Tag Archives: cash

When Opportunity Reveals Itself: CMS Energy Corp.

Summary The uncertainty around the Fed’s action in September seems to be the highest driver of volatility. The correction caught up with the Utilities and REITs. Opportunities are popping up. Here is my CMS buy-point. Tuesday ended up in a red territory after being green most of the day. I have written about that couple of days ago: The sell-off will continue. Here is the end of day Tuesday summary. (click to enlarge) This time it was the REITs and Utilities (highlighted in yellow circles) that led the trading’s last hour free fall. This is completely aligned with the thesis that it is all about the interest rate hike. The China slowdown has some effect on the sentiment but the approaching interest rate hike leads to a significant sell off in sectors that are sensitive to the long term interest rate. For the first time in a while the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) also suffered from a pullback on Tuesday . This makes sense as the approaching interest rate hike should lead to higher yields, but as fear has a huge psychological impact people still rush back to bonds from time to time as it is considered a safe heaven. (click to enlarge) The drops in REITs and Utilities is probably just the beginning as there is some time until the Fed will announce its decision in September. In the meanwhile some opportunities might pop up. CMS Energy Corporation CMS Energy ( CMS ) was founded in 1987 and operates in the state of Michigan. The company is more of a holding company that integrates energy companies. Its primary business operations in the fields of electric and natural gas utility, natural gas pipeline systems, and independent power generation. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily independent power production and owns power generation facilities fueled mostly by natural gas and biomass. It has three business segments: electric utility, gas utility and enterprises. In the last seven years CMS has demonstrated EPS growth and a constant dividend growth. The next graph taken from nasdaq.com illustrates the growth seen since 2008. The yearly dividend went up from $0.4 per share to $1.1 per share. This is an average of 19% over a six years period of time. The full year 2015 EPS is expected to be at the range of $1.86-1.89. This is 5-7% higher year over year. The next chart illustrates the EPS walk in 2015. It was taken from CMS Q2 earning report presentation . (click to enlarge) CMS’ dividend payout target is at 62%. This leaves the cash required for the additional capital investments that the company plans to invest over the course of the next decade. (click to enlarge) The DGR: Though CMS demonstrated a strong dividend increase in the past, based on the company’s forecast the dividend growth rate is expected to be more modest as it should be aligned with the 5-7% EPS expected growth. I feel comfortable with 5-7% growth per year but would like to make sure that my entry point is at a relatively high dividend rate. My buy-point: CMS, like the rest of the Utilities sector is going suffer in the coming weeks, until there will be more clarity regarding the Fed’s action. The stock went down below $33 per share, which based on $1.16 is 3.5% dividend rate. I would prefer to buy the stock close to its lows that supported the stock during last summer at $28 per share. This price represents 4.1% dividend yield rate. Though the stock might drop even further afterwards I believe that $28 is a good long term buy for CMS. (click to enlarge) Conclusions: The uncertainties regarding the interest rate hike will continue to take its toll, especially on high dividend rate sectors like Utilities and REITs. Long term investors should take advantage of the correction and arrange their long term investment portfolios to generate more wealth. I plan to initiate a buy in CMS at $28. Happy investing! Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CMS over 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 opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.

The ETF Monkey Vanguard Core Portfolio: Weathering The Storm And A Rebalance

Summary Since the inception of the model portfolio on 6/30/15, the markets have endured a turbulent period, with all 3 major U.S. averages in correction territory. The situation with foreign stocks, particularly those of emerging markets, has been even worse. In this article, we will evaluate both how the portfolio has held up and what lessons can be learned. I will also rebalance the portfolio for the first time, both explaining the rationale and assessing the cost of doing so. Back on July 1, I wrote an article presenting the ETF Monkey Vanguard Core Portfolio . Readers unfamiliar with the article may wish to review it before proceeding further. However, I will offer a quick summary here. That article linked to three previous articles I had written featuring suggested “core” Vanguard ETFs for Domestic Stocks, Bonds, and Foreign Stocks, as follows: Vanguard Total Stock Market ETF (NYSEARCA: VTI ) Vanguard FTSE All-World ex-U.S. ETF (NYSEARCA: VEU ) Vanguard Total Bond Market ETF (NYSEARCA: BND ) I next reviewed various Vanguard target-date funds to offer suggested weightings for various age groups, based on professionally-designed portfolios. Finally, I selected one of those age groups and built a theoretical $50,000 portfolio, developing it via an Excel spreadsheet and tracking it on Google Finance. The model portfolio was “purchased” as of the closing price of the three ETFs on June 30, 2015. As a reference point to evaluate the overall performance of the portfolio, the S&P 500 index closed that day at 2,063.11. I had not planned to write a follow-up article until the end of the 3rd quarter, using 9/30/15 as my point of comparison. That, however, was before the extreme turmoil that hit the markets during August. Emerging markets, led by China, dropped precipitously. In turn, this led to a sharp drop in U.S. markets culminating on 8/24/15, with a 1,000+ point drop in the Dow at the open and the day ending with all 3 major U.S. averages in correction territory. The S&P 500 closed the day at 1,893.21, 8.24% lower than the reference point for my model portfolio. Evaluating the ETF Monkey Vanguard Core Portfolio So how did the portfolio perform over that period? Here’s a picture of the Google Finance page for the portfolio as of the close on 8/24/15. Have a look, and then I will offer a few comments. (click to enlarge) First, the portfolio received two dividends totaling $34.88 from BND between 6/30 and 8/24, raising our original cash balance of $24.65 after all purchases to the current $59.53. Overall the portfolio decreased by 7.79%, a decrease of .45% less than the S&P 500 index. Let’s break that down. Domestic Stocks – VTI, which comprised 55.67% of our starting portfolio, decreased by 8.34%, roughly equal with the S&P 500. Remembering that we incurred a $7.95 commission to purchase the ETF, this is basically market performance. Foreign Stocks – VEU, which comprised 27.20% of our starting portfolio, decreased by 12.08%. VEU is approximately 19% in emerging markets, including a 5.4% weighting in China. This ETF was hit especially hard by the extreme weakness in those markets since 6/30. Bonds – BND, which comprised 17.08% of our starting portfolio, actually increased by .84%, providing some much-needed stability. Including the dividends, we have actually earned a return of 1.25% to-date. This is notable given the supposedly bad timing to be in bonds, in view of the “inevitable” rise in interest rates. I might note that, because I strictly followed the Vanguard target-date weightings, the portfolio basically held no cash. At the time the portfolio was built, many commentators suggested holding at least a modest percentage in cash. Clearly, a cash cushion would have been helpful in the short term. Overall, however, I am satisfied with the results. During a particularly turbulent stretch in emerging markets–and with no cash cushion–the portfolio has done a little better than the S&P 500. Actively Rebalancing the Portfolio However, this leads nicely to our next topic, that of periodically rebalancing a portfolio to stay true to one’s investment goals. Here are the same values displayed in the Google Finance picture shown above, but moved into Excel to allow for a little analysis. (click to enlarge) Here is what I want you to notice: Our domestic stock allocation is still very close to our target. At 55.27%, it is a mere .23% off our target of 55.50%. In terms of dollars, it is only $106.73 away from the desired target when evaluated against our overall (though lower) portfolio balance. If you think about this intuitively, it makes sense. Although VTI has decreased in value by 8.34%, our overall portfolio has declined by 7.79%. As a result, our relative weighting in VTI has barely moved. VEU and BND, however, are another story. VEU has declined by a particularly brutal 12.08%, while BND has actually increased slightly in value. As a result, VEU is now underweight by 1.06% (25.94% vs. our target of 27.00%). In contrast, BND is overweight by 1.16% (18.66% vs. our target of 17.50%). Based on this, I executed two trades to rebalance our portfolio, as follows: I sold 5 shares of BND at $82.02, generating $402.15 in cash ($410.10 – $7.95 commission). I bought 10 shares of VEU at $42.77, spending $435.65 ($427.70 + $7.95 commission). Here’s how the portfolio looks now: (click to enlarge) You will notice that our cash balance has dropped by $33.50, the net of the two transactions. You will also notice that our overall portfolio value has dropped by $15.90, the total amount of the commissions to execute the two transactions. This is a graphic representation of the concept that, unless one can trade commission-free, all rebalancing transactions do take their toll on our total return. NOTE: In the “real world,” I probably would not have executed a rebalancing transaction for such a small dollar amount unless I could have done it commission-free. With a portfolio of this size, I likely would have waited until I was $1,000 – $1,500 out of balance before doing anything. However, I felt that this was a good time to do this as a learning exercise. Summary and Conclusion So there you have it, the first performance update and rebalancing of the ETF Monkey Vanguard Core Portfolio. Here are my three takeaways from this period: Overall, I was happy with the performance of the portfolio. During a period of severe market turmoil in both domestic and foreign stocks, particularly in the emerging markets, the portfolio held up reasonably well. There are benefits to being properly diversified in various asset classes, even those that are supposedly out of favor. In the case of BND, not only did it offer some stability during this turbulent period, it even provided funds to rebalance into a beaten down asset class, foreign stocks. That it is beneficial to actively rebalance the portfolio when one or more asset classes vary greatly from the desired weighting. However, one must be mindful of the costs involved and act accordingly. Happy investing! Disclosure: I am/we are long VTI, BND, VEU. (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: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.

IFRS Vs US GAAP In Utility Analysis And The UIL Merger

Summary Iberdrola USA filed an S-4 with the SEC related to its acquisition of UIL. Previously IUSA financials were based on IFRS, but the S-4 used US GAAP. This creates a unique opportunity to examine how accounting standards impact utility results. Accounting issues appear to make a noticeable difference when comparing US and international utility companies. IUSA Income under US GAAP was $20M lower than under IFRS; don’t be surprised if guidance for the combined company is eventually lowered. Iberdrola USA’s ( IUSA ) purchase of UIL Holdings (NYSE: UIL ) was announced back in February. The parties have been progressing through the various requirements to complete the merger, and they are still on track to complete it by the end of the year. IUSA financials were previously done under IFRS , because they were a fully owned subsidiary of Spanish utility Iberdrola S.A. (OTCPK: IBDSF ) After the completion of the merger, the combined company will be publicly traded on the NYSE, and will be required to provide financials under US GAAP. The recently filed S-4 IUSA restated their 2014 financials using US GAAP , providing a unique opportunity for investors to see how accounting standards impact utility results. This article provides a side to side comparison of the two financial statements under the two standards. This information should be particularly useful when comparing American utilities to those elsewhere in the world. These issues should also be in investors minds when comparing utility ETFs like (NYSEARCA: XLU ) that are US focused to ones with a bigger international component, like (NYSEARCA: JXI ). Balance Sheet Assets The first thing that jumps out when reviewing IUSA’s assets on the balance sheet is that the two methods come up with different values for cash. Now you would think cash is cash, but somehow the accountants have come up with a way to make it different, with US GAAP showing $18M more in cash than IFRS. Another noticeable difference between the two methods is that no deferred tax assets show up in the US GAAP books. These assets have not disappeared, but they have just been netted against the deferred tax liabilities on the other side of the balance sheet. The US GAAP books show almost $900M more in total assets than the IFRS books, but since the deferred tax assets have just been moved to offset the liabilities, the “real” difference between the two methods is closer to $3.3B. The biggest driver of this difference is regulatory assets. IFRS actually does not allow companies to put regulatory assets or liabilities on the balance sheet, but US GAAP does. This is really a big deal for utilities, which have constant dealings with regulatory authorities. While regulators do sometimes change their minds, if a state public service commission says that a utility can collect $100M from customers to cover certain costs, it is very likely the utility can expect to get that money. IUSA has almost $2.5B in current and non-current regulatory assets. These represent promises from regulators that IUSA should expect to receive. These promises will be an asset that helps support the business going forward, and should be recognized on the balance sheet. Balance Sheet Equity and Liabilities (click to enlarge) IUSA’s equity under US GAAP was $1.9B higher than under IFRS. A big reason for higher equity was from regulatory assets and liabilities. There are almost $1.4B of current and non-current regulatory liabilities which partially offset the $2.5B of regulatory assets discussed earlier. Another driver for the increased equity is a decrease in environmental remediation costs and in asset retirement obligations. These items were included in the “other provisions” line under IFRS. Note 18 of the IFRS books shows an $845M liability between these two items, while it is only $518M in US GAAP. IFRS requires the use of the mid-point of a range of estimates if no best estimate is available. US GAAP uses the low end of the range. So it seems likely that IUSA is at risk to higher environmental costs than are shown in the latest balance sheet. Deferred income also contributed to the change in equity, with US GAAP showing a $300M smaller liability than IFRS. Another area that is important to understand with IUSA is the special financing they have used for their wind projects. Under IFRS these are “Capital Instruments with Debt-Like Characteristics” and have a balance of $344M. US GAAP calls them “tax equity financing arrangements”, and has a current balance of $124M, and a non-current balance of $277M. These are very complicated instruments where investors contribute money to IUSA’s wind projects, and are paid back with cash and tax benefits. At first these investors may receive the majority of a project’s returns, but over time the majority shifts back to IUSA. There is also an interest component to these payments, but how much of the payment should be allocated to interest vs. repayment of principal, or another category is difficult to determine. This difficulty is likely part of the reason there is a current liability for this category under US GAAP, but there is only a noncurrent liability under IFRS. It is interesting to see that US GAAP seems to think that they are a bigger liability than IFRS, though both methods say they should not be considered “true” debt. However, while it may not be “true” debt under either method, it is still similar and it is significant. When thinking about IUSA’s debt and interest ratios these values should be considered in the calculation, but most people likely ignore. Statement of Cash Flows (click to enlarge) The statement of cash flows shows the total change in cash during the year to be the same under both methods. However, some of the cash was categorized differently. As many people know, followers of IFRS have the option to run interest expense through the financing instead of operations, but that was not one of the differences in this instance. One of the big items to stand out is capital expenditures. These are $155M lower under US GAAP, which makes up the majority of the difference under investing activities. It is likely that some of this is differences in how major maintenance spending is capitalized. IUSA also has some investments that were proportionally consolidated on a 50% basis under IFRS, while they received equity method treatment under US GAAP. It is possible CAPEX at the proportionally consolidated subsidiary disappeared using the equity method in US GAAP. Under operations, depreciation and amortization was almost $100M higher under IFRS. This would likely be consistent with the CAPEX numbers discussed in the investments section. If more expenses were capitalized it would make IFRS PP&E higher (and it was $300M higher on the balance sheet), and therefore depreciation would be higher as well. Regulatory assets and liabilities also played a big role in cash flow from operations. Under financing, the “Changes in borrowings from affiliates” line item disappears under US GAAP. It seems likely that some of this was netted against “repayment of long-term debt and related interest” under US GAAP, but this would seem to be important information that investors would want to know about. Another item of note is that the Aeolus debt and the tax equity financing are basically the same thing, but there is a slight difference in the value recorded. This slight difference is probably reasonable considering the difference discussed earlier on the balance sheet. Income Statement (click to enlarge) IUSA’s net income was $22M lower in 2014 under US GAAP than under IFRS. This seems consistent with what we’ve seen on the other financial statements. Moving spending from capital to expenses would lower income. Including regulatory assets in the financials would lower income as well. Under IFRS, the cash recovery of these regulatory assets would likely go to income, while under US GAAP the incoming cash would match up against a decrease in the regulatory asset account. Implications for UIL/IUSA Merger Assuming the merger is completed, this analysis implies that there is a risk that the new company will reduce its combined guidance. According to last month’s S-4 filing, the IUSA forecast used in evaluating the merger was based on the IFRS $446M of net income in 2014. With the biases discussed in this article, it seems like IUSA’s starting point was actually too high, and it makes sense that these biases would have continued in their forecasts. It might be appropriate to reduce the combined 2016 forecast of $700-730M to $680-710M based on these factors. When analyzing the new entity with other metrics, like EBITDA, this accounting review shows that there are a lot of uncertainties created by their tax equity financing arrangements. How much of the payments to these other entities should count as interest and how much as a reduction of the outstanding balance? Should these be considered debt? If the accounting standards cannot agree on how this should be handled, how can investors be consistent when they are comparing different companies on these metrics? While there are no clear answers to these questions, investors cannot forget these issues when analyzing the company. Implications of Analysis of International Utilities This article also shows that the different accounting methods can create significantly different results, with IUSA having a 5% reduction in earnings under US GAAP. Investors should think about this when comparing US utilities to those elsewhere around the world. The different treatment of CAPEX, and especially regulatory assets, would seem to create a bias that would increase international utilities earnings vs. the US. Obviously each case is different, and there are potential factors that could move results the other direction, but this example should be a wakeup call to US investors considering international utilities. 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.