In June, I wrote this article titled “Just Not Worth It: Stay Away From American Realty” that expressed my concern about American Realty’s Chairman Nicholas Schorsch, who is the architect of the mega-growth American Realty Empire and once sought mega-compensation to the tune of $92 million for meeting what I consider to be low hurdles to receive significant chunks of the “incentive bonus” amount (things like deliver 7% annual returns while the dividend yield is above that amount).
He is one of those investment characters that I put into the category of the more I find out, the less I like. His nickname is “Slick Nick.” You don’t earn that nickname by volunteering extra shifts at the soup kitchen and giving until it hurts when the Sunday collection basket comes around. You find genteel REIT analysts saying things like, “Mr. Schorch is a charming man that plays loose with the facts”; that’s a Southern way of saying “That guy is a liar.” Schorsch has made a lot of money by setting up broker-dealers to advertise both his traded and non-traded REITs to clients, and he collects a 1-3% fee (sometimes he has tried to double that). His philosophy seems to be “as long as I find a way to keep those dividends coming, I can do whatever I want behind the curtain.” His fee structures for non-traded REITs are so opaque that FINRA is debating new disclosure rules in response to his practices. He angered his investor base by promising that he wouldn’t issue new shares at $12 a piece (because he said that the company was worth much more than that), and he went out and issued new shares shortly thereafter.
I have been dialoguing with a reader who recently inherited 2,000 shares of Altria and 2,000 shares of Philip Morris International after her dad’s passing. Alongside the inheritance, she received the instruction from her dad, “Don’t sell either stock for the rest of your life.” The legality of the question isn’t worth exploring; courts generally don’t pay mind to the continuance of investments after they are distributed post-death, with the possible exception that some jurisdictions permit restrictions on selling ancestral family homes that have clear sentimental value and are intended for the use of multiple beneficiaries.
Well, Visa’s had a heck of a day. At the time I’m writing this, the price of Visa stock is up $20 per share (almost 9%) to $234. The cause for ebullience? Good earnings, and continued excellent prospects ahead. The company’s profitable margins continued to increase, going from 61% last year to 64% this year. Volumes are up 11%, year over year. The company is repurchasing an additional $5 billion worth of stock. Annual earnings per share growth still hovers around the 15% mark. The China State Council approved plans to open banking clearinghouses, and successful penetration of the Chinese market could prove highly lucrative to Visa shareholders.
Lately, I’ve been studying the companies that don’t have perfectly linear records of dividend growth, but have a strong tendency to give owners lots of cash for decades on end, especially when adjusted for the amount of money you have to invest (e.g. I’ve been looking at the companies that typically offer an initial yield north of 5% or so and offers a dividend that is generally higher every business cycle compared to the last).
My studies keep bringing me back to BP, because the company is beyond huge (it’s going to generate $14.5 billion in net profit this year, about 50% more than Coca-Cola as a frame of reference), has often served as Britain’s proxy equivalent to Exxon Mobil as the stock that you hold forever as you pass it down from generation to generation, and is one of the fair value stocks left in the market because people are hung up on the oil spill in 2010 even though BP is going to be fine in the long run because even after having to sell off a third of its business, the remains still generate almost $15 billion per year in annual profit.
It’s one of the most intriguing questions when contemplating long-term portfolio planning: What role should finance stocks play when you’re planning to buy things that you intend to hold for 10+ years? On one hand, the demand for things like asset collecting (mutual funds, ETFs, etc.), short-term credit (credit cards), and longer-term lending (bank stocks) is an area that will have perpetual demand. There will always be people directing other people’s investments, there will always be people borrowing money on credit, and there will always be people needing long-term loans to start a business, continue funding a business, buy a home, or whatever requires an infusion of meaningful capital.
When investing, it’s important to get the question you’re trying to answer right. When I discuss investment opportunities that look particularly intriguing, I am not making the statement: “This is the cheapest price the stock will ever see.” I don’t attempt to answer that question because it’s something I never could get right—it involves predicting what *other people* will do at a particular point in time, and at best, it’s something that would never amount to more than speculation.
One of the advantages that comes with the turf of buying and holding a particular stock for a long period of time is that you hopefully become familiar with it in a way that someone taking a cursory look at the stock may not notice.
For instance, it is well known in the investor community that Disney typically spends four times as much money repurchasing stock as it does paying out dividends. This fact, coupled with the Disney Board’s decision to pay out the dividend annually, can partially explain why income investors looking for retirement income avoid the stock altogether. There aren’t a whole lot of people in the world who can look at a 1% yield and say, “Yeah, that’s something I can rely upon for retirement.”
Over the course of the January-October snapshot of this year, shares of Amazon have tumbled 30% (recently settling into a range in the $280s, below its recent high of over $400 per share). Two of you have written to ask me whether this is an opportunity purchase a growth stock investment at a value price.
My answer? This is a situation that firmly belongs in the “too hard” pile, an idea borrowed from Charlie Munger. One of the things that is an important with investing—among other things—is to figure out your circle of competence and stick to making decisions there. I can look at the extent of BP’s oil reserves, take a look at the likelihood of a big settlement/measure its potential effect on the company, and figure out that it’s wise to purchase the stock in the low $40s if you have a 10+ year time horizon in mind. The amount of money you make from reinvesting the dividends along the way, plus the capital appreciation, seems so likely that I’d rather spend my time focusing on building on strengths there rather than making actual financial decisions on things I don’t understand as well (really, the vastness of BP continues to be underestimated in most financial commentary I read on the company—its current profit engine is to the tune of $14 billion per year, even with all the asset sales, it is still 7x as profitable as the legendary American grocer Kraft that I just wrote about).
For the past couple of days, we have discussed the ways in which IBM can prove to be a superior investment going forward, despite the narrative that’s become familiar to many—the technology service firm has been having trouble growing its revenues. Because of IBM’s low 25% dividend payout ratio, and its extensive commitment to repurchasing stock that is currently in the 10x earnings range, you can easily way a way IBM can prove to be a lucrative long-term investment even while its revenues stagnate.