First Look at DOW 30 Component United Technologies (UTX)

What does the company do: United Technologies is a $54 billion diversified conglomerate with business operations serving primarily construction and aerospace markets. Otis elevators, Carrier air conditioners, Pratt & Whitney engines, and Sikorsky helicopters are key United Technologies product lines.

Morningstar’s take: Durability and balance are trademarks of the portfolio of United Technologies. While the company may not boast the flashy growth prospects found in some of its diversified industrial peers, we think management’s consistency and commitment to shareholders separate this wide-moat franchise from the cohort.

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Bonds: $9.4 billion outstanding

Times interest earned: 7.4 times.  UTX earned $4.979 billion in 2011 and had interest expenses of $673 million in 2011.  7.4 times earned exceeds Benjamin Graham’s recommendation of earning at least five times interest expenses.  United Technologies’ bonds do not threaten the dividend at all.

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Preferred stock: none.

DIVIDEND RECORD: United Technologies paid a $0.04 quarterly dividend in 1987.  They have grown the dividend to $0.54 quarterly today.  That is 1,250% straight line over 25 years or 50% annual straight line growth.

Dividend: $0.54

Dividend yield: 2.9% ($2.16 / $73.63 share price)

Dividend payout: 39% using the Google Finance reported EPS of $5.49 –OR- 48% using the average adjusted earning power of $4.53

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EARNING POWER: $4.53 @ 911.36 million shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$3.03

$3,069 M

1,014 M

$3.37

2006

$3.71

$3,762 M

1,006 M

$4.13

2007

$4.27

$4,224 M

989 M

$4.63

2008

$4.90

$4,689 M

956 M

$5.15

2009

$4.12

$3,829 M

929 M

$4.20

2010

$4.74

$4,373 M

923 M

$4.80

2011

$5.49

$4,979 M

907 M

$5.46

Seven year average adjusted earnings per share is $4.53

Consider contrarian buying below $36.24 (8 times average adjusted EPS)

Consider value buying below $54.36 (12 times average adjusted EPS)

United Technologies (UTX) is currently trading at 16.3 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $90.60 (20 times average adjusted EPS)

BALANCE SHEET – United Technologies has a weak balance sheet.

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Book value per share: $24.70 ($22.492 B equity / 911.36 shares)

Price to book value ratio: 2.98 (under 1.0 is good) ($73.63 share price / $24.70 book value per share)  UTX investors are paying $2.98 for each $1.00 of book value.  That is a large premium.

Tangible book value per share: $2.83 (equity – $16.169 B goodwill – $3.742 B intangibles / 911.36 M)

Price to tangible book value: 26 ($73.63 share price / $2.98 tangible book value)  UTX investors are paying $26.00 for each $1.00 of tangible book value.  That is insanely expensive.

Current ratio: 1.52 latest quarter (over 2.0 is good) ($27.847 B current assets / $18.33 B current liabilities)

Quick ratio: 0.34 latest quarter (over 1.0 is good) ($6.285 B cash / $18.33 B current liabilities)

Debt to equity ratio: 0.42 (lower is better)

Percentage of total assets in plant, property, and equipment: 9.45% (the higher the better) other assets as a percentage of total assets were: current assets 45.12%, intangibles 32.26%, and other long term assets 13.17%

Working capital trend: Up slightly in the long run.  Up nicely from $3.848 B to $7.142 B.

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CONCLUSION – United Technologies bottomed at $38.54 in March 2009?  It was at an extreme value price back then at 8.5 times average adjusted earnings.  Presently UTX is trading at 16.3 times average adjusted earnings.  That’s too high for a value investor like me.  UTX has a slightly above average dividend yield at 2.9% and the company is a dedicated dividend payer/grower.  It would be a high dividend stock if it returns to its 2009 low.  I think it will return to its 2009 low because there is a worldwide recession brewing in China, Europe, and the USA.  Its main product divisions are related to two industries that will be harmed by another worldwide recession: defense and construction.  Also, their balance sheet stinks due to high price to value ratios, poor current and quick ratios, and stagnant shareholder equity growth.  My recommendation is to wait for this stock to drop to $40 or below.

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DISCLOSURE – I don’t own United Technologies (UTX).

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Published in: on June 28, 2012 at 10:53 pm  Leave a Comment  

The True Source of Monopoly by Thomas DiLorenzo

There is no such thing as a market monopoly. The government creates monopolies. Thomas Dilorenzo explains in this short article.

http://lewrockwell.com/dilorenzo/dilorenzo231.html

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Published in: on June 25, 2012 at 10:56 am  Leave a Comment  

First Look at DOW Component Cisco Systems (CSCO).

What does the company do: Cisco Systems is the world’s leading supplier of data networking equipment and software. Its products include routers, switches, access equipment, and network-management software that allow data communication among dispersed computer networks. The firm has also entered newer markets, such as video conferencing, web-based collaboration, and data center servers.

Morningstar’s take: Significant scale advantages, meaningful customer switching costs, and a reputation as the go-to provider of enterprise-class networking equipment give Cisco a durable competitive advantage in its core markets of routing and switching. Although Cisco faced a challenging 2011 characterized by aggressive competition, restructuring, and rocky product transitions, the firm has largely recovered from missteps with its market share intact and improving operating results. We believe Cisco is well positioned in 2012 to maintain share and expand its operating margin.

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Bonds: $16 billion outstanding

Times interest earned: Cisco earned 12.32 times their interest expenses in the trailing twelve months.  They earned $7.356 billion in the trailing twelve months and paid $597 million in interest expenses.  Cisco’s bonds are not a threat to their dividend.

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Preferred stock: none

DIVIDEND RECORD: Cisco started paying a quarterly dividend in the first quarter of 2011.  They started paying a $0.06 quarterly dividend and have grown it to $0.08 presently.  That is 33% straight-line growth over less than two years.  If Cisco keeps growing their dividend at their present pace, then they will become a powerful dividend stock.

Dividend: $0.08 quarterly

Dividend yield: 1.86% ($0.32 annual dividend / $17.17 share price)

Dividend payout: 24% using the 2011 EPS of $1.35 –OR- 25.6% using their average adjusted earnings of $1.25

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EARNING POWER: $1.25 @ 5.36 billion shares

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

EPS

Net income

Shares

Adjusted EPS

7/2005

$0.87

$5,741 M

6,612 M

$1.07

7/2006

$0.89

$5,580 M

6,272 M

$1.04

7/2007

$1.17

$7,333 M

6,265 M

$1.37

7/2008

$1.31

$8,052 M

6,163 M

$1.50

7/2009

$1.05

$6,134 M

5,857 M

$1.14

7/2010

$1.33

$7,767 M

5,848 M

$1.45

7/2011

$1.17

$6,490 M

5,563 M

$1.21

Seven year average adjusted earnings per share is $1.25

Consider contrarian buying below $10.00 (8 times average adjusted EPS)

Consider value buying below $15.00 (12 times average adjusted EPS)

Cisco Systems (CSCO) is currently trading at 13.7 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $25.00 (20 times average adjusted EPS)

BALANCE SHEET – Cisco has an strong balance sheet loaded with current assets.

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Book value per share: $9.58 ($51.357 B equity / 5.36 B shares)

Price to book value ratio: 1.79 (under 1.0 is good)  ($17.17 share price / $9.58 BV)

Tangible book value per share: $6.01 (equity – $17.006 B goodwill – $2.134 B intangibles / 5.36 B shares)

Price to tangible book value: 2.86 ($17.17 share price / $6.01 TBV)

Current ratio: 3.57 latest quarter (over 2.0 is good) ($61.212 B current assets / $17.124 B current liabilities)

Quick ratio: 2.83 latest quarter (over 1.0 is good) ($48.412 B cash & equivalents / $17.124 B current liabilities)

Debt to equity ratio: 0.33 (lower is better)

Percentage of total assets in plant, property, and equipment: 3.99% (the higher the better)  Disposition of other assets categories: Current assets 67.15%, Intangibles 21.00%, and Other long term assets 7.86%

Working capital trend: Up huge.  This is what a working capital chart should look like.

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CONCLUSION – As usual, the best time to buy Cisco Systems in recent years was back in March 2009 when the stock price was $14.18.  It was a value investment back then at 11.3 times average earning power.  Cisco System is a new dividend payer and grower.  Their dividend record is too short to know if they’ll keep paying and growing their dividend during the next financial crisis.  The company is priced for investment at this time as 13.7 times average earning power.  The balance sheet is strong.  Their current ratio and quick ratio are some of the only good ones in the Dow 30 stocks.  There company has plenty of cash to finance current liabilities.  They are not dependent on any banks for funding in a crisis.  I’d look to buy Cisco below 15.00 when the stock market declines from the worldwide recession just getting started.

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DISCLOSURE – I don’t own Cisco Systems (CSCO).

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Published in: on June 21, 2012 at 5:33 pm  Leave a Comment  

First Look at DOW 30 Component Procter & Gamble (PG).

What does the company do: Since its founding in 1837, Procter & Gamble has become the world’s largest consumer product manufacturer, with a lineup of famous brands. The brands are sold through three global business units, and include Tide laundry detergent, Charmin toilet paper, Pantene shampoo, Cover Girl cosmetics, and Iams pet food. Since 2001, the company has doubled the sales it derives from developing markets; acquired and integrated Wella and Gillette; and sold its pharmaceutical, coffee, and food businesses.

Morningstar’s take: During the past several years, Procter & Gamble has divested noncore businesses, repositioned its product portfolio toward more value offerings, significantly increased spending to reclaim and defend market share, and aggressively expanded in overseas markets. Unfortunately, the firm’s stock hardly budged. Frustrated investors were asking whether P&G was doing enough to fix its problems, which included a bloated cost structure and sluggish top-line growth. In February, management responded with a massive $10 billion cost savings plan that will dramatically reduce headcount as the firm aims to return to 8% to 10% EPS growth and free up funds to reinvest in its business. This overhaul is significant, and while we’re not entirely convinced that the firm can pull it off, we don’t see much downside to the shares at current prices. That said, the stock gave up gains it enjoyed in the wake of its February restructuring announcement when during a a rocky third-quarter conference call management detailed pressures from slowing growth rates, competitive pricing, and negative foreign exchange. None of these pressures are new, so they were perceived as more excuses for a weak quarter, and that’s not what investors expect of P&G management.

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Bonds: $24.6 billion outstanding

Times interest earned: 13.9 times.  PG earned $11.564 billion in 2011 and had interest expenses of $831 million in the same year.  Their bonds are not an immediate threat to the dividend payments, but PG has a lot of big bonds due in 2014.  If interest rates rise between not and 2014 (and I think they will), then PG will have a real challenge refinancing those bonds.

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Preferred stock: PG has a small amount of preferred stock.  They paid about $233 million in preferred dividends in 2011.  The preferred stock is not a threat to the common dividends.  You can see on the market capitalization graphic above that the preferred stock is a very small percentage of total capitalization.

DIVIDEND RECORD: Procter & Gamble has been an excellent dividend payer and grower over the last 25 years.  They paid a $0.04 quarterly dividend in 1987.  Today they pay a $0.56 quarterly dividend.  That is 1,300% straight-line dividend growth over 25 years or 52% straight-line annual growth.

Dividend: $0.56 quarterly

Dividend yield: 3.56% ($2.24 annual dividend / $63.31 share price)

Dividend payout: 70% using 2011 EPS of $3.21 –OR- 57% using average adjusted earning power of $3.93

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EARNING POWER: $3.93 at 2.74 billion shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$2.66

$7,257 M

2,726 M

$2.65

2006

$2.64

$8,684 M

3,286 M

$3.17

2007

$3.04

$10,179 M

3,317 M

$3.71

2008

$3.64

$11,899 M

3,317 M

$4.34

2009

$4.26

$13,244 M

3,154 M

$4.83

2010

$4.11

$12,517 M

3,099 M

$4.57

2011

$3.93

$11,564 M

3,022 M

$4.22

Seven year average adjusted earnings per share is $3.93

Consider contrarian buying below $31.44 (8 times average adjusted EPS)

Consider value buying below $47.16 (12 times average adjusted EPS)

Procter & Gamble (PG) is currently trading at 16.1 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $78.60 (20 times average adjusted EPS)

BALANCE SHEET – Equity growth is stagnant, price to book value is bad at the current stock price, tangible book value is a negative number because of a huge percentage of intangible assets, their liquidity is horrible also.  Weak balance sheet.

Image017

Book value per share: $23.81 ($65.265 B in equity / 2.74 B shares)

Price to book value ratio: 2.65 (under 1.0 is good) ($63.31 share price / $23.81 BV)  PG investors are paying $2.65 per $1.00 of book value.  That is not a bargain price.

Tangible book value per share: -$7.66 (equity – $54.833 B goodwill – $31.429 B intangibles)

Price to tangible book value: N/A because negative number

Current ratio: 0.86 latest quarter (over 2.0 is good) ($23.108 B current assets / $26.904 B current liabilities)

Quick ratio: 0.15 latest quarter (over 1.0 is good) ($3.991 B cash / $26.904 B current liabilities)

Debt to equity ratio: 0.33 (lower is better)

Percentage of total assets in plant, property, and equipment: 15.14% (the higher the better)  Other assets as a percentage of total assets: 64.09% intangibles, 17.17% current assets, and other long term assets 3.6%

Working capital trend: Horrible.  This company relies on just in time financing and will be at risk during a financial crisis like the one in 2008 and the next one brewing right now.  They have to finance about $5 billion dollars each year just to pay their current liabilities.

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CONCLUSION – Procter & Gamble bottomed in March 2009 at $45.59.  That is a little under 12 times average adjusted earnings.  I would wait to buy this stock below 12 times average adjusted earnings of $47.16.  The stock currently yields 3.56%, which is a lot more than the S&P 500 average of around 2.2%.  They continue their awesome dividend growth pattern, but a worldwide recession can harm even the consumer staple stocks.  Poorly run finances can threaten the dividend in the future.  This company has a horrible balance sheet.  I relies on just in time financing like banks to operate.  A worldwide repeat of the financial crisis will hurt PG badly.  I would stay away until they fix their weak balance sheet.

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DISCLOSURE – I don’t own Procter & Gamble (PG).

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Published in: on June 15, 2012 at 1:21 pm  Leave a Comment  

Americans duped by Congress think their social security taxes are theirs

Check out this website I found at lewrockwell.com

Walter Williams explains the lies behind social security in just a few paragraphs.

Published in: on June 12, 2012 at 4:26 pm  Leave a Comment  

First Look at DOW 30 Component DuPont (DD).

Today I take a first look at DOW 30 component DuPont (DD).  This article continues my series on the Dow 30 stocks.  I learned that DuPont pays a decent dividend that they have grown over many years, their share price is approaching speculative pricing, and their balance sheet is pretty weak.  I wouldn’t buy DuPont at today’s prices.  To see a conservative price to buy and learn how I came to these conclusions read on.

E.I. du Pont de Nemours & Company (DD) aka DuPont

Price: $48.76

Shares: 937.04 million

Market capitalization: $45.76 billion

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What does the company do: DuPont is a diversified chemical company operating in more than 80 countries. Its massive portfolio includes agriculture, coatings, electronics and communication, construction and transportation, and safety and protection. DuPont has increased its research into genetically modified seed technologies over the years, making it one of the most prominent global seed providers.

Morningstar’s take: Founded in 1802, E. I. du Pont de Nemours and Company started as a gunpowder mill. Over the years, the company expanded into specialty chemicals, including coating and coloring, safety equipment, textiles, and genetically modified seed production, and became a dominant global chemical conglomerate. We believe product innovation and successful market penetration will remain long-term sources of support for DuPont’s earnings power. We are changing our economic moat rating for DuPont to narrow from none, as the company’s specialty operations now make up more than half of its earnings.

Image008

Bonds: $12.2 billion outstanding

Times interest earned: DuPont earned $3.464 billion in 2011 and they paid 447 million in interest expenses in the same year.  Therefore, they earned 7.74 times their interest expenses.  I like to see companies earn at least eight times their interest expenses.  Their bonds are a moderate threat to the future dividend growth.

Image011

Preferred stock: DuPont paid a small dividend of $10 million in 2011.

DIVIDEND RECORD: DuPont paid a $0.13 quarterly dividend in 1987.  Today it pays $0.43 quarterly.  That is 230% straight-line growth over 25 years or 9.2% annual straight-line growth.  DuPont did not cut their dividend during those 25 years.  They are a dedicated dividend payer and grower.

Dividend: $0.43 quarterly

Dividend yield: 3.52% ($1.72 annual dividend / $48.76 share price)

Dividend payout: 46% ($1.72 / $3.73 EPS in 2011) –OR- 61% ($1.72 / $2.81 average earning power)

High dividend stock (6% dividend yield) at $28.67

Image013

EARNING POWER: $2.81 @ 937.04 million shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$2.07

$2,053 M

987 M

$2.19

2006

$3.38

$3,148 M

928 M

$3.36

2007

$3.22

$2,978 M

925 M

$3.18

2008

$2.20

$2,007 M

907 M

$2.14

2009

$1.92

$1,755 M

909 M

$1.87

2010

$3.28

$3,021 M

922 M

$3.22

2011

$3.68

$3,464 M

941 M

$3.70

Seven year average adjusted earnings per share is $2.81

Consider contrarian buying below $22.48 (8 times average adjusted EPS)

Consider value buying below $33.72 (12 times average adjusted EPS)

DuPont (DD) is currently trading at 17.3 times average adjusted EPS.  This is stock is priced for investment, but it’s getting close to speculative.

Consider speculative selling above $56.20 (20 times average adjusted EPS)

BALANCE SHEET – DuPont’s balance sheet contains too much debt and high price to book values.  DuPont has a large percentage of total assets in intangibles.  Their current ratio and quick ratio are substandard.

Image018

Book value per share: $10.63 ($9.96 billion in total equity / 937.04 million shares)

Price to book value ratio: 4.6 (under 1.0 is good)

Tangible book value per share: -$0.95 (total equity – $5.443 B goodwill – $5.41 B in intangibles / 937.04 million shares)

Price to tangible book value: N/A due to negative number

Current ratio: 1.58 latest quarter (over 2.0 is good) ($19.809 B current assets / $12.536 B current liabilities)

Quick ratio: 0.29 latest quarter (over 1.0 is good) ($3,601 B cash / $12.536 B current liabilities)

Debt to equity ratio: 1.16 (lower is better)  You can see the high debt (red) to equity (green) on the balance sheet graph above.

Percentage of total assets in plant, property, and equipment: 26.67% (the higher the better) Here are the other assets as a percentage of total assets: Current assets were 39.4%, intangibles 21.61%, and other long term assets 12.28%

Working capital trend: slightly up.

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CONCLUSION – DuPont bottomed in March 2009 at a price of $16.87 at extreme contrarian pricing of 6 times average adjusted earnings.  They have been a good dividend grower and dividend payer for at least 25 years.  Their 3.5% yield is above the S&P average.  DuPont (DD) will become a high dividend stock at $28.67 if they keep paying their current dividend.  DuPont is a little expensive because it is trading at 17.3 times average adjusted earnings.  DuPont’s balance sheet stinks.  They have a lot of debt and most of the other measurements of balance sheet strength are weak such as: current ratio, quick ratio, and price to book values.  I would pass up DuPont until they strengthen their balance sheet.  Then I’d wait until their share is down below the $28.67 price range.

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DISCLOSURE – I don’t own DuPont (DD).

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Published in: on June 12, 2012 at 12:40 pm  Leave a Comment  

First Look at DOW 30 Component McDonalds (MCD).

Today I take a first look at Dow 30 component McDonalds (MCD).  Micky Dee’s is a phenomenal dividend growers and sports an above average 3.18 dividend yield.  However, the stock is speculatively priced at the current price.  Their balance sheet could definitely be improved.  Read on to see how I came to these conclusions.

McDonalds (MCD)

Price: $88.16 (two days ago)

Shares: 1.02 billion

Market capitalization: $89.59 billion

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What does the company do: McDonald’s generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of March 2012, there were 33,500 locations in 119 countries, including 27,100 franchisees/affiliates units and 6,400 company units.

Morningstar’s take: McDonald’s continues to thrive despite an increasingly challenging environment for restaurant operators. Although we doubt the firm can duplicate the almost 1,500 basis points of operating margin expansion it posted during the last five years, we are optimistic that it is capable of generating superior returns on invested capital over an extended horizon. Our confidence stems from unrivaled scale advantages, an incredibly strong brand, and ample international growth opportunities. We don’t expect these qualities to abate anytime soon, thus earning McDonald’s the widest economic moat in the restaurant category.

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Bonds: $11.1 billion outstanding

Times interest earned: McDonalds earned 22.5 times it interest expenses in 2011.  They earned $5.503 billion in 2011 and paid $493 million in interest expenses.  McDonalds’ bonds are not a threat to their dividend.

Image011

Preferred stock: none.

DIVIDEND RECORD: McDonalds has been a mind blowing dividend grower.  In 1987, they paid a $0.02 quarterly dividend.  By 1999 McDonalds grew the quarterly dividend to $0.05.  They switched to growing annual dividends until 2008.  McDonalds has grown their dividend to $0.70 quarterly.  Therefore, their annual dividend has grown from $0.08 annually to $2.80 today.  That is a 3,400% straight line gain over 25 years or 136% straight line annual dividend growth.  That it some of the highest dividend growth I’ve ever seen.

Dividend: $0.70 quarterly

Dividend yield: 3.18% ($2.80 annual dividend / $88.16 share price)  This is around double the S&P500 average.  McDonalds becomes a 6% yielding high dividend stock at a price of $46.66.

Dividend payout: 52% using 2011 EPS of $5.35 –OR- 72% using average adjusted earning power of $3.90.  I seriously doubt they will be able to grow their dividend as much as they did over the last 25 years without huge earnings increases in a highly competitive market.

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EARNING POWER: $3.90 @ 1.02 billion shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$2.04

$2,602 M

1,274 M

$2.55

2006

$2.83

$3,544 M

1,252 M

$3.47

2007

$1.98

$2,395 M

1,212 M

$2.35

2008

$3.76

$4,313 M

1,146 M

$4.23

2009

$4.11

$4,551 M

1,107 M

$4.46

2010

$4.58

$4,946 M

1,080 M

$4.85

2011

$5.27

$5,503 M

1,045 M

$5.40

Seven year average adjusted earnings per share is $3.90

Consider contrarian buying below $31.20 (8 times average adjusted EPS)

Consider value buying below $46.80 (12 times average adjusted EPS)

Consider speculative selling above $78.00 (20 times average adjusted EPS)

McDonalds (MCD) is currently trading at 22.6 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – Very high price to book value ratios.  Current ratios and quick ratios show some weakness.

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Book value per share: $14.37 ($14.661 B equity / 1.02 B shares)

Price to book value ratio: 6.13 (under 1.0 is good)  New McDonalds investors are paying a large premium for the company’s equity.  Investors are paying $6.13 for each $1.00 of equity.

Tangible book value per share: $11.71 (equity – $2.219 B in goodwill / 1.02 shares)

Price to tangible book value: 7.53 (near 1.0 is good) Investors are paying $7.53 for each $1.00 of tangible book value.

Current ratio: 1.17 latest quarter (over 2.0 is good) ($4.255 B current assets / $3.646 B current liabilities)

Quick ratio: 0.63 latest quarter (over 1.0 is good) ($2.289 B in cash / $3.646 B current liabilities)

Debt to equity ratio: 0.82 (lower is better)

Percentage of total assets in plant, property, and equipment: 69.91% (the higher the better) other percentages of total assets are 12.76% in current assets, 9.17% other long term assets, and 8.16% in intangibles.

Working capital trend: Averaging $1 billion in working capital in the past five years.

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CONCLUSION – McDonalds weathered the Panic of 2008 – 2009 fairly well compared to the rest of the Dow 30 and the S&P500 stocks.  McDonalds’ pre-crisis peak was $65.67 in August of 2008.  Most big companies saw their stock drop 40% – 50% during the height of the panic.  However, McDonalds only suffered a 20% decline.  Its post crisis bottom formed around $52.12 in March 2009.    Why do I provide all this history?  Because you should be aware how the stock performed during the most recent crisis so you can be prepared for the next crisis.  McDonalds has had quite a run since the post-crisis lows up to just over $100 at the start of 2012.  McDonalds is still speculatively priced at 22.6 times average adjusted earnings.

McDonalds has been a phenomenal dividend grower for the past 25 years.  The yield is not high, but it is nearly double the S&P 500 average at 3.2%.  I like McDonalds below $46.80 for price appreciation and dividend yield.

Their balance sheet is not strong due to high price to book value ratios and low current/quick ratios.

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DISCLOSURE – I don’t own McDonalds (MCD).

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Published in: on June 8, 2012 at 1:56 pm  Leave a Comment  

An excellent commentary on Soros prediction of a Euro meltdown in 3 months

George Soros thinks there are only three months until the Euro meltsdown.  This article contains the Austrian Economics point of view commentary.

http://teapartyeconomist.com/2012/06/04/soros-3-months-to-the-euros-doomsday-unless/

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Published in: on June 6, 2012 at 6:31 pm  Leave a Comment  

First Look at DOW 30 Component Cheveron (CVX).

What does the company do: Chevron is an integrated energy company with exploration, production, and refining operations worldwide. With production of 2.67 million of barrels of oil equivalent a day (69% oil), Chevron is the second-largest oil company in the U.S. Refineries are located in the United States, South Africa, and Asia for total refining capacity of almost 2 million barrels of oil a day. Proven reserves at year-end 2011 stood at 11.2 billion barrels of oil equivalent (58% liquids).

Morningstar’s take: Like its fellow supermajor integrated peers, Chevron is finding it increasingly difficult to expand production and add reserves in a world with a shrinking investable resource base. Much of the remaining pools of cheap, easily accessible resources large enough to interest the larger players reside in the hands of governments and national oil companies. Resource-rich nations are bolstering their nationally owned or controlled energy companies in an attempt to capture more value for their own countries. While this trend can create an opportunity for firms that can offer oil and gas development expertise, it also forces them to greater lengths to acquire reserves. In Chevron’s case, that means focusing on deep-water exploration.

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Bonds: $4.7 billion

Times interest earned: approximately 537 times.  Chevron earned $26.895 billion in 2011 and according to Morningstar.com they paid no interest in 2011.  I don’t think that is right given the $4.7 billion in bonds outstanding.  However, I do have some interest expense information from 2010.  Chevron paid $50 million in interest expense in 2010.  Their bonds are definitely not a threat to the dividend.

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Preferred stock: none

DIVIDEND RECORD: I only have Chevron historical dividend data going back to the 4th quarter of 2001.  CVX paid a $0.35 quarterly dividend in late 2001.  They haven’t cut the dividend at all since then.  In fact, they have grown the dividend through the financial crisis of 2008-2009 when others S&P500 companies cut their dividends.  Today the dividend stands at $0.90 per quarter.  That is 157% straight-line growth over 11 years or straight-line annual dividend growth of 14.3%.  They can proclaim themselves as part of the excellent dividend growers club.

Dividend: $0.90 quarterly

Dividend yield: 3.7% ($3.60 annual dividend / $96.58 share price)

Dividend payout: 26% ($3.60 / $13.61 using 2011 EPS) –OR- 38% ($3.60 / $9.45 using average adjusted earning power)

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EARNING POWER: $9.45 @ 1.97 billion shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$6.54

$14,099 M

2,156 M

$7.16

2006

$7.80

$17,138 M

2,197 M

$8.70

2007

$8.77

$18,688 M

2,132 M

$9.49

2008

$11.67

$23,931 M

2,050 M

$12.15

2009

$5.24

$10,483 M

2,001 M

$5.32

2010

$9.48

$19,024 M

2,007 M

$9.66

2011

$13.44

$26,895 M

2,001 M

$13.65

Seven year average adjusted earnings per share is $9.45

Consider contrarian buying below $75.60 (8 times average adjusted EPS)

Chevron (CVX) is currently trading at 10.2 times average adjusted EPS.  This is stock is value priced.

Consider value buying below $113.40 (12 times average adjusted EPS)

Consider speculative selling above $189.00 (20 times average adjusted EPS)

BALANCE SHEET – Good balance sheet except for current and quick ratios.

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Book value per share: $63.71 ($125.507 B equity / 1.97 B shares)

Price to book value ratio: 1.5 (under 1.0 is good) ($96.58 share price / $63.71 book value per share)

Tangible book value per share: $61.85 (equity – $4.641 B in goodwill)

Price to tangible book value: 1.57 (near 1.0 is good) ($96.58 / $61.35 tangible book value per share)

Current ratio: 1.61 latest quarter (over 2.0 is good) ($55.272 B current assets / $34.257 B current liabilities)

Quick ratio: 0.57 latest quarter (over 1.0 is good) ($19.768 B cash / $34.257 B current liabilities)

Debt to equity ratio: 0.07 (lower is better)

Percentage of total assets in plant, property, and equipment: 58.08% (the higher the better)

Working capital trend: up huge!

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CONCLUSION – Chevron will become a 6% high dividend stock if they continue the present dividend and their share price drops to $60.00 per share.  Right now the stock has an above S&P 500 average yield of 3.7%.  However, the coming worldwide recession will drop the price of oil and Chevron’s stock price.  They’ve proven themselves to be dedicated dividend payers and growers during the 2008-2009 financial crisis.  Chevron’s stock price bottomed in October 2008 at $57.83.  That panic provided a rare contrarian buy opportunity at only 6.1 times average adjusted earnings .  I think that you will get another opportunity to buy CVX near $60.00 per share again when Europe, Asia, and the US all reenter recession territory due to failed Keynesian economic policies.  Chevron has a good balance sheet.  Their current ratio and quick ratio are not satisfactory for me.  I looked at their current ratio over the past 10 years and they are improving toward 2.0.

DISCLOSURE – I don’t own Chevron (CVX).

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Published in: on June 5, 2012 at 4:55 pm  Leave a Comment