Tag Archives: etfs

FFC: A CEF Specializing In Preferred Shares Paying 8% Monthly

Summary FFC has been paying $0.13 monthly for 5 years. FFC uses leverage to increase dividends. FFC is a fund that is highly sensitive to interest rates. Flaherty & Crumrine Preferred Securities Income Fund Incorporated (NYSE: FFC ) is a United States based diversified, closed-end management investment company. FFC’s objective is to provide a high yield while preserving capital by using preferred securities. (TD Ameritrade) Flaherty and Crumrine serves as the investment advisor to the CEF. The 5 year chart below shows how successful this CEF has been in meeting these objectives: (click to enlarge) Source: Interactive Brokers The chart shows that FFC has consistently paid the current $0.13 monthly dividend for 5 years. At the end of each year the company adjusts the payout to match its annual earnings and consequently the December payout is often less than $0.13. The share price modulates somewhat but the median price over the past 3 years has been about $19.00 per share. For those of us that need and/or like to have dividends delivered to us monthly, Flaherty & Crumrine Preferred Securities Income Fund might be the right ticket. This closed end fund recently released its quarterly letter and offered the statistics shown below: Source: FFC Shareholders Letter dated 9/22/15 with statistics as of 8/31/15 Source: FFC Shareholders Letter dated 9/22/15 with statistics as of 8/31/15 Source: FFC Shareholders Letter dated 9/22/15 with statistics as of 8/31/15 Currently FFC is selling at a premium to NAV by about 3% since NAV is about $19.06 and the current price is around $20.10 per share. At this share price the CEF is offering an 8% return and about 8.5 % on NAV. FFC is able to offer this high yield because it uses leverage of around 35%. (Information from Morningstar) That means the fund borrows money to buy more shares over and above what it could buy with only its own cash. Operating expenses for FFC including interest for leverage are running at 1.39% of NAV. Excluding interest operating expenses are running at 0.87% of NAV which is relatively reasonable when compared to most other specialized mutual funds. (Taken from FFC’s Form N-Q filed for the 3rd quarter) Conclusion: As a matter of principle I normally don’t invest in a CEF when it is selling above NAV. You can see that at the end of August FFC was selling below NAV and was an opportune time to buy. Since the fund is currently selling above NAV, I recommend waiting until the fund is selling at or below NAV if you see this as a desirable vehicle for steady monthly income.. Be advised that this CEF is highly sensitive to interest rate changes and one should consider the direction of interest rates when buying this CEF. As interest rates rise, the cost of leverage increases which translates into higher expenses for the fund. Furthermore the value of the preferred shares is likely to decline as interest rates escalate hence NAV will drop as well. Capital losses could be excessive in an environment where interest rates are rising rapidly.

Valuation Dashboard: Utilities – November 2015

Summary 3 key factors are reported across industries in Utilities. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This article is part of a series giving a valuation dashboard by sector of companies in the S&P 500 index (NYSEARCA: SPY ). I follow up a certain number of fundamental factors for every sector, and compare them to historical averages. This article is going down at industry level in the GICS classification, and includes also mid and small cap companies. It covers Utilities. The choice of the fundamental ratios has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A link to a list of individual stocks to consider is provided at the end. Methodology Three industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name (for example D-P/E for price/earnings). The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large cap universe. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. The price-to-cash-flow ratio used in my dashboards for other sectors has been eliminated here, because discontinuities and outliers make it often irrelevant in Utilities. Industry valuation table on 11/4/2015 The next table reports the 3 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are 3 columns for each ratio. P/E Avg D- P/E P/S Avg D- P/S ROE Avg D-ROE Electric Utilities 18.13 15.94 -13.74% 1.77 1.22 -45.08% 8.94 10.43 -1.49 Gas Utilities 21.8 17.24 -26.45% 1.46 0.97 -50.52% 10.34 11.49 -1.15 Multi-Utilities 19 16.59 -14.53% 1.67 0.95 -75.79% 10.22 9.48 0.74 Water Utilities 22.89 23.68 3.34% 4.7 3.94 -19.29% 3.5 7.96 -4.46 Ind.Power Prod. & Energy Traders* 34.92 34.9 -0.06% 3.33 4.16 19.95% -4.22 -5.15 0.93 * Averages since 2005 Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF (NYSEARCA: XLU ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion Utilities have played their traditional defensive role during the correction in August, but XLU has slightly underperformed the broad market last 6 months. Looking at the valuation and quality charts above, only one industry looks attractive: Independent Power Producers and Energy Traders. Its industry P/E factor points to a fair pricing, and the 2 other factors are better than their historical averages. At the opposite, Electric and Gas Utilities look the less attractive, the 3 factors being worse than averages. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Utilities beating their industry factors is provided on this page . If you want to stay informed of my updates, click the “Follow” tab at the top of this article. You can choose the “real-time” option if you want to be instantly notified.

Focusing On Revenue Is A Great Idea! But Do Not Forget About Stabilized Profit

I was feeling a bit sick this morning, so I stayed in bed and turned on CNBC. I NEVER watch CNBC, unless I am at home in bed sick. And it usually makes me feel worse. They were interviewing Reed Hastings, the CEO of Netflix (NASDAQ: NFLX ), who has clearly done a great job guiding that company. In 2005, Netflix did $682 million in revenue, and this past year, it did $5.5 billion in revenue. Quite an accomplishment. Yes, there are a lot of competitors out there, but he has clearly done a great job. So he was talking about how having negative free cash flow and very low profit is proof that the company is in this for the long run, and he is 100% correct. We are actually starting to operate our business the same way, as I said in a previous post about Dell’s new approach to growth. And this is exactly what you would want to see as an investor. HOWEVER, the problem with this is that most investors are not smart enough to do the trickle-down analysis of what this means. Amazon (NASDAQ: AMZN ) has the same issue, and it’s something I have lamented about over and over. What a good investor SHOULD do is analyze what the company would have made had it not reinvested. What would there profit be if the company stopped reinvesting and just operated normally for normal growth? That is exactly what you need to do to analyze the value of a business. Because at the end of the day, what is happening now is that with no profit and negative free cash flow, an investor’s eyes are growing wider and wider saying “The profit potential is infinite!” Clearly, it’s not infinite. Clearly, a company with $100 billion in revenue can’t make more than $100 billion in profit, which is also impossible. If Netflix, on a normalized basis, has 15% in profit, its $5.5 billion in revenue would lead to around $825 million in bottom line profit, and at 20 times earnings – which is high based on history, but we will give it that due to just me being overly optimistic – that’s a valuation of $16.5 billion. Now, I am not saying that its profit margin is 15%, because I know it to be. I am purely speculating. But Netflix is currently selling for a valuation of $47 billion. Hmmm. So, based on 20 times earnings, that’s a bottom line profit of $2.35 billion, which is over 42% margin. Not likely. The same goes with Amazon. In the company’s best year ever, it did 3.5% or so in bottom line profit margin. This last quarter, it made $75 million after making $500 million on its cloud-based AWS business, and that was on total revenue of over $25 billion. Not exactly something that I deem to be worth more than Wal-Mart (NYSE: WMT ), which has almost $500 billion revenue per year. Either way, the point is that valuing something today for future potential is fine, but you also have to be realistic about it and realize that you have to let things grow into what you hope them to be, without overpaying today for that. Make realistic assumptions about their profit margins based on other businesses in their markets and their gross margins. It’s too easy to get stuck in a market like this assuming the best will happen, since it has for the last 6 years. It is a game of musical chairs, and when the music stops – which it will – don’t be caught looking for a seat.