I was reviewing some of the high-profile dividend cuts in the past five years–Pitney Bowes, Conoco Phillips, BHP Billiton, Viacom, Wells Fargo, General Electric, Dow Chemical, American Express, U.S. Bancorp–and I was trying to figure out if there were some elements regarding investor sentiment that could aid us in drafting some common rules relating to the experience.
Here is what I found:
In the nine months preceding a dividend cut, these stocks saw their earnings decline by an average of 62.3%.
And yet, in the nine months preceding a dividend cut, these stocks only saw their stock price decline by an average of 31.0%.
When the dividend cut came, these stocks experienced a maximum trough of an additional 38.5% decline on average (in other words, I measured the subsequent lowest price that occurred sometime within the year after the dividend cut and compared it to the price that existed on … Read the rest of this article!
When a stock is undervalued, one of the more intelligent things that a management team can do is repurchase the stock. If a stock is worth x but trading at 0.85x, a stock repurchase gives you an immediate 15% return (on this, reality is harsher than theory because corporate executives are biased to always think that their stock is worth more than the market quotation suggests.)
When a stock is overvalued, the intelligent course of action is to acquire other companies and issue your own stock as compensation. This is because part of the value that you are transferring will soon prove illusory. If your stock is worth x but is trading at 1.15x, a stock merger will really cost you 15% less than a cash merger.
This is why you cannot possibly answer questions like “Is it wise to accept stock when I sell my company?” in the abstract … Read the rest of this article!
When Benjamin Graham was writing “The Intelligent Investor”, the market edge that American investors possessed was information asymmetry. Because there were few sources of comprehensive data–maybe there was a data chart from Moody’s here or there–the buyers and sellers of corporate stock had wildly different amounts of information at their ready access. Ty Cobb could see Coca-Cola stock rolling out across the southeastern United States and use his paychecks from playing baseball for the Detroit Tigers and endorsements from promoting Chesterfield cigarettes to build a million-dollar fortune. His regional access and insight to the product allowed him to see 20% growth in real time in a way that a Texas doctor could never imagine.
The proliferation of the internet and finance sites means that, outside of the world of micro-cap companies, it is extremely difficult to gain a competitive advantage that is the result of having knowledge that … Read the rest of this article!
A sub-theme that I occasionally stress is the difference between using the stock market as a vehicle to preserve wealth vs. using the stock market as a vehicle to build wealth.
When your goal is wealth preservation, you can keep your focus on companies that have very stable earnings no matter the economic conditions–your chief objective here is to protect what you’ve got.
If you’re trying to make investments that grow so fast they change your standard of living, you require earnings per share growth of at least 8% annually and probably in the neighborhood of 11% annually. Here, you are often taking on higher P/E ratios, more stock price volatility, and more variance in the earnings results during deep recessions. (Note: Another way to build significant wealth in the stock market is to practice a deep value strategy of purchasing stocks trading at $0.33 on the dollar and selling … Read the rest of this article!
Mark Twain told us that history does not repeat but it often rhymes. I want to offer you another data point on the folly of paying high prices for “innovative” stocks.
In 1999, there were 247 stocks trading on the New York Stock Exchange and the Nasdaq exchange with a price-to-sales ratio over 25. That is the sort of “we expect this company to take over the world” valuation. For comparison, the old-school benchmark was that a price-to-sales ratio under “2” signalled fair value and a P/S ratio under “1” was a strong sign of an undervalued stock.
What happened to an investor that bought each of those stocks in 1999 and held through to today? You would have earned 3.5% on your money through today. And if you did not include Nvidia in your holdings, which was the crown jewel performer, you would have lost 7.0% annualized on your … Read the rest of this article!