$3.06 eleven year average adjusted earnings @ 320 million shares

Consider contrarian buying below $24.48 (8 times average adjusted EPS)

Consider value buying below $36.72 (12 times average adjusted EPS)

Transocean is currently trading at 13 times average adjusted EPS

Consider speculative selling above $61.20 (20 times average adjusted EPS)

BALANCE SHEET – Thirty-nine percent of Transocean assets is comprised of goodwill.  Why?  I don’t know yet.  The price to book value ratio would rise to about 1.0 if we exclude the $8.1 billion in goodwill.

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Book value per share: $65.10

Price to book value per share ratio: 0.61 this is good ($39.83 price / $65.10 BV per share)

Current ratio: 1.54 (over 2.0 is good)

Quick ratio: 0.77 (over 1.0 is good)

Debt to equity ratio: 0.71

CONCLUSION – Transocean is currently a high dividend stock, but I’m not convinced that it has the earning power to cover the current dividend for the next few years.  The company is currently trading at 13 times average adjusted earnings, but its earning power is highly variable.  A deeper analysis is necessary to determine why there is so much volatility in Transocean’s earning power.  Other companies in this sector do not have the same volatility in earning power.  RIG’s balance sheet is okay right now, but without more earnings it will deteriorate.

I would wait buy until the dividend situation stabilizes and the price falls closer to contrarian territory in the mid-20’s.  China’s looming recession will lower demand for oil at the current price.  That’s not good for Transocean.

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DISCLOSURE – I don’t own Transocean (RIG).

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Published in: on December 21, 2011 at 1:30 pm  Leave a Comment  

TIP OF THE WEEK – Why MF Global went down and how you can protect your life’s savings

December 16th, 2011

Jason Brizic

Investment institutions (like MF Global) can legally steal your assets and use your property for their own purposes.  They can do this because you have agreed to let them do this by consenting to their customer agreements.  Read the article below by Austrian economist, Doug French, for a devastatingly clear explanation of what killed MF Global and it customer’s [victims] savings.

Your savings and investments may not be safe in your brokerage accounts depending on the fine print in the agreements you consented to.  Some financial corporations have agreements that allows them to use your assets as their collateral in their bets in the derivatives markets.  Other financial corporation’s only claim to do this with your margin accounts; therefore, standard brokerage accounts and retirement accounts would remain untouched in that situation.

This means that an investor who had $100,000 in a money market account with MF Global could still be wiped out by the MF Global bankruptcy.  Most people think that their brokerage money is safe in money markets, but that is not necessarily the case depending on the customer agreements you entered into.

Action steps:

1)    Go to Google and perform a search using the name of your financial institution plus the word rehypothecation.  The results might scare you.

a.    For example Fidelity rehypothecation yields the following results: http://www.google.com/search?q=fidelity+rehypothecation&rls=com.microsoft:*&ie=UTF-8&oe=UTF-8&startIndex=&startPage=1

b.    Click through a couple of the results until you find someone who dug out the applicable fine print from the customer agreements

2)    If the fine print says anything like what MF Global’s fine print said, then you have a decision to make soon.  You can keep the account or close the account.

“7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.”

It isn’t clear to me at this time how the MF Global bankruptcy will be handled by the FDIC and the SIPC (http://en.wikipedia.org/wiki/Sipc).  There are proposals in congress to change what is covered and by how much.  Regardless of the actions of congress, ultimately the FDIC and SIPC are empty promises because they don’t have enough money to insure the assets they claim to insure.  The Federal Reserve would have to hyper inflate the money supply to back their insurance claims.  Doug French addresses this at the end of his article below.

* * * * * * * * * *

MF Global’s Fractional Reserves

by Doug French

Recently by Doug French: Who Serves During Disaster?

 

 

 

Jon Corzine told the House Agriculture Committee, "I simply do not know where the money is, or why the accounts have not been reconciled to date." The public is outraged that the former CEO of bankrupt global financial-derivatives broker and prime dealer in US Treasury securities MF Global doesn’t know where the missing $1.2 billion in client funds went.

Corzine is the member a few exclusive clubs: he is a Goldman Sachs alum, former US senator, and former New Jersey governor. After the incumbent Corzine was beat by Chris Christie in the 2009 New Jersey gubernatorial race, the MF board probably rejoiced, believing the guy to fix their problems was suddenly available. Now he’s in the club of taking a mere 20 months to create the eighth largest bankruptcy in history.

As a stand-alone entity, MF Global was born in 2007 when it was spun off from UK hedge-fund giant, Man Group. MF booked revenues of $4 billion that year from interest earned by using its customers’ funds, an operation that sounds like fractionized banking: short-term embezzlement used to make profits.

For banks, the practice was sealed in English common law in 1811 in the court case of Carr vs. Carr, where Master of the Rolls Sir William Grant ruled that debts mentioned in a will included bank accounts since the money had been deposited into the bank and wasn’t earmarked in a sealed bag. The deposit was thus a loan rather than a bailment.

The same Judge Grant ruled the same way five years later in Devaynes vs. Noble, despite an attorney’s argument that "a banker is rather a bailee of his customer’s funds than his debtor … because the money in … [his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up."

In 1848, in Foley vs. Hill and Others, Lord Cottenham ruled,

"Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it.… The money placed in the custody of a banker to do with it as he pleases."

It’s been clear sailing for bankers ever since. No questions asked.

At the same time, people are surprised that a commodity brokerage firm would misplace client assets. As Christopher Elias explains for Thomson Reuters,

"MF Global’s bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet."

Free bankers are always insisting that fractional-reserve banking is A-OK, as long as bankers inform depositors up front that the bank will be using their customers’ money to make loans and investments.

That is exactly the case with MF Global. The company’s customer agreements included the following clause:

7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.

Back in 2007, customer funds held by MF as collateral against commodities trades could be invested in two-year Treasuries earning north of 4.5 percent. But in the wake of the ’08 meltdown, the Bernanke Fed has flattened yields to be counted in basis points. With these low rates MF Global revenues fell to $517 million in 2010.

The old bond trader Corzine thought he could juice up MF’s earnings with a little financial razzle-dazzle. Thinking outside the box (and off the balance sheet), Corzine moved $16.5 billion in assets into repos. A repo involves putting up assets as collateral, assets to be repurchased later, and borrowing money against those assets. MF used an off-balance-sheet repo called a "repo-to-maturity" where the loan and the collateral in the transaction have the same maturity. US accounting rules consider the transaction a sale and the assets can be moved off the balance sheet.

Most of these assets were bonds from Italy, Spain, Belgium, Portugal, and Ireland, all paying healthy coupon rates that would easily cover the repo interest rate and provide a nice profit. MF Global would have virtually no skin in the game (their customers provided it) and be earning a nice interest-rate spread.

Although things have been rocky in euroland, the collateral value of the short-term bonds appeared safe with the guarantee provided by the European Financial Stability Facility (EFSF).

With the $16.5 billion in assets moved off its balance sheet, MF Global then ramped up a net-long sovereign-debt position of $6.2 billion on its balance sheet – exposure that was five times the company’s net worth.

While the EFSF guarantee would insure against the default of the sovereign debt if the bonds were held to maturity, MF was still at risk to make margin calls, if the bonds dropped in price day-to-day. Elias writes,

"Like Wall Street cocaine, leveraging amplifies the ups and downs of an investment; increasing the returns but also amplifying the costs. With MF Global’s leverage reaching 40 to 1 by the time of its collapse, it didn’t need a Eurozone default to trigger its downfall – all it needed was for these amplified costs to outstrip its asset base."

So while MF Global’s eurozone bets had not defaulted, the company’s liquidity was drained making margin calls and trying to meet short-term-debt obligations as the euro-crisis news flow out of Europe vacillated.

MF Global was able to leverage up its euroland bets by way of the rehypothecation of their clients’ collateral. Hypothecation is pledging collateral for a loan. Like the mortgage on your house.

Customers of MF posted cash, gold, or securities as collateral to backstop their commodity futures and derivatives trading. MF would then take those customer assets to back its own trades and borrowing. Mr. Elias explains, "The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds."

Under US rules, a prime broker is allowed to rehypothecate assets to the value of 140 percent of the client’s liability to the broker. The rules are more liberal in the United Kingdom, where there is no limit and in many cases UK brokers rehypothecate 100 percent of collateral value placed in their custody.

Elias writes that by 2007, rehypothecation was half the shadow banking system.

"Prior to Lehman Brothers’ collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as ‘churn’), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation."

All of this churning has created rivers of liquidity, much of it with no asset backing. And what assets do provide backing aren’t the quality they used to be. The repo rules were liberalized in the Clinton era. So instead of AAA government paper being required, AA sovereign debt works just fine; after all, as James B. Stewart writes for the New York Times:

"The law also allows commodities firms like MF Global to use segregated customer funds as a source of low-cost financing for their own operations, but they are required to replace any customer assets taken from segregated accounts with supposedly ultrasafe collateral of the same value, typically United States Treasuries, municipal obligations and obligations whose payments of principal and interest are guaranteed by the government." [emphasis added]

Of course all this rehypothecating creates mountains of counterparty risk, all dependent on dubious collateral that has been pledged multiple times. The equivalent of having four mortgages on a house, each having been sold to other parties who have been told their mortgage is in first position. When the property value starts dropping or the borrower doesn’t pay, only one lender will get there first and legal fistfights ensue.

This rehypothecation activity may be the biggest credit bubble of all time, according to Elias. J.P. Morgan alone has rehypothecated over half a trillion dollars in 2011, Morgan Stanley $410 billion, Goldman Sachs $28 billion, and the list goes on.

Americans have been told US banks have little exposure to European sovereign debt, but according to the Bank for International Settlements (BIS), US banks hold $181 billion in the sovereign debt of Greece, Ireland, Italy, Portugal, and Spain. And while Germany is considered the belle of the Continental ball, Grant’s Interest Rate Observer reports that Deutsche Bank is levered at 43:1 and the Bundesbank has doubled its leverage since 2007 when it was geared at 75:1 – these days the central bank is levered at 153:1.

Extreme leverage is a problem if the slightest thing goes wrong – anywhere. When the cost of swapping euros for dollars soared at the end of last month, a coordinated central-bank cavalry charged out of nowhere, cutting swap rates and establishing temporary bilateral-liquidity swap arrangements. Nobody but financial news junkies seemed to know or care.

The truth about the financial crash wasn’t known until Bloomberg chased its request for information all the way to the Supreme Court to obtain documents that shed light on how much dough the Federal Reserve really provided the banks during the 2008 meltdown.

For instance, it turns out Wachovia shareholders got lucky as the bank was floated a secret loan from the Fed of $50 billion to keep the doors open while a sale could be arranged with Wells Fargo for $7 a share rather than shareholders having to take the buck-a-share offer from the wounded Citibank.

"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Wachovia’s chief executive Robert Steel said at the time.

Right, no government support at all.

Instead of being among the bailed out, Corzine and MF Global are now joining Lehman, IndyMac, Colonial, and all the small-fry banks lacking the friends in high places needed to keep them afloat. In the fractional-reserve world, markets don’t decide the winners and losers; government does.

Stewart writes for the NYT, "SIPC will replace up to $500,000 of securities and cash (but not futures contracts) missing from customer accounts at member firms," and the notion of even covering futures accounts has been floated on CNBC by Senator Debbie Stabenow, just as the FDIC replaces deposits up to $250,000. But covering the losses of clients and depositors is hardly the reflection of sound capitalism and the honoring of property rights.

Murray Rothbard wrote,

"If no business firm can be insured, then an industry consisting of hundreds of insolvent firms is surely the last institution about which anyone can mention ‘insurance’ with a straight face. ‘Deposit insurance’ is simply a fraudulent racket, and a cruel one at that, since it may plunder the life savings and the money stock of the entire public."

So it’s unlikely Jon Corzine knows where the $1.2 billion in customer money went any more than the president of a failed bank would know exactly where the customer deposits went.

The bigger issue is that, day by day, Mr. Corzine looks to be merely a canary in the fractional-reserve coal mine.

Reprinted from Mises.org.

December 15, 2011

Doug French [send him mail] is president of the Ludwig von Mises Institute and the author of Early Speculative Bubbles & Increases in the Money Supply. He received the Murray N. Rothbard Award from the Center for Libertarian Studies. See his tribute to Murray Rothbard.

* * * * * * * * * *

Link to the article on LewRockwell.com: http://lewrockwell.com/french/french143.html

For more tips of the week click here: www.myhighdividendstocks.com/tip-of-the-week

Published in: on December 16, 2011 at 1:03 pm  Leave a Comment  

First look at Ensco (ESV)

Morningstar’s take: Ensco’s strategy is a breath of fresh air in a contract drilling industry where differentiation is hard to come by. Its cost-efficient approach results in industry-leading operating margins. In contrast, Pride has one of the industry’s worst cost structures, with gross margins typically 20 points lower than Ensco’s. In addition, Pride’s administrative costs run around 7% of revenue, versus Ensco’s more svelte 3%. We think Ensco has significant cost-cutting opportunities available, which could lead to substantial value creation. We’ve already seen positive early results, as recently Ensco doubled its anticipated 2012 savings estimate to $100 million from $50 million and introduced a post-2012 target of $150 million in annual savings, made up of both capital expenditure and expense savings.

Image004

Ensco owns one of the newest jackup fleets in the contract drilling industry, which drills for oil and natural gas globally. The firm has been acquiring jackups since the early 1990s and has recently expanded its fleet to include four semisubmersibles. It has several additional semisubmersibles under construction. After the merger with Pride is completed, Ensco will own one of the industry’s largest and youngest deep-water fleets.

DIVIDEND RECORD – Ensco has been paying dividends since at least 1997.  It payed $0.03 per share for years and then jumped to $0.35 per share in 2Q 2010.

Image008

Dividend: $0.35 per quarter

Dividend yield: 2.96%

Dividend payout ratio: 49.4% ($1.40 annual DIV / $2.83 recent Google Finance EPS) or 40% ($1.40 / $3.50 average adjusted EPS)

EARNING POWER – Six year average adjusted earning power of $3.50 per share at 230.67 million shares

(earnings adjusted for changes in capitalization – Ensco has near doubled the number of shares outstanding in 2011)

                        EPS                   Net inc.             Shares               Adj EPS

2006                 $5.04                $757 M              153 M                $3.28

2007                 $6.73                $967 M              147 M                $4.19

2008                 $8.02                $1,151 M           142 M                $4.99

2009                 $5.48                $779 M              141 M                $3.38

2010                 $4.06                $580 M              141 M                $2.51

2011 E              $2.99                $613.5 M E        230.67 M           $2.66

————————————————————————————–

2011 Q1            $0.45                $63.6 M             141.4 M             $0.28

2011 Q2            $0.59                $100.9 M           170.2 M             $0.44

2011 Q3            $0.88                $202.2 M           228.60 M           $0.88

2011 Q4            $1.07 E             $246.8 M E        230.67 M E        $1.07 E

Estimates for 2011 Q4 are from Reuters.com consensus estimate.

Six year average adjusted earnings are $3.50 per share @ 230.67 million shares

Consider contrarian buying at $28.00 (8 times average adj EPS)

Consider value buying at $42.00 (12 times average adj EPS)

Consider speculative selling at $70 (20 times average adj EPS)

Ensco is trading at 13.5 times average adjusted earnings.  This is priced for investment.

BALANCE SHEET – That is a nice look balance sheet.

Image012

Book value per share: $46.43

Price to book value ratio: 1.02 (good)

Current ratio: 1.21 latest quarter (okay; over 2.0 is good)

Quick ratio: 0.90 latest quarter (okay; over 1.0 is good)

Debt/equity ratio: 0.46 (not bad)

CONCLUSION – Ensco (ESV) looks like a well run company with a modest dividend.  It is price just barely above value territory right now at 13.5 times average adjusted earnings.  However, I think you will have your chance to buy this stock much cheaper as the world’s stock markets drop due to worldwide recession.  The sovereign debt crisis will suck up capital that could be use to fuel real economic growth.  Take a look at how Ensco performed during the Panic of 2008 to see what might happen to the stock price in the event of another recession worse than the one in 2008.  It hit a high near $80.74 in June 2008, then it dropped 69.5% down to near $24.58 in February 2009.  I believe that the world’s economic problems will drop the price of oil and Ensco down to those levels again.  Ensco would yield 5.6% if it returned to its February 2009 lows and kept its current quarterly dividend of $0.35 per share.  That is getting very close to the kind of high dividend stock I like.  Wait for this one to come to you.

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DISCLOSURE – I don’t own Ensco (ESV).

P.S. I’ve written about SeaDrill before.  Check out my SeaDrill analysis here: http://www.myhighdividendstocks.com/category/high-dividend-stocks/seadrill

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Published in: on December 15, 2011 at 10:42 am  Leave a Comment  

AGNC declares another $1.40 quarterly dividend. Dividend payout ratio up to 118%, again.

American Capital Agency Corp. has just declared another $1.40 dividend
payable on January 27th, 2012 to common shareholders of record as of
December 22nd, 2011, with an ex-dividend date of December 20th, 2011.

http://tinyurl.com/7banmep

This will be the 10th consecutive quarterly dividend payment of $1.40.
However, the trend of dividend payout ratio over 100% also continues.

Reuters.com financial website shows analyst’s concensus estimates for
AGNC’s 4th quarter earnings at $1.18 per share. If they are right,
then AGNC’s dividend payout ratio will be 118%. They will probably
announce a secondary share offering soon to finance their dividend
deficit. Then the share price will drop again. This has been the
pattern for the last few quarters.

AGNC is not earning enough money to cover their dividend payments at
$1.40 per share. There is a substantial downside risk to your capital
if you buy AGNC at today’s price.

DISCLOSURE – I don’t own AGNC.

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discover high dividend stocks with earning power and strong balance
sheets.

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Published in: on December 13, 2011 at 1:38 pm  Leave a Comment  

Legendary Investor, Jim Rogers, says times are going to get much worse

An excellent, straight shooting article on Jim Rogers thoughts.  Own real assets in times of high inflation.  Central bank money printing will lead to highly inflationary times.
 
http://www.bi-me.com/main.php?id=55682&t=1&cg=4
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!
Published in: on December 12, 2011 at 10:56 pm  Leave a Comment  

TIP OF THE WEEK -

Reuters.com has easy to find earnings estimates
December 9th, 2011
Jason Brizic
 
Knowing a company's earning power should help you determine when the company's shares are relatively value priced.  Companies are value priced when they are trading at less than 12 times average adjusted earnings.
 
I like to factor the current year's earnings into my long term average adjusted earnings.  I use Morninstar.com's website to gather the earnings per share, net income, and number of shares for the past five years.  That usually gets me 2006-2010.  But I still need 2011.  I switch the view from annual to quarterly to get Q1, Q2, and Q3 of the current year.  That leaves Q4 as an unknown.
 
This is where Reuters.com comes in.  I use Reuters.com to get an estimate for the next quarter to complete the year.  Its okay if a company beats or misses this estimate because it has little effect on a five or six year average adjusted earnings calculation.
 
Let's do this for one of my favorite stocks, Safe Bulkers (SB).  This data comes from Morningstar.com's financials tab.
(Earnings adjusted for changes in capitalization – Safe Bulkers has issued shares in the past two years)
Year        EPS       Net inc.       Shares      Adj EPS
2006        $1.78     $97 M         55 M         $1.47
2007        $3.84     $209 M       55 M         $3.17
2008        $2.19     $119 M       55 M         $1.81
2009        $3.03     $165 M       55 M         $2.50
2010        $1.73     $110 M       63 M         $1.67
 
For some reason unknown to me Morningstar.com wouldn't show me the quarterly data for Safe Bulkers, so I used Google Finance to find the data I need for Q1-Q3 2011
 
Year        EPS       Net inc.      Shares       Adj EPS
2011 Q1  $0.41     $27.31 M   65.88 M     $0.41
2011 Q2  $0.47     $31.13 M   65.88 M     $0.47
2011 Q3  $0.33     $22.01 M   65.88 M     $0.33
 
http://www.reuters.com/finance/stocks/analyst?symbol=SB.N
Click on the Analysts tab
Scroll down to Consensus Recommendations
You will see Safe Bulkers next quarter consensus estimate of $0.35 per share
 
Now we can complete the estimated earnings for 2011
Year        EPS       Net inc.      Shares      Adj EPS
2011 Q4  $0.35 E  $23.06 M   65.88 M    $0.35
 
Total        $1.56 E  $103.5 M   65.88 M   $1.56 E
 
Compute the six year average adjusted earnings, which equals $2.03 per share @ 65.88 million shares.  Safe Bulkers is trading at $6.16 as I write this, so it is only trading at 3.03 times its six year average earnings.  What a value especially with the 9.79% dividend yield.  However, its stock price will decline in a global recession and a China hard landing so I think you can get it even cheaper in the $3 – $4 range.
 
 
For more tips like these go to www.myhighdividendstocks.com/tip-of-the-week
 
 
Published in: on December 9, 2011 at 12:26 pm  Leave a Comment  

Gold mining stocks day four: Kinross Gold Corp (KGC)

Price: $13.26

Shares: 1.14 billion

Market capitalization: $15.08 billion

Bonds outstanding: $3.3 billion

Image006

None of Kinross’ bonds are due anytime soon.

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DIVIDEND RECORD – Kinross has been paying a low semi-annual dividend since 2008.  There isn’t much history there, but they have grown the dividend by 50% from $0.04 to $0.06 in 4 years.

Image010

Dividend: $0.06 semi-annually

Dividend yield: 0.9% ($0.12 annual DIV/$13.26 share price)

Dividend payout ratio: 15% to 38% depending on how you calculate ($0.12/$0.81 recent EPS or $0.12/$0.26 avg adjusted EPS over six years)

EARNING POWER – Six year average adjusted earnings of $0.26 per share @ 1.142 billion shares

(Earnings adjusted for changes in capitalization – Kinross has increase the number of shares by 223% since 2006)

                        EPS       Net Inc.             Shares               Adj EPS

2006                 $0.47    $165 M              353 M                $0.14

2007                 $0.59    $334 M              566 M                $0.29

2008                 ($1.28) ($807 M)           629 M                ($0.71)

2009                 $0.44    $310 M              697 M                $0.27

2010                 $0.93    $772 M              829 M                $0.68

—————————————————————————-

2011 Q1            $0.22    $256 M              1,139 M             $0.22

2011 Q2            $0.22    $247 M              1,141 M             $0.22

2011 Q3            $0.19    $213 M              1,142 M             $0.19

2011 Q4            $0.24 E $274 M E           1,142 M             $0.24 E

20011 E             $0.87    $990 M E           1,142 M             $0.87 E

Six year average adjusted earnings of $0.26 per share.

Consider contrarian buying at $2.08 (8 times average adj EPS)

Consider value buying at $3.12 (12 times average adj EPS)

Consider speculative selling at $5.20 (20 times average adj EPS)

Kinross Gold Corp is currently trading at 51 times average adjusted annual earnings.  The is highly speculative pricing.

BALANCE SHEET – That is a nice balance sheet, but goodwill accounts for 33% of assets.  It would still be a good balance sheet if goodwill were zero.

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Book value per share: $13.22

Price to book value ratio: 1.00 (good)

Current ratio: 4.43 latest quarter (over 2.0 is good)

Quick ratio: 3.19 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.09 (this is good)

CONCLUSION – Kinross Gold Corp. is a low dividend grower that is speculatively priced for its earning power.  The company’s balance sheet is strong.

Kinross bottomed in the $8.81 dollar range in October 2008 several months before the US stock market bottom in March of 2009.  That represented the best investment entry into Kinross since late 2008.  The gold price will go down at least half of the percentage of the stock market’s decline.  This happened in 2008-2009.  US stocks dropped about 50% and gold dropped about 25%.  However, Kinross dropped even more than the broader market or gold.  It dropped almost 67% from $26.84 in March 2008 down to $8.81 by October 2008.  Don’t think that it won’t happen again.  Wait for another bottom near value territory at $5.20 per share.  Kinross would be yielding about 2.3% if it keeps its new dividend rate at such a low price.  The good news is that gold will continue to go up in price as the world’s sovereign debt crisis worsens, but you have to buy extremely low to preserve your capital when purchasing mining stocks.

DISCLOSURE – I don’t own Kinross Gold Corp. (KGC).

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Published in: on December 8, 2011 at 5:31 pm  Leave a Comment  

Dividends Are Sexier Than You Think by Addison Wiggin

In fact, many, many world-leading American companies now pay dividend yields higher than long-dated Treasuries.

As James Grant framed this contrast in the Oct. 7, 2011 edition of Grant’s Interest Rate Observer, “Better the common equity of an adaptive and profitable American enterprise — say, Molson Coors (NYSE: TAP/A) — than the inert emissions of the US Treasury…Today, the stock is quoted at 39… at 11.1 times earnings with the yield of 3.25%. Meanwhile, the utterly unadaptive 10-year note of Timothy Geithner’s negative-cash-flow Treasury is quoted at 1.83% [now 2.03%].”

Grant also highlights Campbell Soup (NYSE:CPB) as a compelling alternative to long-term Treasury securities. At the current quote of $33, Grant observes, this blue chip stock is selling for about 13 times trailing earnings and yielding 3.5%. “Campbell, which traces its corporate ancestry back to 1869 and which incorporated in 1922, early on conceived the bright idea of draining the water from canned soup. The shipping expense thereby saved was enough to allow a price reduction to a dime per can from 30 cents.”

The company has flourished ever since. “From 1955 to the present,” Grant points out, “dividends have grown at an 8.9% compound rate.”

Now, I realize that dividends sound very boring — kind of like watching paint dry… I can almost hear you saying, “C’mon, Addison! This isn’t the Great Depression! I don’t want to invest for dividends, clip bond coupons and store canned peas in my basement. I want something that’s high-growth. Something sexy.”

My answer to that is: Sexy sometimes sneaks up on you.

What if I had told you on Jan. 1, 2000, to sell all your tech stocks — those highflying stocks that were doubling and tripling every few months — and to spread the proceeds equally across three very boring investments: gold, 10-year Treasury bonds and stodgy old dividend-paying stocks — like the ones inside the Vanguard Dividend Growth Fund (VDIGX), the mutual fund we highlighted in Apogee.

You would have looked at me as if I had lost my mind. You might have even felt sorry for me and tried to offer me some intelligent investment advice. But with the benefit of hindsight, we know what happened next.

The high-flying tech stocks that comprised the Nasdaq Composite Index crashed…and still have not recovered their losses, even after all this time. The Nasdaq is down 28% since the end of 1999. Even the “blue chip” S&P 500 stocks are down 15% during that time frame… until you add back those boring dividends.

With dividends included, the S&P 500’s 15% loss flips to a 6% gain. That’s still a miserable return for an entire decade, but it illustrates the point that dividends matter. In fact, for long periods of time in the stock market’s history, dividends have been the only thing that mattered.

Without dividends, the S&P 500 index would have produced a loss for the 25 long years from August 1929 to August 1954. Then again, without dividends, the S&P 500 produced a 5% loss during the 13 years from September 1961 to September 1974. But with dividends included, the S&P’s loss became a 46% gain.

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If you think that’s just a bunch of “ancient history”, think again. During the last 12 years — from early November 1999 until this very moment — the S&P 500 has produced a loss…unless you include dividends.

The moral of the story is simple: Dividends matter. In fact, they may even be a little bit sexy. Over the course of the last half-century, dividends have contributed more than half of the stock market’s total return — 56%, to be exact.

So what happened to all that boring stuff you could have purchased at the dawn of the new millennium? Well, the Vanguard Dividend Growth Fund delivered a total return of 50%, 10-year Treasuries produced a total return of 162% and the “barbarous relic” gold provided a dazzling total return of nearly 500%. Average return of the three investments: 236%!

We would expect the Vanguard Dividend Growth Fund to outperform their low-dividend or no-dividend counterparts over the next few years…and to greatly outperform the return of long-term government bonds. As James Grant observes, “Better the common equity of an adaptive and profitable American enterprise than the inert emissions of the US Treasury.”

Regards,

Addison Wiggin,
for The Daily Reckoning

Dividends Are Sexier Than You Think originally appeared in the Daily Reckoning. The Daily Reckoning provides over 400,000 readers economic news, market analysis, and contrarian investment ideas.

* * * * * * * * * *

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Published in: on December 8, 2011 at 9:39 am  Leave a Comment  

Gold mining stocks day three: Newmont Mining (NEM)

Price: $67.62

Shares: 494.82 million (504 million fully diluted)

Market capitalization: $33.44 billion

Bonds outstanding: $4.2 billion

The circle near 2019 is $900 million dollars for scale purposes.

DIVIDEND RECORD – Steady dividend payer since at least 1987.  Last dividend cut was in 1997.  Newmont appears to be a decent dividend grower since 2010.

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Dividend: $0.35/quarter

Dividend Yield: 2.08% ($1.40 annual DIV/$67.62 share price)

Dividend Payout Ratio:   ($1.40/$4.72 recent EPS)

EARNING POWER – Six year average adjusted earnings is $1.35 per share @ 504 million shares

(Earnings adjusted for changes in capitalization)

                        EPS       Net Inc.             Shares               Adj EPS

2006                 $1.75    $791 M              452 M                $1.57

2007                 ($4.17) ($1,886 M)        452 M                ($3.74)

2008                 $1.83    $831 M              455 M                $1.65

2009                 $2.66    $1,297 M           487 M                $2.57

2010                 $4.55    $2,277 M           500 M                $4.52

————————————————————————–

2011 Q1            $1.03    $514 M              501 M                $1.02

2011 Q2            $0.77    $387 M              501 M                $0.77

2011 Q3            $0.98    $493 M              504 M                $0.98

2011 Q4            $1.38 E $682 M  E          504 M                $1.35 E

————————————————————————–

2011 E              $4.16 E $2,076 E           504 M                $4.12 E

Estimates come from Reuters.com consensus for the next quarter

Six year average adjusted earnings per share is $1.35

Consider contrarian buying at $10.80 (8 times average adj EPS)

Consider value buying at $16.20 (12 times average adj EPS)

Consider speculative selling at $27.00 (20 time average adj EPS)

Newmont Mining is trading at 50 times average adjusted earnings.  This stock’s price is highly speculative.

BALANCE SHEET – I don’t like the recent dip in Newmont’s shareholder equity.  And the stock price is way too high compared to book value.

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Book value per share: $27.50

Price to book value ratio: 2.45 (close to 1.0 or under is good)

Current ratio: 1.42 latest qtr (above 2.0 is good)

Quick ratio: 0.63 latest qtr (above 1.0 is good)

Debt to equity ratio: 0.26 (this is good)

CONCLUSION – Newmont Mining is a low dividend grower that is speculatively priced for its earning power.  The company’s balance sheet is okay, but its hard to tell if it is deteriorating without in depth analysis.  There is no need for this deeper analysis since the stock price is so speculative compared to earning power and price to book value per share.

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Newmont bottomed in the $23.82 dollar range in October 2008 several months before the US stock market bottom in March of 2009.  That represented the best investment entry into Newmont since late 2008.  The gold price will go down at least half of the percentage of the stock market’s decline.  This happened in 2008-2009.  US stocks dropped about 50% and gold dropped about 25%.  However, Newmont dropped even more than the broader market or gold.  It dropped almost 60% from $59.87 in January 2006 down to $23.82 by October 2008.  Don’t think that it happen again.  Wait for another bottom near value territory at $16.20 per share.  Newmont would be yielding about 8.6% if it keeps its new dividend rate at such a low price.  The good news is that gold will continue to go up in price as the world’s sovereign debt crisis worsens, but you have to buy extremely low to preserve your capital when purchasing mining stocks.

DISCLOSURE – I don’t own Newmont Mining (NEM).

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Published in: on December 7, 2011 at 6:12 pm  Leave a Comment  
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