Monday, February 28, 2011

My Own Advisor: As a consumer and investor, Coke is it!

My Own Advisor: As a consumer and investor, Coke is it!

As a consumer and investor, Coke is it!


First, let’s start with the refreshing news:

On February 17, 2011, Coca-Cola Board of Directors approved and announced the company’s 49th consecutive annual dividend increase, raising the quarterly dividend 7% from $0.44 to $0.47 per common share. From the press release, the increase was said to reflect the Board’s “confidence in the company’s long-term cash flow. The company returned $7.2 billion to shareowners in 2010, through $4.1 billion in dividends and $3.1 billion in share repurchases.”

Second, let’s discuss why I think Coke is really “it”.

As a consumer there is lots to like:

With a portfolio of more than 3,000 beverages, from sparkling beverages to still beverages such as fruit juices and fruit drinks, water, sports and energy drinks, teas and coffees, and milk-and soy-based beverages, Coke’s products span the globe. These products are everywhere. These products are inexpensive and I think they taste pretty darn good, especially with some rum in the summer!



As an investor, geez, what’s not to love?

Right from their mission statement and corporate roadmap, it’s all there in plain language. “Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions.

• To refresh the world...
• To inspire moments of optimism and happiness...
• To create value and make a difference."

Focused, captivating and clear. You know where they're going.

Secondly, their financials tell a story of on-going success. Here are some highlights:

Annual Revenues:

• 2010 annual revenues = ~ $35 billion.
• 2009 annual revenues = ~ $31 billion
• 2008 annual revenues = ~ $32 billion
• 2007 annual revenues = ~ $29 billion

Cash flow last year was over $8 billion. In 2008 it was $7.5 billion and the year before it was $7.1 billion. It’s growing to say the least.

Coca-Cola has a moderate payout ratio. It’s less than 60% so the dividend is very safe and has room to grow.

Coke has a five-year average dividend growth rate of over 9%.

Total return (including dividends) over the last five years is over 70%.

Bottom line, Coca-Cola is an outstanding stock to own.

As Dividend Monk nicely put it, this “company has had solid revenue, earnings, and cash flow growth. The stock offers an above average dividend yield, and has been diligently increasing dividends over the past 48 49 years. This is the type of company that just works, period.” Like Derek Foster recently told me, nobody is going to replace this company anytime soon. Based on another year of refreshing dividend news, I couldn’t agree more Derek.

What do you think?
For consumers and investors, will Coca-Cola always be it?

I look forward to your comments!
My Own Advisor

Dividend Monk — Minimalist Wealth Building

Dividend Monk — Minimalist Wealth Building

9 Steps to Build and Manage a Dividend Portfolio

by MATT on FEBRUARY 25, 2011

There are various approaches to designing and managing a personal stock portfolio. Some approaches are more like a science, while others are more like an art.

A portfolio of stocks is more than the sum total of its contents. For most investors, it should have a clear overarching strategy and a certain amount of diversification. In addition, it should be combined with other asset classes for complete diversification.

Step 1: Determine your Goals

The first thing to do is determine the type of portfolio you want. A common theme that all dividend portfolios share is that they provide passive income, but even among portfolios with a dividend theme, there can be big differences.

Ask yourself:
-What kind of rate of return am I looking for?
-What is my risk tolerance?
-How experienced am I?
-How long until I plan to retire?
-How much time do I want to devote to stock research?

Step 2: Consider a Yield Target

Once your goals are determined, it’s helpful to have an average portfolio dividend yield in mind. The average yield should be substantial enough so that the portfolio truly receives the benefits that dividend-paying companies can provide.

As a general rule, people that plan to currently live off of their dividend income will want to seek higher yields while investors that are primarily focused on earning a good rate of return for several years should focus on achieving a high sum of dividend yield and dividend growth.

Step 3: Identify your Core Competencies

Nobody is an expert on everything, and yet investors should have a reasonably diversified portfolio. Identify a few sectors that you feel you have a solid understanding of, and use those as your primary means of diversification. If all of your stocks are too concentrated in one or two sectors, then a single unexpected macro-economic trend can dominate your portfolio. While I don’t recommend over-diversifying, it’s important to spread risk and reward into a few different sectors while remaining in your circle of competence.

Step 4: Socially Responsible Investing

Before you begin to buy shares of companies, it makes sense to develop a guideline or two about what sort of company you’ll let inside your portfolio. Maybe your view is that anything goes, and you’ll invest without social responsibility in mind. Maybe you’re on the other end of the spectrum, and will only allow companies that meet specific guidelines into your portfolio. Or perhaps you’ll have some sort of middle ground. In order to have peace of mind, it makes sense to develop a simple set of guidelines that are well-reasoned in your view.

Step 5: Research

After you have identified your goals, yield target, and comfortable sectors, it’s time to begin constructing the portfolio. The internet is a valuable tool in identifying worthwhile companies to invest in. Several services, including Google Finance, offer stock screeners that allow an investor to narrow down the search to companies that meet certain criteria such as yield thresholds or P/Es.

In addition, there are specialized sites out there to help you make stock selections. Sites like Morningstar can be of solid assistance to an individual investor. Sites like Seeking Alpha provide a ton of investor commentary and analysis. And of course, sites like this one and others constantly analyze individual stocks for readers. Ultimately, whatever investing decisions you make will be yours, and information from other sources can be helpful but should not be overvalued.

Step 6: Start Small

Once you’ve decided to invest in a company, there are a few ways to do it. Basically, there is a clumsy way and a more elegant way. The clumsy way is to take whatever capital you have available and buy that much worth of stock. The more elegant way is to start small, and enter your position over time. This allows you to average out your buy price over a given time period rather than going all-in on a single day.

Step 7: Finish Big

It’s useful to start small, but it’s important to finish big. What I mean is, once you’ve identified what you believe to be a good investment, and you’ve been buying up more shares, it makes sense to commit. Consider having a set of core holdings that you hold through all market conditions, a set of more cyclical companies, and lastly a set of smaller companies. Core holdings should have a wide economic moat, should exist in an industry that has good long-term prospects, and should have a strong financial position and be fairly resistant against recessions. Cyclical companies may have a lot of those good traits but will likely be more volatile. This volatility can be harnessed as you increase or diminish your position as economic conditions permit. Smaller companies are those that can provide more upside but need a little bit more attention. Become an “expert” on a few small caps that you know extremely well and follow closely.

When you identify what you believe to be an excellent investment, you’ve done your homework, and you have initiated your position over time and continually re-considered your reasoning and outlook for this company, don’t hold back. Make the position a meaningful size so that you can capture some serious value from your wise investment choice. Of course, always diversify, and don’t put all your eggs in one basket, but have some confidence.

Step 8: Prune and Grow

Buying and holding great dividend-paying companies is the path to wealth, but “buy and hold” doesn’t mean “set and forget”. Keep tabs on your stocks. It helps to write your reasons down for buying a stock in the first place, and then regularly check that your companies are still meeting your expectations. Make sure their dividends look as though they can be maintained, that the companies remain at reasonable valuations, and that the financial strength of the business continues to meet your requirements.

Step 9: Allocate Your Assets

In addition to maintaining a solid dividend portfolio, it’s important to complete your diversification by owning other asset classes such as bonds. One can also consider stocks that don’t pay a dividend, real estate, as well as options if that’s of interest to you. Owning investments in a variety of asset classes allows you to take advantage of the fact that different asset classes move inversely to one another, and it reduces your overall portfolio risk.

Should You Buy and Hold Telefonica? (FTE, TEF, VZ)

Should You Buy and Hold Telefonica? (FTE, TEF, VZ)

Should You Buy and Hold Telefonica?

TEFTelefonica S

CAPS Rating4/5 Stars

Up $25.52 $0.41 (1.63%)

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Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50-59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and social security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.

Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:

  1. Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
  2. Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform non-paying dividend companies over long periods of time.
  3. Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
  4. Low Volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a rollercoaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.

So how does Telefonica stack up?
In order to check out the valuation of Telefonica (NYSE: TEF), we don't want to look at only its P/E ratio of 7.42. That may seem cheap, but really we don't know without looking at the ratio in historical context. Over the last five years, Telefonica's average P/E ratio has been 11.6, which is greater than the current ratio. This suggests that investors could be seeing an opportunity to buy Telefonica on the cheap right now.

Telefonica's dividend is 7.05%. This is tremendous; not only does Telefonica pay a dividend, but it pays way more than the average company in the S&P 500.

Next, we want to ensure that Telefonica's stock has the ability to rise over the next 5, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past five years, Telefonica has grown its net income by 25.7%. Fortunately, Telefonica has been able to grow its earnings over the past five years, and that's pretty significant considering all of the market turmoil in the last few years. Of course, this doesn't mean that growth will continue, but it's a great sign that the company can prosper in the face of difficulty.

One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Telefonica will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, Telefonica has a beta of 0.781, which is pretty low. Generally speaking, I like to see a beta below 1.2 for retirees. In this case, Telefonica fits the bill.

Let's look at the competition
We've taken a look at Telefonica, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it to understand that particular company. Here are Telefonica's stats when compared to three of its closest competitors:

Company

Current P/E

Dividend Yield

5-Year Net Income Growth

1-Year Beta

Telefonica7.47.1%25.7%0.8
Vodafone Group (NYSE:VOD)8.54.6%10.2%0.7
France Telecom (NYSE:FTE)14.78.6%4.16%0.5
Verizon Communications(NYSE: VZ)40.25.4%-19.2%0.5

Source: Capital IQ, a division of Standard & Poor's.

Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just Telefonica in isolation.

Of course, I can't decide for you whether or not this is the best stock for retirement, but it has passed all four tests, which is pretty darn impressive. It doesn't necessarily mean this stock is a slam dunk, but it has shown its ability to reward shareholders, and that means it could have a place in your portfolio.

Berkshire Hathaway Is Undervalued on a Price/Book Value Basis - Seeking Alpha

Berkshire Hathaway Is Undervalued on a Price/Book Value Basis - Seeking Alpha

In Warren Buffett's 2010 Letter to Shareholders released on February 26, 2011, Buffett states that he uses the "understated proxy for intrinsic value -- book value" to measure Berkshire Hathaway's (BRK.A) performance. His annual reports every year highlight Berkshire's annual percentage change in book value per share vs. the S&P 500 with dividends included. He also disparages the use of income per share since Berkshire's net income can vary greatly depending upon when he decides to realize gains or losses in Berkshire's investment portfolio. Therefore, instead of comparing Berkshire's current price to earnings ratio with its historical average to determine if Berkshire is undervalued, a better comparison would be to focus on its price to book value ratio.

In the table below I show, for each year from 1985 through 2010, Berkshire's book value per share and market price per share of its class A shares, as well as its annual price to book value ratio. From this table it can be seen that Berkshire's 2010 yearend price to book value ratio of 1.25 is 23% below its average of 1.63 over the past 26 years, and 44% below its peak value of 2.23 achieved in 1995. Indeed, in only two of the past 26 years has this ratio been lower than its 2010 value of 1.25. (In 2009 the ratio equaled 1.17 as the economy was beginning to recover from the financial crisis, and in 1987 the ratio equaled 1.19 after the Stock Market Crash of 1987.)

Utilizing Warren Buffett's preferred proxy of intrinsic value of book value per share, the yearend price to book value per share of Berkshire indicates that it is undervalued. (Using Berkshire's closing price of 127,550 on February 25 and the 2010 yearend book value of 95,453, the current price to book value ratio would equal 1.34, which still represents an 18% discount from its historical average of 1.63. Of course, the current book value of Berkshire can also be assumed to exceed the 2010 yearend level, which in turn would lower this ratio.)

Year

Book Value

Price

P/Book Value

2010

95453

119100

1.25

2009

84487

99200

1.17

2008

70530

96600

1.37

2007

78008

141600

1.82

2006

70281

109990

1.57

2005

59377

88620

1.49

2004

55824

87900

1.57

2003

50498

84250

1.67

2002

41727

72690

1.74

2001

37920

75600

1.99

2000

40442

71000

1.76

1999

37987

56100

1.48

1998

37801

70000

1.85

1997

25488

46000

1.8

1996

19011

34100

1.79

1995

14426

32100

2.23

1994

10083

20400

2.02

1993

8854

16325

1.84

1992

7745

11750

1.52

1991

6437

9050

1.41

1990

4612

6675

1.45

1989

4296

8675

2.02

1988

2975

4700

1.58

1987

2477

2950

1.19

1986

2073

2870

1.36

1985

1644

2470

1.5

Avg. = 1.63



Disclosure: I am long BRK.B.

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Comments (7)
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  • While you are right that the long-term average of price to book is above where the stock is currently trading, I still don't understand why people would pay so far above book value for what is essentially a closed-end fund. There is some merit to the argument that Buffett gets better deals than the average investor (i.e. the preferred deals with GE and Goldman), but that is not enough to justify the stock trading at 2x book.

    If the stock were to trade at 2x book, it would mean that investors are willing to pay twice the value of Berkshire's assets just to essentially have Buffett select stocks for them. I don't think 25% over book is too much to pay given Buffett's acumen and ability to get the best deals, but 1.63x book is, in my opinion, ridiculous. Especially when considering that Buffett is already 81 years old and he has no clear successor, if anything at all happens to Buffett, this stock will easily trade down to 1x book.

    To be clear, is isn't that I think your strategy will not be profitable, as I believe the price to book ratio will probably converge to the long-term average over time, but I think the risk of it not happening outweighs the reward.
    Feb 27 11:01 PMReply! Report abuse+4-2
  • I always chuckle when I read that BRK is just a mutual fund. We all know this is B.S. because mutual funds don't own over 100 businesses plus one of the biggest rail roads. BRK gets all the profits from their businesses while mutual funds get dividends. BRK deserves a price at least 1.75 X book because of the property these old companies own. Unless I am wrong, book value does not increase from year to year based on the market value of the fixed assets such as land. If anything it is depreciated. The growth of earnings from the companies BRK owns plus the reinvestment of the profits makes Berkshire unique.
    You are living in lala land if you think the break up value of BRK is less that twice its current price.
    Feb 28 08:56 AMReply! Report abuse+40
  • Berkshire looks overvalued and as a proxy for financial markets on the edge of a fresh collapse this is not the time to buy, see: www.arabianmoney.net/g.../
    Feb 28 04:53 AMReply! Report abuse0-3
  • I prefer P/E (expected earning) than P/B. After many years the book value is not a reliable value to reflect the real value of a company.

    It is OK to treat his share as a mutual fund, the same we treat GE as one.

    Any one has the stock performance (including any dividends) of the last 3 years?
    Feb 28 10:51 AMReply! Report abuse+10
  • I appreciate people airing opposing views, so thanks, Ananthan, but I agree with long_on_oil that it is no longer much like a mutual fund and is dominated by its operating businesses. Two additional elements of instrinsic value are not reflected in book value.

    1. Any increase in goodwill (i.e. intangible value in excess of tangible assets) since purchase isn't included in book value. Many of Berkshire's subsidiaries are so good that their true economic goodwill is now easily ten times the goodwill showing in the balance sheet.

    2. Insurance float, while not owned by Berkshire is nigh-on permanent (in fact growing) capital and has maintained negative cost-of-float averaged over long periods. Provided you anticipate that zero-cost float is to be expected for decades to come (and I do, given the structural advantages at play) it makes sense to consider this as part of the capital that is at work earning money for Berkshire shareholders.

    To my mind, therefore, Price to (Book Value + Float) is a better valuation metric that P/BV alone, and still understates IV (but only for a business of the quality of Berkshire).

    Float at YE2010 was $65.8bn. With 1,648,000 class-A equivalent shares outstanding that amounts to

    Float/share = $39,947

    BV/share = $95,453

    (Float + BV)/share = $135,400

    Price/(Float+Book) ratio = 0.942 using Friday's closing price above.

    This is still a crude metric, and it's far better to make a range of estimates of complete intrinsic value then demand a discount before purchasing, but I think it sheds some more light on what you're getting thrown-in for free at current prices.
    Feb 28 11:16 AMReply! Report abuse00
  • BRK is undervalued because its run by an 80 year old who won't pay dividends even though he is returning less to shareholders than the S&P index.

    BRK is more about supporting Buffett's ego rather than returning cash to shareholders.

    I have never understood his thinking on this.

    What's he going to do for his opus, take Exxon private?

    No innovation, just ego stroking. At least his tax free foundation is supporting innovation.
    Feb 28 12:57 PMReply! Report abuse00
  • The dividend part is not important. It does not force the stockholder to pay uncle Sam. However, we need to include dividend in S&P if you use S&P to compare his performance.