First Look at Arch Coal (ACI). Stock price -75% over past 52 weeks. Should you buy?

Bonds: $9.0 billion outstanding.  The bonds are a threat to the common dividend.

Times interest earned:  Arch Coal paid $230 million on interest charges in 2011.  They earned $142 million net income in 2011.  This is troubling.  They only earned 0.62 times their interest expenses.  The father of value investing, Benjamin Graham, likes to see a company earn at least four times their fixed charges (interest expenses).  All of these bonds are ahead of the common dividend.

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Preferred stock: none.

DIVIDEND RECORD: Arch Coal cut their quarterly dividend by 50% in late 1999 from $0.06 to $0.03.  They have grown it back to $0.11 since late 1999.

Dividend: $0.11 quarterly

Dividend yield: 4.5% ($0.44 annual dividend / $9.76 share price)

Dividend payout: 58.6% ($0.44 / $0.75 2011 EPS) –OR- 56% ($0.44 / $0.79 average adjusted earning power)

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EARNING POWER: $0.79 per share @ 213.29 million shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$0.18

$38 M

129 M

$0.18

2006

$1.80

$261 M

145 M

$1.22

2007

$1.21

$175 M

144 M

$0.82

2008

$2.45

$354 M

144 M

$1.66

2009

$0.28

$42 M

151 M

$0.20

2010

$0.97

$159 M

163 M

$0.75

2011

$0.74

$142 M

191 M

$0.67

Seven year average adjusted earnings per share is $0.79

Consider contrarian buying below $6.32 (8 times average adjusted EPS)

Consider value buying below $9.48 (12 times average adjusted EPS)

Arch Coal (ACI) is currently trading at 12.4 times average adjusted EPS.  This is stock is priced for investment.  It isn’t as cheap as the happy faced articles portray.

Consider speculative selling above $15.80 (20 times average adjusted EPS)

BALANCE SHEET – The price to book and tangible book values look great.  But the company has little current assets to pay its current liabilities.  The overall balance sheet is not strong.

Image008

Book value per share: $16.78 ($3,578 M equity / 213.29 M shares)

Price to book value ratio: 0.58 (under 1.0 is good)

Tangible book value per share: $13.98

Price to tangible book value: 0.70 (under 1.0 is really good)

Current ratio: 1.16 latest quarter (over 2.0 is good) ($1,183 M current assets / $1,021 M current liabilities)

Quick ratio: 0.14 latest quarter (over 1.0 is good) Horrible!! No cash!  ($138 M cash or equivalents/ $1,021 M current liabilities)

Debt to equity ratio: 1.05 (lower is better)  Too much debt to equity.

Percentage of total assets in plant, property, and equipment: 77.8% (the higher the better).  Current assets = 11.58%, intangibles = 5.84%, and other long term assets = 4.76%

Working capital trend: Their trend is certainly not up, but at least 90% of the last 10 years are positive numbers.

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CONCLUSION – Arch Coal is cheaper not than during the Panic of 2008 – 2009.  It has lost over 75% of its share price in the last 52 weeks, but that doesn’t mean you should buy it.  The dividend is 4.5%, but it is not safe due to the bonds.  They have cut the dividend drastically in the past and I see no reason why they wouldn’t do that again in the future.  Coals main competitor, natural gas, is extremely cheap.  That will inhibit earnings growth in the coal industry until the price of natural gas goes much higher.  Arch coal’s share price is currently flirting with value territory of less than 12 times average adjusted earning power.  I think poor commodity fundamentals and a worldwide double dip recession are going to sink this stock further.  The weak balance sheet real is a deal breakers.  They are going to have to sell more shares in a secondary offering or take on more debt to pay for their current liabilities.  I think that Arch Coal should not be bought until they strengthen their balance sheet by paying of debts.

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DISCLOSURE – I don’t own Arch Coal (ACI).

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 April 30, 2012 at 1:41 pm  Leave a Comment  

First look at Enerplus Corporation (ERF). Huge dividend, weak balance sheet.

(Source: Finviz.com)

Due to company’s exposure to natural gas-related assets, the stock has lost more than 26% in this year alone. However, it looks like a cheap deal after the recent sell-off. Enerplus is trading near its book value. The P/S and P/CF ratios stand at 2.4, and 5.3, respectively. The company has substantial assets in the Marcellus and Bakken shales. Morningstar claims that these assets could prove highly productive in the long term.

My FED+ fair model suggests a fair value range of $20 – $38. Analysts mean target price of $26.79 fits almost perfectly at the middle of my fair value range. The current price of $18 suggests that Enerplus is deeply undervalued. I think the stock is oversold, and ready for a big bounce. That is why I rate it as a buy.

Here is my first look analysis of Enerplus Corporation

Enerplus Corporation (ERF)

Price: $17.76

Shares: 196.30 million

Market capitalization: $3.48 billion

All the financial numbers are in Canadian dollars.  Fortunately the US dollar and Canadian dollar are at near parity.  Here is a Google Finance chart of the last 10 years of USD to CAD exchange rates.

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What does the company do – Enerplus, based in Calgary, Alberta, is an independent energy company engaged in the exploration for and production of oil and gas in the Western Canadian Sedimentary Basin and Pennsylvania’s Marcellus Shale. At the end of 2010, the company reported proven reserves of 219.4 million barrels of oil equivalent. Daily net production averaged about 83,139 barrels of oil equivalent per day in 2010 at a ratio of 58% gas/42% liquids.

Morningstar’s take – The passing of 2010 marked a series of changes for Enerplus as it converted from an income trust to a corporation. The company sold off conventional and oil sands assets, using the proceeds to build its acreage position in Pennsylvania’s Marcellus Shale and the Bakken in North Dakota and Saskatchewan. We think the company will continue to pay an attractive dividend and aggressively pursue production growth in the Marcellus and Bakken.

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Bonds: According to Morningstar.com Enerplus Corp has no bond data available.

Times interest earned:  ERF’s 2011 net income was $109 million and the company paid $60 million in interest charges.  This means that the company earned only 1.81 times the interest on its long term debts.  The father of value investing, Benjamin Graham, believed that a company should earn fully four times the interest charges to warrant the purchase of shares of an industrial preferred stock.

Preferred stock: none

Margin of profit: 8.19%  Profit margins were between 18.7% and 37.9% from 2002 through 2008.  Since then they have ranged between 6.9% and 9.4%.

DIVIDEND RECORD: Enerplus Corporation cut its dividend 57% from $0.42 monthly in late 2008 to $0.18 monthly since the beginning of 2009.  There has been no dividend growth since the cut.

Dividend: $0.18 monthly

Dividend yield: 12.16%  ($2.16 annual dividend / $17.76 share price)

Dividend payout: 386% ($2.16 / $0.56 EPS in 2011) –OR- 133% ($2.16 / $1.62 average adjusted earning power).  Either way ERF the dividend is not safe by any measure.  The world is reentering recession.  That will drive the price of oil down and natural gas price will not recover anytime soon.  I expect another significant dividend cut in the next year.

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EARNING POWER: $1.62* @ 196.3 million shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$3.95

$432 M

109 M

$2.20

2006

$4.47

$545 M

122 M

$2.78

2007

$2.66

$340 M

128 M

$1.73

2008

$5.53

$889 M

161 M

$4.53

2009

$0.53

$89 M

170 M

$0.45

2010

($1.02)

($179 M)

176 M

($0.91)

2011

$0.61

$109 M

180 M

$0.56

Seven year average adjusted earnings per share is $1.62

Consider contrarian buying below $12.96 (8 times average adjusted EPS)

Enerplus Corporation (ERF) is currently trading at 10.96 times average adjusted EPS.  This is stock is value priced.

Consider value buying below $19.44 (12 times average adjusted EPS)

Consider speculative selling above $32.40 (20 times average adjusted EPS)

BALANCE SHEET – ERF’s current ratio and quick ratio reveal how tenuous their balance sheet is.

Image014

Book value per share: $16.69 ($3,277 million shareholder equity / 196.3 million shares)

Tangible book value per share: $15.90 (shareholder equity – intangible assets of $155 million / shares)

Price to book value ratio: $1.06 (under 1.0 is good)

Price to tangible book value ratio: 1.11 (under 1.0 is great)

Current ratio: 0.27 latest quarter (over 2.0 is good)

Quick ratio: 0.011 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.26 (lower is better)

Percentage of total assets in plant, property, and equipment: 90.98% (the higher the better)

Working capital trend is down.  That means that ERF must find funding to make up the difference.  This is a bad sign coupled with the extreme dividend payout ratio.

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CONCLUSION – The best time to buy Enerplus Corporation in recent years was in 2009 when the stock bottomed around $15 per share.  However there is a worry-some downward spike in the price during the “flash crash” of May 2010.  I don’t like stocks that get pummeled in flash crashes.  ERF is a high dividend stock yielding over 12%, but the dividend is not safe based on the expected earnings in the near future.  The world is slipping back into recession.  Europe is already in recession, China is moving towards recession, and the US data keeps getting worse.  Recessions cause oil prices to drop.  That will reduce ERF’s earnings like in 2009.  Natural gas has dropped, dropped, dropped.  Maybe it stabilizes at around $2 per MCF or $3, but the point is that it will not miraculously go back up to $10 – $14 per MCF with all the supply increases due to the fracking technology.  I expect ERF to cut their dividend significantly again when its obvious to the common man that worldwide recession is back.  The stock price is value now, but it will be even cheaper in the near future.  ERF’s balance sheet has several weaknesses.  Their low current ratio and quick ratio shows that the company has little current assets to pay for current liabilities.  Those liabilities will need to be funded through additional stock offerings or increasing long term debts.  This isn’t a single year issue.  Look at the working capital trend to see a company that is always short of paying its current liabilities from current assets.  I would ignore this company until they cut their dividend and improve their balance sheet.

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DISCLOSURE – I don’t own Enerplus Corporation (ERF).

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

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Published in: on April 25, 2012 at 2:30 pm  Leave a Comment  

TIP OF THE WEEK – What the Heck is Working Capital and Why Should You Care?

What the Heck is Working Capital and Why Should You Care?

Jason Brizic

April 20st, 2011

You need to know what working capital is because it is one of the indicators of balance sheet strength.

Follow Benjamin Graham’s advice on the importance of working capital.  The following passage comes from the 1937 book The Interpretation of Financial Statements Chapter XII:

            In studying what is called the “current position” of an enterprise, we never consider the current assets by themselves, but only in relation to the current liabilities.  The current position involves two important factors: (a) the excess of current assets over current liabilities – known as the Net Current Assets or the Working Capital, and (b) the ratio of current assets to current liabilities – known as the Current Ratio.

            The Working Capital is found by subtracting the current liabilities from the current assets.  Working Capital is a consideration of major importance in determining financial strength of an industrial enterprise, and it deserves attention also in the analysis of public utility and railroad securities.

            In the working capital is found the measure of the company’s ability to carry on its normal business comfortably and without financial stringency, to expand its operations without the need of new financing, and to meet emergencies and losses without disaster.  The investment in plant account (or fixed assets) is of little aid in meeting these demands.  Shortage of working capital, at its very least, results in slow payment of bills with attendant poor credit rating, in curtailment of operations and rejection of desirable business, and in a general inability to “turn around” and make progress.  Its more serious consequence is insolvency and the bankruptcy court.

            The proper amount of working capital required by a particular enterprise will depend upon both the amount and the character of its business.  The chief point of comparison is the amount of working capital per dollar of sales.  A company doing business for cash and enjoying a rapid turnover of inventory – for example, a chain grocery enterprise – needs a much lower working capital compared with sales than does the manufacturer of heavy machinery sold on long-term payments.

            The working capital is also studied in relation to fixed assets and to capitalization, especially the funded debt and preferred stock.  A good industrial bond or preferred stock is expected, in most cases, to be entirely covered in amount by the net current assets.  The working capital available for each share of common stock is an interesting figure in common stock analysis.  The growth or decline of the working capital position over a period of years is also worthy of the investor’s attention.

            In the field of railroads and public utilities, the working capital item is not scrutinized as carefully as in the case of industrials.  The nature of these service enterprises is such as to require relatively little investment in receivables or inventory (supplies).  It has been customary to provide for expansion by means of new financing rather than out of surplus cash.  A prosperous utility may at times permit its current liabilities to exceed its current assets, replenishing the working capital position a little later as part of its financing program.

            The careful investor, however, will prefer utility and railroad companies that consistently show a comfortable working capital situation.

Let’s take a look at Safe Bulkers (SB) working capital situation from the past few years (Source: Morningstar.com).  Safe Bulkers financial strength has been eroding along with the dry bulk shipping market.

12/2007

12/2008

12/2009

12/2010

12/2011

Total Current Assets

$98,883,000

$88,086,000

$105,648,000

$104,276,000

$37,959,000

Total Current Liabilities

$43,984,000

$70,863,000

$65,551,000

$52,983,000

$51,673,000

Working Capital

$54,899,000

$17,223,000

$40,097,000

$51,293,000

($13,714,000)

Current Ratio

2.25

1.24

1.61

1.97

0.73

Revenues

$165,848,000

$200,772,000

$164,606,000

$157,020,000

$168,908,000

WC as % of Revenue

33.1%

8.6%

24.4%

32.7%

N/A

For more tips, go here:

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

Published in: on April 20, 2012 at 3:47 pm  Leave a Comment  

The Interpretation of Financial Statements – Ratio Analysis using Safe Bulkes (SB) as an example

I recently finished reading Benjamin Graham’s 1937 classic The Interpretation of Financial Statements.  Graham explains the financial statement concepts in clear English.  At the end of the book he walks the reader through the analysis of a balance sheet and income statement using the ratio method.  His example was Bethlehem Steel Corporation.

I will do the same with Safe Bulkers (SB).

A number of the ratios used in the analysis of an industrial company’s income account and balance sheet are presented herewith by the use of a single example – namely the financial statements of the Safe Bulkers corporation for 2011.  Various items in the Balance Sheet and Income account are numbered.  This will facilitate the explanation as to the method of computing ratios.  For example margin of profit, the first ratio computed in this study, is operating income divided by sales.  On the Income Account operating income is item No. 4 and sales is item No. 1.  The method of computing margin of profit is expressed at (4) ÷

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(1) or in actual amounts $108,936,000 ÷

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$172,036,000 = 63.3%

SAFE BULKERS

Income Account Year Ended December 31, 2011

(1)

Revenues

$172,036,000

Commissions

(3,128,000)

(2)

Voyage, vessel operating, general and administrative expenses

(36,542,000)

Early redelivery income

207,000

(3)

Depreciation

(23,637,000)

(4)

Operating Income

$108,936,000

Add – interest, dividends, and other misc income

0

(5)

Total Income

$108,936,000

(6)

Deduct-Interest charges

(19,202,000)

(7)

Net Income

$89,734,000

(8)

Deduct-Dividends on Preferred Stock

0

(9)

Net for Common Stock

$89,734,000

Deduct-Dividends on Common Stock

$42,536,652

(10)

Transferred to Surplus

$47,197,348

BALANCE SHEET

SAFE BULKERS

December 31st, 2011

ASSETS

Current Assets:

(11)

Cash, time deposits

$28,121,000

(12)

Other current assets

9,838,000

(13)

Accounts and notes receivable

0

(14)

Inventories

0

(15)

Total Current Assets

$37,959,000

Advances for vessel acquisition and vessels under construction

$122,307,000

Restricted cash non-current

5,423,000

Long-term investment

50,000,000

Other non-current assets

6,226,000

(16)

Vessels

?

(17)

Less reserve for depreciation and depletion

0

(18)

Vessels, net

$655,356,000

Total Long Term Assets

$ 839,312,000

Total Assets

$877,271,000

LIABILITIES

Current Liabilities:

Current portion of long-term debt

$18,486,000

Other current liabilities

$33,187,000

(19)

Total Current Liabilities

$ 51,673,000

(20)

Long-term debts, net of current portion

$465,805,000

(21)

Other non-current liabilities

$27,951,000

Total Non-current Liabilities

$493,756,000

(22)

Common stock 70,894,420 shares, no par value?

0

(23)

Shareholder equity (Surplus)

$331,842,000

Total Shareholder Equity

$331,842,000

Total Liabilities

$877,271,000

Margin of Profit

Operating income divided by Sales.

Formula: (4) ÷

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(1)

Published in: on April 18, 2012 at 3:28 pm  Leave a Comment  

You Can Plainly See That the Emperor Has No Clothes.

The Keynesian economists that make up the Federal Reserve Board of Governors are clueless and blind.  They did not see the Panic of 2008 coming, yet they claim that they see recovery and good times ahead now.  Don’t believe them unless you belive this.

You will have ample opportunities to buy high dividend stocks with earning power and strong balance sheets cheaply in the next two years.

Be seeing you!

Published in: on April 14, 2012 at 8:47 am  Leave a Comment  

First Look at ConocoPhillips (COP). Not a Cheap As You Think.

Preferred stock: none

Bonds: $20.1 billion.  COP paid $972 million in interest expenses in 2011.  It earned $12.436 billion in the same year.  The company has the interest covered 12.8 times over.  The bonds are not a threat to the dividend at this time.

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DIVIDEND RECORD: ConocoPhillips paid a $0.01 quarterly dividend in 1987.  They are paying $0.66 per quarter this year.  That is 6,500% dividend growth over 25 years.  And they are a dedicated dividend payer because when most of the other spineless CEOs were cutting dividends near the depths of the markets in 2009 Conoco raised the dividend 15% when they had huge per share losses.  Why can’t more executives have the fortitude that COP has.

Dividend: $0.66

Dividend yield: 3.55%   COP becomes a high dividend stock with a dividend yield of 6% when the stock price drops to $44.00.

Dividend payout: 29% using 2011 EPS of $8.98 –OR- 29% using the alternative earning power excluding extraordinary charges

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EARNING POWER: $3.61 @ 1.28 billion shares –OR- $8.83 @ 1.28 billion shares excluding the massive impairment charges in 2008.

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

EPS

Net income

Shares

Adjusted EPS

2007

$7.22

$11,891 M

1,646 M

$9.29

2008

($11.16)

($16,998 M)

1,523 M

($13.28)

2009

$2.94

$4,414 M

1,498 M

$3.45

2010

$7.62

$11,358 M

1,491 M

$8.87

2011

$8.97

$12,436 M

1,387 M

$9.72

Here is the CEO’s explanation from the 2008 annual report.  You can decide for yourself if the impairments are not indicative of the strength of their underlying earnings.

Despite our progress, like the entire industry ConocoPhillips was severely impacted by falling commodity prices, tightening refining margins, and steep declines in share prices. The decline in market capitalization, as well as expectations for extended weakness in prices and margins, necessitated noncash impairments of goodwill related to our Exploration and Production (E&P) business, and to the carrying value of our LUKOIL investment.

These and other impairments in 2008 totaled $34.1 billion. As a result, despite record earnings through three quarters, we closed 2008 with a net loss of $17 billion, or $11.16 per share, compared with a profit during 2007 of $11.9 billion, or $7.22 per share. Our capital program during the year totaled $19.9 billion. Total debt increased to $27.5 billion, compared with $21.7 billion at year-end 2007.

We believe that the impairments are not indicative of the strength of our underlying earnings and cash flow, or the potential offered by our asset base. Exemplifying these attributes, if impairment charges and other similar items are excluded for both years, adjusted earnings during 2008 were $16.4 billion, or $10.66 per share, compared with $15.2 billion, or $9.21 per share, in 2007.

Alternative earnings excluding extraordinary impairment charges in 2008

EPS

Net income

Shares

Adjusted EPS

2007

$7.22

$11,891 M

1,646 M

$9.29

2008

$10.99

$16,400 M

1,523 M

$12.81

2009

$2.94

$4,414 M

1,498 M

$3.45

2010

$7.62

$11,358 M

1,491 M

$8.87

2011

$8.97

$12,436 M

1,387 M

$9.72

Six year average adjusted earnings per share is $3.61 –OR- $8.83 (depending on whether you believe the CEO’s explanation).  I don’t believe him because I think there is another worldwide recession coming that was delayed by central bank counterfeiting.  The price of oil and natural gas will fall from their present levels in a worldwide recession.  If this is true, then ConocoPhillips is not currently priced as cheaply as it is portrayed in the online P/E values.

Consider contrarian buying below $28.88 (8 times average adjusted EPS of $3.61)

Consider value buying below $43.32 (12 times average adjusted EPS of $3.61)

Consider speculative selling above $72.20 (20 times average adjusted EPS $3.61)

ConocoPhillips is currently trading at 20.6 times average adjusted EPS.  This is stock is speculatively priced.

Here are the buy/sell prices if you believe their CEO and his explanation and Keynesian economics

Consider contrarian buying below $70.64 (8 times average adjusted EPS of $8.83)

ConocoPhillips is currently trading at 8.4 times average adjusted EPS.  This is stock priced for value.

Consider value buying below $105.96 (12 times average adjusted EPS of $8.83)

Consider speculative selling above $176.60 (20 times average adjusted EPS of $8.83)

BALANCE SHEET – You can clearly see the $34 billion drop in assets and equity in 2008 caused by low oil prices.  ConocoPhillip’s balance sheet is not strong.

Image009

Book value per share: $50.96 ($65.224 B equity / 1.28 B shares)

Tangible book value per share: $47.77 (equity above – $4.077B intangibles / 1.28 B shares)

Price to book value ratio: 1.46 (under 1.0 is good)

Price to tangible book value ratio: 1.55 (under 1.0 is best)

Current ratio: 1.12 latest quarter (over 2.0 is good)

Quick ratio: 0.78 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.34 (lower is better) That is pretty low.

Percentage of total assets in plant, property, and equipment: 55% (the higher the better) Other long term investments comprised 23%, current assets comprise 19%, and intangibles were only 3% of total assets.

The working capital trend is negative

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CONCLUSION – As usual, the best time to buy ConocoPhillips in recent years was in March 2009.  It was a value investment back then.  ConocoPhillips is a powerful dividend payer and grower.  Their dividend is safe due to relatively low debt and a low payout ratio.  However, the company is speculatively priced at this time a 20.6 time average adjusted earnings.  Wise investors should have scaled out of it when it reached $72.20 back in February 2011.  The balance sheet is weak when you look at the price to book value ratio and the current ratio and quick ratios.   They might issue some more bonds or cut back on their capital expenditures to make up the difference between current assets and current liabilities.  You can safely ignore this stock until it drops back to the $47 – $44 range were the tangible book value is almost even and the dividend is near 6%.

Image011

DISCLOSURE – I don’t own ConocoPhillips (COP).

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 April 13, 2012 at 10:45 pm  Leave a Comment  

First Look at General Electric. Malaise!

Preferred stock: GE paid $1.031 billion in preferred dividends last year.  They reported that they retired the preferred dividend on their 4Q 2011 earnings webcast.

Bonds: $112.6 billion outstanding.  That is a really ugly bond chart.  GE loves issuing debt.

Image006

DIVIDEND RECORD: Not good because of their huge dividend cut in 2Q 2009.  GE cut the dividend from $0.31 to $0.10 quarterly.  They have since increased the dividend to $0.17 quarterly at the present time.

Dividend: $0.17

Dividend yield: 3.6% ($0.68 annually/$19.01 share price)

Dividend payout: 55% using 2011 earnings of $1.23 –OR- 48% using the average adjusted earning power of $1.41

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EARNING POWER: $1.41 @ 10.58 billion shares

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

EPS

Net income

Shares

Adjusted EPS

2007

$2.17

$22,208 M

10,218 M

$2.10

2008

$1.72

$17,335 M

10,098 M

$1.64

2009

$1.01

$10,725 M

10,615 M

$1.01

2010

$1.06

$11,344 M

10,678 M

$1.07

2011

$1.23

$13,120 M

10,620 M

$1.24

Five year average adjusted earnings per share is $1.41

Consider contrarian buying below $11.28 (8 times average adjusted EPS)

Consider value buying below $16.92 (12 times average adjusted EPS)

General Electric (GE) is currently trading at 13.5 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $28.20 (20 times average adjusted EPS)

BALANCE SHEET – GE is a company in decline and the balance sheet shows it.  The balance sheet is not strong.  GE forgot how to compound shareholder equity.  The entire balance sheet should remain suspect because of the bailed out GE Capital.

Image009

Book value per share: $11.00 ($116.438 B equity divided by 10.58 billion shares = $11.00 per share)

Tangible book value per share: $3.00 ($116.438 B equity – $72.625 B goodwill – $12.068 B intangibles = $31.745 B tangible book value divided by 10.58 billion shares = $3.00 per share)

Price to book value ratio: 1.73 (under 1.0 is good)

Price to tangible book value ratio: 6.33 Horrible!!

Current ratio: 2.29 latest quarter (over 2.0 is good)

Quick ratio: 2.21 latest quarter (over 1.0 is good)

Debt to equity ratio: 2.16 (lower is better)  Notice all the red above the green on the balance sheet chart.  They love debt.

Percentage of total assets in plant, property, and equipment: 9.17% (the higher the better) Wow! That number really shocked me.  I though GE was an industrial conglomerate with a large percentage of its assets in net PPE.  10 years ago they were at 8.21% net PPE.  Current assets comprise 63.18% of total assets (42.87% accounts receivable & 18.39% cash equivalents), other long term assets comprise 15.85%, and intangibles made up 11.81% of total assets.

The working capital trend is up.

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CONCLUSION –   As usual, the best time to buy GE in recent years was in March 2009.  It was a contrarian investment back then at $7.06 per share.  General Electric was a steady dividend payer and grower from 1987 to 2009, but then they panicked and cut the dividend from $0.31 to $0.10 quarterly.  GE had plenty of retained earnings to continue to pay the dividend during the recession of 2009.  I think they really damaged their reputation as a dedicated dividend payer.  They pay a modest dividend and are cautiously growing the dividend since the cut.  The stock is still priced for investment at 13.5 times average adjusted earning power.  But the coming worldwide double-dip recession will drag the price of the stock back down to value pricing territory.  The balance sheet is weak when you look at increasing debt and a lack of shareholder equity growth, the price to tangible book value ratio is just horrible, and the net assets in property, plant, and equipment.   I would ignore this stock until if falls below $13.00.  Those are some key support levels from June 2010 and September 2011.

GE Capital owns Greek bonds!!  Complete idiots are running that part of the company.  Enough said.

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DISCLOSURE – I don’t own General Electric (GE) and I would never own it as long as GE Capital is part of the company.

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Published in: on April 11, 2012 at 6:49 pm  Leave a Comment  

First Look at Dividend Grower Merck (MRK).

Preferred stock: none that I’m aware of.

Bonds: $8.9 billion outstanding.  Some big bonds are coming due in 2015, but they aren’t threatening this year’s dividend.

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DIVIDEND RECORD: Merck paid a $0.03 quarterly dividend in 1987.  The quarterly dividend has grown to $0.42 per share in 2012.  It has increased its dividend 1,300% over 25 years.  Merck is a dedicated dividend grower.

Dividend: $0.42 quarterly

Dividend yield: 4.35%  (Merck becomes a 6% high dividend stock at a price of $28.00 per share)

Dividend payout: 82.8% using recent EPS of $2.03 –OR- 82.3% using average adjusted earning power of $2.04

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EARNING POWER: $2.04 @ 3.04 billion shares

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

EPS

Net income

Shares

Adjusted EPS

2007

($1.04)

$3,275 M

2,193 M

$1.08

2008

$3.63

$7,808 M

2,145 M

$2.57

2009

$5.65

$12,853 M

2,273 M

$4.23

2010

$0.28

$859 M

3,120 M

$0.28

2011

$2.02

$6,257 M

3,040 M

$2.06

Merck’s five year average adjusted earnings per share is $2.04

Consider contrarian buying below $16.32 (8 times average adjusted EPS)

Consider value buying below $24.48 (12 times average adjusted EPS)  Merck’s stock price bottomed at $23.45 in April 2009.

Merck (MRK) is currently trading at 18.9 times average adjusted EPS.  This is stock is priced for investment, but is nearing speculative pricing.

Consider speculative selling above $40.80 (20 times average adjusted EPS)

BALANCE SHEET – 44% of Merck’s assets are comprised of goodwill and intangibles ($46.457 billion of $105.128 billion).  From 2003 through 2007 intangible assets only comprised about 4% of Merck’s total assets.  I don’t like so much subjectivity determining asset values.  The price to book value is too high.  The price to tangible book value is astronomical.

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Book value per share: $17.93

Tangible book value per share: $2.65  TBV is found by subtracting goodwill ($12.155 B) and intangibles ($34.302 B) from shareholder equity ($54.517 B) and then dividing by the number of shares (3.04 B)

Price to book value ratio: 2.15 (under 1.0 is good)

Price to tangible book value radio: 14.6

Current ratio: 2.04 latest quarter (over 2.0 is good)

Quick ratio: 0.92 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.28 (lower is better)

Percentage of total assets in plant, property, and equipment: 15.5% (the higher the better)  Current assets account for 31.6%, long term assets 5.46%, and other equity/investments 3.29%.

Working capital trend is way up.  Working capital equals current assets less current liabilities.  Financially strong companies have a positive upward trend.

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CONCLUSION – As usual, the best time to buy MRK in recent years was in April 2009.  It was a value investment back then.  Merck is a steady dividend payer and grower.  The dividend yield is nothing special until the stock takes a beating.  The company is still priced for investment at this time, but it’s getting dangerously close to 20 times average adjusted earnings.  I think it is time to get out of Merck.  Scale out of it above $40.80.  The balance sheet is weak when you look at the price to book value ratio and the tangible book value ratio.  Much of its assets are intangibles.  That in never a good sign.  Pharmaceutical companies are always a the mercy of FDA bureaucrats and their clinical trial approvals.  I don’t like the Sword of Damocles hanging over my investments.  I wouldn’t buy Merck until it is back below $24.48, if at all.

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DISCLOSURE – I don’t own Merck (MRK).

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Published in: on April 10, 2012 at 11:22 pm  Leave a Comment  

Some examples of high price to tangible book values.

Last Friday I wrote my “Tip of the Week” on book value and its calculation.  I used the original writing of legendary value investor Benjamin Graham in that article.  If you missed it, then you can get it here:

http://www.myhighdividendstocks.com/high-dividend-stocks/tip-of-the-week-book-value-or-equity-and-how-to-calculate-book-value-per-share

At the end of the article I calculated the tangible book value of Safe Bulkers (SB).  Today I will take a look at the tangible book value of a few more stocks: AT&T (T), Verizon (VZ), Terra Nitrogen (TNH), Goldcorp (GG), Southern Copper (SCCO), and Apple (AAPL).

AT&T (T) tangible book value

Shareholder equity equals $105.534 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  AT&T claimed $70.842 billion in goodwill assets as of 4Q2011 and $59.343 billion in intangibles.  AT&T’s tangible book value is negative $24.651 billion dollars.  The company has 5.93 billion shares outstanding.  AT&T’s tangible book value per share is negative $4.15 dollars.  That really stinks.  Maybe Verizon has a positive net book value per share.  AT&T stock sold for $30.64 recently.  Their price to tangible book value ratio is negative.

Verizon (VZ) tangible book value

Shareholder equity equals $35.97 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Verizon claimed $23.357 billion in goodwill assets as of 4Q2011 and $79.128 billion in intangibles.  Verizon’s tangible book value is negative $66.515 billion dollars.  The company has 2.84 billion shares outstanding.  The tangible book value per share is negative $23.42 dollars.  That really stinks also.  Verizon stock sold for $37.46 recently.  Their price to tangible book value ratio is negative.

Terra Nitrogen (TNH) tangible book value

Shareholder equity equals $269.3 million.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Terra Nitrogen claimed no goodwill or intangibles as of 4Q2011.  Terra Nitrogen’s tangible book value is $269.3 million.  The company has 18.69 million shares.  The tangible book value per share is $14.41.  That is very low compared to the current stock price.  Terra Nitrogen stock sold for $262 per share recently.  Their price to tangible book value ratio is 18.18.  Shareholders that bought at $262 are paying $18.18 for each $1.00 in tangible assets.  That is a whopping premium on invested capital.  A smart businessman would never overpay so much for so little assets.  Stay away from Terra Nitrogen because there is much more risk than reward.

Goldcorp (GG) tangible book value

Shareholder equity equals $21.272 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Goldcorp claimed no goodwill of $1.737 billion as of 4Q2011.  Goldcorps’s tangible book value is $19.535 billion.  The company has 810 million shares.  The tangible book value per share is $24.11.  Goldcorp stock sold for $41.04 per share recently.  Their price to tangible book value ratio is a respectable 1.7.  Goldcorp stock will be cheap when the price is near one times tangible book value.

Southern Copper (SCCO) tangible book value

Shareholder equity equals $4.015 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Southern Copper claimed intangibles of $110 million as of 4Q2011.  Southern Copper’s tangible book value is $3.905 billion.  The company has 840.98 million shares.  The tangible book value per share is $4.64.  Southern Copper’s stock sold for $30.46 per share recently.  Their price to tangible book value ratio is an overpriced 6.56.  SCCO share holders who bought near $30.46 are paying $6.56 for each dollar of invested capital.

Apple (AAPL) tangible book value

Shareholder equity equals $76.615 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Apple claimed $896 million in goodwill and $3.536 billion in intangible in their 4Q2011 financials.  Apple’s tangible book value is $72.183 billion.  The company has 932.37 million shares.  The tangible book value per share is $77.42.  Apple’s stock sold for $636.23 per share recently.  Their price to tangible book value ratio is grotesque 8.22.  AAPL share holder who bought near $636 are paying $8.22 for each dollar of invested capital.

Goldcorp is the only stock on this short list with a price to tangible book value under 2.0 and even that isn’t cheap.  I wrote this article to serve as a warning to value investors and high dividend stock investors.

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Published in: on April 9, 2012 at 10:24 pm  Leave a Comment  

TIP OF THE WEEK – Book Value or Equity and How to Calculate Book Value per Share

Book Value or Equity and How to Calculate Book Value per Share

Jason Brizic

April 6th, 2012

Knowing the book value of a company helps the intelligent investor to buy low.

You want to buy assets that produce profits as cheap as possible.

The following comes from Benjamin Graham’s 1937 book The Interpretation of Financial Statements.

The book value of a security is in most cases a rather artificial value.  It is assumed that if the company were to liquidate, it would receive in cash the value at which its various tangible assets are carried on the books.  Then the amounts applicable to the various securities in their due order would be their book value.  (The word “equity” is frequently used instead of book value in this sense, but it is generally applied only to common stocks and to speculative senior securities.)

As a matter of fact, if the company were actually liquidated the value of the assets would most probably be much less than their book value as shown on the balance sheet.  An appreciable loss is likely to be realized on the sale of the inventory, and a very substantial shrinkage is almost certain to be suffered in the value of the fixed assets.  In practically every case the adverse conditions which would lead to a decision to liquidate the business would also make it impossible to obtain anywhere near cost or reproduction price for the plant and machinery.

The book value really measures, therefore, not what the stockholders could get out of their business (its liquidating value), but rather what they have put into the business, including undistributed earnings.  The book value is of some importance in analysis because a very rough relationship tends to exist between the amount invested in a business and its average earnings.  It is true that in many individual cases we find companies with small asset values earning large profits, while others with large asset values earn little or nothing.  Yet in these cases some attention must be given to the book value situation, for there is always a possibility that large earnings on the invested capital may attract competition and thus prove temporary; also that large assets, not now earning profits, may later be made more productive.

CALCULATING BOOK VALUE

As has already been said, in calculating book value it is assumed that the company’s assets are worth the figure shown on the balance sheet.  Indeed, book value simply means the value as shown by the books or balance sheet.

To take a simple example, a company’s balance sheet is as follows:

Fixed Property

$1,000,000

Capital Stock

$1,700,000

Good-will

500,000

Surplus

100,000

Current Assets

500,000

Current Liabilities

200,000

$2,000,000

$2,000,000

In this case the capital stock is represented by 17,000 shares of $100 par value common stock.  To find the book value of the common stock, add the $100,000 surplus to the $1,700,000 value shown for the stock, making a total of $1,800,000.  Then look on the asset side of the balance sheet for intangibles.  You will find $500,000 good-will.  This is then deducted from the $1,800,000, leaving $1,300,000 equity available for the 17,000 common shares.  Incidentally, the figure $1,300,000 is often referred to as the “net tangible assets” of the company.  Dividing this out, the net book value per share would be $76.47.

If you had not deducted the intangibles and had simply divided the $1,800,000 by the 17,000 shares you would have found the book value per share to be $105.88.  You will not that there is quite a difference between this book value and the net book value of $76.47 a share.  If only “book value” of the stock is mentioned, tangible or net book value is usually meant.  The larger figure may be termed: “Book value, including intangibles.”

I will perform this calculation on one of my favorite high dividend stocks – Safe Bulkers (SB)

Fixed Property

$777,663,000

Capital Stock

$71,000

Intangibles

0

Additional Paid-in Capital

114,918,000

Current Assets

37,959,000

Retained Earnings

216,853,000

Other Investments

11,649,000

Current Liabilities

51,673,000

Other Long Term Assets

50,000,000

Non-current Liabilities

493,756,000

$877,271,000

$877,271,000

All of this balance sheet information is as of 4Q 2011.  Safe Bulkers has since added another 5,750,000 shares and $37,375,000 in additional paid-in capital since the 4Q 2011 report.  Safe Bulkers had 70,896,924 shares at the time of the 4Q 2011 financials report.

Safe Bulkers had $331,842,000 in book value at the end of 4Q 2011 (equity values – intangibles; highlighted in yellow above).  Divided that by 70,896,924 shares and you get a book value per share of $4.68.  That would be a very nice, low price to buy Safe Bulkers at.  Safe Bulkers sold for $3.00 – $2.50 per share at the depths of the 2009 recession.

Safe Bulkers book value per share rises to $4.82 if you include the additional paid-in capital the company raised after 4Q 2011.  This also assumes they didn’t incur any new liabilities in the meantime either.

For more tips, go here:

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

Published in: on April 6, 2012 at 4:33 pm  Leave a Comment