An Easy Way To Go Broke

Since I began covering stocks in 2011, almost every company imaginable has gone through an unpopular period. People didn’t want to touch Johnson & Johnson for a while, as a string of manufacturing recalls punished the stock in the $60s. An inability to deliver sales growth concurrent with price increases kept Procter & Gamble stagnating for a few years. A decline in the price of energy companies sent ExxonMobil and Chevron stock down 30% or more. General Electric, possibly the greatest industrial giant in the world, saw its price hover in the teens before recently becoming more appropriate priced around $28. Poor short-term news at Wal-Mart has sent the stock currently down to the $60 range. AT&T, with a century of dividend payments and a platform that will grow profits from $13 billion to $20 billion over the next five years, is currently unfashionable. Coca-Cola, Exhibit A for blue-chip investing, … Read the rest of this article!

Wealth Creation Through Repeatability of Sales

When you look at Microsoft over the past ten years, the reason why it has managed to grow profits per share at a high double-digit rate is because it dramatically increased the repeatability of its sales. A decade ago, much of the profits were derived from the sale of Microsoft Office which was an event that required businesses to make a purchase every 2-3 years. Nowadays, Microsoft generates a substantial portion of its revenues through its cloud/data storage services where corporate America pays Microsoft a monthly fee for providing exceptional data services.

The dramatic increase in repeat business has been an important component in explaining why Microsoft has been able to deliver such strong returns to its shareholders over the past decade. Alas, Microsoft is now trading at a valuation of 30-40x earnings (depending upon whether you are forward or backward looking with your projections) and is not the best … Read the rest of this article!

AT&T: Bright Future After The DirecTV Acquisition

Over the past five years, AT&T only managed to grow earnings at 1% per year. You got to collect a 5% or 6% dividend along the way, which was a nice offset, but ultimately core business was not keeping up with inflation. This was due to three things: (1) the company was losing lucrative landline customers at a fast rate; (2) Verizon Wireless was making market share gains in the mobile space; and (3) the company was investing heavily into Mexican infrastructure that had a payoff several years down the line. This slow growth explains why the quarterly dividend has only grown by a penny per share during each year since 2007.

This acquisition of DirecTV is going to add $3 billion in annual profits immediately, and estimated cost savings of $1.5 billion per year for the next four years could make AT&T a company making $20 billion per year … Read the rest of this article!

Altria Stock: Those Big Tobacco Dividends

Between 1964 and 1987, almost eight hundred cases made it to various Courts of Appeals throughout the United States that sought to hold tobacco companies liable for damages resulting from smoking. The tobacco lawyers protected the interests of Philip Morris USA, Brown & Williamson, R.J. Reynolds, and Lorillard by raising Rule 8 affirmative defenses of contributory negligence and assumption of the risk–arguing that tobacco consumers had a duty not to smoke if they wanted to protect their health, and they abandoned this responsibility by willingly smoking despite knowledge of the health hazards.

The tobacco industry had some merit to its claim that the American public was on notice about the risks of tobacco smoking. In 1964, the Smoking and Health: Report of the Advisory Committee to the Surgeon Rule released a study noting that cigarette smokers had a 70% increased chance of premature mortality compared to non-smokers. And heavy smokers, … Read the rest of this article!

The Coffee Can Portfolio Approach To Investing

Robert Kirby, a professional manager whose heyday was in the 1970s and 1980s, once wrote an article titled “The Coffee Can Portfolio” which focused on the importance of letting winners run as the most important yet chronically neglected component of finding investment success.

When Kirby presented the concept, he told the story about a lady whose money he managed. Specifically, after her husband died, she transferred the assets from her deceased husband to Kirby. 

When Kirby reviewed the husband’s portfolio, he noticed that he had tracked the same exact investments that were made in the wife’s account, except there was one exception: the husband never sold any of the stocks when Kirby did–he just let them all run and achieve whatever compounding it was that they generated. 

Upon comparing the results, Kirby had two observations: (1) the portfolio was dramatically skewed, with just four or five stocks making … Read the rest of this article!