Tag Archives: alternative

After The Fall: The Dividend Aristocrats Detailed

Summary Loss averse investors with long-run horizons should not be heading to the sidelines, but rather looking to buy quality businesses on weakness. An index tracking the Dividend Aristocrats has outperformed the S&P 500, producing higher average returns with lower variability of returns over the trailing quarter-century. This article details the components of this index, with current valuation and year-to-date performance, to highlight companies that may outpeform through the next bout of volatility. In yesterday’s article entitled ” Stocks Will Go Higher “, I showed readers that over ten year periods, stocks almost invariably produce positive returns, and suggested the readers plan to buy high quality businesses on weakness and be prepared to hold these investments for long time periods. If history is a guide, such a strategy is very likely to come out a winner. (click to enlarge) Sources: Standard and Poor’s; Robert Shiller (Blue Line is price returns and pink line includes dividends) That article was spurred by a recent quote by famed investor and CEO of Berkshire Hathaway ( BRK.A , BRK.B ), Warren Buffett, who stated in an August 10th interview on CNBC that ” Stocks are going to be higher, and perhaps a lot higher 10 years from now, 20 years for now .” In this same interview, Buffett went further stating that “my game is to own decent businesses and decent prices and you are going to make a lot of money over time.” A strategy populated by good businesses that have generated market beating returns over times is the Dividend Aristocrats. The Dividend Aristocrats are S&P 500 (NYSEARCA: SPY ) constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years. To be included in this index, these companies, at a minimum, have paid increasing dividends through the Eurozone Sovereign Crisis, the Global Financial Crisis, the Tech Bubble, and the early 1990s recession. These are the types of businesses that would be likely to produce market-beating risk-adjusted returns through the next downturn as well. Heeding Buffett’s advice, perhaps buying these businesses on weakness will spur market beating returns prospectively. Demonstrating this success, below is the cumulative total return of the S&P 500 Dividend Aristocrats Index, which is replicated by the ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ). (click to enlarge) Source: Standard and Poor’s; Bloomberg The Dividend Aristocrats have produced higher average annual returns, outperforming the S&P 500 by 2.5% per year. This approach has also produced returns with roughly three-quarters of the risk of the market, as measured by the standard deviation of annual returns. This long-run outperformance saw this strategy included in my “5 Ways to Beat the Market .” Given the weak domestic equity market performance in August, I wanted to detail the Dividend Aristocrat components for Seeking Alpha readers with current P/E ratio and year-to-date performance. (click to enlarge) For the broad “Investing for Income” community on Seeking Alpha, I have also sorted the list of Dividend Aristocrat constituents descending by dividend yield. (click to enlarge) If you are a long-term investor, looking to buy solid businesses on weakness, perhaps this list of companies who can weather another bout of market-related volatility. If readers find this helpful, I will also put together a list of the constituents of the Low Volatility Index, another factor tilt towards high quality businesses that has generated long-run alpha. Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long NOBL, SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Bargain Bin Stocks Part 1: Greece’s Public Power Corporation

Summary This series seeks to find extremely cheap stocks and determine whether they are deep value opportunities or deep value traps. Public Power Corporation is one of the cheapest stocks on the already depressed Athens Stock Exchange. If Greece can turn a corner, it could be a surprising winner, subject to major political risks. But how long until Greece turns a corner? Greece’s financial markets have had a rough ride but for those willing to put some capital on the line some very cheap equities are available. Here I’ll be looking at Public Power Corporation of Greece (OTC: PUPOF ) (ATHENS: PPC.AT) to see whether its deep value position is actually worth investing in. Background Public Power Corporation of Greece, hereafter referred to as PPC, is often talked about as Greece’s power monopoly. And there’s good reason for that. PPC supplied 97.9% of Greece’s electricity in 2014 and is vertically integrated owning mines, generation facilities, and transmission lines. Traditionally, a major utility company would be seen as one of the safest investments but PPC experienced troubles over the past few years since many customers lacked the ability to pay due to the economic depression in Greece. PPC is also majority state-owned although this could change as EU regulators push for greater privatization. Valuation Compared to the high valuations paid for the “safety” of U.S. utilities, PPC trades at an extremely low valuation.   2014 est. 2015 est. 2016 est. 2017 Price to Earnings 10.7x 3.9x 4.6x 4.2x These numbers equate to a roughly 25% forward earnings yield which is clearly pricing in a large amount of risk and skepticism. PPC also trades far below its end of 2014 book value of 26.4 euros per share giving a price to book value of 0.16x. While this may seem like a steal, it doesn’t mean much on its own since PPC is unlikely to break up to maximize asset values given that it’s a government controlled power company. Dividends For 2015, PPC paid an annual dividend of 0.05 euros per share for a yield of 1.2%. Even compared to the low yield U.S. markets, this is a small yield, especially for an utility. Although the dividend was a high as 0.90 euros per share in 2004, it was gradually reduced falling to only 0.10 euros per share prior to the financial crisis. Because of this dividend record, I do not see PPC as a near-term dividend play since there would have to be significant changes in capital allocation to produce a sizeable yield. However, if PPC were to show signs of dividend growth, I may be willing to reconsider this point. Catalysts to realize value Buying undervalued stocks is no good unless the market eventually realizes the value and drives up the stock price or dividend. Like many deep value stocks, PPC does have some potential catalysts but investors may need to be willing to wait. Privatization Reducing the government’s stake in PPC could help drive its value higher by lessening political risk and there are some powerful groups trying to push this forward. EU regulators have been pushing Greece to open up its electricity market for years yet PPC has remained a government monopoly. It turns out that powerful groups in Greece are also opposed to privatizing more of PPC. When the previous Greek government proposed selling off some of its PPC shares, workers protested by shutting off power to certain areas. To some extent, it’s easy to understand why these workers are protesting. Since the government reduced its PPC stake about a decade ago PPC worker wages have fallen about 60%. For its own part, SYRIZA has also opposed further privatizing PPC throwing up another roadblock. If PPC is further privatized, I see it as a long-term event and not a near term catalyst for value recognition. Economic recovery PPC shares also suffer from a low valuation caused by the clouds of uncertainty hanging over Greece in conjunction with the depressed economy. While Greece’s economy is actually starting to slowly grow again, an unemployment rate over 25% signals that a turnaround is far from complete. On top of that, the recent bailout package really did not solve Greece’s debt problem so issues relating to the sovereign debt are likely to continue cropping up. As long as these issues stick around, investors will be reluctant to take Greece out of the financial penalty box thus preventing PPC’s valuation from rising in the near-term. Public Power takeaway If you’re looking for a long-term recovery pick for Greece, PPC shares may be worth an investment, however, a lack of near-term catalysts reduces their appeal as a deep value turnaround investment. I will continue to follow the latest on PPC and may be willing to acquire shares if the dividend is significantly raised, major progress is made toward restructuring Greece’s debt, or privatization plans actually gain significant traction. Note: Trading in PUPOF is extremely illiquid and the best liquidity is found on the Athens Stock Exchange. For those without access to the Athens exchange, shares trade with reasonable volume on the Frankfurt exchange. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The author does not guarantee the performance of any investments and potential investors should always do their own due diligence before making any investment decisions. Although the author believes that the information presented here is correct to the best of his knowledge, no warranties are made and potential investors should always conduct their own independent research before making any investment decisions. Investing carries risk of loss and is not suitable for all individuals.

Will GLD Resume Its Decline?

The market remains on fence on the timing of the Fed’s rate hike. SPDR Gold Trust benefits from economic uncertainty but not from low inflation. The Fed still expects inflation will reach its target in the coming years. A strong non-farm payroll report could further push down the price of GLD. Even though shares of SPDR Gold Trust (NYSEARCA: GLD ) are up for August , they are still down for the year. The debate over the Federal Reserve’s rate hike continues. The devaluation of the Chinese yuan along with low inflation and the strong U.S. dollar reduce the odds of a rate hike in September. But the Fed keeps us guessing. Nonetheless, a stronger than expected non-farm payroll report could bring back up the probability of a September hike and drag back down the price of GLD. Let’s see the recent developments in the market and their relation to GLD. The market still doesn’t know when the Fed will be ready to hit liftoff. And although the implied probabilities for a September rate hike are still very low – the odds are only 28% in September and 56% in December, the market could still raise these odds again if the upcoming non-farm payroll report exceeds the market’s expectations. Currently, the market expects a gain of around 220,000 jobs; if the actual number comes at over 250,000 this may be enough to rekindle the possibility of a rate hike later this month. Back in July, the NFP report showed a gain of 215,000, slightly below expectations, which still led to a rise in the price of GLD. When it comes to the September rate hike, even Federal Reserve Vice Chair Stanley Fischer , in a recent interview, still refrained from voicing his opinion about the September meeting and kept the possibility of a hike on the table. He was also optimistic in Jackson Hole and thinks inflation will pick up: “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” If this is the case, it will be harder for the Fed to reach its goal of 2% as rates start to rise again. Also, inflation aren’t, for now, rising. Moreover, the ongoing descent in the core CPI may have also contributed to the weakness of gold in the past couple of years. The chart below presents the price of gold and annual percent changes in core PCE between 2011 and 2015. (click to enlarge) Source: FRED The combination of a stronger dollar, which is likely to further strengthen as the Fed begins normalization, along with the low price environment, driven, in part, by falling commodities prices, isn’t expected to help gold or the price of GLD to bounce back from its recent fall. It’s also worth noting, a point made on CNBC , that the current long-term yields are still low – the 10-year Treasury bond yields are around 2.2%. Back when the Fed started to raise rates, yields were much higher – the spread between the federal funds rate and the 10-year note was closer to 4%. Thus, the market conditions, at least from the bond market, aren’t best for a rate hike. I think it’s not likely that the Fed will raise rates – for the same reasons everyone states including China, low inflation and yields, global economic uncertainty, strong U.S. dollar and more – any time soon. But we should also remember the Fed is purposefully avoiding from giving clearer guidance and keeping us guessing: It’s trying to test the waters and see the market’s reactions. So far, the growth in the U.S., which was very strong in Q2, could still change course. The labor market is improving but still has room for improvement especially when it comes to wages. And most importantly, inflation is low and higher rates won’t bring it any faster to the Fed’s target. For GLD, low inflation and the strong U.S. dollar will drag its shares down. Conversely, economic uncertainty could play in favor for its price – as was the case back in mid-August. Thus, over the short term, we could still see modest gains in the price of GLD, but as long as the Fed heads towards normalization – if not in September then in December or the beginning of 2016 – the U.S. dollar is, for the most part, heading up, GLD is likely to resume its slow descent. For more please see: 3 Questions About Investing in Gold . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.