First Look at Public Service Enterprise Group (PEG).

Preferred stock: none

Bonds: $1.3 billion.  The outstanding bonds do not appear to be a threat to the dividend.

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What the company does – Public Service Enterprise Group is the holding company for a regulated utility (PSE&G), a merchant power generation owner (PSEG Power), and an energy investment firm (Energy Holdings). PSE&G provides regulated energy delivery services in New Jersey. PSEG Power owns and operates power plants that sell wholesale power in New Jersey, Pennsylvania, New York and Connecticut. Energy Holdings invests in energy-related assets worldwide.

Morningstar’s take – Since New Jersey regulators effectively killed a $17.8 billion merger with Exelon EXC in 2006, we think Public Service Enterprise Group continues to realize the value that Exelon sought to capture. Tightly constrained power supplies in the New Jersey and Northeast markets make those markets some of the most attractive in the United States for selling electricity that PSEG generates. The company’s efficiency, financial strength, and focus provide strong investor returns even through turbulent power markets. This makes the stock one of our top utility picks at the right price for long-term investors.

DIVIDEND RECORD: PEG has been paying dividends since at least 1987 according to Google Finance.  They have been a pathetic grower.  The dividend has only grown by 9 cents quarterly in 25 years.  That equates to roughly a 1.4% annual increase which is way below the government reported price increases of 2%-3% per annum.  I don’t like it when a company can’t keep dividend increase with the understated government CPI.  Did the company really miss its dividend payment in 2009 4Q?  Or is that a Google Finance graphical artifact?  I don’t know.  Make sure you do before you invest.

Dividend: $0.34 quarterly

Dividend yield: 4.4% ($1.36 annual dividend / $30.90 share price)

Dividend payout: 49% ($1.36 annual dividend / $2.78 recent EPS IAW Google Finance) –OR- 47% ($1.36 DIV / $2.84 average earning power)

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EARNING POWER: $2.84 @ 505.9 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2007

$2.62

$1,335 M

509 M

$2.64

2008

$2.34

$1,188 M

508 M

$2.35

2009

$3.14

$1,592 M

507 M

$3.15

2010

$3.08

$1,564 M

507 M

$3.09

2011

$2.96

$1,503 M

505.9 M

$2.97

Six year average adjusted earnings per share is $2.84

Consider contrarian buying below $22.72 (8 times average adjusted EPS)

Public Service Enterprise Group (PEG) is currently trading at 10.9 times average adjusted EPS.  This stock is currently priced for VALUE.

Consider value buying below $34.08 (12 times average adjusted EPS)

Consider speculative selling above $56.80 (20 times average adjusted EPS)

BALANCE SHEET – Its nice to see decreasing liabilities for a change.  Most companies are gaining equity by increasing assets at a slightly higher rate than they are increasing liabilities.  The price to book value and current ratio is not good.  This is a moderate balance sheet.

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Book value per share: $20.30 ($10,270 M equity / 505.9 M shares)

Price to book value ratio: 1.52 (under 1.0 is good) ($30.90 price / $20.30 BV)

Current ratio: 1.35 latest quarter (over 2.0 is good)

Quick ratio: 0.82 latest quarter (over 1.0 is good)

Debt to equity ratio: 2.94 (lower is better)

Percentage of total assets in plant, property, and equipment: 59.85% (the higher the better)  A potential investor in PEG should know why 26% of assets are categorized as “other long term assets”.  What are those?

CONCLUSION – As usual, the best time to buy PEG in recent years was in March 2009.  It was a contrarian investment back then.  Public Service Enterprise Group (PEG) is a steady dividend payer and pathetic dividend grower.  They are a regulated utility company serving some of the most socialist states in the USA.  Therefore, I don’t expect much earnings growth in the future.  The company is value priced at this time at 10.9 times average adjusted earnings.  The balance sheet is weak when you look at the price to book value ratio and the current ratio and quick ratios.   This stock will drop in the upcoming worldwide recession.  Buy below $20.30 when the price/book value equals 1.0.  The dividend yield will be higher than 6% below a price of $22.66.  You need that high dividend yield to compensate you for the lack of dividend growth that PEG’s historical dividend record shows.

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DISCLOSURE – I don’t own Public Service Enterprise Group (PEG).

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Published in: on February 29, 2012 at 2:38 pm  Leave a Comment  

First Look at ONEOK Partners (OKS).

Bonds outstanding: $3.8 billion.  Big bonds due in 2016.  The preferred shows a dashes here, but they paid $148 million in preferred dividends in 2011 according to the company’s income statement.

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What the company does – ONEOK Partners gathers, processes, and transports natural gas and natural gas liquids. The partnership’s interstate pipelines carry nearly one fifth of the gas exported from Canada to the United States, while its large gathering and processing operations serve Texas, Oklahoma, Kansas, and the High Plains region. ONEOK Partners’ largest segment is its NGL business, which is growing rapidly thanks to multiple recent projects.

Morningstar’s take – ONEOK Partners has positioned itself for growth in the midstream sector by focusing on natural gas liquids. While natural gas transportation still makes up a third of cash flows, we think ONEOK’s sweet spot is on the liquids side of the business. Recently completed and announced projects will shift cash flows more strongly toward NGLs, and we think the partnership can differentiate itself from peers by continuing to address the challenge of getting liquids to market.

DIVIDEND RECORD – Steady dividend payer and moderate dividend grow since mid-2006 when OKS started paying dividends.  The dividend was $0.48 quarterly in 2006.  This quote comes from the company’s 2010 annual report, “Distributions to unitholders have increased 43 percent since 2006; they are expected to increase one penny per quarter in 2011 and 5 to 10 percent annually in 2012 to 2013, pending board approval.”  I looks like they’ve kept their word from the dividend record chart below.

Dividend: $0.61 quarterly

Dividend yield: 4.17%

Dividend payout ratio: 67% using Google Finance recent EPS of $3.35 –OR- 107% using average adjusted earning power of $2.28.

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EARNING POWER – $2.28 @ 203.82 million shares

(Earnings adjusted for changes in capitalization)

EPS

Net income

Shares

Adjusted EPS

12/2007

$2.10

$408 M

166 M

$2.00

12/2008

$3.00

$537 M

179 M

$2.63

12/2009

$3.60

$338 M

94 M

$1.66

12/2010

$1.75

$355 M

203 M

$1.74

12/2011

$3.35

$682 M

204.82 M

$3.35

Six year average adjusted earnings per share is $2.28

Consider contrarian buying below $18.24 (8 times average adjusted EPS)

Consider value buying below $27.36 (12 times average adjusted EPS)

Consider speculative selling above $45.60 (20 times average adjusted EPS)

ONEOK Partners (OKS) is currently trading at 25.6 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – The chart looks fine, but the stock is way overpriced compared to book value.  Also, the company has little current assets to pay current liabilities.  Huge capital expenditures leaving little free cash flow need to be examined before investing.

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Book value per share: $16.88

Price to book value ratio: 3.47 (under 1.0 is good)

Current ratio: 0.69 (over 2.0 is good)

Quick ratio: 0.0185 (over 1.0 is good)

Debt to equity ratio: 2.64 (lower is better)

Percentage of total assets in plant, property, and equipment: 63.76%

CONCLUSION – As usual, the best time to buy OKS in recent years was in March 2009.  It was a value investment back then.  ONEOK Partners is a steady dividend payer and grower, but I’m concerned that the capital expenditures are going to threaten the dividend growth in the future.  The company is speculatively priced at this time.  Wise investors should have scaled out of it when it reached $45.60 back in November 2011.  The balance sheet is weak when you look at the price to book value ratio and the current ratio and quick ratios.   The company is going to have to issue more debt or stock to finance its current operations.  You can safely ignore this stock until it drops back to the $19.00 – $20.00 range.

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DISCLOSURE – I don’t own ONEOK Partners (OKS).

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Published in: on February 28, 2012 at 6:10 pm  Leave a Comment  

Phony gold standard proponents in Utah and Colorado. Beware of wolves in sheep’s clothing.

Some Colorado lawmakers are considering making gold and silver money again, but there is more than meets the eye going on here in SmartMoney’s article.

http://tinyurl.com/8xcgujd

You will get screwed if lawmakers have their way.  I guarantee that these politicians are not for a private gold coin standard.

If some lawmakers have their way, the future of money might not be a digital wallet, but a clinking gold coin.

How many Colorado state senators are sponsors of this bill?  I’m guessing hardly any.  Utah legalized the payment of taxes in gold coins at face-value.  For example, if Utah claims you owe $500 in Utah state taxes, then you could pay with 10 one ounce gold coins with a $50 face-value each (market value $17,750).  Thanks, but no thanks.

Colorado state senators are considering a bill that would legalize gold and silver as currency, a practice President Franklin Roosevelt banned to prevent hoarding. Currently, the metals are considered property, with capital gains taxes levied on the profits from their sale. Utah passed a similar measure legalizing gold and silver use last year, and a dozen other states are considering it.

There are two gold standards: a government gold standard and a private gold coin standard.  The first barely offers any more freedom than the current system.  The later offers privacy and freedom.

“It’s a message from the grassroots level that there needs to be a change in monetary policy,” says Rich Danker, economics director for American Principles Project, a conservative think tank. Investors often turn to gold as a way to preserve wealth in tough economic times, and supporters of such state laws have cited concerns about the strength of the U.S. dollar and the country’s growing deficit. A return to the gold standard, they say, would result in a stronger dollar.

Mr. Danker is not calling for a private gold coin standard in which prices are expressed in gold and/or silver weights.  He wants the government to control the price of gold like after WWI and before the government confiscation of 1933.  It is a fake gold standard if you can’t redeem dollars for gold at a bank.

Going with gold has its hurdles. “Gold and silver prices fluctuate dramatically throughout the day,” says Jack Plunkett, chief executive of Plunkett Research. “It would be difficult to figure out what your coin was worth at the moment you paid your bill with it.” Finding merchants willing to accept gold as payment isn’t likely to be easy, either. (Utah’s law, for example, doesn’t require merchants accept gold or silver as payment.) Those buyers would need to determine the precious metal content of items such as coins and root out counterfeits, which could cost them money on the transaction, he says.

The same could be said about the dollar.  The dollar’s price fluctuates dramatically throughout the day.  It would be difficult to figure out what your dollars are worth at the moment you paid you bill with it.  The Federal Reserve could by inflating on the day you spend your dollars.  Violently enforced legal tender laws make finding merchants that accept dollars easy, but that isn’t a detractor to gold and silver as money.  Enterprising banks could issue gold/silver debit cards that guarantee the fineness and weights.  Trust would become commonplace if gold was redeemable at any time.  Dollars are counterfeits to gold and silver.  Inflation destroys the purchasing power of dollars.  This dwarfs transaction cost during a transition to a private gold / silver coin standard.

But supporters say those concerns are overblown. For one, they say the new state measures would allow consumers who have invested in gold or silver to spend it directly, rather than selling the metal first and incurring capital gains taxes, says Danker. That’s especially useful for older U.S. coins, which may have a higher value in metal content than their marked face value. It also may not mean walking around with a bag of precious coins, either — Utah Gold & Silver Depository is working on a debit card system that draws against the value of a customer’s deposited gold.

A repeal of legal tender laws would doom the dollar.  People would be free of the politicians and the Federal Reserve.  That isn’t what Colorado state senators want.  They are wolves in sheep’s clothing.

(Thanks to Jim for the link)

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Published in: on February 27, 2012 at 4:27 pm  Leave a Comment  

I tried to open a lemonade stand by John Stossel

http://www.creators.com/opinion/john-stossel/i-tried-to-open-a-lemonade-stand.html

Politicians add 79,000 – 80,000 three column fine print regulations to the Federal Register every year.  You think you are free – whoever told you that is a liar or clueless or both.

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Published in: on February 27, 2012 at 1:09 pm  Leave a Comment  

Borrowing Your Way Out of Debt and Other Normal Abnormalities

Published in: on February 26, 2012 at 8:32 pm  Leave a Comment  

First Look at Altria (MO). Hint: Quit Smoking and Quit MO.

Bonds outstanding: $12.8 billion, this company has a lot of debt and liabilities that I see as a threat to the dividend.

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What the company does – Altria comprises Philip Morris USA (PM USA), U.S. Smokeless Tobacco Company, John Middleton, Ste. Michelle Wine Estates, and Philip Morris Capital Corporation (PMCC). It also owns a 27.1% interest in SABMiller, the world’s second-largest brewer. Through its tobacco subsidiaries, Altria holds the leading position in cigarettes and smokeless tobacco in the U.S., and the number-two spot in cigars. PMCC specializes in leveraged and direct finance leases but no longer accepts new investments.

Morningstar’s take – Having divested its nontobacco and international segments over the last four years, Altria now operates primarily in the challenging U.S. tobacco industry. Cigarette volumes are in structural decline; the Food and Drug Administration, having assumed regulatory control, has been quick to assert its authority. The threat of regulation has now overtaken that of litigation as the most significant risk to an investment in tobacco, in our view. In spite of these headwinds, tobacco manufacturing is still a lucrative business, and we think Altria is well-positioned to generate steady medium-term earnings growth. The addictive nature of cigarettes and Altria’s dominance of the U.S. market are the reasons behind our wide economic moat rating.

DIVIDEND RECORD – Long term dividend payer and grower, but MO cut its quarterly dividend from $0.86 to $0.69 in 2007.  Another big dividend cut occurred in 2008 from $0.75 to $0.29 per share.  The current dividend has grown up to $0.41.  However, the dividend is not safe from cuts in the near future.

Dividend: $0.41 quarterly

Dividend yield: 5.5% ($1.64 annual dividend / $29.67 share price)

Dividend payout ratio: 100% using full year 2011 EPS of $1.64 OR 70.6% using the average earning power over the past six years ($1.64 annual dividend / $2.32 earning power)

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EARNING POWER – $2.32 @ 2.05 billion shares

(Earnings adjusted for changes in capitalization)

EPS

Net income

Shares

Adjusted EPS

2006

$4.62

$9,786 M

2,116 M

$4.77

2007

$2.36

$4,930 M

2,084 M

$2.40

2008

$1.54

$3,206 M

2,071 M

$1.56

2009

$1.87

$3,905 M

2,079 M

$1.90

2010

$1.64

$3,390 M

2,064 M

$1.65

2011

$1.64

$3,390 M

2,050 M

$1.66

EPS

Net income

Shares

Adjusted EPS

2011 Q1

$0.45

$937 M

2,084 M

$0.46

2011 Q2

$0.21

$444 M

2,076 M

$0.22

2011 Q3

$0.57

$1,173 M

2,054 M

$0.57

2011 Q4

$0.41

$836 M

2,043 M

$0.41

2011 total

$1.64

$3,390 M

2,050 M

$1.66

Six year average adjusted earnings per share is $2.32

The company recently reaffirmed its 2012 EPS guidance: http://www.reuters.com/finance/stocks/MO.N/key-developments/article/2485916  If true, then MO will earn closer to their six year average adjusted earning power in 2012.

Consider contrarian buying below $18.56 (8 times average adjusted EPS)

Consider value buying below $27.84 (12 times average adjusted EPS)

Altria is currently trading at 12.8 times average adjusted EPS.  This is stock is priced for investment; it is nearly a value stock.

Consider speculative selling above $46.40 (20 times average adjusted EPS)

BALANCE SHEET – Altria has a horrible balance sheet filled with liabilities, goodwill assets, and intangible assets.  You can see the selloff of much of its assets in 2007-2008.  Shareholder equity has be eroded.  This is not good.

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Book value per share: $1.80 ($3,680 M in equity / 2,050 M shares)

Price to book value ratio: 16.5 (under 1.0 is good)  This is absolutely horrible.  You would be paying sixteen times the company’s equity for a share!!

Current ratio: 0.94 (over 2.0 is good)

Quick ratio:  0.46 (over 1.0 is good)

Debt to equity ratio: 2.96 (lower is better)

Percentage of total assets in plant, property, and equipment: 6% (most assets are Intangibles: 46.7% and Other: 27.98% [mostly Goodwill])  I don’t like this at all.

CONCLUSION – Altria is not a dedicated dividend grower.  It has a recent history of cutting its dividend and that bothers me.  Its earnings are fairly stable since the sale of major assets in 2007-2008, but lawsuits and the government are a constant threat to its earnings.  The stock is priced for investment only if you only look at its earnings.  The balance sheet is horrible.  This company only has a book value of $1.80 per share.  Strong company’s build equity; Altria sheds equity.  All measures of the balance sheet are not good.  I would not buy Altria even at its 2009 lows with its current balance sheet.  This stock should not be bought on its fundamentals.

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DISCLOSURE – I don’t own Altria (MO).

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Published in: on February 23, 2012 at 2:23 pm  Leave a Comment  

First Look at PPL Corp,

Bonds outstanding: $1.8 billion; nothing big due until 2019.  The company’s bonds are not a threat to the dividend.

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What the company does – PPL is an integrated energy holding firm with four segments. Supply owns and operates about 11,200 megawatts of generating capacity. The international regulated delivery segment operates distribution networks providing electricity service to customers in the United Kingdom. The Pennsylvania regulated delivery and transmission segment provides distribution to 1.4 million customers in central and eastern Pennsylvania.

Morningstar’s take – PPL has shifted its business profile from its competitive electricity generation and marketing segment to a profile focused on its regulated utility business. Prior to the acquisition of Louisville Gas & Electric, Kentucky Utilities, and Central Networks, PPL derived 75% of its earnings from its competitive supply segment. By 2013, PPL’s regulated business will generate 75% of EBITDA. While this diversification offers a more stable earnings outlook, investors will be less able to partake in the upside when power prices eventually rebound. However, PPL is still able to earn higher returns than its fully regulated peers.

DIVIDEND RECORD – PPL grew dividends until a 19% dividend cut in 1998.  Growth from the cut to today’s $0.35 quarterly dividend.

Dividend: $0.36 quarterly (starting in MAR 2012).  Last dividend was $0.35 quarterly.

Dividend yield: 5.1% ($1.44 annual dividend in MAR 2012 / $28.31)

Dividend payout ratio: 55% ($1.44 / $2.62 recent Google Finance EPS) OR 86% using average earning power ($1.44 / $1.67 six year average adjusted earning power)

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EARNING POWER – $1.67 @ 578.3 million shares

(Earnings adjusted for changes in capitalization)

EPS

Net income

Shares

Adjusted EPS

2006

$2.24

$813 M

363 M

$1.41

2007

$3.35

$1,288 M

384 M

$2.23

2008

$2.47

$930 M

375 M

$1.61

2009

$1.08

$407 M

376 M

$0.70

2010

$2.17

$938 M

432 M

$1.62

2011 (est)

$2.59

$1,422.67 M

578.3 M

$2.46

EPS

Net income

Shares

Adjusted EPS

2011 Q1

$0.82

$401 M

484 M

$0.69

2011 Q2

$0.35

$196 M

562 M

$0.34

2011 Q3

$0.76

$444 M

578 M

$0.77

2011 Q4 (est)

$0.66

$381.67 M

578.3 M

$0.66

2011 total (est)

$2.59

$1,422.67 M

578.3 M

$2.46

Six year average adjusted earnings per share is $1.67

Consider contrarian buying below $13.36 (8 times average adjusted EPS)

Consider value buying below $20.04 (12 times average adjusted EPS)

PPL Corp. is currently trading at 16.95 times average adjusted EPS.  This stock is still priced for investment, but it is headed toward speculative pricing.

Consider speculative selling above $33.40 (20 times average adjusted EPS)

BALANCE SHEET – What assets did PPL Corp. buy from 2009 – 2011?  They doubled their assets in two years.

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Book value per share: $18.75

Price to book value ratio: 1.51 (under 1.0 is good)

Current ratio: 1.19 (over 2.0 is good)

Quick ratio: 0.33 (over 1.0 is good)

Debt to equity ratio: 1.63 (lower is better)

Percentage of assets in property, plant & equipment: 65%

CONCLUSION – PPL has been a fairly consistent dividend payer and grower since 1998.  The high dividend payout ratio of 86% using average earning power is a little disconcerting especially since PPL has large capital expenditures that also compete for net income.  I think the company will have to issue more debt to make ends meet and to sustain the dividend.  The stock price is a little too high for me at 16.95 times average adjusted earnings of $1.67.  PPL should be bought below $22.  At that price there would be a high dividend yield of 6.5%.   Their balance sheet looks okay, but the low current ratio (current assets / current liabilities) and quick ratio (cash / current liabilities) bothers me.  Where is PPL going to get the money to cover their current liabilities.  I’d like to see the stock price drop closer to the book value per share before I would consider buying.

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DISCLOSURE – I don’t own PPL Corp. (PPL).

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Published in: on February 22, 2012 at 1:02 pm  Leave a Comment  

TIP OF THE WEEK – Why you should purchase rolls of nickels from your bank.

Why you should purchase rolls of nickels from your bank.

Jason Brizic

February 17th, 2012

Gresham’s law states that “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”  This is what happened to the 90% pre-1963 silver dimes and quarters in the US.  It has happened to copper pennies.  And it is about to happen nickels.

http://en.wikipedia.org/wiki/Gresham%27s_law

Americans had the opportunity to buy and hold 90% silver coins before 1963 cheaply.  Those that did so were smart.  Gresham’s law took effect.  You will almost never happen upon a 90% silver dime or quarter anymore.  Most of them have been picked out of circulation.  Today, the 90% silver coins are valued for their metal content and not their face value anymore.  You have an opportunity to buy nickel at less than spot market price.  You can resell them later at a profit. 

The composition of the US nickel has been unchanged since the end of WWII.  The nickel is 75% copper and 25% nickel.  It costs the US government 11.2 cents to produce the 5 cent nickel.  They are broke and they need to cut government costs wherever it is easiest.  The voters don’t care about the composition of the coinage.  So, the US government is proposing changes to the composition of the nickel.

http://money.cnn.com/2012/02/15/news/economy/pennies_nickels/

The website www.coinflation.com calculates the daily metal value of all US coins.  The metal inside a nickel is worth 5.6 cents.  Nickel is selling for $9.07 per pound and copper is selling for $3.78 per pound in commodity markets today.  Buy low at 5 cents and sell high at 5.6 cents.  That is a 12.68% return on invested capital at today’s prices.  However, there is no market for coinage nickels right now because there is only one type of nickel.  You will have to wait to make any money off Gresham’s law.

The potential return on investment (ROI) is much higher.  About a year ago when nickel was selling for over $10.00 per pound and copper was over $4.00 per pound the metal in a single nickel was worth 6.2 cents.  That is a ROI of 24%.

The long term prospects for the price of copper and nickel are up.  Central bank monetary inflation will continue to erode the purchasing power of the dollar.  The price of nickel and copper expressed in dollars will continue to increase with monetary inflation.  A relapse of the world economy into recession will have the opposite effect on the price on copper and nickel.  So, in the short term the price of nickel and copper will go down, but long term the price will go up.

Buy nickels in two dollar rolls from you local bank.  You don’t have to sort nickels since there is only one composition of nickels in circulation.  The pre-1982 copper pennies are worth 2.5 cents (150% ROI), but you have to find them and separate them from all the zinc pennies.  That is a very labor intensive process.  I performed a test.  It took me one hour to sort through $10.00 of pennies.  Only about 15% were copper pennies (Gresham’s law again).  1 hour of labor yielded $1.50 in copper pennies worth $3.75 in metal.  Time is money.  I could have bought $100 in nickels in five minutes at a bank and been done with it.  No sorting necessary.  The best part is that your nickels are always worth their face value.  It is a guaranteed investment so long as you are patient.

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

Published in: on February 21, 2012 at 2:21 pm  Leave a Comment  

Is Japan Next? No, Rest of the PIIGS Are Next.

Is Japan next.pdf Download this file

A friend of mine sent me an article from Fortune.  The article asked the question if Japan is next to suffer a sovereign debt crisis.  I think the rest of the PIIGS will suffer before Japan, but Japan’s and the USA’s day of reckoning is coming at some point.  The full article is here with my comments and explanations why I believe this to be the case.

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Published in: on February 16, 2012 at 1:53 pm  Leave a Comment  

A First Look at Duke Energy (DUK).

Bonds outstanding: They have $4.5 billion in outstanding bonds.

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What the company does – Duke Energy is one of the largest multistate holding companies of regulated electric and gas utilities, with regulated utilities in the Carolinas, Indiana, Ohio, and Kentucky that deliver electricity to about 4 million customers and deliver natural gas to 500,000 customers. Duke’s competitive generation and power retailing business operates primarily in the Midwest, and its international energy segment owns and operates hydroelectric generation assets in Latin America.

Morningstar’s take – Pending necessary regulatory approvals, Duke is poised to become the largest regulated utility in the United States following its announced merger with Progress Energy PGN, which is expected to close at the end of 2011.

DIVIDEND RECORD – Duke was a dividend grower from 1987 – 2005, then they cut the dividend from $0.32 per quarter to $0.21 in 2005.  The dividend has grown back to $0.25 since then.

Dividend: $0.25 quarterly

Dividend yield: 4.6% ($1.00 annual dividend / $21.42 share price)

Dividend payout ratio: 72% using Google Finance’s recent EPS of $1.38 OR 88% using the average earning power of $1.13 per share

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EARNING POWER – $1.13 per share at 1.333 billion shares

(Earnings adjusted for changes in capitalization)

EPS

Net income

Shares

Adjusted EPS

2006

$1.57

$1,863 M

1,188 M

$1.40

2007

$1.18

$1,500 M

1,266 M

$1.13

2008

$1.07

$1,362 M

1,267 M

$1.02

2009

$0.83

$1,075 M

1,294 M

$0.81

2010

$1.00

$1,320 M

1,319 M

$0.99

2011 (est)

$1.43

$1,911.21 M

1,333 M

$1.43

EPS

Net income

Shares

Adjusted EPS

2011 Q1

$0.38

$511 M

1,331 M

$0.38

2011 Q2

$0.33

$435 M

1,333 M

$0.33

2011 Q3

$0.35

$472 M

1,333 M

$0.35

2011 Q4 (est)

$0.37

$493.21 M

1,333 M

$0.37

2011 total (est)

$1.43

$1,911.21 M

1,333 M

$1.43

Six year average adjusted earnings per share is $1.13

Consider contrarian buying below $9.04 (8 times average adjusted EPS)

Consider value buying below $13.56 (12 times average adjusted EPS)

Duke Energy is currently trading at 18.9 times average adjusted EPS.  This stock is still priced for investment, but it’s pretty close to speculative pricing.

Consider speculative selling above $22.60 (20 times average adjusted EPS)

BALANCE SHEET – Shareholder equity is very stable, but I’m a little concerned about the low current ratio of 1.23 and quick ratio of 0.42.   Where will Duke Energy get money to cover current liabilities?  Their

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Book value per share: $17.10

Price to book value ratio: 1.25 (under 1.0 is good) ($21.42 / $17.10)

Current ratio: 1.23 latest quarter (over 2.0 is good) ($6,273 M current assets / $5,115 M current liabilities)

Quick ratio: 0.42 (over 1.0 is good) ($2,178 M cash / $5,115 current liabilities)

Debt to equity ratio: 0.77 (lower is better)

Percentage of plant, property, and equipment compared to total assets: 68.9%

CONCLUSION – Duke Energy is trying to merge with Progress Energy (http://www.reuters.com/finance/stocks/DUK/key-developments/article/2441001 ).  Mergers typically involve large sums of debts which erodes shareholder equity.  I would wait to buy the combined company after some combined analysis confirms a value price.  However, if the merger fails, then don’t buy Duke above $13.56.  The stock is currently too close to speculative pricing and the lack of current assets gives me pause.  Europe is already in recession and China has a looming recession (http://teapartyeconomist.com/2012/02/13/chinas-imports-fall-indicating-an-economis-slowdown/ ).  A worldwide recession will ensue and drop stock prices everywhere.

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DISCLOSURE – I don’t own Duke Energy (DUK).

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Published in: on February 14, 2012 at 4:31 pm  Leave a Comment