Tag Archives: over-the-past

Consolidated Edison’s Ticker ‘ED’ Should Stand For ‘Enticing Dividend’

ED has consistently grown dividends per share with increases each year over the past five years. The Payout Ratio over the same period has been steady ranging from ~55-70% of earnings. In 2016 the dividend per share could be as high as $2.80 based on a 70% payout ratio on $4.00 of earnings (analyst consensus). Consolidated Edison (NYSE: ED ) has arguably one of the most enticing risk-adjusted dividend yields around, at > 4%. The company has a strong track record of growing dividends per share (5 consecutive years of increases), a stable payout ratio (~55-70%), and the ability to make future increases. ED’s share price is up 11% over the last twelve months. ED data by YCharts The divided yield has increased since the start of 2015 on recent share price weakness and represents a good entry point. ED Dividend Yield (NYSE: TTM ) data by YCharts ED has consistently grown dividends per share with increases each year over the past five years. ED Dividend data by YCharts Over the past five years ED has shown steady growth in EPS with an increase from $3/share to $3.6/share. ED Normalized Diluted EPS (Annual) data by YCharts The Payout Ratio over the same period has been steady ranging from ~55-70% of earnings. I believe this is a conservative ratio and expect to see an average payout ratio of ~70% going forward. ED Payout Ratio ( TTM ) data by YCharts If we take the payout ratio expectation of 70% and apply it to analyst EPS estimates , we can get a good sense of the potential for dividend increases going forward. EPS estimates are as follows: $3.97 in 2015 $4.00 in 2016 In 2016 the dividend per share could be as high as $2.80 based on a 70% payout ratio on $4.00 of earnings. This implies a yield of 4.6% on the current share price. Given the company’s track record of 5 consecutive years of dividend increases, a reasonable payout ratio, and analyst estimates for EPS of $4.00 in 2016 ED represents a great risk adjusted opportunity. Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in ED over the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague

Is Hope For Active Management Right Around The Corner?

By DailyAlts Staff Investors are looking closely at the role of active management relative to passive investing products such as indexed ETFs, and for good reason: Between March 2009 and the end of 2014, less than one-third of active managers beat the broad stock market’s returns. Why should investors pay management fees for active products that fail to generate positive alpha? Perhaps they shouldn’t, but Neuberger Berman’s Juliana Hadas, CFA, and Andrea Pompili argue that the major factors that have contributed to active managers’ underperformance over the past five years are about to change, and that the investment environment is likely to become much more hospitable to active managers in the very near future. Ms. Hadas and Ms. Pompili make their case in the recently published whitepaper, Can Active Management Make A Combeback? “Post-financial crisis underperformance by active portfolio managers is easily explained and, we believe, only temporary,” they write, before outlining three major fundamental factors suppressing active managers’ returns: Unprecedented central bank stimulus leading to ultra-low interest rates; The magnitude of the bull market in U.S. stocks since 2009; and Flows into passive investment vehicles, such as index ETFs. Ultra-Low Interest Rates Ms. Hadas and Ms. Pompili argue that the Federal Reserve’s policy of keeping benchmark interest rates near 0% have created “valuation distortions in the market.” When companies can borrow at low interest rates, they can finance expansion with debt, rather than with cash flow from operations. What’s more, low interest rates narrow the valuation gulf between near term and more distant cash flows, making further out and more speculative cash flows comparatively more attractive than they would be in a higher interest rate environment. The good news for active managers is that the Fed appears to be preparing for an interest rate hike some time in 2015; quite possibly as early as June. Higher interest rates will result in higher financing costs, thereby sharpening the distinction between firms that have been generating profits with easy money financing, and those that have been generating profits through efficient operations. This discrepancy between companies will make it easier for active managers to beat the broad market’s beta returns, whereas the low level of return dispersion in the U.S. stock market over the past five years has made generating alpha difficult. The Stock Bull Market Since ’09 Low interest rates have helped propel the bull market in stocks since 2009, since low financing costs make it easier for U.S. companies to generate profits. According to Ms. Hadas and Ms. Pompili, 70% of the S&P 500’s returns over the past 20 years have been based on earnings, and with earnings generally easier to come by, there has been a low level of dispersion between U.S. large-cap stocks. Another way low interest rates have contributed to the bull market in stocks has been by suppressing bond yields, and thereby encouraging greater risk-taking by income-oriented investors. Stocks are generally viewed as riskier assets than bonds, and investors are taking on greater risk in the face of bond yields well below 3%. But with interest rates expected to rise later this year, that trend is likely to reverse, which should provide opportunity for active investment managers. Passive Indexing Trends With U.S. large-cap stocks generally trending higher over the past five years, it has been more difficult for active managers to beat the market’s “average” (beta) returns. This is a function of the math: If the S&P 500 returns 30% above the risk-free rate of return, and an active manager had a portfolio with a beta of 0.9, then the portfolio would have to generate more than 3% alpha to outperform the market. But if the S&P 500 only exceeded the risk-free rate by 5%, then an active portfolio would only have to generate a little more than 0.5% alpha to beat the market. In somewhat of a vicious cycle, this mathematical reality has led more investors to dump funds into passive index funds, but these funds are inadvertently momentum investments, since they’re market cap-weighted. Investors buying the SPDR S&P 500 ETF (NYSEARCA: SPY ), for example, buy into all 500 components of the S&P 500 in proportion to their index weightings, without regard to the specifics of each company. Large companies that get even larger end up taking up a greater share of the index. Should the markets turn, and active management delivers, then the trend of migrating to indexed ETFs may slow. Conclusion As Ms. Hadas and Ms. Pompili point out, the performance of active managers versus the broad market’s benchmarks tends to be cyclical and to improve during less exuberant bull markets. Once interest rates begin rising, the “valuation distortions” caused by “aggressive central bank easing” will likely reverse, in the view of the whitepaper’s authors, “creating a market environment in which underlying company fundamentals start to once again matter more.”

A Peek Inside The Fidelity Contrafund

The Fidelity Contrafund has been an excellent performer, with 12.5% annual returns since inception. It has large positions in companies like Berkshire Hathaway, Google, and Apple, which have $200+ billion in cash between them. The one concern about this fund is the annual turnover rate of 45% which means the average stock is only held for a little over two years. The Fidelity Contrafund Fund (MUTF: FCNTX ) is one of the largest mutual funds in the world, with over $112 billion in assets. For a fund of that size, the stockpickers are unusually active – the Contrafund has an annual turnover rate of 45%, which means that each stock lasts in the portfolio for a little over two years on average. A turnover rate like this explains the difficulty in analyzing mutual funds – even if you like what you see inside the fund, there is no guarantee that those stocks will still be there a few years from now. That said, the Contrafund does deserve some benefit of the doubt due to its excellent performance over the course of its inception. It has given investors 12.5% annual returns since it opened the doors to take clients, and it has beaten the performance of the S&P 500 over the past ten years as well. From 2004 through 2014, the Contrafund has returned 9.6% annually while the S&P 500 has returned 7.6% annually. The expense ratio is around 0.6%, so the difference is narrower: 9.0% to 7.6% (although someone buying an S&P 500 Index Fund may have to pay some fees as well). Still, in an absolute sense, entrusting your money to the Contrafund has made you wealthier than the S&P 500 over the past decade. Why is the Contrafund something that does well? Because it stuffs its portfolio with companies that have great ten-year earnings per share growth rates. Its largest holding is Berkshire Hathaway (NYSE: BRK.B ), and it also has large positions in Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Wells Fargo (NYSE: WFC ), Colgate-Palmolive (NYSE: CL ), Apple (NASDAQ: AAPL ), Disney (NYSE: DIS ), and Facebook (NASDAQ: FB ). Surrounding yourself with stocks like that is how you achieve significant growth. Very few funds bother to make Berkshire Hathaway the largest holding, yet the few that do end up richly rewarded (see the Sequoia Fund’s 14% annual returns for a great example of this). Berkshire Hathaway is sometimes regarded as a stock that has been put out to pasture, but the company’s results are much more impressive than you’d think: Book value has increased by 19.0% annually for the past ten years, and the company is sitting on $62 billion in cash. This acts as a coiled spring of sorts, because Berkshire’s profits can increase substantially in short order once it deploys some of that cash to presumably purchase an operating company. Google and Apple also need no introduction, but I’ll add this: Google has been increasing its profits by 20% annually over the past five years, and Apple has been increasing its profits by 57.5% annually over the past five years (the exceptionally high compounding rate that Apple has offered primarily occurred between 2010 and 2012 when Apple grew its profits from $2.16 per share to $6.31 per share). This is something that has often gone unreported in discussions of the Contrafund: the top holdings of Berkshire Hathaway, Apple, and Google are sitting on nearly $250 billion in cash. This is one of the most cash rich mutual funds I have ever studied in my life. Whether those funds will be used for dividends, buybacks, or acquisitions, they represent a great amount of capacity for creating shareholder wealth. It’s also a welcome sight to see Disney and Colgate-Palmolive in a large-cap fund. Colgate is a stock that usually gets ignored because its dividend is in the low 2% range and its P/E ratio usually hovers in the 20s, leading investors to say things like “It’s not cheap right now.” That kind of thinking discounts Colgate’s future cash flows – it is admittedly difficult to think about where a company’s profits will be five years from now rather than where they will be in the immediate future. But yet, Colgate has returned 14% annually since 1977, and tends to grow profits at 12% annually because the company’s retained earnings grow at 15%. Colgate is one of those stocks that can wear both the hats of defense and offense: it has a streak of dividend increases going for over half a century, and it also has a growth rate of over 10%. You could convincingly make the argument that it is an all-weather stock that belongs in every investor’s portfolio. Disney is also a welcome sight to see in a portfolio. It too, tends to get ignored because it spends 4x as much money repurchasing stock as it does paying out dividends and the dividend payment is annual and only around 1%. However, the trailing earnings per share growth rate is 15% annually, since The Great Recession. It has been compounding at 13% annually since 1970, so this isn’t especially unusual – like Colgate Palmolive, double-digit growth is simply what it does. The only real headwind is that the valuation is quickly becoming its highest since the dotcom era boom, and that could mean that future returns will trail growth by about two percentage points due to P/E compression. When the earnings per share growth rate is in the double digits, this is only a mild concern. And lastly, there is Wells Fargo. Despite the wild ride through the financial crisis, the ten-year metrics for Wells Fargo are best in breed among the largest banks: Book value has increased by 11.5% annually, and loans have increased by 17.0% annually over the past ten years. This is partially why Warren Buffett loves the stock – it actually grows a robust loan portfolio over time. This superiority doesn’t mean much when interest rates are low, but when interest rates advance the advantage of Wells Fargo becomes more dominant because the interest income will rapidly rise. Furthermore, when you figure the 37% dividend payout ratio has room to increase to 45-50%, there is still room for further price gains if investors respond well to a high dividend growth rate. The Fidelity Contrafund Fund is one of the funds that you want to look for in your 401(k), especially if there is an arrangement to get the 0.64% lowered for tax-advantaged accounts. It is not just the fact that the Contrafund has outperformed the S&P 500 (which it has), but the fact that the fund is filled with some of the most cash-rich companies in the world. It seems to do a good job of selecting those high-quality businesses that have earnings per share growth rates over 10%. The only catch is that the turnover is high at 45% annually, and the worry is that the fund could make a strategic shift that you don’t like in the next few years. Disclosure: The author is long BRK.B. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.