My High Dividend Stocks Blog http://myhighdividendstocks.posterous.com Most recent posts at My High Dividend Stocks Blog posterous.com Wed, 06 Jul 2011 16:42:44 -0700 Is Coca-Cola (KO) price for value, investment, or speculation? http://myhighdividendstocks.posterous.com/is-coca-cola-ko-price-for-value-investment-or http://myhighdividendstocks.posterous.com/is-coca-cola-ko-price-for-value-investment-or

Charlie Munger, Warren Buffet’s longtime business partner, on Coca-Cola recently:

Coke today vs. past: Coca-Cola (NYSE: KO  ) is not as good today as it used to be. It's just so big. Like Berkshire, it's hard to make the elephant move very fast.

But it's still one of our favorites. The trouble with selling an expensive product is that it gives people the incentive to knock you off. Coke isn't like that. Branded companies that sell cheap products, and lots of them, is a fantastic business model to have.

Here is the rest of the article: http://www.fool.com/investing/general/2011/07/02/charlie-mungers-thoughts-on-the-world-part-1.aspx

Is Coca-Cola (KO) priced for value at $68.53 per share?  Here is my first look at Coke.

Coca-Cola (KO)

Market price: $68.53 per share

Shares: 2.29 billion shares

Market capitalization: $156.88 billion

Dividend record:  This company is a solid dividend grower for at least the last decade.

Dividend: $0.47 quarterly

Dividend yield: 2.75%  ($1.88 annual dividend/$68.53 share price)

2010 EPS: $5.17

Dividend payout ratio:   36.3%  ($1.88/$5.17), but its usually closer to 72%  ($1.88/$2.58 average EPS over five year excluding the extra $6 billion in other income during 2010)

Earning power: $2.58 average EPS @ 2.29 billion shares ($3.10 if extra income in 2010 is included)

(Earnings adjusted for changes in capitalization; Coke has been buying back shares)

            EPS       Net inc.             Adj. EPS

2006     $2.16    $5,080 M           $2.22

2007     $2.57    $5,981 M           $2.61

2008     $2.49    $5,807 M           $2.54

2009     $2.93    $6,824 M           $2.98

2010     $5.06    $11,809 M         $5.16 (+$6 billion in other income)

2010                 $5,809 M           $2.54 (excluding the extraordinary income)

Five year average earnings excluding extraordinary income in 2010 equals $2.58 per share

Value price territory below 12x average earnings = $30.96

Speculative price territory above 20x average earnings = $51.60

Coca-Cola priced at 26.5 times average earnings (market price $68.53 per share)  This is speculative.

Balance sheet: Coke has a nice looking balance sheet; however, I’d like to see better current and quick ratios.

Image001

Book value per share: $13.83

Price to book value: 4.95 (bad)

Current ratio: 1.07 (greater than 2.0 is good)

Quick ratio: 0.77 (greater than 1.0 is good)

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http://files.posterous.com/user_profile_pics/697493/v_for_vendetta_guy_fawkes_mask11.jpg http://posterous.com/users/4wuf4tt8LZzb Jason Brizic myhighdividendstocks Jason Brizic
Tue, 21 Jun 2011 15:15:11 -0700 3 So-called High Dividend Stocks The Dumb Money Is Buying. You can do better. http://myhighdividendstocks.posterous.com/3-so-called-high-dividend-stocks-the-dumb-mon http://myhighdividendstocks.posterous.com/3-so-called-high-dividend-stocks-the-dumb-mon

Benzinga staff writer, Jonathan Chen, wrote an article on what he called “3 High Dividend Stocks The Smart Money Is Buying”.  His three stocks were Philip Morris International Inc. (PM), Pfizer (PFE), and Johnson & Johnson (JNJ).

These aren’t high dividend stocks.  I believe that high dividend stocks begin above 6% yield because they should be higher than bonds because common stocks are subordinate to bonds for claims on the company’s assets in the event of a liquidation.  Also, the long term rate of price inflation is much higher than the 2-3% that the Federal Reserve reports as part of its CPI numbers.  These stocks are barely yielding over 3 percent.  I would consider these stocks moderate dividend stocks.  PFE had to half its dividend in 2009, so it isn’t a great dividend grower.  JNJ is the best dividend grower of the bunch.

These stocks are not cheap.  They are closer to speculative pricing of 20 times average earnings than value territory below 12 times average earnings.

            Philip Morris is trading at 18.5 times its five year average earnings.

            Pfizer is trading at 18.24 times its five year average earnings.

            Johnson & Johnson is trading at 15.14 times its five year average earnings.

So, when should you buy these so-called high dividend stocks?  Buy them when they are values below 12 times average earnings.  The yields will be higher then also.  Then next stock market crash in reaction to the fiscal and monetary insanity of the US government and Federal Reserve will drive the prices of these stocks lower.  Buy them on sale (low); sell them when everyone thinks the market will continue up forever (high).  The smart money should be selling these stocks now if they bought them back in 2009-2010.

Consider buying Philip Morris under $44.04 per share.  PM traded below $44.00 in June 2010.

Consider buying Pfizer under $13.44 per share.  PFE traded below $13.44 in May 2009, but is has been down in the $14.00’s several times since then.

Consider buying Johnson & Johnson under $52.68 per share.  JNJ traded below $52.68 in May 2009.

Philip Morris Intl. (PM)

Market price: $68.05

Shares: 1.78 billion

Dividend record:

            Dividend yield: 3.76%

            Dividend: $0.64 quarterly

            Dividend payout ratio: 62.6% ($2.56 annual dividend divided by $4.09 recent EPS)

Earning power: $3.67 per share @ 1.78 billion shares

            Earnings adjusted for changes in capitalization

            EPS       Net inc.             Adj. EPS

2006     $2.91    $6,130 M           $3.44

2007     $2.86    $6,038 M           $3.39

2008     $3.31    $6,890 M           $3.87

2009     $3.24    $6,342 M           $3.56

2010     $3.92    $7,259 M           $4.08

Five year average earnings = $3.67

Value below 12x average earnings = $44.04

Market price at 18.5x average earnings = almost speculatively priced

Speculative above 20x average earnings = $73.40

Strength of balance sheet: Quite weak (liabilities are rising faster than assets)

Image003

Book value per share: $1.90 (Really?  That’s bad)  I calculated it at $1.97 which is still horrible

Price to book value: 35.81 (Wow!!  That’s horrible)

Current ratio: 1.07 (Less than 2.0 is bad)

Quick ratio: 0.37 (Less than 1.0 is bad)

Pfizer (PFE)

Market price: $20.43

Shares: 7.90 billion

Dividend record:

            Dividend yield: 3.92%

            Dividend: $0.20 quarterly

            Dividend payout ratio: 76% ($0.80 annual dividend divided by $1.05 recent EPS)

Earning power: $1.12 per share @ 7.90 billion shares

            Earnings adjusted for changes in capitalization

            EPS       Net inc.             Adj. EPS

2006     $2.66    $11,019 M*        $1.40

2007     $1.17    $8,140 M           $1.03

2008     $1.20    $8,104 M           $1.04

2009     $1.23    $8,635 M           $1.09

2010     $1.02    $8,257 M           $1.05

* Net income was $19,332 M but $8,313 M was from discontinued operations.  I removed the discontinued ops so the earnings wouldn’t be skewed too much.

Five year average earnings = $1.12

Value below 12x average earnings = $13.44

Market price at 18.24x average earnings = almost speculatively priced

Speculative above 20x average earnings = $22.40

Strength of balance sheet: Fairly stable

Image006

Book value per share: $11.17

Price to book value: 1.83 (good)

Current ratio: 2.00 (Over 2.0 is good)

Quick ratio: 1.66 (Over 1.0 is good)

Johnson & Johnson (JNJ)

Market price: $66.49

Shares: 2.74 billion

Dividend record:

            Dividend yield: 3.43%

            Dividend: $0.57 quarterly

            Dividend payout ratio: 51.7% ($2.28 annual dividend divided by $4.41 recent EPS)

Earning power: $4.39 per share @ 2.74 billion shares

            Earnings adjusted for changes in capitalization (PFE has been buying back shares)

            EPS       Net inc.             Adj. EPS

2006     $3.73    $11,053 M         $4.03

2007     $3.63    $10,576 M         $3.86

2008     $4.57    $12,949 M         $4.73

2009     $4.40    $12,266 M         $4.48

2010     $4.78    $13,334 M         $4.87

Five year average earnings = $4.39

Value below 12x average earnings = $52.68

Market price at 15.14x average earnings = priced for investment

Speculative above 20x average earnings = $87.80

Strength of balance sheet: Strong (That’s what I like to see…shareholder equity covering up the liabilities – nice.)

Image009

Book value per share: $21.51

Price to book value: 3.09 (decent)

Current ratio: 2.05 (Over 2.0 is good)

Quick ratio: 1.57 (Over 1.0 is good)

Disclosure: I don’t own any of these stocks.

                                                                                                              

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

* * * * * * * *

3 High Dividend Stocks The Smart Money Is Buying

By Jonathan Chen

Created 06/20/2011 - 11:59am

[1]

In times of uncertainty, investors look to high-dividend paying stocks for some sort of normalcy. Every investor looks for dividends to juice yields and returns, as dividends are an important source of income for many, especially retirees.

We also want to be playing the same game the "smart money" is playing. The hedge funds, the legendary investors, the institutions. They are all known as the "smart money," so why should they benefit and not us?

Here is a list of a few low-risk, high dividend stocks that will allow investors to play the same game the "smart money" is playing, and hopefully, generate the same returns.

Philip Morris International Inc. (NYSE: PM [2]) is a low-risk, large-cap stock that sports a hefty 3.7% dividend yield, in addition to strong growth from outside the U.S. Philip Morris International was spun off from Altria (NYSE: MO [FREE Stock Trend Analysis] [3]) last decade as a way to unlock the value from the company's international presence, and not deal with the regulatory scrutiny here in the U.S. Shares trade at 13.6 times earnings, and have risen 17% this year, best among the tobacco stocks only behind Lorillard (NYSE: LO [4]). Capital Research Global Investors, Blackrock, and State Street are among Philip Morri's largest investors.

Pfizer Inc. (NYSE: PFE [5]) is another low-risk defensive play, and sports a dividend yield of 3.9%. The company is currently in the process of divesting businesses as a way to unlock shareholder value. Shares have been stagnant for what seems like forever, but it looks as if shares are starting to perk up a bit. The company has a rock solid balance sheet, trades at less than 9 times earnings, and counts State Street, BlackRock and Vanguard among major shareholders. The stock is also a hedge fund favorite.

The last name to consider is Johnson & Johnson (NYSE: JNJ [FREE Stock Trend Analysis] [6]). The New Brunswick-based company is the maker of things like Band-Aids, Tylenol, and other products we use everyday, but don't really think about it. Johnson & Johnson has one investor in it that will make other shareholders sleep better at night: Warren Buffett.

Late last year, the company issued one of the lowest yields over U.S. Treasuries on record, indicating the strong demand for its debt. Johnson & Johnson boasts a triple-A credit rating from Standard & Poor's, a distinction shared by only three other U.S. industrial firms. It trades at just 12.8 times earnings, and is one of the safest companies out there.

Link to original article: http://www.benzinga.com/trading-ideas/long-ideas/11/06/1183851/3-high-dividend-stocks-the-smart-money-is-buying

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Fri, 13 May 2011 15:29:34 -0700 TIP OF THE WEEK - Why the dividend/earning yield ratio is better than the dividend payout ratio http://myhighdividendstocks.posterous.com/tip-of-the-week-why-the-dividendearning-yield http://myhighdividendstocks.posterous.com/tip-of-the-week-why-the-dividendearning-yield

Why the dividend/earning yield ratio is better than the dividend payout ratio

Jason Brizic

May 13, 2011

Rock solid high dividend stocks earn more than they payout in dividends year after year.  This ratio between earnings per share and dividends per share is commonly known as the dividend payout ratio.  A dividend payout ratio above 100% signals a possible dividend cut (especially the longer it stays above 100%).

The dividend payout ratio is nice but it only shows you the difference between the two numbers being compared.  There is another number that called the earnings yield that can be compared to the dividend yield.  Let’s compare three companies with some similar ratios.  Proctor & Gamble (dividend aristocrat) and Safe Bulkers have similar dividend payout ratios and div yield/earnings yield ratios, but much different dividend yields.  Safe Bulkers and WWE have high dividend yields, but very different ratios.

Proctor & Gamble (PG)

Safe Bulkers (SB)

World Wrestling Ent.(WWE)

Dividend/share

$2.10

$0.60

$1.44

Earnings/share

$4.32

$1.73

$0.72

Dividend Payout Ratio

48.6%

34.7%

200%

Dividend yield

3.0%

7.3%

13.9%

Earnings yield

5.7%

19.2%

4.8%

Div yld./Earning yld.

52.6%

38.0%

289%

It should be no surprise that WWE cut its dividend recently and now its dividend yield is in the 4-5% range.

You can use Morningstar.com to quickly find these yields.  Go to www.morningstar.com.  Type your stock ticker into the box at the top.  Then click on the Valuations tab.  Scroll down to the bottom of the page’s contents and you will see the dividend and earnings yields.  It looks like this:

Image002

I like to see double digit earnings yields with a slightly smaller dividend yield.  Safe Bulkers (SB) is a beautiful thing.  Click here to be taken right to the page:

http://financials.morningstar.com/valuation/price-ratio.html?t=SB

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

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http://files.posterous.com/user_profile_pics/697493/v_for_vendetta_guy_fawkes_mask11.jpg http://posterous.com/users/4wuf4tt8LZzb Jason Brizic myhighdividendstocks Jason Brizic
Thu, 31 Mar 2011 08:43:47 -0700 Examples of Speculative and Investment Common Stocks You've Got to See. http://myhighdividendstocks.posterous.com/examples-of-speculative-and-investment-common-0 http://myhighdividendstocks.posterous.com/examples-of-speculative-and-investment-common-0

The second edition of Security Analysis provided several examples of speculative and investment common stocks.  The examples are so illustrative, but they are from 1940.  I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .

I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T.  Let me tell you why I chose these stocks.  I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.

Goldcorp (GG)  I used to own Goldcorp when it was priced in the high teens and twenties.  I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX.  I currently own FSAGX in my 401(k) account and I’m considering selling it.  You will see why momentarily.

Proctor & Gamble (PG)  This stock is often written about in dividend aristocrat articles.  It pays a modest dividend and grows its dividend annually like clockwork.  Many people watch this dividend stock.

American Capital Agency Corp. (AGNC)  I’ve included it because I have written many articles on this ultra-high dividend stock.  I don’t like it because its earnings can’t support the current dividend payout.  It balance sheet is horrible like all financial institutions (e.g. banks).

Seadrill Limited (SDRL)  This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.

Safe Bulkers (SB)  I love this high dividend stock with earning power and a strong balance sheet.  You will see why in moments.

AT&T (T)  I pays almost a 6% dividend and it is and dividend aristocrat.  Many eyes are on this one so I want to know at what price is it a value buy.

* * * * * * *

Examples of Speculative and Investment Common Stocks.  Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating.  For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell.  According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them.  Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.

* * * * * * *

Image001

There were three groups of examples in Security Analysis.  Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization).  The companies in group A were: General Electric, Coca Cola, and Johns-Manville.  Proctor & Gamble and AT&T sort of fit into the Group A category.

Group B were common stocks speculative in December 1938 because of their irregular record.  Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube.  American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B.  Goldcorp also has a poor divided and a high price.  AGNC is irregular with a high price.

Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint.  They included Adams-Millis, American Safety Razor, and J.J. Newberry.  I have never heard of any of these stocks.  The only stock in my example that makes this cut is Safe Bulkers.  This is why Safe Bulkers is in my best dividend stocks category.

* * * * * * *

Comments on the Various Groups.  The companies listed in Group A are representative of the so-called “first-grade” or “blue-chip” industrials, which were particularly favored in the great speculation of 1928-1929 and in the markets of ensuing years.  They are characterized by a strong financial position, by presumably excellent prospects and in most cases by relatively stable or growing earnings in the past.  The market price of the shares; however, was higher than would be justified by their average earnings.  In fact the profits of the best year in the 1929-1938 decade were less than 8% of the December 1938 market price.  It is also characteristic of such issues that they sell for enormous premiums above the actual capital invested.

            The companies analyzed in Group B are obviously speculative, because of great instability of their earning records.  They show varying relationships of market price to average earnings, maximum earnings, and asset values.

            The common stocks shown in Group C are examples of those which meet specific and quantitative tests of investment quality.  These tests include the following:

1.      The earnings have been reasonably stable, allowing for the tremendous fluctuations in business conditions during the ten-year period.

2.      The average earnings bear a satisfactory ratio to market price.

3.      The financial set-up is sufficiently conservative, and the working-capital position is strong.

Although we do not suggest that common stock bought for investment be required to show asset values equal to the price paid, it is non the less characteristic of Group C that, as a whole, they will not sell for a huge premium above the companies’ actual resources.

            Common-stock investment, as we envisage it, will confine itself to issues making exhibits of the kind illustrated by Group C.  But the actual purchase of any such issue must require also that the purchaser be satisfied in his own mind that the prospects of the enterprise are at least reasonably favorable.

* * * * * * *

Safe Bulkers is a dry bulk shipper with around sixteen ships rented out to various customers.  The dry bulk market suffering due to the global recession and a glut of ships built during the boom, but Safe Bulkers is well positioned to prosper in even that harsh environment.  Its prospects and the industries are good.

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

Be seeing you!

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http://files.posterous.com/user_profile_pics/697493/v_for_vendetta_guy_fawkes_mask11.jpg http://posterous.com/users/4wuf4tt8LZzb Jason Brizic myhighdividendstocks Jason Brizic
Wed, 30 Mar 2011 14:46:45 -0700 Examples of Speculative and Investment Common Stocks You've Got to See. http://myhighdividendstocks.posterous.com/examples-of-speculative-and-investment-common http://myhighdividendstocks.posterous.com/examples-of-speculative-and-investment-common

The second edition of Security Analysis provided several examples of speculative and investment common stocks.  The examples are so illustrative, but they are from 1940.  I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .

I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T.  Let me tell you why I chose these stocks.  I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.

Goldcorp (GG)  I used to own Goldcorp when it was priced in the high teens and twenties.  I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX.  I currently own FSAGX in my 401(k) account and I’m considering selling it.  You will see why momentarily.

Proctor & Gamble (PG)  This stock is often written about in dividend aristocrat articles.  It pays a modest dividend and grows its dividend annually like clockwork.  Many people watch this dividend stock.

American Capital Agency Corp. (AGNC)  I’ve included it because I have written many articles on this ultra-high dividend stock.  I don’t like it because its earnings can’t support the current dividend payout.  It balance sheet is horrible like all financial institutions (e.g. banks).

Seadrill Limited (SDRL)  This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.

Safe Bulkers (SB)  I love this high dividend stock with earning power and a strong balance sheet.  You will see why in moments.

AT&T (T)  I pays almost a 6% dividend and it is and dividend aristocrat.  Many eyes are on this one so I want to know at what price is it a value buy.

* * * * * * *

Examples of Speculative and Investment Common Stocks.  Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating.  For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell.  According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them.  Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.

* * * * * * *

There were three groups of examples in Security Analysis.  Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization).  The companies in group A were: General Electric, Coca Cola, and Johns-Manville.  Proctor & Gamble and AT&T sort of fit into the Group A category.

Group B were common stocks speculative in December 1938 because of their irregular record.  Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube.  American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B.  Goldcorp also has a poor divided and a high price.  AGNC is irregular with a high price.

Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint.  They included Adams-Millis, American Safety Razor, and J.J. Newberry.  I have never heard of any of these stocks.  The only stock in my example that makes this cut is Safe Bulkers.  This is why Safe Bulkers is in my best dividend stocks category.

Item

Goldcorp (GG)

Proctor & Gamble (PG)

American Capital Agency Corp. (AGNC)

Seadrill Limited (SDRL)

Safe Bulkers (SB)

AT&T (T)

Dividend Yield

0.84%

3.14%

19.50%

7.46%

6.85%

5.77%

Earnings per share

2001

?

?

-

-

-

?

2002

?

?

-

-

-

?

2003

?

?

-

-

-

?

2004

?

?

-

-

-

?

2005

$0.35

?

-

-

?

?

2006

$0.51

$3.05*

-

$0.56

$1.48

$1.24

2007

$0.58

$3.64*

-

$1.32

$3.18

$2.02

2008

$1.85

$4.25*

$0.28

($0.43)

$1.81

$2.18

2009

$0.30

$4.73*

$0.94

$3.31

$2.51

$2.05

2010

$1.64

$4.47*

$2.30

?

$1.66

$3.36

10-yr. average

?

?

-

-

-

?

5-yr. average (2006-2010)

$0.98

$4.03

3-yr. average

$1.17

4-yr. average

$1.19

$2.13

$2.17

12 times 5Y average earnings

$11.71

$48.36

$14.08

$14.28

$25.56

$26.04

20 times 5Y average earnings

$19.60

$80.60

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http://files.posterous.com/user_profile_pics/697493/v_for_vendetta_guy_fawkes_mask11.jpg http://posterous.com/users/4wuf4tt8LZzb Jason Brizic myhighdividendstocks Jason Brizic
Tue, 29 Mar 2011 12:26:54 -0700 A Mechanical Check for Investment in Common Stocks. The First in a Series. http://myhighdividendstocks.posterous.com/a-mechanical-check-for-investment-in-common-s http://myhighdividendstocks.posterous.com/a-mechanical-check-for-investment-in-common-s

In this blog post I’m going discuss some aspects of the mechanical tests your should apply to common stocks you are considering to buy and at what price.

On March 16th, 2011 I wrote about not buying a common stock generally above 20 times average earnings in this post: http://bit.ly/MaxAvgPE .  I have to admit that I was a little lazy.  Like most people I used 20 times the current annual earnings to complete the table in that blog post because it the info was readily available, but a five or ten year average is more through and enlightening.  It takes a while to find all the earnings data for the past ten years and then to make adjustments for changes in capitalization, warrants, and convertible preferred stocks.

The excerpt below from Benjamin Graham’s Security Analysis 2nd edition is a devastating indictment on how speculative so-called investors are both in 1940 and today.

Over the next couple of days I’m going to calculate many values for testing common stocks for investment basis that I’ve already written about on this blog.  The goal is separate the speculative stocks from the investment stocks.  The list includes: GoldCorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), SeaDrill (SDRL), Safe Bulkers (SB), and AT&T (T).

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Higher Prices May Prevail for Speculative Commitments.  The intent of this distinction must be clearly understood.  We do not imply that it is a mistake to pay more than 20 times average earnings for any common stock.  We do suggest that such a price would be speculative.  The purchase may easily turn out to be highly profitable, but in that case it will have proved a wise or fortunate speculation.  It is proper to remark, moreover, that very few people are consistently wise or fortunate in their speculative operations.  Hence we may submit, as a corollary of no small practical importance, that people who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.  This is the more probable because, in the absence of such a mechanical check, they are prone to succumb recurrently to the lure of bull markets, which always find some specious argument to justify paying extravagant prices for common stocks.

            Other Requisites for Common Stocks of Investment Grade and a Corollary Therefrom.  It should be pointed out that if 20 times average earnings is taken as the upper limit of price for an investment purchase, then ordinarily the price paid should be substantially less than this maximum.  This suggests that about 12 or 12.5 times earnings may be suitable for the typical case of a company with neutral prospects.  We must emphasize also that a reasonable ratio of market price to average earnings is not the only requisite for a common-stock investment.  It is a necessary but not sufficient condition.  The company must be satisfactory also in its financial set-up and management, and not unsatisfactory in its prospects.

            From this principle there follows another important corollary, viz.: An attractive common-stock investment is an attractive speculation.  This is true because, if a common stock can meet the demand of a conservative investor that he get full value for his money plus not unsatisfactory future prospects, then such an issue must also have a fair chance of appreciating in market value.

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