In 1988, the private equity firm of Kohlberg Kravis Roberts was on the prowl to take over a company after making hundreds of millions of post-tax dollars quickly from the leveraged buyout of Reynolds Tobacco. It wanted to buy The Kroger Company, a large American grocer that looked small enough to be taken over by activist investors. Because KKR wanted to oust the then-existing management at Kroger, the management team sought a creative strategy to keep out KKR so that they could keep their jobs. At the time, KKR did not engage in the golden-parachute strategy of paying off executives handsomely to relinquish control of the company and go away.
In one of the riskiest financial engineering moves in corporate American history, Kroger took on $4 billion in debt to issue a $48.50 special dividend to shareholders (it was set to come in the form of an August 1988 $40 … Read the rest of this article!
Many of you are familiar with the statistic that 40% of Americans could not withstand an unexpected expense of $1,000 or more without incurring a deep level of financial hardship. What people have not realized, and are perhaps realizing now, is that over the past thirty years the leading corporations (and even much smaller ones) have put themselves in nearly the same position.
Back in 1990, the median American corporation in the S&P 500 had enough cash to sustain itself for approximately 14 months and credit lines for another 9 months in the event that revenues turned to zero. If the world fell apart for a particular business, industry, or the economy as a whole, the average S&P 500 participant would have a “two year clock” to straighten itself out. Nowadays, the median S&P 500 stock has a little under 2 months of cash and about 6.5 months of financing … Read the rest of this article!
At Berkshire Hathaway’s annual meeting this past weekend, Warren Buffett mentioned that most stocks are likely a bit pricey right now unless interest rates remain low for the next 5+ years. You don’t have to consult the Oracle at Delphi to know that paying 28x earnings for Church & Dwight right now is going to lead to total returns lower than the company’s growth rate because Church & Dwight’s valuation tends to settle in the 18-22x earnings range during words of 5%, 6%, and 7% long-term U.S. bond rates. That story plays out across hundreds of stock across the nation.
That’s the bad news—we aren’t in 2010 or 2011 anymore where buying any large stock you’ve heard of before has probably led to great returns over the past four years. Instead, you have to zero in—pull out the magnifying glass!—and find those two or three dozen companies that either fall … Read the rest of this article!
On CNBC last week, a financial analyst/TV pundit went on air and said, “We are bearish on AT&T—it hasn’t grown its profits at a rate above inflation in a very long time. We don’t have it in any of our client portfolios.” Now, the statement by itself isn’t necessarily indicative of poor investment thought—I would imagine an investment portfolio consisting of Franklin Resources, Nike, Visa, Disney, and Becton Dickinson would create more aggregate wealth than AT&T stock.
Discussing the telecom giant’s 2% growth rate in isolation does paint a picture that would blend in with what the analyst said. But there is a catch: it’s not the whole picture. It’s like only talking a supermodel marrying an overweight old person without disclosing the fact that the person is also sitting on a million-dollar fortune. The totality of the facts affect your judgment of an action. In the case of AT&T, … Read the rest of this article!
When someone contemplates filing for bankruptcy, one of the first choices that an individual or a family must make is this: “Do we want to file for a Chapter 7 or Chapter 13 bankruptcy?” In a nutshell, the difference is this: If you file for a Chapter 7, you are going to lose almost all of your possessions and personal property, but the principal advantage is that you get almost all of your debts wiped clean (with the exception of things like student loans, costs related to a DWI, child support payments, and things like that) so that you can start your life mostly anew a few months after filing you file for Chapter 7 bankruptcy.
Chapter 13 bankruptcy, is a little different. If you’re behind on your mortgage payments, you get a chance to catch up, and you get a chance to keep most of your possessions (like your … Read the rest of this article!