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.

Some examples of high price to tangible book values.

Last Friday I wrote my “Tip of the Week” on book value and its calculation.  I used the original writing of legendary value investor Benjamin Graham in that article.  If you missed it, then you can get it here:

http://www.myhighdividendstocks.com/high-dividend-stocks/tip-of-the-week-book-value-or-equity-and-how-to-calculate-book-value-per-share

At the end of the article I calculated the tangible book value of Safe Bulkers (SB).  Today I will take a look at the tangible book value of a few more stocks: AT&T (T), Verizon (VZ), Terra Nitrogen (TNH), Goldcorp (GG), Southern Copper (SCCO), and Apple (AAPL).

AT&T (T) tangible book value

Shareholder equity equals $105.534 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  AT&T claimed $70.842 billion in goodwill assets as of 4Q2011 and $59.343 billion in intangibles.  AT&T’s tangible book value is negative $24.651 billion dollars.  The company has 5.93 billion shares outstanding.  AT&T’s tangible book value per share is negative $4.15 dollars.  That really stinks.  Maybe Verizon has a positive net book value per share.  AT&T stock sold for $30.64 recently.  Their price to tangible book value ratio is negative.

Verizon (VZ) tangible book value

Shareholder equity equals $35.97 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Verizon claimed $23.357 billion in goodwill assets as of 4Q2011 and $79.128 billion in intangibles.  Verizon’s tangible book value is negative $66.515 billion dollars.  The company has 2.84 billion shares outstanding.  The tangible book value per share is negative $23.42 dollars.  That really stinks also.  Verizon stock sold for $37.46 recently.  Their price to tangible book value ratio is negative.

Terra Nitrogen (TNH) tangible book value

Shareholder equity equals $269.3 million.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Terra Nitrogen claimed no goodwill or intangibles as of 4Q2011.  Terra Nitrogen’s tangible book value is $269.3 million.  The company has 18.69 million shares.  The tangible book value per share is $14.41.  That is very low compared to the current stock price.  Terra Nitrogen stock sold for $262 per share recently.  Their price to tangible book value ratio is 18.18.  Shareholders that bought at $262 are paying $18.18 for each $1.00 in tangible assets.  That is a whopping premium on invested capital.  A smart businessman would never overpay so much for so little assets.  Stay away from Terra Nitrogen because there is much more risk than reward.

Goldcorp (GG) tangible book value

Shareholder equity equals $21.272 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Goldcorp claimed no goodwill of $1.737 billion as of 4Q2011.  Goldcorps’s tangible book value is $19.535 billion.  The company has 810 million shares.  The tangible book value per share is $24.11.  Goldcorp stock sold for $41.04 per share recently.  Their price to tangible book value ratio is a respectable 1.7.  Goldcorp stock will be cheap when the price is near one times tangible book value.

Southern Copper (SCCO) tangible book value

Shareholder equity equals $4.015 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Southern Copper claimed intangibles of $110 million as of 4Q2011.  Southern Copper’s tangible book value is $3.905 billion.  The company has 840.98 million shares.  The tangible book value per share is $4.64.  Southern Copper’s stock sold for $30.46 per share recently.  Their price to tangible book value ratio is an overpriced 6.56.  SCCO share holders who bought near $30.46 are paying $6.56 for each dollar of invested capital.

Apple (AAPL) tangible book value

Shareholder equity equals $76.615 billion.  Subtract goodwill and intangibles from share holder equity to calculate tangible book value (aka net book value).  Apple claimed $896 million in goodwill and $3.536 billion in intangible in their 4Q2011 financials.  Apple’s tangible book value is $72.183 billion.  The company has 932.37 million shares.  The tangible book value per share is $77.42.  Apple’s stock sold for $636.23 per share recently.  Their price to tangible book value ratio is grotesque 8.22.  AAPL share holder who bought near $636 are paying $8.22 for each dollar of invested capital.

Goldcorp is the only stock on this short list with a price to tangible book value under 2.0 and even that isn’t cheap.  I wrote this article to serve as a warning to value investors and high dividend stock investors.

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Gold stock week day one - Goldcorp (GG)

It is crisis time in the Eurozone and elsewhere.  Stock markets will crash at least as hard as in 2008 when Europe goes into recession.  Gold is a crisis hedge, but it drops in a stock market crash also (just not a badly).  And gold mining stocks are a great performing asset, but only after most of the stock market crisis has passed because the world is dominated by Keynesian economics.  The financial media, government technocrats, and almost all PhD economists practice the voodoo economic religion of Keynesian economics.  Keynesian investors flee stock markets in a panic and run to US government bonds.  Bonds are bought in dollars.  Demand for dollars increases, demand for gold drops.  This is an opportunity of immense proportions if you keep your powder dry.

It is gold miners week at www.myhighdividendstocks.com, but not because gold miners are high dividend stocks.  Most are no or low dividend stocks.  However, gold mining stocks will offer some huge capital appreciation potential once the US and European stock markets crash again.  Every central bank in the world is printing money (Dollars, Euros, Yen, Pounds, and Yuan) and the commodity gold is priced in fiat currencies, so as more money is printed the price of gold expressed in fiat currencies goes up.  It really is that simple.  Gold mining companies can increase their profit margins when the cost of extracting gold from the Earth’s crust goes up a little and the price of gold goes up a lot.  But gold mining companies tend to be more volatile than the price of the underlying commodity.  They amplify gold’s gains and losses as you will see below.

So what is the best price for several of the gold majors that offers capital preservation and maximum opportunity for capital appreciation with maybe some dividends thrown in for good measure?  That’s what I hope to find out this week for you and I.

First up is Goldcorp (GG)

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Market price: $51.10

Shares: 809.73 million

Market capitalization: $41.43 billion

Bonds: Goldcorp has very little bonds outstanding

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DIVIDEND RECORD

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Dividend: $0.045/month ($0.54 annually).  Goldcorp just announced a dividend increase from $0.03/mo. to $0.045/mo.  http://www.marketwatch.com/story/goldcorp-increases-monthly-dividend-2011-12-05-73400 .  They have been paying dividends steadily since late 2003.

Dividend yield: ~1.0% ($0.54/$51.10 market price)

Dividend payout ratio:  23.8% to 52.4% depending on what you measure ($0.54/$2.26 latest EPS = 23.8% or $0.54/$1.03 avg adjusted EPS = 52.4%)

EARNING POWER

(Earnings adjusted for changes in capitalization)

                        EPS       Net inc.             Shares               Adj. EPS

2006                 $0.93    $408 M              441 M                $0.50   

2007                 $0.65    $460 M              709 M                $0.57

2008                 $2.06    $1,476 M           715 M                $1.82

2009                 $0.33    $240 M              735 M                $0.30

2010                 $2.13    $1,574 M           786 M                $1.94

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2011 Q1            $0.81    $651 M              809.73 M           $0.80

2011 Q2            $0.52    $489 M              809.73 M           $0.60

2011 Q3            $0.41    $336 M              809.73 M           $0.41

2011 Q4 (E)       $0.64 E $518 M E           809.73 M E        $0.64 E

Goldcorp’s six year average adjusted earnings* is $1.27 per share

Consider contrarian buying at $10.16 (8 times average adj. EPS)

Consider value buying at $15.24 (12 times average adj. EPS)

Consider speculative selling at $25.40 (20 times average adj. EPS)

Goldcorp is trading at 40.2 times average adjusted earnings.  This is highly SPECULATIVE despite the bull market in gold.

* includes 2011 4Q Reuters concensus earnings estimates of  $0.64 per share

BALANCE SHEET – That is a pretty good looking balance sheet

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Book value per share: $25.76

Price to book value ratio: 1.98 (not bad, but closer to 1.00 is desirable)

Current Ratio: 3.82 (latest quarter; over 2.0 is good)

Quick Ratio: 2.65 (latest quarter; over 1.0 is good)

Debt/equity Ratio: 0.03 (awesome)

CONCLUSION – Goldcorp bottomed in the $17.00 dollar range in October 2008 several months before the US stock market bottom in March of 2009.  That represented the best value entry into Goldcorp since late 2008.  The gold price will go down at least half of the percentage of the stock market’s decline.  This happened in 2008-2009.  US stocks dropped about 50% and gold dropped about 25%.  However, Goldcorp dropped even more than the broader market or gold.  It dropped almost 65% from $48.29 in July of 2008 down to $17.01 by October 2008.  Don’t think that it happen again.  Wait for another bottom near value territory at $15.24 per share.  Goldcorp would be yielding about 3.5% if it keeps its new dividend rate at such a low price.  The good news is that gold will continue to go up in price as the world’s sovereign debt crisis worsens, but you have to buy extremely low to preserve your capital when purchasing mining stocks.

DISCLOSURE – I don’t own Goldcorp (GG) now, but I did own it a few years ago.

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A Mechanical Check for Investment in Common Stocks. The First in a Series.

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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