Two factors right now are interacting to provide a distorted view of valuations for investors that make decisions based on historical P/E analyses of large U.S. stocks. On one hand, you have the growing trend of international profits contributing to the overall earnings of large U.S. multinationals. The average S&P 500 company currently generates 42% of its profits overseas. That matters because of our second factor: In the past twelve months, the United States dollar has gained almost 25% in value compared to the global basket of currencies index.
Normally, overseas profits do not require a separate distinction unless you are trying to analyze the amount of cash available for buybacks and dividends because foreign profits sometimes get trapped overseas to avoid the 35% repatriation tax. During the early 2000s, the United States dollar only lost about 5% in total against global currencies during the period 2002-2006 period between the … Read the rest of this article!
Lately, I’ve been doing some back-testing to try and find good answers to the following: (1) What if someone invested a lump sum in 2007 right before the financial crisis, and (2) what if that investor paid an unusually high premium for the stock even during a period of high valuations? It’s been my way of challenging the Benjamin Graham thesis that investors should focus on getting the price above all else. I wanted to test scenarios to see what happens if treated quality as your primary concern, and regarded price as a secondary matter (you can never truly get past “price matters” because paying something like 50x earnings for Coca-Cola in 1998 will take 25 years to burn off, but you can test what happens when you pay 25x earnings for a high-quality stock instead of 20x earnings.)
My testing gave me renewed appreciation for the likes of Hershey, … Read the rest of this article!
Hershey stock has come down 15% since the Christmastime period when I wrote about it being overvalued. The price currently sits at $93 per share (down from the January high of $111). I would classify the current price as high end of fair value. Many people will look to the 2.3% dividend yield and conclude that it is too low to meet their needs.
I certainly get that. If you have a plan to live off dividend income within the next ten years, you are going to receive much higher checks if you buy Chevron at $105 per share, lock in a starting yield of 4%, and reinvest those dividend payments until the time comes when you need the cash.
But, over super long periods of time, companies like Hershey will have the best dividend growth rates of all because people eat chocolate in bad times, ordinary times, and good … Read the rest of this article!