Tag Archives: health

DLN: A Perfectly Adequate Dividend ETF

Summary DLN offers a dividend yield of 2.74%. It’s acceptable, but nothing to write home about. The top several holdings are a mix of established dividend champions, except for the allocation to Apple which is really hanging on the company paying out their cash. The ETF has a moderate expense ratio, but there are so many options I’ve seen lately with ratios that are excellent. I’d really prefer to see consumer staples as an overweight allocation or a higher allocation to utilities. The WisdomTree Largecap Dividend ETF (NYSEARCA: DLN ) looks quite adequate. Ironically, there seems to be no better way to sum up the fund in a single sentence. Expenses The expense ratio is a .28%. When it comes to investing, who wants to throw away their capital on high expenses ratios or trading costs? This is fairly middle of the road for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 2.74%. That isn’t too bad if the universe of comparable securities is all ETFs, but as far as dividend ETFs go this is running a bit low. Based on current valuations throughout the industry I would expect to see dividend ETFs running closer to 2.9% with some high yield dividend ETFs exceeding 3.5%. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) Apple (NASDAQ: AAPL ) being the top holding makes sense for an ETF that wants to more closely track the market since Apple is such a large part of the market. They certainly have the cash to pay out great dividends but a yield below 2% doesn’t seem like a great fit for the top holding in a dividend ETF. I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) as a top holding. These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on their personal expenditures. Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with heavy weights is one area where I tend to feel conflicted. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Johnson & Johnson (NYSE: JNJ ) is another great dividend company to hold. They have an effective R&D team and a global market presence. Sectors (click to enlarge) The sector composition is fairly balanced. On one hand, a balanced portfolio seems positive. However, I think it comes down to the individual investor. I have more risk tolerance than many investors because I have a fairly long time to recover from negative events, but my portfolio is also missing traditional bond exposure so I tend to prefer the less risky equity allocations. That puts me in a position to favor consumer staples, equity REITs, energy (only in the context of large companies like XOM), and utilities. Occasionally equity REITs are included in the “financials” category, but I’d rather get my REIT exposure through a separate ETF because I want to shove all my REITs into tax advantaged accounts. Therefore, I tend to use large equity REIT allocations in those accounts and would prefer a dividend champion ETF to be underweight on equity REITs. When “financials” simply means banks, then I prefer to see the allocation limited to around 10 to 15% of the portfolio. This allocation is reasonable as a balanced portfolio, but I would really rather see information technology swapping place with utilities and wouldn’t mind seeing financials trade place with either health care or energy. I think those areas offer investors a safer income stream as it relates to the expenses they will face in their life. What to Add Clearly my first area to increase the allocations would be utilities or consumer staples. The utilities offer investors a solid dividend yield while being moderately correlated with interest rates which allows them to serve a purpose that is somewhat similar to bonds in the portfolio while still having the dividend income grow over time. The consumer staples allocation is already almost 15%, but I’d rather see it running closer to 20%. For my risk tolerance, I wouldn’t mind seeing it be even more overweight. Conclusion This is a fairly interesting fund in that it doesn’t stand out from the crowd, but it also doesn’t make have any glaring problems. Overall, I’d have to say that it is perfectly adequate but nothing that really gets me excited. This seems to be a dividend growth fund that just tries to remain reasonable. That makes it an acceptable investment for many investors but it doesn’t stand out as being anything great for my desired allocations.

A Portfolio For The Next Market Crash – Revisited

Summary In February 2013, I published my thoughts on portfolio allocation and construction, assuming a negative market event in the next five years. That event has not yet occurred. In the interim, how has my portfolio held up? My relative conservatism has had its costs, but the portfolio still has performed pretty well, except for bad a call to include some exposure to oil. Going forward, what to do? I conclude this article with some thoughts on that. Two-and-half years ago, I published an article called “A Portfolio For The Next Market Crash”. The premise was that sometime in the next five years, there will be a significant negative market event, that a prudent investor should be prepared for such an event, but that in the meantime, equity returns were going to beat other investments. Halfway through the five years, the market event has not occurred and the equity market has provided good returns. The market, as represented by the S&P 500 plus dividends (Pending: GSPC ), is up about 30% in the two-and-a-half years, a return that would (or at least should) delight long-term investors for the long term. (click to enlarge) Therefore, we have to conclude that I left money on the table by suggesting that about a 50% allocation to equities was prudent. Had I said 70%, that would have been better with hindsight. But if and when the negative market event occurs, the 50% allocation will look better. I made two serious mistakes, however. One, I said an investment in non-leveraged oil companies should be part of the portfolio, basically as a hedge against inflation. I got the non-leveraged part right, but the oil part was dead wrong. And my portfolio has suffered from that. (On the bright side, my portfolio would have suffered far more had I invested in leveraged oil companies – or a leveraged shale play). Two, I shied away from longer-term debt on the ground that the downside was greater than the upside. In practice, the upside has come to pass. Again, I was too cautious, but for the right reasons, I think. Perhaps these errors of caution come from being over 70 years of age, when it is harder to recover from losses because one has less time. I did get the general theme right however: Invest in companies with low leverage and strong market positions. In general, those companies have performed well, with less risk. Companies I mentioned were Apple (NASDAQ: AAPL ), Cisco (NASDAQ: CSCO ), Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ), Bio-Reference Laboratories (NASDAQ: BRLI ), and Healthcare Services Group (NASDAQ: HCSG ). All have performed pretty well, with most performing better than the market. Berkshire is the laggard, with approximately market performance. BRLI’s performance depends on what you did with your shares after the merger with OPKO Health (NYSE: OPK ) was announced on June 4 of this year. That merger changed the nature of the investment, as I wrote at the time. If you sold about half of your BRLI holding soon after the announcement, as I suggested I would do (and did at $41.90), then for that part of your holding, you did just fine. Unfortunately, for the other half that you held, you have not done well so far, with the losses on OPKO Health destroying a lot of value. OPKO Health may pan out over the long term, but I wish I had sold all my BRLI instead of just half. As a consequence, I am sitting with a long-term investment that I did not really choose. I still hope it will pan out. That’s the basic two-and-a-half-year scorecard. Not bad. But where do we go from here? Is the negative market event still to come? Or did this past summer’s fake-out substitute for it? I think this summer’s mini-correction was indeed a fake-out. A few weeks ago, I wrote that: Interest rates and spreads have been kept low in recent years not only by central banks, but also by high global savings. Global savings rates appear to be declining, with the result that there is less money chasing yield. Just as pro-cyclical forces reinforced the narrowing of spreads in the recent past, such forces now will go into reverse and will make life hard for weak credits. Corporate bonds and emerging market debt will suffer. And I think I see a knock-on effect on the U.S. stock markets. I am sticking by that medium-term assessment despite the market having reacted otherwise in the last few weeks. The market is driven by sentiment, the lack of good alternatives, and the shilly-shallying Fed. Eventually, fundamentals come to the fore. And too much credit for companies and states that cannot afford to service it, much less repay it, is a fundamental that is hard to run away from for very long. It already is catching up with leveraged oil companies and leveraged companies that have depended on oil exploration and development or Chinese consumption of natural resources. That has an influence on their lenders as their own futures. Other non-U.S. borrowers in dollars also are likely to become victims, as will their lenders. Market Drivers I think we are seeing a market that is increasingly divided between the newer-style companies that have relatively few employees and comparatively little invested in hard assets, which are doing very well, and the older-style companies that have many employees and higher levels of hard asset investments that are not doing as well. I think this bifurcation is going to continue. Here are a couple of graphs that I think indicate the change that has been occurring over the last 40-plus years and that is continuing. Comparison between income per employee of the Top 50 U.S. public companies by market capitalization with the Top 20 U.S. public companies by number of employees 1970-2013, in dollars deflated to 1970 using the GDP deflator (data from S&P Capital IQ, computations and graph by Martin Lowy) (click to enlarge) Net Income as a percentage of revenue for the Top 50 public U.S. companies by market cap versus the Top 20 ranked by number of employees, 1970-2013, in dollars deflated to 1970 using the GDP deflator (data from S&P Capital IQ, computations and graph by Martin Lowy) (click to enlarge) As you can see, the top 20 companies by number of employees have had a relatively static income per employee compared with the top 50 companies by market cap. (It has increased, but little by comparison). That is because the types of companies in the top 20 by number of employees have remained fairly constant while the types of companies in the top 50 by market cap have changed dramatically, as the likes of Apple, Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Microsoft (NASDAQ: MSFT ), Amazon (NASDAQ: AMZN ) and Facebook (NASDAQ: FB ) have replaced more employee-heavy and resource-rich (mostly oil) companies. It is the employee-light companies that have provided the big returns over the last 20 years. At the current point in the business cycle, this disparity in investment returns is likely to grow even further, as less slack in the labor market (weekly initial unemployment claims are the lowest since 1973, according to Calculated Risk , for example) leads to higher wages and governmental policies are evolving toward requiring employers to pay more for employees in a variety of ways (healthcare, overtime, minimum wage, to name a few). The employee-heavy companies have nowhere to turn to increase their profits because most of them are under pricing pressure from the employee-light companies. We saw that recently as Wal-Mart (NYSE: WMT ) announced depressed results due to increased employee costs and its response to that result as being to invest in competing with Amazon. Some think Wal-Mart will not succeed at this. See New York Times on the subject here . The gig economy is moving in the same direction. Competition from the likes of Uber (Pending: UBER ) and Airbnb (Pending: AIRB ) affects high-employee and high-fixed investment companies more than it does the opposite. Therefore, even though I may not be able to anticipate where the gig economy will strike next, I do anticipate that it will be in sectors that require high fixed investments or high levels of employees relative to revenue. Based on these considerations, I am configuring my portfolio to reduce exposure to employee-heavy companies as well as highly leveraged companies. There are still plenty of investments to choose from without those. Of course, I am not the only person in the world who has noticed these trends, and they are reflected in stock prices. Therefore, in many cases, one has to go up the p.e. scale in order to buy in. What to do going forward? Where does this leave us regarding a going-forward investment posture? (1) I am sticking to my basic asset allocation – 50% stocks. People I respect (e.g., Cam Hui) are saying the remainder of 2015 will be good for stocks. But I still fear a reversal of some consequence in 2016. There are just too many things that can go wrong for a market that still seems priced for perfection. And if something could go wrong in 2016, it could go wrong earlier. (2) I am reviewing my portfolio to make sure that on balance it reflects my investment thesis. Though there will be exceptions, I do not see the high-employee-count style of a company as the engine of future growth. (An exception in my portfolio is Berkshire, which now ranks among the nation’s largest employers. Its net income per employee remains respectable, and its large number of employees is accounted for by the sheer size of its portfolio of companies). One of the questions that a few readers asked two-and-a-half years ago was why I am not recommending international exposure. I replied at the time that (1) where a company manufactures and sells matters more than where it is headquartered or its stock is listed, and (2) most large U.S. companies offer significant international exposure. For example, look at Apple’s recent financial results, which were driven by sales and profit increases in China, according to the WSJ . Despite many U.S.-based frauds etc., I place more trust in the financial information from companies subject to U.S. accounting conventions and securities laws than I do in companies subject to other rules. The kind of company that I wish I could find more of is MarketAxess Holdings (NASDAQ: MKTX ), which operates a leading bond trading platform. It has a high return on capital, few employees, and operates in a space that is ripe for automated takeover because the costs of traditional bond trading have been astronomical. The stock is up five-fold over five years, but there still should be plenty of room for growth unless some other similar platform steals market share or undercuts the pricing. Perhaps some readers will give me good ideas. Please remember, I am not a securities analyst. I am just a guy who reads a lot and tries to reflect the panoply of things going on in the world in his investment decisions. I also enjoy my interaction with the Seeking Alpha community.

It’s MADness! (Mergers, Acquisitions, And Divestitures)

Approximately half of all mergers & acquisitions eventually fail. There seems to be little benefit to long-term investors from M&A. If a stock is truly undervalued, it is worth owning. How do companies create value for shareholders? In the long run, nothing matters more than earnings and earnings growth. The more a company earns, the higher the stock price should go. That might seem obvious, but it might also surprise you if you have been listening to what CEOs say. For example, Hewlett-Packard (NYSE: HPQ ) announced a few months ago that it was planning to split itself into two companies. In July, CEO Meg Whitman said, “Today, I’m more convinced than ever that this separation will create two compelling companies well positioned to win in the marketplace and to drive value for our stockholders.” In other words, the CEO argued that the sum of the parts is greater than the whole. If Whitman believes that earnings drive value, then she must also believe that the combined earnings of the two separate companies will be greater than if they remain together as one. Sounds logical. But on Tuesday, Walgreens Boot Alliance (NASDAQ: WBA ) announced plans to acquire Rite Aid (NYSE: RAD ). Rite Aid CEO John Standley said, “Joining together with Walgreens Boots Alliance will enhance our ability to meet the health and wellness needs of Rite Aid’s customers while also delivering significant value to our shareholders.” In other words, Standley believes that the whole is greater than the sum of the parts. If he believes that earnings matter, then he must be arguing that the combined entity will create more earnings and more value than if they remain separate. Can both Whitman and Standley be right? When two companies merge, they often argue that the merger will create “synergies.” In other words, they might be able to reduce total costs by getting rid of duplicate functions. (For example, you don’t need two CEOs.) The merger might increase market share and, therefore, create more pricing power. There may also be some tax advantages or perhaps a greater degree of diversification. If the benefits of the merger outweigh the transaction costs, then shareholders should come out ahead. If that’s the case, then why are there divestitures? Companies often argue that a divestiture (in the form of a spin-off, carve-out, etc.) will create value by allowing distinct business segments to separate into new companies in order to focus more intently on their separate businesses. They may claim that the market does not understand or appreciate the value of the combined businesses, and that a divestiture will “unlock” value for shareholders. So, if you believe all this, it must follow that separating a large company into two creates more value. Two companies merging into one creates more value. One company buying another creates more value. And a company splitting off a small part of itself creates more value. Well, do you believe it? There are lots of examples of mergers that have succeeded; yet, there are also plenty of examples of mergers that have failed. One of the best-known failures is Hewlett-Packard’s own acquisition of Compaq. It’s still haunting former CEO Carly Fiorina on the presidential campaign trail. When it comes to mergers, acquisitions, and divestitures, here’s what we know for sure. When Company A announces plans to buy Company B, it typically pays a premium. In order to convince the target company’s shareholders to approve the deal, it has to offer to pay more than the market price. So, Company B’s shareholders often see a quick and significant increase in the value of their shares. What happens to the shares of Company A, however, is less consistent. Sometimes they rise a little when the deal is announced. Sometimes they fall. Over the long run, how the shares perform depends on a number of factors, including whether the merger was really a case of exploiting potential synergies, or a desperate bid to grow the top line without regard to profits. As far as divestitures go, we know that they often follow mergers & acquisitions. In fact, academic studies show that 35-50% (or more) of acquisitions are later divested by the acquiring firm. In other words, it appears that approximately half of mergers & acquisitions eventually fail. They may create a lot of value in the short term for shareholders who want to sell, but there seems to be little benefit to long-term investors. Over the years, I have recommended the stocks of many companies that acquired other businesses, were acquired themselves, or that engaged in some sort of divestiture. When that happens, there is often a quick increase in value. I’m happy to take the gains. However, my recommendations are never based solely on the hope that these kinds of transactions will occur. In my view, if a stock is truly undervalued, it is worth owning. It may take a while before the true value is appreciated by the rest of the market, but that’s something I’m willing to wait for.