Reader’s Choice on the Next Stocks to Analyze

I’m looking for some stocks that the readers of this website want to hear about the most.

What high dividend stocks would you like me to write about?  Scroll down to the Contact Us link on the bottom left side and send me your requests.

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Published in: on August 1, 2012 at 4:54 pm  Leave a Comment  

Austerity is not Discretionary

This is the most important article from a high level Washington insider in years.  David Stockman is the former Reagan Budget Director and Congressman.  He resigned because the congress refused to cut spending and Reagan went along with them.  Here is the wikipedia entry on him http://en.wikipedia.org/wiki/David_Stockman.  He discusses the future of the US economy in terms of the coming US sovereign debt crisis.  The Keynesians have created the mess and they will not get us out of it using the same failed methods.  Ignore the implications of this interview at your own peril.

http://www.caseyresearch.com/cdd/david-stockman-austerity-not-discretionary

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Published in: on July 30, 2012 at 12:31 pm  Leave a Comment  

TIP OF THE WEEK: An Open Letter to Warren Buffett

Warren Buffett is a genius investor but an economic ignoramus.  He has been paraded around by statists in government for his willingness to be taxed more.

This is a excellent article on why Warren Buffett should stop acting like a guilt ridden billionaire who wants the government to raise taxes on everyone.  It explains in very clear terms why Marx’s exploitation theory is complete wrong and why capitalism has improved all individuals standards of living.

http://mises.org/daily/6134/An-Open-Letter-to-Warren-Buffett

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Published in: on July 27, 2012 at 1:24 pm  Leave a Comment  

The Soveriegn Debt Crisis in Europe and What It Means to Your Investments.

European Union bureaucrats are fessing up that the Greek government still can’t pay its bills.

http://www.marketwatch.com/story/us-stocks-fall-on-greece-debt-restructure-news-2012-07-24

This news tanked markets in the US.  Anyone who is surprised by this news has not been paying attention to the sovereign debt crisis in Europe.  This crisis is going to get worse when Greece gets bailed out for a second or third time.  Portugal, Italy, and Spain will be back for more bailouts of their own.  Where will the money come from.  The European Central Bank will print Euros.  The money will go to the Northern European banks who will be scared to lend it, so they will buy more bad debt of the PIIGS.

I would stay out of the stock market until this sovereign debt crisis has run its course.  You will know it is over when stock prices drop 40% – 60% from their May 2012 highs of about 13,000 on the Dow Jones Industrial Average.  Well run companies with fat dividend yields and decent balance sheets like Safe Bulkers (SB) can have their stock price cut from $6.00 per share down to $2.50 per share like in 2008-2009.  Safe Bulkers fell precipitously from its 2008 IPO price of $19.00 per share down to about $2.50 at the height of the financial crisis.

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I’m spending my time during the sovereign debt crisis analyzing stocks to find the best ones to buy in the aftermath and at what price.  This crisis will take a long time to unravel.

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Published in: on July 24, 2012 at 11:37 am  Leave a Comment  

Do you want to know what is going on in Europe?

Nigel Farage explains the insanity going on in Europe in two minutes.

http://www.youtube.com/embed/TN_1mF-3JTI

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Published in: on July 18, 2012 at 10:38 pm  Leave a Comment  

First Look at DOW 30 Component Walt Disney Co. (DIS)

Price: $47.07

Shares: 1.79 billion

Market capitalization: $84.15 billion

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What does the company do: Disney owns the rights to some of the most famous characters ever created, including Mickey Mouse and Winnie the Pooh. These characters and others are featured in several theme parks Disney owns or licenses around the world. Disney makes live-action and animated films under several labels and owns ABC, Disney Channel, and ESPN. Disney also owns a 42.5% stake in A&E, The History Channel, and Lifetime Networks. The company generates about 25% of its sales from outside the United States.

Morningstar’s take: Disney owns a collection of valuable assets, but its media networks, which generate more than half of the company’s operating profit, are the backbone of this conglomerate.

Bonds: $11.0 billion outstanding

Times interest earned: 11 times (DIS earned $4.807 billion as of 3Q 2011 / $435 million interest expense).  That far exceeds Benjamin Graham’s recommendation of earning at least five times interest expenses.  Disney’s bonds do not threaten the dividend at all.

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Preferred stock: none.

DIVIDEND RECORD: Walt Disney Co. has paid a dividend since at least 1987.  Disney paid a $0.02 annual dividend in 1987 and it has grown that dividend to $0.60 annually today.   That is 2,900% straight-line dividend growth over 25 years or 116% annual straight-line dividend growth per year.  Disney has been a phenomenal dividend grower.  Note: they paid a quarterly dividend from 1987 until 1997.  In 1998 they switched to an annual dividend.

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Dividend: $0.60 annual dividend paid late in the year

Dividend yield: 1.27% ($0.60 / $47.07 share price) Disney will become a 6%  high dividend stock at $10.00

Dividend payout: 21.5% using the Google Finance reported EPS of $2.79 –OR- 27.7% using the average adjusted earning power of $2.16

I’d like to see Disney pay out at least 50% of their average adjusted earnings in the form of dividends.  That would work out to an annual dividend of $1.08.  Even better would be a quarterly dividend of $0.27 per share instead of the annual dividend.

EARNING POWER: $2.16 per share at 1.79 billion shares

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

Date

EPS

Net Income

Shares

Adjusted EPS

9/2005

$1.22

$2,533 M

2,089 M

$1.41

9/2006

$1.64

$3,374 M

2,076 M

$1.88

9/2007

$2.25

$4,687 M

2,092 M

$2.62

9/2008

$2.28

$4,427 M

1,948 M

$2.47

9/2009

$1.76

$3,307 M

1,875 M

$1.85

9/2010

$2.03

$3,963 M

1,948 M

$2.21

9/2011

$2.52

$4,807 M

1,909 M

$2.69

Seven year average adjusted earnings per share is $2.16

Consider contrarian buying below $17.28 (8 times average adjusted EPS)

Consider value buying below $25.92 (12 times average adjusted EPS)

Consider speculative selling above $43.20 (20 times average adjusted EPS)

Walt Disney Co. (DIS) is currently trading at 21.8 times average adjusted EPS.  This is speculatively priced; consider shorting.

BALANCE SHEET – Disney has a weak balance sheet.  The price to book value ratios and other measures of financial strength are weak.

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Book value per share: $21.26 ($38.049 B equity / 1.79 B shares)

Price to book value ratio: 2.2 (under 1.0 is good) ($47.07 share price / $21.26 BV)  Investors are paying $2.20 for each $1.00 in book value.

Tangible book value per share: $4.35 (equity – $25.113 B goodwill – $5.142 B intangibles)

Price to tangible book value: 10.8 ($47.07 share price / $4.35 TBV)  40.2% of Walt Disney’s assets are in intangibles which explains why the P/TBV increased so much.

Current ratio: 1.14 latest quarter (over 2.0 is good) ($14.537 B current assets / $12.724 B current liabilities)

Quick ratio: 0.29 latest quarter (over 1.0 is good) ($3.731 B cash and equivalent / $12.724 B current liabilities)

Debt to equity ratio: 0.33 (lower is better)

Percentage of total assets in plant, property, and equipment: 27.7% (the higher the better) Disney has massive intangible assets at 40.2% of total assets, current assets were 19.52%, and other long term assets were 12.76%

Working capital trend (w/ 3 year moving average trendline): Up slightly in the long run, but I don’t like the several year stint of negative working capital.

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CONCLUSION – Walt Disney Co. bottomed near $15.00 in early 2009 near the height of the financial crisis.  That price represented an extreme contrarian buying opportunity at 6.9 times average adjusted earnings.  The stock price has tripled since that time and has entered speculative price territory at 21.8 times average adjusted earnings.  I would consider shorting Disney above $43.20.  A return of the worldwide recession will hurt Disney’s theme park revenues and media sales.  Disney’s dividend yield is less than the S&P 500 average of 2.2%.  I wish the board  of directors would increase the payout from 27% to 50% or more.  A high payout would increase yield.  Disney’s real weakness is its balance sheet.  The price to tangible book value is horrible.  Also, Disney has weak financial strength in the current ratio and quick ratio metrics.  I would stay away from Disney until the stock drops back to the $25 to $17 dollar range.

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DISCLOSURE – I don’t own Walt Disney Co. (DIS).

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Published in: on July 13, 2012 at 10:29 am  Leave a Comment  

First Look at DOW 30 Component Microsoft (MSFT)

Bonds: $12.0 billion outstanding

Times interest earned: 78 times (MSFT earned $23.15 billion as of 6/2011 / $295 million interest expense).  That far exceeds Benjamin Graham’s recommendation of earning at least five times interest expenses.  Microsoft’s bonds do not threaten the dividend at all.

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Preferred stock: none.

DIVIDEND RECORD: Microsoft started dividend payments in 2003 biannually and maintained that pattern until the start of 2005.  In Q1 2005 Microsoft started paying a quarterly dividend of $0.08 per share.  It has grown the dividend to $0.20 quarterly today.  That is 200% straight-line dividend growth over 7 years, or 28.5% annual growth per year.  That’s pretty impressive growth.

Dividend: $0.20

Dividend yield: 2.6% ($0.80 / $30.76 share price) Microsoft is a 6% high dividend stock at $13.33

Dividend payout: 29% using the Google Finance reported EPS of $2.75 –OR- 42% using the average adjusted earning power of $1.92

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EARNING POWER: $1.92 @ 8.4 billion shares

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

EPS

Net income

Shares

Adjusted EPS

6/2005

$1.12

$12,254 M

10,906 M

$1.46

6/2006

$1.20

$12,599 M

10,531 M

$1.50

6/2007

$1.42

$14,065 M

9,886 M

$1.67

6/2008

$1.87

$17,681 M

9,470 M

$2.10

6/2009

$1.62

$14,569 M

8,996 M

$1.73

6/2010

$2.10

$18,760 M

8,927 M

$2.23

6/2011

$2.69

$23,150 M

8,593 M

$2.76

Seven year average adjusted earnings per share is $1.92

Consider contrarian buying below $15.36 (8 times average adjusted EPS)

Consider value buying below $23.04 (12 times average adjusted EPS)

Microsoft (MSFT) is currently trading at 16.02 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $38.04 (20 times average adjusted EPS)

BALANCE SHEET – Microsoft has a strong balance sheet.  The only problem is the high price to book value ratios.

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Book value per share: $8.17 ($68.659 B equity / 8.4 B shares)

Price to book value ratio: 3.76 (under 1.0 is good) ($30.76 share price / $8.17 BV)  Investors are paying $3.76 for each $1.00 in book value.

Tangible book value per share: $5.50 (equity – $19.698 B goodwill – $2.756 B intangibles)

Price to tangible book value: 5.59 ($30.76 share price / $5.50 TBV)  19.03% of Microsoft’s assets are in intangibles which explains why the P/TBV increased so much.

Current ratio: 2.94 latest quarter (over 2.0 is good) ($76.86 B current assets / $26.17 B current liabilities)

Quick ratio: 2.27 latest quarter (over 1.0 is good) ($59.529 B cash and equivalent / $26.17 B current liabilities)

Debt to equity ratio: 0.17 (lower is better)

Percentage of total assets in plant, property, and equipment: 6.97% (the higher the better) Microsoft has massive current assets at 65.13% of total assets, intangibles were 19.03%, and other long term assets were 8.87%

Working capital trend: Up slightly in the long run.

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CONCLUSION – As usual, the best time to buy MSFT in recent years was in March 2009 when the stock hit bottom at $15.28.  It was a contrarian buy then at just below 8 times average adjusted earning power.  Today the stock trades for double that price.  I think the stock is overpriced given the coming worldwide recession.  Microsoft is a steady dividend payer and grower.  The dividend yield is slightly above the S&P average of 2.2%.  The best part of Microsoft is their balance sheet.  The balance sheet is strong with the exception of their price to book value ratio and tangible book value ratio.  I would ignore this stock until it drops below the $23.04 value stock threshold.

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DISCLOSURE – I don’t own Microsoft (MSFT).

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Published in: on July 5, 2012 at 10:54 am  Leave a Comment  

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