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My High Dividend Stocks
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First Look at Dow 30 component Caterpillar (CAT). Little DIV Yield, Huge DIV Growth.

Today I take a first look at heavy equipment giant Caterpillar (CAT).  This is the second stock in a series I’m writing on the Dow 30 stocks since many of them are dividend payers.  The dividend yield is puny, but the dividend growth has been tremendous.  It is speculatively priced today.  Lastly, their balance sheet is really ugly.  It’s not the ugliest I’ve seen, but it is pretty close.  To see how I came to these conclusions read on.

Caterpillar (CAT)

Price: $95.99

Shares: 666 million fully diluted at the end of 2011

Market capitalization: $62.63 billion (based on the undiluted 652.5 million shares)

What does the company do: Based in Peoria, Ill., Caterpillar is the world's largest manufacturer of heavy construction machinery such as bulldozers, excavators, and loaders and equipment for surface and underground mines. The firm also produces engines for its own off-highway vehicles and others' machines. Cat supports its machinery and engine revenue with a financial services arm, a logistics business, and remanufacturing service work.

Morningstar’s take: Caterpillar is the largest heavy equipment manufacturer in the world and holds an especially dominant share in the U.S. market. With its rebounding end markets, we don't think Cat has lost its competitive edge.

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Bonds: $12.2 billion

Times interest earned: 3.95 times (over 5.0 is adequate)  Caterpillar earned $4.928 billion in 2011 and it paid $1.222 billion in interest expense in the same year.  Caterpillar’s bonds are a growing threat to the dividend, but since their dividend payout ratio is less than 50% it will take a few more years to really threaten the dividend.

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Preferred stock: none.

DIVIDEND RECORD: No dividend cuts all the way back to 1987 (that’s the limit on Google Finance’s dataset).  Caterpillar has grown its dividend from $0.02 quarterly per share in 1987 to $0.46 quarterly in 2011.  That is a 2,200% straight-line gain over 25 years.  That equates to 88% per year straight-line dividend growth.

Dividend: $0.46 quarterly

Dividend yield: 1.9% ($1.84 annual dividend / $95.99 share price)

Dividend payout: 23% (using recent 2011 EPS of $7.92) –OR- 39% (using average adjusted earning power of $4.72)

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EARNING POWER: $4.72 per share at 666 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2005

$4.04

$2,854 M

706 M

$4.29

2006

$5.17

$3,537 M

684 M

$5.31

2007

$5.37

$3,541 M

660 M

$5.32

2008

$5.66

$3,557 M

628 M

$5.34

2009

$1.43

$895 M

626 M

$1.34

2010

$4.15

$2,700 M

650 M

$4.05

2011

$7.40

$4,928 M

666 M

$7.40

Seven year average adjusted earnings per share is $4.72

Consider contrarian buying below $37.76 (8 times average adjusted EPS)

Consider value buying below $56.64 (12 times average adjusted EPS)

Consider speculative selling above $94.40 (20 times average adjusted EPS)

Caterpillar (CAT) is currently trading at 20.3 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – Way too much total liabilities (Red) compared to shareholder equity (Green)!!  Some of the assets are likely overvalued because CAT has a financing business, but the liabilities are real.

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Book value per share: $19.34

Price to book value ratio: 4.96 (under 1.0 is good)  CAT investors are paying $4.96 for each $1.00 in book value at the present time ($12,883 M in shareholder equity / 666 million shares).  That’s way too high for me.

Tangible book value per share: $2.15

Price to tangible book value: 44.65 (near 1.0 is good)  This is extremely high.

Current ratio: 1.49 latest quarter (over 2.0 is good)

Quick ratio: 0.52 latest quarter (over 1.0 is good)

Debt to equity ratio: 1.68 (lower is better)

Percentage of total assets in plant, property, and equipment: 17.37% (the higher the better)  Here are the other percentages: Current Assets were 47.92%, Other long term assets were 21.17%, and Intangibles were 13.55%

Working capital trend: nicely upward

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Here are some questions you had better be able to answer before you buy Caterpillar:

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CONCLUSION – The best time to buy Caterpillar in recent years was in February 2009 when the stock bottomed at $24.61.  It was in definite contrarian price territory because the average earning power from 2005 – 2009 was $4.32.  Since then it has more than tripled, but I think its heading back down again due to the return of the worldwide recession.  Caterpillar doesn’t have a high dividend yield, but it is an amazing dividend grower through boom and bust.  However, today Caterpillar is speculatively priced at 20.3 its seven year average earning power of $4.72 per share.  That’s where the good news ends because Caterpillar’s balance sheet is horribly weak.  Almost every measure of balance sheet strength shows weakness.  The price to book value ratios, current ratios, quick ratios, and debt to equity are deep into the red.  The working capital position is about the only good part of the balance sheet.  I suspect the financial arm is contributing to that weakness because banks borrow short and lend long, but I haven’t read all the financial statements.  I would ignore CAT until it drops back down in $56.64 value price territory.  Recessions hurt equipment manufacturers like CAT.  The stock price will be hurt greatly.

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DISCLOSURE – I don’t own Caterpillar (CAT).

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First look a DOW 30 component IBM.

I’m going to take a look at the Dow Jones Industrial Average 30 stocks over the next few weeks that I’ve never examined.  Today I take a look at IBM.  Their dividend is unremarkable, the stock price is too high, and the balance sheet is weak.  To see how I came to that conclusion read on.

International Business Machines (IBM)

Price: $207.08 (last week)

Shares: 1.15 billion

Market capitalization: $238.86 billion

What does the company do: IBM is one of the largest information technology companies with an array of offerings, including system hardware, infrastructure software, outsourcing, and systems integration services. The firm has operations in more than 170 countries and generates about 65% of revenue from abroad.

Morningstar’s take: IBM's technological leadership and sticky products and services will enable the company to deliver steady recurring revenue for a long time.

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Bonds: $27.5 billion outstanding

Times interest earned:  There are a multitude of bonds coming due between now and 2019.  These bonds are not a threat to the dividend.  IBM paid $411 million in interest expenses in 2011.  The company earned $15.885 billion in 2011.  This means that IBM earned its interest expenses by 38.6 times. 

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Preferred stock: none

DIVIDEND RECORD: IBM cut its quarterly dividend of $0.30 per share down to $0.14 for the 1st and 2nd quarters of 1993.  Then they cut the dividend further down to $0.06 in the 3rd quarter of 1993.  They have grown the dividend to $0.75 per share over the next 19 years.

Dividend: $0.75 quarterly

Dividend yield: 1.5% ($3.00 annual dividend / $207.08 share price)

Dividend payout: 22% ($3.00 / $13.41 EPS in 2011) –OR- 28.7% ($3.00 / $10.47 average adjusted earning power)

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EARNING POWER: $10.47 @ 1.150 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2005

$4.87

$7,934 M

1,628 M

$6.90

2006

$6.11

$9,492 M

1,554 M

$8.25

2007

$7.18

$10,418 M

1,451 M

$9.06

2008

$8.89

$12,334 M

1,388 M

$10.73

2009

$10.01

$13,425 M

1,341 M

$11.67

2010

$11.52

$14,833 M

1,287 M

$12.90

2011

$13.06

$15,855 M

1,214 M

$13.79

Seven year average adjusted earnings per share is $10.47

Consider contrarian buying below $83.76 (8 times average adjusted EPS)

Consider value buying below $125.64 (12 times average adjusted EPS)

Consider speculative selling above $209.40 (20 times average adjusted EPS)

IBM (IBM) is currently trading at 19.8 times average adjusted EPS.  This is stock is so close to speculatively pricing that I’m going to call it speculative pricing.

BALANCE SHEET – More red (liabilities) than green (shareholder equity) coupled with declining assets is never a strong balance sheet.

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Book value per share: $17.51 ($20,138 M shareholder equity / 1,150 million shares)

Price to book value ratio: 11.8 (under 1.0 is good) IBM investors are paying $11.80 for each $1.00 in book value.  That is a huge premium to book value that a conservative business man would never pay for a non-public company.

Tangible book value per share: N/A  (IBM had $20,138 M in shareholder equity less $26,213 M in goodwill and $3,392 M in intangibles leaving a negative tangible book value per share)

Price to tangible book value: N/A

Current ratio: 1.21 latest quarter (over 2.0 is good) IBM had $50,928 M in current assets at the end of 2011 and $42,123 M in current liabilities.

Quick ratio: 0.28 latest quarter (over 1.0 is good) IBM had only $11,922 M in cash or equivalents at the end of 2001 and $42,123 M in current liabilities.  I’m surprised how little cash they had onhand given all the claims the financial press have written accusing corporation of hoarding cash.

Debt to equity ratio: 1.24 (lower is better)  You can see a lot of red (total liabilities) relative to green (shareholder equity) on the balance sheet graphic above.

Percentage of total assets in plant, property, and equipment: 12% (the higher the better)  IBM had 42% in current assets, 27% in intangibles, and other long term assets 19%.

Working capital trend: slightly positive.

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CONCLUSION – IBM bottomed at $75 in November 2008 at 7.2 times average adjusted earnings.  It has climbed to almost 20 times average adjusted earnings since then.  IBM’s dividend yield of 1.5% is unremarkable  Its actually lower than the S&P500 average of 2.2%.  The company has been buying back shares the past seven years which could have been used to increase dividends significantly.  I don’t like the fact that management in 1993 cut the dividend significantly.  Dividend growth is nothing special.  IBM’s balance sheet is very weak.  I would ignore IBM until its share price drops below $125.64.  The dividend yield would be higher and you would have a much better chance at some capital appreciation.  This will give IBM some time to reduce debts and to build up its current ratio and quick ratio.

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DISCLOSURE – I don’t own International Business Machines Corp. (IBM).

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Shipping Industry Current Ratios and The Erosion of the Current Ratios Since the 1930's.

I’m always looking for high dividend stocks with earning power and strong balance sheets.  I consider a dividend yield above 6% to be a high dividend stock.  To see why read this: http://bit.ly/6percentDIV.  But don’t let that article distract you.  The focus of this article is going to be on the balance sheet measure known as the current ratio.

There are many measurements of strong balance sheets.  A company’s current ratio is one such measure of a strong balance sheet.  The current ratio is the company’s current assets (usually cash, equivalents, and accounts receivable) divided by its current liabilities (those are liabilities due within one year such as accounts payable and the current portion of the long term debt, etc.).

One of my favorite companies is Safe Bulkers (SB).  They are a dry bulk shipping company.  Unfortunately their current ratio has dropped in the last few quarters.  It currently stands a 0.73.  The father of value investing, Benjamin Graham, consider a current ratio of 2.0 the minimum for investment.  He wrote that back in his book Security Analysis in the 1930’s.  Safe Bulkers current ratio seems really low.  That made me wonder how all the other shipping companies compare.  Here is what I found:  (Note - The size of the bubbles represent the company’s market capitalization in millions of dollars.  For example, Knightsbridge Tankers has a market cap of $303 million.)

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Here is a table with most of the largest publicly traded shipping companies used in the graphic above:

Company

Ticker

Market Capitalization (Millions of dollars)

Current Ratio

Dividend Yield

Kirby Corp.

(KEX)

$                          3,710

1.48

0.00%

Golar LNG Limited

(GLNG)

$                          2,920

0.41

3.13%

Teekay LNG Partners

(TGP)

$                          2,700

0.58

6.44%

Teekay Corp.

(TK)

$                          2,490

1.00

3.51%

Alexander & Baldwin

(ALEX)

$                          2,230

0.99

2.44%

Seacor Hldgs.

(CKH)

$                          1,960

2.59

0.00%

Golar LNG Partners

(GMLP)

$                          1,350

0.49

4.85%

DryShips

(DRYS)

$                          1,310

0.78

0.00%

Ship Finance Intl.

(SFL)

$                          1,060

1.11

8.85%

Seaspan Corp.

(SSW)

$                          1,030

2.74

4.30%

Navios Maritime Partners

(NMM)

$                             901

1.12

10.60%

Costamare Inc.

(CMRE)

$                             832

0.61

10.64%

Diana Shipping

(DSX)

$                             650

9.00

0.00%

Frontline Ltd.

(FRO)

$                             488

2.45

3.38%

Safe Bulkers

(SB)

$                             475

0.73

8.65%

Danaos Corp.

(DAC)

$                             444

0.40

0.00%

Navios Maritime

(NM)

$                             384

1.47

6.38%

Overseas Shipholding

(OSG)

$                             359

2.44

0.00%

Knightsbridge Tankers

(VLCCF)

$                             303

7.30

16.09%

Intl. Shipping Corp.

(ISH)

$                             150

1.30

4.88%

Box Ships

(TEU)

$                             147

0.96

13.17%

Star Bulk Carriers

(SBLK)

$                               53

0.62

6.26%

The average current ratio of the shipping industry is 1.84.  If you throw out the highest and lowest current ratios, then you get 1.56.  So the average of the industry by either measure is below what Graham considered acceptable.  That is interesting.  What was the ratio of the shipping industry in Graham’s day?  Fortunately for use he produced a gem of a table in his 1937 book Interpretation of Financial Statements which I’ve included here:  The 8 companies in shipping had an average current ratio of 3.7.

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I have a sickening feeling that almost every industry nowadays will have an average current ratio below 2.0.  My hypothesis is that decades of Keynesian MBA finance grads have abandoned saving money to ensure financial resilience in a bad economy (like 2008-2009).  Keynesians hate savings because they believe that it causes consumer spending to go down and therefore the economy goes down.  If you want to learn more about this, then read Henry Hazlitt’s The Failure of the New Economics available free from www.mises.org.  He’s got a whole section on the faulty logic of Keynes’ “Paradox of Thrift”.

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First Look at Arch Coal (ACI). Stock price -75% over past 52 weeks. Should you buy?

Arch Coal’s stock price has declined over 75% in the past 52 weeks.  Should you buy like this article recommends?  http://seekingalpha.com/article/473521-4-reasons-why-analysts-expect-arch-coal-s-stock-to-double.  The answer is no because the dividend isn’t safe and the balance sheet is weak.  Read on to see how I came to that conclusion.

Arch Coal (ACI)

Price: $9.76

Shares: 213.29 million

Market capitalization: $2.08 billion

What does the company do: Arch Coal is the nation's second-largest coal producer. Based in St. Louis, Arch provides coal for 6% of the United States' electricity generation. The company owns and operates mining facilities in the Appalachian region in West Virginia, Virginia, and Kentucky; the Powder River Basin in Wyoming; and the Western Bituminous Region in Colorado and Utah. In 2011, Arch sold 155 million tons of coal.

Morningstar’s take: Arch Coal is the second-largest coal producer in the United States, with significant assets in the Powder River Basin (PRB), Central Appalachia, and various Western states (Western Bituminous). The PRB is ruled by a stable oligopoly of firms and is Arch's best asset. However, the company's purchase of International Coal Group, which was struck months before the European crisis, may have put that advantage in jeopardy. With the Chinese economy showing signs of slowing, an investment in Arch is now more of a souped-up play on global economic recovery than methodical value creation.

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Bonds: $9.0 billion outstanding.  The bonds are a threat to the common dividend.

Times interest earned:  Arch Coal paid $230 million on interest charges in 2011.  They earned $142 million net income in 2011.  This is troubling.  They only earned 0.62 times their interest expenses.  The father of value investing, Benjamin Graham, likes to see a company earn at least four times their fixed charges (interest expenses).  All of these bonds are ahead of the common dividend.

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Preferred stock: none.

DIVIDEND RECORD: Arch Coal cut their quarterly dividend by 50% in late 1999 from $0.06 to $0.03.  They have grown it back to $0.11 since late 1999.

Dividend: $0.11 quarterly

Dividend yield: 4.5% ($0.44 annual dividend / $9.76 share price)

Dividend payout: 58.6% ($0.44 / $0.75 2011 EPS) –OR- 56% ($0.44 / $0.79 average adjusted earning power)

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EARNING POWER: $0.79 per share @ 213.29 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2005

$0.18

$38 M

129 M

$0.18

2006

$1.80

$261 M

145 M

$1.22

2007

$1.21

$175 M

144 M

$0.82

2008

$2.45

$354 M

144 M

$1.66

2009

$0.28

$42 M

151 M

$0.20

2010

$0.97

$159 M

163 M

$0.75

2011

$0.74

$142 M

191 M

$0.67

Seven year average adjusted earnings per share is $0.79

Consider contrarian buying below $6.32 (8 times average adjusted EPS)

Consider value buying below $9.48 (12 times average adjusted EPS)

Arch Coal (ACI) is currently trading at 12.4 times average adjusted EPS.  This is stock is priced for investment.  It isn’t as cheap as the happy faced articles portray.

Consider speculative selling above $15.80 (20 times average adjusted EPS)

BALANCE SHEET – The price to book and tangible book values look great.  But the company has little current assets to pay its current liabilities.  The overall balance sheet is not strong.

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Book value per share: $16.78 ($3,578 M equity / 213.29 M shares)

Price to book value ratio: 0.58 (under 1.0 is good)

Tangible book value per share: $13.98

Price to tangible book value: 0.70 (under 1.0 is really good)

Current ratio: 1.16 latest quarter (over 2.0 is good) ($1,183 M current assets / $1,021 M current liabilities)

Quick ratio: 0.14 latest quarter (over 1.0 is good) Horrible!! No cash!  ($138 M cash or equivalents/ $1,021 M current liabilities)

Debt to equity ratio: 1.05 (lower is better)  Too much debt to equity.

Percentage of total assets in plant, property, and equipment: 77.8% (the higher the better).  Current assets = 11.58%, intangibles = 5.84%, and other long term assets = 4.76%

Working capital trend: Their trend is certainly not up, but at least 90% of the last 10 years are positive numbers.

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CONCLUSION – Arch Coal is cheaper not than during the Panic of 2008 – 2009.  It has lost over 75% of its share price in the last 52 weeks, but that doesn’t mean you should buy it.  The dividend is 4.5%, but it is not safe due to the bonds.  They have cut the dividend drastically in the past and I see no reason why they wouldn’t do that again in the future.  Coals main competitor, natural gas, is extremely cheap.  That will inhibit earnings growth in the coal industry until the price of natural gas goes much higher.  Arch coal’s share price is currently flirting with value territory of less than 12 times average adjusted earning power.  I think poor commodity fundamentals and a worldwide double dip recession are going to sink this stock further.  The weak balance sheet real is a deal breakers.  They are going to have to sell more shares in a secondary offering or take on more debt to pay for their current liabilities.  I think that Arch Coal should not be bought until they strengthen their balance sheet by paying of debts.

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DISCLOSURE – I don’t own Arch Coal (ACI).

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First look at Enerplus Corporation (ERF). Huge dividend, weak balance sheet.

Seeking Alpha contributor, EFSinvestment, wrote that Enerplus Corporation (ERF) is a buy at today’s price of $17.76.  His article is here: http://seekingalpha.com/article/513701-dividend-stock-ideas-2-buys-3-holds .  He pays no attention to the effects of a worldwide recession on oil and natural gas prices.  That will hurt earning further.  And he pays no attention to the balance sheet.  This is what he wrote:

Enerplus Corporation - Buy

With a dividend yield of 12.1%, Enerplus is one of the top-yielding Canadian commodity stocks. In the last year, the company paid $389 million in dividends. While it might be claimed that the payout ratio is unsustainable, I think the dividend is pretty safe. It is more than fully covered by the company's operating cash flow. Enerplus generated an operating cash flow of $641 million in the last 12 months.

(click to enlarge)

(Source: Finviz.com)

Due to company's exposure to natural gas-related assets, the stock has lost more than 26% in this year alone. However, it looks like a cheap deal after the recent sell-off. Enerplus is trading near its book value. The P/S and P/CF ratios stand at 2.4, and 5.3, respectively. The company has substantial assets in the Marcellus and Bakken shales. Morningstar claims that these assets could prove highly productive in the long term.

My FED+ fair model suggests a fair value range of $20 - $38. Analysts mean target price of $26.79 fits almost perfectly at the middle of my fair value range. The current price of $18 suggests that Enerplus is deeply undervalued. I think the stock is oversold, and ready for a big bounce. That is why I rate it as a buy.

Here is my first look analysis of Enerplus Corporation

Enerplus Corporation (ERF)

Price: $17.76

Shares: 196.30 million

Market capitalization: $3.48 billion

All the financial numbers are in Canadian dollars.  Fortunately the US dollar and Canadian dollar are at near parity.  Here is a Google Finance chart of the last 10 years of USD to CAD exchange rates.

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What does the company do – Enerplus, based in Calgary, Alberta, is an independent energy company engaged in the exploration for and production of oil and gas in the Western Canadian Sedimentary Basin and Pennsylvania's Marcellus Shale. At the end of 2010, the company reported proven reserves of 219.4 million barrels of oil equivalent. Daily net production averaged about 83,139 barrels of oil equivalent per day in 2010 at a ratio of 58% gas/42% liquids.

Morningstar’s take - The passing of 2010 marked a series of changes for Enerplus as it converted from an income trust to a corporation. The company sold off conventional and oil sands assets, using the proceeds to build its acreage position in Pennsylvania's Marcellus Shale and the Bakken in North Dakota and Saskatchewan. We think the company will continue to pay an attractive dividend and aggressively pursue production growth in the Marcellus and Bakken.

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Bonds: According to Morningstar.com Enerplus Corp has no bond data available.

Times interest earned:  ERF’s 2011 net income was $109 million and the company paid $60 million in interest charges.  This means that the company earned only 1.81 times the interest on its long term debts.  The father of value investing, Benjamin Graham, believed that a company should earn fully four times the interest charges to warrant the purchase of shares of an industrial preferred stock.

Preferred stock: none

Margin of profit: 8.19%  Profit margins were between 18.7% and 37.9% from 2002 through 2008.  Since then they have ranged between 6.9% and 9.4%.

DIVIDEND RECORD: Enerplus Corporation cut its dividend 57% from $0.42 monthly in late 2008 to $0.18 monthly since the beginning of 2009.  There has been no dividend growth since the cut.

Dividend: $0.18 monthly

Dividend yield: 12.16%  ($2.16 annual dividend / $17.76 share price)

Dividend payout: 386% ($2.16 / $0.56 EPS in 2011) –OR- 133% ($2.16 / $1.62 average adjusted earning power).  Either way ERF the dividend is not safe by any measure.  The world is reentering recession.  That will drive the price of oil down and natural gas price will not recover anytime soon.  I expect another significant dividend cut in the next year.

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EARNING POWER: $1.62* @ 196.3 million shares

*Canadian dollars (earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2005

$3.95

$432 M

109 M

$2.20

2006

$4.47

$545 M

122 M

$2.78

2007

$2.66

$340 M

128 M

$1.73

2008

$5.53

$889 M

161 M

$4.53

2009

$0.53

$89 M

170 M

$0.45

2010

($1.02)

($179 M)

176 M

($0.91)

2011

$0.61

$109 M

180 M

$0.56

Seven year average adjusted earnings per share is $1.62

Consider contrarian buying below $12.96 (8 times average adjusted EPS)

Enerplus Corporation (ERF) is currently trading at 10.96 times average adjusted EPS.  This is stock is value priced.

Consider value buying below $19.44 (12 times average adjusted EPS)

Consider speculative selling above $32.40 (20 times average adjusted EPS)

BALANCE SHEET – ERF’s current ratio and quick ratio reveal how tenuous their balance sheet is.

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Book value per share: $16.69 ($3,277 million shareholder equity / 196.3 million shares)

Tangible book value per share: $15.90 (shareholder equity – intangible assets of $155 million / shares)

Price to book value ratio: $1.06 (under 1.0 is good)

Price to tangible book value ratio: 1.11 (under 1.0 is great)

Current ratio: 0.27 latest quarter (over 2.0 is good)

Quick ratio: 0.011 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.26 (lower is better)

Percentage of total assets in plant, property, and equipment: 90.98% (the higher the better)

Working capital trend is down.  That means that ERF must find funding to make up the difference.  This is a bad sign coupled with the extreme dividend payout ratio.

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CONCLUSION – The best time to buy Enerplus Corporation in recent years was in 2009 when the stock bottomed around $15 per share.  However there is a worry-some downward spike in the price during the “flash crash” of May 2010.  I don’t like stocks that get pummeled in flash crashes.  ERF is a high dividend stock yielding over 12%, but the dividend is not safe based on the expected earnings in the near future.  The world is slipping back into recession.  Europe is already in recession, China is moving towards recession, and the US data keeps getting worse.  Recessions cause oil prices to drop.  That will reduce ERF’s earnings like in 2009.  Natural gas has dropped, dropped, dropped.  Maybe it stabilizes at around $2 per MCF or $3, but the point is that it will not miraculously go back up to $10 - $14 per MCF with all the supply increases due to the fracking technology.  I expect ERF to cut their dividend significantly again when its obvious to the common man that worldwide recession is back.  The stock price is value now, but it will be even cheaper in the near future.  ERF’s balance sheet has several weaknesses.  Their low current ratio and quick ratio shows that the company has little current assets to pay for current liabilities.  Those liabilities will need to be funded through additional stock offerings or increasing long term debts.  This isn’t a single year issue.  Look at the working capital trend to see a company that is always short of paying its current liabilities from current assets.  I would ignore this company until they cut their dividend and improve their balance sheet.

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DISCLOSURE – I don’t own Enerplus Corporation (ERF).

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TIP OF THE WEEK - What the Heck is Working Capital and Why Should You Care?

What the Heck is Working Capital and Why Should You Care?

Jason Brizic

April 20st, 2011

You need to know what working capital is because it is one of the indicators of balance sheet strength.

Follow Benjamin Graham’s advice on the importance of working capital.  The following passage comes from the 1937 book The Interpretation of Financial Statements Chapter XII:

            In studying what is called the “current position” of an enterprise, we never consider the current assets by themselves, but only in relation to the current liabilities.  The current position involves two important factors: (a) the excess of current assets over current liabilities – known as the Net Current Assets or the Working Capital, and (b) the ratio of current assets to current liabilities – known as the Current Ratio.

            The Working Capital is found by subtracting the current liabilities from the current assets.  Working Capital is a consideration of major importance in determining financial strength of an industrial enterprise, and it deserves attention also in the analysis of public utility and railroad securities.

            In the working capital is found the measure of the company’s ability to carry on its normal business comfortably and without financial stringency, to expand its operations without the need of new financing, and to meet emergencies and losses without disaster.  The investment in plant account (or fixed assets) is of little aid in meeting these demands.  Shortage of working capital, at its very least, results in slow payment of bills with attendant poor credit rating, in curtailment of operations and rejection of desirable business, and in a general inability to “turn around” and make progress.  Its more serious consequence is insolvency and the bankruptcy court.

            The proper amount of working capital required by a particular enterprise will depend upon both the amount and the character of its business.  The chief point of comparison is the amount of working capital per dollar of sales.  A company doing business for cash and enjoying a rapid turnover of inventory – for example, a chain grocery enterprise – needs a much lower working capital compared with sales than does the manufacturer of heavy machinery sold on long-term payments.

            The working capital is also studied in relation to fixed assets and to capitalization, especially the funded debt and preferred stock.  A good industrial bond or preferred stock is expected, in most cases, to be entirely covered in amount by the net current assets.  The working capital available for each share of common stock is an interesting figure in common stock analysis.  The growth or decline of the working capital position over a period of years is also worthy of the investor’s attention.

            In the field of railroads and public utilities, the working capital item is not scrutinized as carefully as in the case of industrials.  The nature of these service enterprises is such as to require relatively little investment in receivables or inventory (supplies).  It has been customary to provide for expansion by means of new financing rather than out of surplus cash.  A prosperous utility may at times permit its current liabilities to exceed its current assets, replenishing the working capital position a little later as part of its financing program.

            The careful investor, however, will prefer utility and railroad companies that consistently show a comfortable working capital situation.

Let’s take a look at Safe Bulkers (SB) working capital situation from the past few years (Source: Morningstar.com).  Safe Bulkers financial strength has been eroding along with the dry bulk shipping market.

12/2007

12/2008

12/2009

12/2010

12/2011

Total Current Assets

$98,883,000

$88,086,000

$105,648,000

$104,276,000

$37,959,000

Total Current Liabilities

$43,984,000

$70,863,000

$65,551,000

$52,983,000

$51,673,000

Working Capital

$54,899,000

$17,223,000

$40,097,000

$51,293,000

($13,714,000)

Current Ratio

2.25

1.24

1.61

1.97

0.73

Revenues

$165,848,000

$200,772,000

$164,606,000

$157,020,000

$168,908,000

WC as % of Revenue

33.1%

8.6%

24.4%

32.7%

N/A

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The Interpretation of Financial Statements - Ratio Analysis using Safe Bulkes (SB) as an example

I recently finished reading Benjamin Graham’s 1937 classic The Interpretation of Financial Statements.  Graham explains the financial statement concepts in clear English.  At the end of the book he walks the reader through the analysis of a balance sheet and income statement using the ratio method.  His example was Bethlehem Steel Corporation.

I will do the same with Safe Bulkers (SB).

A number of the ratios used in the analysis of an industrial company’s income account and balance sheet are presented herewith by the use of a single example – namely the financial statements of the Safe Bulkers corporation for 2011.  Various items in the Balance Sheet and Income account are numbered.  This will facilitate the explanation as to the method of computing ratios.  For example margin of profit, the first ratio computed in this study, is operating income divided by sales.  On the Income Account operating income is item No. 4 and sales is item No. 1.  The method of computing margin of profit is expressed at (4) ÷

0image007
(1) or in actual amounts $108,936,000 ÷
0image007
$172,036,000 = 63.3%

SAFE BULKERS

Income Account Year Ended December 31, 2011

(1)

Revenues

$172,036,000

Commissions

(3,128,000)

(2)

Voyage, vessel operating, general and administrative expenses

(36,542,000)

Early redelivery income

207,000

(3)

Depreciation

(23,637,000)

(4)

Operating Income

$108,936,000

Add – interest, dividends, and other misc income

0

(5)

Total Income

$108,936,000

(6)

Deduct-Interest charges

(19,202,000)

(7)

Net Income

$89,734,000

(8)

Deduct-Dividends on Preferred Stock

0

(9)

Net for Common Stock

$89,734,000

Deduct-Dividends on Common Stock

$42,536,652

(10)

Transferred to Surplus

$47,197,348

BALANCE SHEET

SAFE BULKERS

December 31st, 2011

ASSETS

Current Assets:

(11)

Cash, time deposits

$28,121,000

(12)

Other current assets

9,838,000

(13)

Accounts and notes receivable

0

(14)

Inventories

0

(15)

Total Current Assets

$37,959,000

Advances for vessel acquisition and vessels under construction

$122,307,000

Restricted cash non-current

5,423,000

Long-term investment

50,000,000

Other non-current assets

6,226,000

(16)

Vessels

?

(17)

Less reserve for depreciation and depletion

0

(18)

Vessels, net

$655,356,000

Total Long Term Assets

$ 839,312,000

Total Assets

$877,271,000

LIABILITIES

Current Liabilities:

Current portion of long-term debt

$18,486,000

Other current liabilities

$33,187,000

(19)

Total Current Liabilities

$ 51,673,000

(20)

Long-term debts, net of current portion

$465,805,000

(21)

Other non-current liabilities

$27,951,000

Total Non-current Liabilities

$493,756,000

(22)

Common stock 70,894,420 shares, no par value?

0

(23)

Shareholder equity (Surplus)

$331,842,000

Total Shareholder Equity

$331,842,000

Total Liabilities

$877,271,000

Margin of Profit

Operating income divided by Sales.

Formula: (4) ÷

0image007
(1)

You Can Plainly See That the Emperor Has No Clothes.

The Keynesian economists that make up the Federal Reserve Board of Governors are clueless and blind.  They did not see the Panic of 2008 coming, yet they claim that they see recovery and good times ahead now.  Don't believe them unless you belive this.

You will have ample opportunities to buy high dividend stocks with earning power and strong balance sheets cheaply in the next two years.

Be seeing you!

First Look at ConocoPhillips (COP). Not a Cheap As You Think.

Some article I read touted ConocoPhillips (COP) as a good dividend stock selling at 8 times earnings.  I was skeptical.  It turns out my suspicions were warranted.  2008 was a really bad year for ConocoPhillips.  Those who say that 2008 was an aberration do not understand economics (Austrian economics).  The Keynesian economists think that there will be no double-dip worldwide recession.  Just like in 2008; they will be proved wrong by the markets.  Natural gas and oil prices will go down from their present prices in a worldwide recession.  Therefore, ConocoPhillips will go down back to something closer to the 2009 lows.  Read on to see how I came to that conclusion.

ConocoPhillips (COP)

Price: $74.35

Shares: 1.28 billion

Market capitalization: $95.16 billion

What does the company do – ConocoPhillips is an international integrated energy company. In 2011, it produced 867,000 barrels per day of oil and natural gas liquids and 4.5 billion cubic feet a day of natural gas, primarily from the United States, Canada, Norway, and the United Kingdom. Proven reserves at year-end 2011 stood at 8.4 billion barrels of oil equivalent, 41% of which are natural gas. With refining capacity of 1.9 million barrels of oil a day, it's the third-largest refinery operator in the U.S.

Morningstar’s take - Faced with a tightening resource market, ConocoPhillips made significant acquisitions over the past decade to boost reserves and increase production. The ensuing fall in commodity prices made those acquisitions appear poorly timed, however. As a result, management changed course last year by selling assets and reducing investment. Now it is taking another step by spinning off the downstream assets into a separate company, potentially as early as May.

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Preferred stock: none

Bonds: $20.1 billion.  COP paid $972 million in interest expenses in 2011.  It earned $12.436 billion in the same year.  The company has the interest covered 12.8 times over.  The bonds are not a threat to the dividend at this time.

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DIVIDEND RECORD: ConocoPhillips paid a $0.01 quarterly dividend in 1987.  They are paying $0.66 per quarter this year.  That is 6,500% dividend growth over 25 years.  And they are a dedicated dividend payer because when most of the other spineless CEOs were cutting dividends near the depths of the markets in 2009 Conoco raised the dividend 15% when they had huge per share losses.  Why can’t more executives have the fortitude that COP has.

Dividend: $0.66

Dividend yield: 3.55%   COP becomes a high dividend stock with a dividend yield of 6% when the stock price drops to $44.00.

Dividend payout: 29% using 2011 EPS of $8.98 –OR- 29% using the alternative earning power excluding extraordinary charges

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EARNING POWER: $3.61 @ 1.28 billion shares –OR- $8.83 @ 1.28 billion shares excluding the massive impairment charges in 2008.

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2007

$7.22

$11,891 M

1,646 M

$9.29

2008

($11.16)

($16,998 M)

1,523 M

($13.28)

2009

$2.94

$4,414 M

1,498 M

$3.45

2010

$7.62

$11,358 M

1,491 M

$8.87

2011

$8.97

$12,436 M

1,387 M

$9.72

Here is the CEO’s explanation from the 2008 annual report.  You can decide for yourself if the impairments are not indicative of the strength of their underlying earnings.

Despite our progress, like the entire industry ConocoPhillips was severely impacted by falling commodity prices, tightening refining margins, and steep declines in share prices. The decline in market capitalization, as well as expectations for extended weakness in prices and margins, necessitated noncash impairments of goodwill related to our Exploration and Production (E&P) business, and to the carrying value of our LUKOIL investment.

These and other impairments in 2008 totaled $34.1 billion. As a result, despite record earnings through three quarters, we closed 2008 with a net loss of $17 billion, or $11.16 per share, compared with a profit during 2007 of $11.9 billion, or $7.22 per share. Our capital program during the year totaled $19.9 billion. Total debt increased to $27.5 billion, compared with $21.7 billion at year-end 2007.

We believe that the impairments are not indicative of the strength of our underlying earnings and cash flow, or the potential offered by our asset base. Exemplifying these attributes, if impairment charges and other similar items are excluded for both years, adjusted earnings during 2008 were $16.4 billion, or $10.66 per share, compared with $15.2 billion, or $9.21 per share, in 2007.

Alternative earnings excluding extraordinary impairment charges in 2008

EPS

Net income

Shares

Adjusted EPS

2007

$7.22

$11,891 M

1,646 M

$9.29

2008

$10.99

$16,400 M

1,523 M

$12.81

2009

$2.94

$4,414 M

1,498 M

$3.45

2010

$7.62

$11,358 M

1,491 M

$8.87

2011

$8.97

$12,436 M

1,387 M

$9.72

Six year average adjusted earnings per share is $3.61 –OR- $8.83 (depending on whether you believe the CEO’s explanation).  I don’t believe him because I think there is another worldwide recession coming that was delayed by central bank counterfeiting.  The price of oil and natural gas will fall from their present levels in a worldwide recession.  If this is true, then ConocoPhillips is not currently priced as cheaply as it is portrayed in the online P/E values.

Consider contrarian buying below $28.88 (8 times average adjusted EPS of $3.61)

Consider value buying below $43.32 (12 times average adjusted EPS of $3.61)

Consider speculative selling above $72.20 (20 times average adjusted EPS $3.61)

ConocoPhillips is currently trading at 20.6 times average adjusted EPS.  This is stock is speculatively priced.

Here are the buy/sell prices if you believe their CEO and his explanation and Keynesian economics

Consider contrarian buying below $70.64 (8 times average adjusted EPS of $8.83)

ConocoPhillips is currently trading at 8.4 times average adjusted EPS.  This is stock priced for value.

Consider value buying below $105.96 (12 times average adjusted EPS of $8.83)

Consider speculative selling above $176.60 (20 times average adjusted EPS of $8.83)

BALANCE SHEET – You can clearly see the $34 billion drop in assets and equity in 2008 caused by low oil prices.  ConocoPhillip’s balance sheet is not strong.

Image009

Book value per share: $50.96 ($65.224 B equity / 1.28 B shares)

Tangible book value per share: $47.77 (equity above – $4.077B intangibles / 1.28 B shares)

Price to book value ratio: 1.46 (under 1.0 is good)

Price to tangible book value ratio: 1.55 (under 1.0 is best)

Current ratio: 1.12 latest quarter (over 2.0 is good)

Quick ratio: 0.78 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.34 (lower is better) That is pretty low.

Percentage of total assets in plant, property, and equipment: 55% (the higher the better) Other long term investments comprised 23%, current assets comprise 19%, and intangibles were only 3% of total assets.

The working capital trend is negative

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CONCLUSION – As usual, the best time to buy ConocoPhillips in recent years was in March 2009.  It was a value investment back then.  ConocoPhillips is a powerful dividend payer and grower.  Their dividend is safe due to relatively low debt and a low payout ratio.  However, the company is speculatively priced at this time a 20.6 time average adjusted earnings.  Wise investors should have scaled out of it when it reached $72.20 back in February 2011.  The balance sheet is weak when you look at the price to book value ratio and the current ratio and quick ratios.   They might issue some more bonds or cut back on their capital expenditures to make up the difference between current assets and current liabilities.  You can safely ignore this stock until it drops back to the $47 - $44 range were the tangible book value is almost even and the dividend is near 6%.

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DISCLOSURE – I don’t own ConocoPhillips (COP).

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First Look at General Electric. Malaise!

I’ve read several articles which tout General Electric as a good large cap dividend stock.  Here are just two examples of lackluster initial analysis.

Gurufocus.com ran an article April 3rd, 2012 on “High-Dividend Yielders for 2012”.  General Electric (GE) was one the five stocks recommended in the article.  Apparently the author of the article thinks that a 3% dividend yield is a high dividend.  I think that a stock needs to yield at least 6% to be considered a high dividend stock.

http://www.gurufocus.com/news/170209/5-highdividend-yielders-for-2012

The author has this to say about GE:

General Electric (GE) – General Electric has performed well over the last few months and the stock is up about 13%. It has a trailing price to earnings ratio of about 15.8 which puts it a little higher than the market multiple so it is not a great bargain, but its 3.6% dividend yield is quite a bit higher than that of the market. Also, with a payout ratio of only 50% investors can sleep well knowing that it is safe.

General Electric is unique but can probably be best compared to Siemens AG ADR (SI), which is a much smaller company with a market cap of only $88 billion compared to GE’s $207 billion. Siemens looks a little cheaper at first glance with a trailing 12 month price to earnings ratio of 11.5 compared to almost 16 for GE as noted above, but GE has significantly higher gross margins and operating margins at 37.9% and 12.1% respectively. A good article detailing GE’s current situation can be found here.

The stock trades at a price that is near its 52 week high of $20.85 and is not cheap as mentioned above. However, it is a great company that will offer yield-starved investors a place to earn a decent yield and I would be a buyer at $19 per share or less.

Seeking alpha contributor, DividendInvestr, wrote the article titled “7 High Dividend Large Cap Stocks For Income Investors”

http://seekingalpha.com/article/485891-7-high-dividend-large-cap-stocks-for-income-investors

He had this to say about GE:

6. General Electric Company: General Electric Company operates as a technology and financial services company worldwide. GE recently traded at $19.49 and has a 3.5% dividend yield. GE lost 1.7% during the past 12 months. The stock has a market cap of $206.2 billion, P/E ratio of 15.9 and Total Debt/Equity ratio of 3.89. GE also had an EPS growth rate of -7.2% during the last five years. Ken Fisher holds the largest position in GE with his $397 million investment. Ken Fisher reduced his position in GE by 30% during the last quarter of 2011.

Read on to see when GE was a contrarian stock worth buying.

General Electric (GE)

Price: $19.01

Shares: 10.58 billion

Market capitalization: $201.15 billion

What does the company do – General Electric is a diversified manufacturer and is organized into four segments: technology infrastructure, energy infrastructure, home and business services, and capital services. Financial services accounted for 25% of the firm's profit from continuing operations in 2010.

Morningstar’s take - General Electric positions itself to be a leader in all markets in which it competes. After shedding underperforming businesses during the past few years, the firm has energy infrastructure square in its sights. We believe GE will emerge as a leader in the power infrastructure market, which will be the backbone for the firm's growth.

Image002

Preferred stock: GE paid $1.031 billion in preferred dividends last year.  They reported that they retired the preferred dividend on their 4Q 2011 earnings webcast.

Bonds: $112.6 billion outstanding.  That is a really ugly bond chart.  GE loves issuing debt.

Image006

DIVIDEND RECORD: Not good because of their huge dividend cut in 2Q 2009.  GE cut the dividend from $0.31 to $0.10 quarterly.  They have since increased the dividend to $0.17 quarterly at the present time.

Dividend: $0.17

Dividend yield: 3.6% ($0.68 annually/$19.01 share price)

Dividend payout: 55% using 2011 earnings of $1.23 –OR- 48% using the average adjusted earning power of $1.41

Image007

EARNING POWER: $1.41 @ 10.58 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2007

$2.17

$22,208 M

10,218 M

$2.10

2008

$1.72

$17,335 M

10,098 M

$1.64

2009

$1.01

$10,725 M

10,615 M

$1.01

2010

$1.06

$11,344 M

10,678 M

$1.07

2011

$1.23

$13,120 M

10,620 M

$1.24

Five year average adjusted earnings per share is $1.41

Consider contrarian buying below $11.28 (8 times average adjusted EPS)

Consider value buying below $16.92 (12 times average adjusted EPS)

General Electric (GE) is currently trading at 13.5 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $28.20 (20 times average adjusted EPS)

BALANCE SHEET – GE is a company in decline and the balance sheet shows it.  The balance sheet is not strong.  GE forgot how to compound shareholder equity.  The entire balance sheet should remain suspect because of the bailed out GE Capital.

Image009

Book value per share: $11.00 ($116.438 B equity divided by 10.58 billion shares = $11.00 per share)

Tangible book value per share: $3.00 ($116.438 B equity - $72.625 B goodwill - $12.068 B intangibles = $31.745 B tangible book value divided by 10.58 billion shares = $3.00 per share)

Price to book value ratio: 1.73 (under 1.0 is good)

Price to tangible book value ratio: 6.33 Horrible!!

Current ratio: 2.29 latest quarter (over 2.0 is good)

Quick ratio: 2.21 latest quarter (over 1.0 is good)

Debt to equity ratio: 2.16 (lower is better)  Notice all the red above the green on the balance sheet chart.  They love debt.

Percentage of total assets in plant, property, and equipment: 9.17% (the higher the better) Wow! That number really shocked me.  I though GE was an industrial conglomerate with a large percentage of its assets in net PPE.  10 years ago they were at 8.21% net PPE.  Current assets comprise 63.18% of total assets (42.87% accounts receivable & 18.39% cash equivalents), other long term assets comprise 15.85%, and intangibles made up 11.81% of total assets.

The working capital trend is up.

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CONCLUSION –   As usual, the best time to buy GE in recent years was in March 2009.  It was a contrarian investment back then at $7.06 per share.  General Electric was a steady dividend payer and grower from 1987 to 2009, but then they panicked and cut the dividend from $0.31 to $0.10 quarterly.  GE had plenty of retained earnings to continue to pay the dividend during the recession of 2009.  I think they really damaged their reputation as a dedicated dividend payer.  They pay a modest dividend and are cautiously growing the dividend since the cut.  The stock is still priced for investment at 13.5 times average adjusted earning power.  But the coming worldwide double-dip recession will drag the price of the stock back down to value pricing territory.  The balance sheet is weak when you look at increasing debt and a lack of shareholder equity growth, the price to tangible book value ratio is just horrible, and the net assets in property, plant, and equipment.   I would ignore this stock until if falls below $13.00.  Those are some key support levels from June 2010 and September 2011.

GE Capital owns Greek bonds!!  Complete idiots are running that part of the company.  Enough said.

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DISCLOSURE – I don’t own General Electric (GE) and I would never own it as long as GE Capital is part of the company.

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