My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

First Look at DOW 30 Component 3M (MMM).

Today I continue my series on the DOW 30 component stocks.  I will be examining 3M (MMM).  3M is an exceptional dividend grower with an average yield.  Its priced for investment, but its balance sheet has some weakness.  To see how I came to those conclusions read on.

3M (MMM)

Price: $84.40

Shares: 693.87 million

Market capitalization: $58.56 billion

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What does the company do: Based in St. Paul, Minn., 3M manufactures a diversified array of industrial products. Known especially for popular consumer products such as Scotch Tape and Post-It Notes, the company's portfolio also offers liquid crystal display films, health-care technology, heavy-duty adhesives, and more than 40 other technology platforms. 3M is an S&P 500 component and a part of the Dow Jones Industrial Average.

Morningstar’s take: Over its long history, 3M has invented some of the world's greatest products. We think the firm's innovative culture, bottom-line focus, and low-cost manufacturing have carved a wide moat around its business that will enable the company to reap outsized rewards over the long run. That said, the company tends to feel the pinch of economic slowdowns relatively early, and near-term headwinds could crimp the firm's results for several quarters.

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Bonds: $5.8 billion outstanding

Times interest earned: 3M’s earned 23 times its bond interest expenses in 2011.  They earned $4.283 billion and paid $186 million in interest expenses in 2011.  Their bonds are not a threat to the dividend at the present time.  Although, it looks like they have some big bonds due in the 2013-2017 timeframe.

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Preferred stock: none.

DIVIDEND RECORD: I don’t see any cuts going back to 1987 which is as far as I can see on Google Finance.  They have grown their quarterly dividend from $0.12 in 1987 to $0.59 today.  That is a straight line gain of 391% over 25 years or 15.6% straight line annual dividend growth.

Dividend: $0.59 quarterly

Dividend yield: 2.8% ($2.36 annual dividend / $84.40 share price)

Dividend payout: 39% using 2011 EPS of $6.06 –OR- 44% using average adjusted earning power of $5.39

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EARNING POWER: $5.39 @ 693.87 million shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$4.12

$3,199 M

777 M

$4.61

2006

$5.06

$3,851 M

761 M

$5.55

2007

$5.60

$4,096 M

732 M

$5.90

2008

$4.89

$3,460 M

707 M

$4.99

2009

$4.52

$3,193 M

707 M

$4.60

2010

$5.63

$4,085 M

726 M

$5.89

2011

$5.96

$4,283 M

719 M

$6.17

Seven year average adjusted earnings per share is $5.39

Consider contrarian buying below $43.12 (8 times average adjusted EPS)

Consider value buying below $64.68 (12 times average adjusted EPS)

3M (MMM) is currently trading at 15.7 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $107.80 (20 times average adjusted EPS)

BALANCE SHEET – Horrible price to book value ratios.  Quick ratio (Cash/Current Liabilities) looks weak.

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Book value per share: $23.32 ($16.182 B equity / 693.87 million shares)

Price to book value ratio: 3.61 (under 1.0 is good) 3M investors are paying $3.61 for each $1.00 in book value.  That is a huge premium to pay.

Tangible book value per share: $10.42 (equity - $7.090 B goodwill - $1.865 B intangibles / 693.87 million shares)

Price to tangible book value: 8.10 (near 1.0 is good)  Wow! Investors are paying $8.10 for each $1.00 in tangible assets.  The is a substantial premium.

Current ratio: 2.37 latest quarter (over 2.0 is good)  ($12.853 B current assets / $5.408 B current liabilities)

Quick ratio: 0.69 latest quarter (over 1.0 is good) 3M has huge amounts of receivables and inventory.

Debt to equity ratio: 0.28 (lower is better)

Percentage of total assets in plant, property, and equipment: 24.2% (the higher the better)  Other assets percentages of the total assets are: current assets 40.15%, intangibles 27.97%, and other long term assets 7.66%

Working capital trend: Nicely upward

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CONCLUSION – The best time to buy 3M in recent years was in early March 2009 when the price dropped to $41.83.  That was below contrarian pricing of $43.12.  Their dividend growth has been phenomenal over the past 25 years.  However, the dividend yield is just average for a DOW 30 stock.  3M is currently priced for investment at 15.7 times, but that seems quite expensive when you consider where the stock price has been.  3M’s net income has been incredibly stable even at the height of the financial panic of 2008-2009.  3M’s balance sheet is very weak mostly due to extremely high price to book value ratios.  I would put 3M on your watchlist with an alert set for below $64.68 per share.

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DISCLOSURE – I don’t own 3M (MMM).

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First look at DOW 30 Component Alcoa (AA)

Today’s article continues my series on the DOW 30 companies.  I take a look at aluminum producer Alcoa.  I’ll bet you didn’t know that Alcoa has a pretty dark past regarding the introduction of fluoride into your local drinking water.  Here is the link if you’re interested: http://www.lewrockwell.com/rothbard/rothbard85.html 

Alcoa’s earning have suffered greatly since the Panic of 2008, its dividend yield is smaller than the S&P 500 average, they cut the dividend big time every crisis, and their balance sheet is not strong.  The return of a worldwide recession will crush Alcoa’s share price further.  Read on to see how I came to this conclusion.

Alcoa (AA)

Price: $8.49

Shares: 1.07 billion

Market capitalization: $9.06 billion

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What does the company do: Alcoa is the largest player in the global aluminum market, producing 20% of the world's alumina and 10% of its aluminum. Alcoa is involved in bauxite mining; alumina refining; aluminum smelting; and producing aluminum products such as beverage cans, aerospace components, and auto and building products. The company has operations on every continent and has been actively expanding its operations in lower-cost regions such as South America and the Middle East.

Morningstar’s take: Alcoa is one of the top players in the aluminum industry, as the largest producer of alumina; a major smelter of aluminum; and a leading manufacturer of aluminum products for beverages, cars, aircraft, and building construction. The company's size and vertical integration enable strategic advantages such as lower input costs, greater efficiency, and access to financial resources. But, like all commodity industries, aluminum is a challenging business, as profitability is linked to cyclical demand and volatile price movements.

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Bonds: $8.4 billion outstanding

Times interest earned: Alcoa earned $611 million in 2011 and paid $524 million in interest expenses in the same year.  This means that Alcoa only earned 1.16 times its interest expenses in 2011.  The interest expenses are a threat to the dividend.  The dividend is threatened when net income is less than five times interest expenses.

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Preferred stock: none.

DIVIDEND RECORD: Alcoa has a history of huge dividend cuts.  In 1997, they cut their dividend 50% from $0.06 to $0.03.  One year later they cut their dividend by 66% from $0.03 to $0.01.  They grew the dividend from $0.01 to $0.17 over the next decade, but then they had another huge 82% dividend cut from $0.17 to $0.03 in Q2 2009.

Dividend: $0.03

Dividend yield: 1.4% ($0.12 annual dividend / $8.49 share price)

Dividend payout: 22% ($0.12 / $0.55 2011 EPS) –OR- 16% ($0.12/$0.76 average earning power)  Alcoa does not pay a substantial portion of its earning to owners in the form of dividends.

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EARNING POWER: $0.76 @ 1.07 billion shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$1.40

$1,233 M

879 M

$1.15

2006

$2.57

$2,248 M

874 M

$2.10

2007

$2.95

$2,562 M

869 M

$2.39

2008

($0.10)

($74 M)

813 M

($0.07)

2009

($1.23)

($1,151 M)

935 M

($1.08)

2010

$0.24

$254 M

1,025 M

$0.24

2011

$0.55

$611 M

1,161 M

$0.57

Seven year average adjusted earnings per share is $0.76

Consider contrarian buying below $6.08 (8 times average adjusted EPS)

Alcoa (AA) is currently trading at 11.2 times average adjusted EPS.  This is stock is value priced.

Consider value buying below $9.12 (12 times average adjusted EPS)

Consider speculative selling above $15.20 (20 times average adjusted EPS)

BALANCE SHEET – Stagnant.  Not horrible, but not strong either.  Their tangible book value per share is definitely a high point.

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Book value per share: $13.22 ($14.142 B equity / 1.07 B shares)

Price to book value ratio: 0.64 (under 1.0 is good)

Tangible book value per share: $8.29 (equity – $5.271 B goodwill / 1.07 shares)

Price to tangible book value: 1.02 (near 1.0 is good)

Current ratio: 1.25 latest quarter (over 2.0 is good)

Quick ratio: 0.27 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.61 (lower is better)

Percentage of total assets in plant, property, and equipment: 48.18% (the higher the better)  Here are the totals for the other asset classes: Other long term assets were 19.49%, current assets were 19.37%, and intangibles were 12.95%

Working capital trend: unchanged near $1.7 billion

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CONCLUSION – Alcoa’s share price bottomed on March 6th, 2009 at $5.22 per share.  All of the problems present in the world economy back then are still present today.  In fact, the economies of the world are even worse due to all the money printing of the central banks such as the US Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of China, and other lesser know central banks.  You will get an opportunity to buy Alcoa below $5.22 per share in the next couple of years when Keynesian central bank inflation backfires.

Alcoa’s dividend record is horrible.  They make big dividend cuts whenever the market takes a significant dive.  Why do they do this when their dividend payout ratio is relatively low?  I think the answer is the increasing bond interest expenses that Alcoa suffers from.  The bond interest expense is a threat to the dividend.

Alcoa’s balance sheet is somewhat respectable for its stability.

I’d stay away from this stock because it is susceptible to the return of the worldwide recession that was papered over by the world’s central banks.

The price of aluminum will determine the fate of Alcoa’s share price.  Aluminum on the spot market fell almost 60% in 2008 due to the Great Recession.  The price of aluminum rose back to 2007 levels to $1.20 per pound in March 2011 following the March 2009 lows.  However, the price has retreated nearly 30% since the summer of 2011 due to fears of a Chinese recession and an worsening of the European sovereign debt crisis.  China will have a recession and Europe will get worse.  Therefore Alcoa will suffer in the next two years.

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The London Metals Exchange publishes daily warehouse inventory levels.  The chart below shows the incredible buildup of aluminum inventories following the Panic of 2008.  Aluminum warehouse stock buildups indicating increasing supplies.  Increased supplies do not lead to increasing aluminum prices.  This is bad for Alcoa.

DISCLOSURE – I don’t own Alcoa (AA).

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First Look at DOW 30 Component Home Depot (HD).

Today I return to the DOW 30 component stocks with Home Depot (HD).  Home Depot has a typical S&P 500 dividend yield and payout ratio.  It has be an exceptional dividend grower.  It is approaching speculative pricing and it has some weak aspects to it’s balance sheet.  To see how I came to those conclusions read on.

Home Depot (HD)

Price: $48.83

Shares: 1.52 billion

Market capitalization: $74.45 billion

What does the company do: Home Depot is the world's largest home-improvement specialty retailer, operating 2,250 warehouse-format stores throughout the United States, Canada, Mexico, and China. The company's stores offer products and services for home construction, renovation, remodeling, and maintenance. The firm is based in Atlanta and employs more than 300,000 people.

Morningstar’s take: Home Depot, the world's largest home-improvement retailer with more than $70 billion in annualized revenue, spent the last three years battling economic headwinds and updating its distribution network. After a decade of aggressive expansion and store and concept growth, the company changed course; it sold its professional supply business in 2007 and closed its ancillary retail businesses in early 2009. Home Depot is now solely focused on its orange box stores and is engaged in a strategic overhaul of its supply chain. We believe the ongoing upgrades will strengthen the firm's competitive position, particularly as macroeconomic pressures abate in the coming years. The firm earns a wide economic moat rating because of its substantial economies of scale.

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Bonds: $10.3 billion outstanding

Times interest earned: Home Depot earned $3.883 billion in the year ending the first quarter of 2012.  For some reason Morningstar’s financials aren’t displaying last year’s interest expenses, so I will use the average over the previous four years ($631.5 million).  Home Depot earned 6.15 times its interest expenses; its bonds are not a threat to its dividend.  Earning more than five times the interest expenses demonstrates that the interest expenses are not a threat to the dividend.

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Preferred stock: none

DIVIDEND RECORD: Home Depot has been growing its dividend since at least 1987.  Back in 1994 the quarterly dividend was $0.01 per share.  Today the dividend is $0.29 quarterly.  That is 2,800% straight-line growth over 18 years or 155% per year.  The missing dividend payment in 4Q 2009 on the picture below is just a Google Finance display problem.  Home Depot made that dividend payment.

Dividend: $0.29 quarterly

Dividend yield: 2.4% ($1.16 annual dividend / $48.83 share price)

Dividend payout: 44% using most recent EPS of $2.65 –OR- 45% using average adjusted earning power of $2.57

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EARNING POWER: $2.57 @ 1.52 billion shares

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

EPS

Net income

Shares

Adjusted EPS

1/2006

$2.26

$5,001 M

2,216 M

$3.29

1/2007

$2.72

$5,838 M

2,147 M

$3.84

1/2008

$2.37

$4,395 M

1,856 M

$2.89

1/2009

$1.34

$2,260 M

1,686 M

$1.49

1/2010

$1.57

$2,661 M

1,692 M

$1.75

1/2011

$2.01

$3,338 M

1,658 M

$2.20

1/2012

$2.47

$3,883 M

1,570 M

$2.55

Seven year average adjusted earnings per share is $2.57

Consider contrarian buying below $20.56 (8 times average adjusted EPS)

Consider value buying below $30.84 (12 times average adjusted EPS)

Home Depot (HD) is currently trading at 19 times average adjusted EPS.  This is stock is priced for investment, but at 20 times it will be speculatively priced.

Consider speculative selling above $51.40 (20 times average adjusted EPS)

BALANCE SHEET – Declining assets and stagnant shareholder equity.  The price to book value ratios by any measure are extremely high.  I don’t like HD’s quick ratio because they have so little cash to weather another financial crisis.

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Book value per share: $11.77 ($17.878 B shareholder equity / 1.52 B shares)

Price to book value ratio: 4.15 (under 1.0 is good)  HD investors are paying $4.15 for each $1.00 of book value for each share.

Tangible book value per share: $11.04  (shareholder equity less intangibles of $1.12 B / 1.52 B shares)

Price to tangible book value: 4.42 (near 1.0 is good)  HD investors are paying $4.42 for each $1.00 of tangible book value.  That is a huge premium.

Current ratio: 1.55 latest quarter (over 2.0 is good)  Why don’t corporations improve the strength of their balance sheets instead of buying back shares?

Quick ratio: 0.21 latest quarter (over 1.0 is good)  HD has very little cash compared to its current liabilities.  Another financial crisis will produce a crisis at Home Depot.

Debt to equity ratio: 0.60 (lower is better)

Percentage of total assets in plant, property, and equipment: 60.34% (the higher the better)  All those big box stores add up.  Other asset percentages of the total assets were: current assets 35.84%, intangibles 2.76%, and other long term assets were 1.06%

Working capital trend: up slightly

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CONCLUSION – Home Depot could be bought in March 2009 for $18.00 per share.  The stock was much closer to a value investment at that price.  It is trading for 19 times its average adjusted earnings which is very close to speculative pricing.  I would sell it now if I owned it because the US economy is visibly reentering recession and the European sovereign debt crisis is putting pressure on world stock markets.  I wouldn’t even consider buying Home Depot until it drop below $30.00 per share.  Home Depots 2.4% dividend yield is near the S&P 500 average dividend yield of 2.2%.  They shine with their dividend growth.  They could strengthen their balance sheet by using some of the share buyback money to put into current assets.

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DISCLOSURE – I don’t own Home Depot (HD).

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First Look at Speedway Motorsports Inc. (TRK). This Stock Won't Make the Sprint Cup Chase Anytime Soon.

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Today I take a break from my series of articles on the DOW 30 stocks to cover the business of racing.  I love racing.  So imagine my joy when I learned that track operator Speedway Motorsports (TRK) pays a decent dividend yield of 3.7%.  While the action on the track has been thrilling the last few years, the action in the stands has been disappointing.  High unemployment, high gasoline prices, and a Keynesian induced economic bust has hurt TRK badly.  I’ve been watching most NASCAR races on TV since 1997 and I’ve never seen the stands more empty than since the financial crisis of 2008.  This New York Times blog summed it up in late 2008.  Nothing has changed in the stands since then.

http://wheels.blogs.nytimes.com/2008/10/17/perfect-storm-brewing-for-nascar/

Speedway Motorsports Inc. (TRK)

Price: $16.23

Shares: 41.46 million

Market capitalization: $672.89 million

What does the company do: Speedway Motor Sports owns and operates Atlanta Motor Speedway, Bristol Motor Speedway, Infineon Raceway, Las Vegas Motor Speedway, Lowe’s Motor Speedway, and Texas Motor Speedway. The company derives a majority of its revenue from activities related to NASCAR sponsored events such as ticket sales, broadcast licensing, and sales commissions.

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Bonds: $1.3 billion outstanding

Times interest earned:  Speedway Motorsports net income did not cover its interest expenses in 2011.  Their bonds are a threat to the dividend.  TRK lost $6.444 million dollars in 2011 and they had interest expenses of $42.414 million dollars.  I like it when company earn at least five times their interest expenses.  TRK is deficient in this regard and this will not change until the US economy improves.  That isn’t going to happen anytime soon, so this is a real threat to the dividend.

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Preferred stock: none.

DIVIDEND RECORD:  TRK started paying dividends in 2002.  They paid around a $0.31 dividend once a year from 2002 until 2008.  Those dividends yielded about 1%-2%.  Then in late 2008 they began paying a quarterly dividend of $0.34.  That dividend only lasted one quarter because the Panic of 2008 occurred at that time.  In 1Q 2009 they cut their dividend significantly to $0.09 per share quarterly.  Since then they have grown the dividend to $0.15 per quarter, but their payout ratio keeps rising.  The grandstands are just as empty as they were following the financial crisis.  They haven’t shown themselves to be dedicated dividend growers.

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Dividend: $0.15 quarterly

Dividend yield: 3.7% ($0.60 annual dividend / $16.23 share price)

Dividend payout: n/a using the 2011 EPS of ($0.16) per share –OR- 48% using the average adjusted earning power of $1.26 per share.

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EARNING POWER: $1.26 with 41.46 million shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$2.45

$108 M

44 M

$2.60

2006

$2.53

$111 M

44 M

$2.68

2007

$0.87

$38.4 M

43.9 M

$0.93

2008

$1.84

$80 M

43.4 M

$1.93

2009

($0.24)

($10.3) M

42.7 M

($0.25)

2010

$1.06

$44.5 M

41.9 M

$1.07

2011

($0.16)

($6.4) M

41.5 M

($0.16)

Seven year average adjusted earnings per share is $1.26

Consider contrarian buying below $10.08 (8 times average adjusted EPS)

Consider value buying below $15.12 (12 times average adjusted EPS)

Speedway Motorsports Inc. (TRK) is currently trading at 12.9 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $25.20 (20 times average adjusted EPS)

BALANCE SHEET – Speedway Motorsports has a average balance sheet.  The steady decline in assets is not comforting.  Their price to book value ratio looks good until you compare it to the price to tangible book value ratio.  Their current ratios and quick ratios are sort of weak.  I do like their large percentage of net property and equipment.  Most of their assets are bound up in their big racetracks.  The working capital trend is down.  That is expected given the sparse attendance at the races.

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Book value per share: $20.29  ($841.180 M total shareholder equity / 41.46 M shares)

Price to book value ratio: 0.80 (under 1.0 is good)

Tangible book value per share: $7.42 (total shareholder equity less goodwill of $138.717 M and intangibles of $394.96 M / 41.46 M shares)

Price to tangible book value: 2.19 (near 1.0 is good)

Current ratio: 1.17 latest quarter (over 2.0 is good)

Quick ratio: 0.98 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.66 (lower is better)

Percentage of total assets in plant, property, and equipment: 60.46% (the higher the better)  Intangibles made up 27.51% of total assets, current assets were 8.29%, and other long term assets comprised 1.82%.

Working capital trend: down slightly as expected.

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CONCLUSION – I think it is great that Speedway Motorsports is paying a dividend yielding 3.7%, but the dividend is not safe given the US economic conditions and the company’s present debt load.  This company will rebound when the US economy rebounds.  However, a recovery is going to take many years due to the depression that Keynesian central bankers have put us in.  The middle class fans are the ones that attend races and they’ve been hit hard by unemployment and rising prices of consumer products cause by Fed money printing going back to 2002-2003.  The bust arrived in 2008 and racetrack operators have suffered because of it.  I think that this stock will go lower due to the continuing depression/recession.  Look to pick it up at or below 2009 lows of around $10.00 per share.  The stock will be yielding a high dividend of 6% at that price and will only be trading at a slight premium to tangible book value.  Do that any you’ll get the Lucky Dog pass to get out from being a lap down in the race for total return.

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DISCLOSURE – I don’t own Speedway Motorsports Inc. (TRK).

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First Look at DOW Component JP Morgan Chase (JPM). Never Buy a Financial Stock.

JP Morgan Chase is part of the banking cartel.  This bank is run by Keynesian morons.  Even the Keynesian financial press is catching on: http://www.google.com/finance/company_news?q=NYSE:JPM#  The politicians are using JPM’s losses to campaign for more government intervention into the financial markets.  The problem is not JPM’s proprietary trading losses.  The problem is the moral hazard created by Federal Reserve System bailouts.  These bankers would not take so much risk if the Federal Reserve was behind them with a bailout.  I would never buy a bank stock even if it had a high dividend because you never know what assets they really own.  However, I decided to do some First Look analysis on JP Morgan Chase for those of you who will buy a bank stock.

JP Morgan Chase (JPM)

Price: $36.15

Shares: 3.81 billion

Market capitalization: $137.57 billion.  Most of JP Morgan’s capitalization is in the form of debt.  Benjamin Graham, the father of value investing, recommended that you avoid ordinary industrial companies in which more than 30% of their total capitalization is in bonds.  Graham also warned investors against the purchase of financial companies and insurance companies because their composition of their assets are opaque.

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What does the company do: JP Morgan Chase is one of the largest financial institutions in the U.S., with more than $2 trillion in assets and operations in more than 60 countries. The company is organized into six business segments: investment banking, commercial banking, treasury and securities services, asset management, retail financial services, and credit card businesses. JP Morgan Chase is a major player in the derivatives markets.

Morningstar’s take: Jamie Dimon, Morningstar's 2002 CEO of the Year, has a well-deserved reputation as one of the best bankers in the business. Indeed, JP Morgan Chase made it through the worst of the financial crisis in remarkably good shape, adding Washington Mutual's retail banking operations and Bear Stearns' investment bank to its already wide-ranging lines of business. In our view, much of JP Morgan Chase's outperformance was due to common sense risk management. For example, the bank carried far more tangible capital than Citigroup C in early 2008, providing a much larger buffer against subsequent losses. Additionally, JP Morgan Chase bought Washington Mutual in an FDIC-assisted transaction, while Bank of America BAC may be on the hook for billions of dollars in additional liabilities thanks to its open market purchase of Countrywide and certain subsequent actions. As a result, JP Morgan Chase is now the largest bank holding company in the U.S., with more than $2 trillion in assets.

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Bonds: $525.8 billion outstanding.  That is a huge amount of debt.

Times interest earned:  In 2011, JPM had net income for its common stock of $17.568 billion.  They amassed $13.604 billion in interest expenses on their bonds.  Therefore, they only earned 1.29 times their interest expenses.  I believe that their interest expenses are a threat to their dividend because they earned significantly less than five times their interest expenses.

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Preferred stock:  JPM paid $1.408 billion in preferred stock dividends in 2011.

DIVIDEND RECORD: JPM cut its dividend severely in 2000 and 2009.  In 2000, the dividend was nearly $1.00 per share quarterly.  They cut it to $0.38 per quarter.

Dividend: $0.30 quarterly

Dividend yield: 3.32% ($1.20 / $36.15 share price)

Dividend payout: 27% ($1.20 / $4.50 using 2011 EPS) –OR- 38% ($1.20 / $3.20 using average earning power)

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EARNING POWER: $3.20 @ 3.81 billion shares

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

EPS

Net income

Shares

Adjusted EPS

2005

$2.38

$8,483 M

3,557 M

$2.23

2006

$4.04

$14,444 M

3,574 M

$3.79

2007

$4.38

$15,365 M

3,508 M

$4.03

2008

$1.35

$4,931 M

3,522 M

$1.29

2009

$2.26

$8,774 M

3,880 M

$2.30

2010

$3.96

$15,764 M

3,977 M

$4.14

2011

$4.48

$17,568 M

3,920 M

$4.61

Seven year average adjusted earnings per share is $3.20

Consider contrarian buying below $25.60 (8 times average adjusted EPS)

JP Morgan Chase (JPM) is currently trading at 11.3 times average adjusted EPS.  This is stock is value priced.

Consider value buying below $38.40 (12 times average adjusted EPS)

Consider speculative selling above $64.00 (20 times average adjusted EPS)

BALANCE SHEET – The assets are not real thanks to accounting fictions, but the liabilities are real.  Too much debt (red)!!

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Book value per share: $48.18  ($183.573 B equity / 3.81 B shares)

Price to book value ratio: 0.75 (under 1.0 is good), but I don’t trust the accounting standards regarding bank asset values.

Tangible book value per share: $32.80 (equity less goodwill and intangibles = $124.955 B / 3.81 B shares)

Price to tangible book value: 1.10 (near 1.0 is good).  Same comment as above.  I don’t trust the asset values.

Current ratio: N/A latest quarter (over 2.0 is good)  Banks are borrowed short and lent long.

Quick ratio: N/A latest quarter (over 1.0 is good)  Banks are borrowed short and lent long.

Debt to equity ratio: 1.41 (lower is better)

Percentage of total assets in plant, property, and equipment: 0.61% (the higher the better)

Working capital trend: Not available because bank balance sheets do not break out current assets and current liabilities; otherwise, the investors would realize how leveraged they are.  Banks and financial institutions are always borrowed short and lent long.

CONCLUSION – If you must own a bank stock, then wait for the next Keynesian banking crisis.  You won’t have to wait too long thanks to the central bankers and commercial bankers in Europe.  JPM traded for below $20.00 per share during the height of the Panic of 2008.  You’ll be able to get it for the same price or less during the next crisis.  Their 3.32% dividend yield is currently better than the S&P 500 average of 2.2%, but beware: JPM has a history of dividend cuts during financial crisis.  The stock is value priced compared to their average adjusted earning power, but it will decline a lot during the coming financial crisis.  The balance sheet is that of a standard too-big-to-fail bank…it is loaded with toxic sovereign debts of the PIIGS and other Keynesian malinvestments.  Don’t buy it.

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DISCLOSURE – I don’t own JP Morgan Chase (JPM) and I never will.

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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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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 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.

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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.

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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

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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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First Look at Dividend Grower Merck (MRK).

Gurufocus.com ran an article April 3rd, 2012 on “High-Dividend Yielders for 2012”.  Merck (MRK) 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.  Merck has some volatility in it’s earnings and it is approaching speculative pricing territory.  Read on to see when Merck was a value stock worth buying.

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

Merck (MRK)

Price: $38.58

Shares: 3.04 billion

Market capitalization: $117.47 billion

What the company does – Merck & Co., Inc. (Merck) is a global health care company. Merck delivers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. It operates in four segments: Pharmaceutical, Animal Health, Consumer Care and Alliances. Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by Merck or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. It sells these human health pharmaceutical products to drug wholesalers and retailers, hospitals, government agencies and managed health care providers. In September 2011, it sold its 50% interest in the Johnson & Johnson-Merck Consumer Pharmaceuticals Co. joint venture. In December 2011, it announced establishment of an Asia Research & Development headquarters for drug discovery and development located in Beijing, China.

Morningstar’s take - Facing increased competition, patent losses, and a pipeline of late-stage drugs with poor chances of approval, Merck greatly improved its long-term outlook by acquiring Schering-Plough. Without Schering, Merck's prospects were muddled, despite its recent success launching several new blockbusters. Now, with the addition of Schering, we believe Merck is favorably positioned for long-term growth.

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Preferred stock: none that I’m aware of.

Bonds: $8.9 billion outstanding.  Some big bonds are coming due in 2015, but they aren’t threatening this year’s dividend.

Image004

DIVIDEND RECORD: Merck paid a $0.03 quarterly dividend in 1987.  The quarterly dividend has grown to $0.42 per share in 2012.  It has increased its dividend 1,300% over 25 years.  Merck is a dedicated dividend grower.

Dividend: $0.42 quarterly

Dividend yield: 4.35%  (Merck becomes a 6% high dividend stock at a price of $28.00 per share)

Dividend payout: 82.8% using recent EPS of $2.03 –OR- 82.3% using average adjusted earning power of $2.04

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EARNING POWER: $2.04 @ 3.04 billion shares

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

EPS

Net income

Shares

Adjusted EPS

2007

($1.04)

$3,275 M

2,193 M

$1.08

2008

$3.63

$7,808 M

2,145 M

$2.57

2009

$5.65

$12,853 M

2,273 M

$4.23

2010

$0.28

$859 M

3,120 M

$0.28

2011

$2.02

$6,257 M

3,040 M

$2.06

Merck’s five year average adjusted earnings per share is $2.04

Consider contrarian buying below $16.32 (8 times average adjusted EPS)

Consider value buying below $24.48 (12 times average adjusted EPS)  Merck’s stock price bottomed at $23.45 in April 2009.

Merck (MRK) is currently trading at 18.9 times average adjusted EPS.  This is stock is priced for investment, but is nearing speculative pricing.

Consider speculative selling above $40.80 (20 times average adjusted EPS)

BALANCE SHEET – 44% of Merck’s assets are comprised of goodwill and intangibles ($46.457 billion of $105.128 billion).  From 2003 through 2007 intangible assets only comprised about 4% of Merck’s total assets.  I don’t like so much subjectivity determining asset values.  The price to book value is too high.  The price to tangible book value is astronomical.

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Book value per share: $17.93

Tangible book value per share: $2.65  TBV is found by subtracting goodwill ($12.155 B) and intangibles ($34.302 B) from shareholder equity ($54.517 B) and then dividing by the number of shares (3.04 B)

Price to book value ratio: 2.15 (under 1.0 is good)

Price to tangible book value radio: 14.6

Current ratio: 2.04 latest quarter (over 2.0 is good)

Quick ratio: 0.92 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.28 (lower is better)

Percentage of total assets in plant, property, and equipment: 15.5% (the higher the better)  Current assets account for 31.6%, long term assets 5.46%, and other equity/investments 3.29%.

Working capital trend is way up.  Working capital equals current assets less current liabilities.  Financially strong companies have a positive upward trend.

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CONCLUSION – As usual, the best time to buy MRK in recent years was in April 2009.  It was a value investment back then.  Merck is a steady dividend payer and grower.  The dividend yield is nothing special until the stock takes a beating.  The company is still priced for investment at this time, but it’s getting dangerously close to 20 times average adjusted earnings.  I think it is time to get out of Merck.  Scale out of it above $40.80.  The balance sheet is weak when you look at the price to book value ratio and the tangible book value ratio.  Much of its assets are intangibles.  That in never a good sign.  Pharmaceutical companies are always a the mercy of FDA bureaucrats and their clinical trial approvals.  I don’t like the Sword of Damocles hanging over my investments.  I wouldn’t buy Merck until it is back below $24.48, if at all.

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DISCLOSURE – I don’t own Merck (MRK).

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