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Monthly Archives: August 2011

Big Oil – Stability & Growth Potential

Posted on by Posted in Dividends, Investing, Stock Picks, Stocks, Strategy Leave a comment

In the wake of the latest market correction I would recommend investors revisit Exxon Mobile (XOM) and Chevron (CVX), if they have given the slightest thought of buying either company.  Both major oil producers are in stable industries with very deep entrenched businesses around the globe.  Energy is needed by everyone in every country and these companies have the capital and network to provide what is demanded.

I particularly like XOM & CVX right now because they are selling at a discount compared to where they were at a little over a month ago and they could appreciate handsomely, even though they are value stocks.  If you assume between now and sometime in 2012 the global economy will go one a run (short or long term), we are likely to experience a jump in oil prices.

For the last 10 years the U.S. amount of oil consumption has remained relatively flat.  Today the main driver of oil demand resides in the emerging markets, such as China, India, and Brazil.  These large developing markets may not use a tremendous amount of energy per person, but a slight increase can have a huge impact because of their sheer volume.

An increase in global economic activity would likely lead to pressure on energy prices, particularly oil.  This would then lead to futures contracts being quickly bid up and we’d shortly see a relapse of what we experienced earlier this year with oil briefly shoot up near $120 a barrel.

If you want to look at these companies as a potential trade or a long-term investment, I believe either will work for you.  The companies both have a strong track record of growing their dividend amounts annually and both will respond favorably to oil price spikes.

Ultimately, an investment in either company is a bet on global growth continuing its course into the future.  Limited resources faced with increasing demand eventually will lead to hire prices.  If you don’t have exposure to major energy players in your portfolio, now is a good time to take a serious look at potentially establishing a position.

Tackling Variable Costs

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In last week’s blog post on personal finances I focused on the need to understand your monthly budget in terms of variable and fixed costs.  The distinction is very important because most people looking to tune-up their budget can make significant improvement in a short amount of time, if they define and focus on their variable costs.

Where can you trim some fat?  In many cases it might not mean totally eliminating certain goods or services from your life, but either cutting back or finding a lower cost replacement.  For example, earlier this year I switched Internet providers.  My previous provider also forced me to have a home phone line with the Internet package.  The home phone I never used.  I now have a different provider, my Internet speed is faster and I no longer am charged for a home phone line.  My bill has fallen over $15 per month (That’s about $180 per year).

The way I would go about tackling your monthly variable cost would be to compile a list.  From the list identify those items that are a total waste – That which isn’t needed to be incurred at all on a monthly basis.  Then look at the items that look rather high in cost.  First, ask yourself if they’re necessary.  If the answer is yes, then move on to evaluating what control you have over these costs.  Can you find another provider of the same/comparable good or service that is less costly?  You’re job is to look for areas where you have control!  Once you have identified the areas, exercise your control in order to change your future.

Information can be very powerful.  If you have a clear picture of what is occurring, you will be in a much better place to make adjustments you’d like to see.  I encourage all visitors to use the Monthly Budget Worksheet (Now updated!) to help them determine where they are and where they want to be.

American Tower takes step toward REIT status

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American Tower (AMT) announced on Thursday that is has agreed to merge with American Tower REIT, Inc. and hopes to have the REIT designation applied to all company shares by January 1st of 2012.  A shareholder meeting will occur on November 29th of this year to vote on the plan.

As stated previously, I expect the conversion to attract new investors to AMT primarily based on dividend distribution.  A large group of investors are in search of income investments.  In AMT’s case they will find an income stream and technology play.  AMT would be one of, if not the first, cell phone tower company to move into the REIT arena.

AMT poses a distinct opportunity for income investors.  They would be able to position themselves in a way to benefit from the growth in wireless usage across the globe, while being heavily shielded from product cycles and consumer trends.

In addition, I continue to see AMT as a company with the experience and capital necessary to make in-roads in under-served parts of the world, such as Africa.  Africa is a nation that is developing and will not receive the infrastructure that developed countries have in the way of ground transmission lines.  Why put a line into every home when wireless is available?

AMT has begun to expand into Africa. This spring the company acquired 440 tower sites in South Africa for $60 million.  AMT is also considering to acquire up to an additional 1,800 towers in Africa in the next 2-3 years.

The company’s stock has held its ground well throughout August, even during the days that the market was rocked the hardest.  As an investor, I am very interested in learning more about this company in terms of its financial stability.

It’s time to do some research and look forward to the shareholder meeting on the 29th of November.

The Next Boom: The World Between Now and 2025

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Where do we stand today in relation to where we’ll stand tomorrow.  Investors and non-investors alike seek the answer to this question.  For investors, forecasting can help unlock the answer to what tomorrow holds.

In his recently released book, The Next Boom: What You Absolutely, Positively Have to Know About the World Between Now and 2025 by Jack Plunkett, a broad stroke depiction of where we’re headed as a world is provided.  Thought he author readily admits he is bullish on what the future will bring, obstacles are noted, but they’re not a focus of his grand tour.

What I’ve found most helpful in reading this book is not only the subject matter presented, but the way in which it is presented.  Daily news does not do a very good job of giving a big picture view of actions of the day and how they fit into overarching developments and trends.  This book helps readers understand where things are set to progress.  Though the trajectory provided might not be exactly as it is in the future, a general frame of reference is presented based on current states of affairs and likely outcomes.

When you’re thinking about your investment strategy and where you should spend your time researching, it’s very helpful to have a frame of reference regarding where certain economies and industries are headed.  Plunkett provides a clear view of where he sees a number of economies and industries moving within in the next 25 or so years.  Much of what he talks about pertains to demographic trends which are already set in motion.

Although I’m not fully done with the book, I will say that the bullishness that Plunkett expresses throughout the book in his forecast for the future could be a drawback for readers looking to use the book strictly as a guidepost for their investment decisions.

Even if all that is stated in the book comes to fruition in the time frame provided, investors will likely not succeed if they run out and buy X, Y, Z sectors, industries or economies.  Corrections will occur over the period.  Think of the path of progress like that of a hike to the peak of a mountain.  From the start until you reach the peak you will experience some periods of decline, some shallow and some deep.  Ultimately you will get to the top, but it’s not a straight climb up.

For investors or those interested in what lies ahead, I would highly recommend reading The Next Boom: What You Absolutely, Positively Have to Know About the World Between Now and 2025 by Jack Plunkett.

Considering the Dividend Payout Ratio

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A number of reasons exist as to why investors flock to stocks that pay a regular dividend.  For investors with an inclination toward dividend stocks, the all-mighty dividend payout ratio exists to provide a reference point regarding historical financial performance verses historical dividend distribution (payout) information.  The ratio is expressed as a percent and considers dividends paid out per share divided by earnings per share ($Dividends Per Share/$Earnings Per Share).

It’s always important to at least consider the dividend payout ratio when a company’s dividend payment is holding weight in your decision to invest in the company.  When you see a company paying at, near or above 100% this could be a sign of trouble.  Though not always the case, it’s at least a red flag.  The dividend payout ratio provides a guidepost for investors to gauge the weight the company’s payout ratio is placing against the company’s earnings.

One way to further leverage the usefulness of the dividend payout ratio is to think of it as an axillary gauge.  You can use the ratio to help better understand other information you’re seeing.  How do you accomplish this feat?

Dividend investors generally enjoying seeing that the company they’re considering has a history of increasing dividend distributions.  Such action is not only good because of increased payments for current shareholders, but also benefits owners because increases have the power to attract more prospective investors.  In short, growing dividend payments draw investors like ants to sugar.

How, as a new investor in a company that regularly pays and has a history of growing their dividend, do you evaluate the soundness of the dividend and its future growth?  A good start to providing an answer to both questions is through the dividend payout ratio.   As a rule of thumb a company that has a payout ratio of around 50% or less is not likely to be financially stressing itself in maintaining its current dividend payout.  Additionally, a company in such a position with a history of dividend increases is providing investors a signal that they have additional room to continue their historical dividend growth growth pattern.

A good example of what is discussed above is Chevron (CVX).  Chevron’s last quarterly dividend increased from .72 to .78 cents per share (quarterly) and their dividend payout ratio is 26%.  If you look back over the past 20 years you see that the company has a strong history of dividend payment increases.  Though history doesn’t necessarily lead to a linear future, observing the low dividend payout ratio gives additional insurance to investors that the company is positioned in a way to continue their dividend growth pattern.

The dividend payout ratio is a simple but powerful ratio, especially for dividend focused investors.  Remember to consider the ratio when evaluating the health of a dividend payment and its propensity to potentially be increased in the future.

The Changing Face of Elderly America

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In my last post I noted how we are projected to experience a downturn in the +65 old population from around 2012-2018.  During this period baby boomers will begin to increasingly move into the +65 group while their parents pass away.  This is a major demographic shift and an important fact for investors to be aware of.

The main area of concern/opportunity I see in light of the data presented pertains to health care real estate investment trusts (REITs).  These REITs are focused on providing retirement care and living facilities.  They come in many different flavors, but each have their own tilt towards specific services. (More area’s of the economy will be impacted, but let’s stick to REITs for this example.)

A few months ago I posted a blog about Health Care REIT, Inc. as a long-term investment prospect.  Under the light of this new data I would not necessarily say the investment is ill advised, especially if we’re talking about the long-term, but I would want to evaluate the business from a few different angles.

What different angles would I view Health Care REIT, Inc. from?  First, I would want to have a good understanding of their mix of properties.  If we’re about to enter into a period where many older people are passing away, then the REIT could have a potential problem.  Nursing homes and facilities that are weighted towards caring for those who cannot care for themselves may experience a decline in clients.  Remember, we’re entering a period where the bulk of seniors are actually ‘young’ (near age 65).

Secondly, I would be concerned with the types of senior communities under their operation.  Though a mass of baby boomers are moving into the 65+ category, it’s my opinion that most are not going to gravitate toward a senior based community until well into their late 70’s at the earliest.  In the case of Health Care REIT, Inc., they have put forth an aggressive growth strategy in building and acquiring new properties to meet the needs of the older population.  Will the benefit from this growth payoff as soon as they think?  What happens if retirees begin to delay their shift towards senior and assisted living facilities?

The main point investors should take away from this data and example is to not necessarily fall back on linear thinking.  History can provide us with well established templates of known cycles, but the way a cycle forms and happens can change within different groups and circumstances.

A very discernible cultural difference is seen between boomers and their parents.  Though time has smoothed out the divide, they are still separate groups with particular inclinations and views.  This reality is likely to play into the way boomers behave in their retirement years.

Are the products and services that served their parents generation in retirement going to be the products and services that meet the boomer’s needs?

Remember – When investing in the trend of graying baby boomers, you must consider how their change in perception and behavior compared to previous generations will impact the success of any current senior centric business model.

The Old-Timers Population Boom Isn’t Here…Yet

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Isn’t the population of +65 old persons in the U.S. supposed to gradually increase until the 2030’s?  It’s the coming of the baby boom generation into the senior class and we know the weight this generation can through around in terms of sheer numbers.

I recently did some research regarding the population trends of the +65 crowd in the U.S. I had previously been under the assumption that the group was in a state of perpetual growth.  Amazing as it might sound, what I found is that we’re actually nearing the start of a miniature bust in the growth of the +65 age group in the U.S.

From 2012-2018 the country is projected to experience a 6 year decline in the +65 population.  This is actually a shocking statistic that feels counter-intuitive, but makes a lot of sense once you sit down and think about what is occurring.

The chart below provides a graphical representation of what the U.S. Census believes the total +65 population will look like (in numbers) from now until 2030.

Why the bust?  Why will this older segment of society actually contract for approximately 6 years of this decade?  The easiest way to explain what is occurring is through an analogy.  Imagine you’re on a boat or at the shore of an ocean.  The one wave that is nearest you represents all those born and are still alive from the 1920’s and 1930’s.  They’re a much older group and much closer to coming on shore (passing away) than the next wave that now is becoming visible.

The 2nd wave is the baby boomer generation.  Though they are a huge group demographically speaking, they will slowly transition into the +65 range.  Their wave isn’t near the point of cresting; it’s still building itself as moves into the +65 range.

A large portion of those people born in the 1920’s and 1930’s will pass away this decade.  This will put downward pressure on the +65 population and thus make it a more youthful group.  Near the close of this decade, the 20’s and 30’s babies will still be around, but constitute a much smaller portion of the +65 demographic.  Therefore, they will not be able to sustain their downward pressure on the +65 range of the population.

Demographic trends can have profound implications for investors.  Tomorrow I will discuss a few specific and general ideas I have for investors in coping with this mini-bust in the +65 population demographic in the U.S.

Budget Today, Achieve Your Goals Tomorrow

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You must have savings if you are to invest and therefore, you must have some constraint over your spending.  For most people, it is much easier to spend than to save.  Since the previous statement is true, many people preach about the need for personal budgeting.  Budgeting is a powerful tool not only for managing one’s spending habits, but also in planning and projecting one’s future.

Many sites and software programs are available to provide assistance when budgeting.  In all honestly, if you have a spreadsheet program like Excel, then you have enough to start and build a solid foundation.  In developing a budget I like to think of expenses that are fixed and those that are variable.

The more difficult an expense is to change month to month the more fixed it is.  For example, the mortgage or rent you pay is a fixed expense.  It could change, but would involve much more effort than buying a different mix of food products each month.  The differentiation between fixed and variable expenses is more of an art than a science.  When starting to budget, look at those items that you feel you have the power to change from month to month as a variable expenses, while other expenses fall into the fixed category.

Click here for a model budget you can use to help control and evaluate your monthly income, expenses and savings.

After you’ve laid out the general expenses and classified them into their appropriate variable and fixed categories, it’s time to think about a few simple measurements.  What does your rate of savings look like compared to your variable and fixed expenses?  If you take your variable expenses and compare it to your monthly income, what does this look like?  How can you change your variable expenses to paint a more acceptable picture?

Example: I make $1000 per month and I have $400 of variable expenses per month.  Thus, (400/1000 = 40%) 40% of my monthly income would be allocated towards items that can be adjusted.  This tells me that I have some power in moving away from the 40% level towards a lower range.

I would highly encourage anyone who does not have an idea of their monthly expenses to use the spreadsheet linked above to gain a better understanding of where their income is going and how they might be able to adjust their habits to achieve the rate of savings they desire.

Remember decisions made in the past do shape the direction of the future, but the future is not set in stone.  Setting goals and priorities can help provide the structure necessary to reach your financial and investment goals.

LED’s – The Future of Light

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A lot of talk has been made about LED lighting in the last 3 years.  The potential of LED lights is clear to see in terms of energy consumption and heat displacement, but the price points of new LED lights can make even the biggest environmentalist cringe.  With advancements in LED technology and increases in production, LED’s are soon to be a mainstream lighting source.

At current prices an LED equivalent 60 watt bulb costs around $40.  That’s a lot for a light bulb, especially when consumers are used to paying around a $1 for a bulb.  The U.S. Department of Energy foresees the cost of LED’s bulbs to drop to about 1/10th of the current price within 10 years (That’s $4 for you keeping score at home.).

The real question consumers will have is whether or not the new light source will be worth the price premium.  New technology without a real practical application only sells to geeks with money.  The LED light does bring value with its premium price.  LED’s last 20-5o times longer than a regular incandescent bulb, use a fraction of the power needed to run a compact florescent light,  contain no mercury and give off a very minimal amount of heat.

If you assume most businesses, governments, and households will adopt these new bulbs, then the implications are very large for companies competing in the market.  Philips, GE and Siemens are currently the major players in the market with around 60% market share.  Yet, this technology is in its infant stage in terms of artificial lighting application and growth.  Fates may change in the coming years as more Asian manufactures like LG, Toshiba, Samsung and Sharp make their way into the market.

Cree, a U.S. based LED developer/manufacturer, is the only pure play on LED lights I know of that is public.  The company in the last quarter of 2010 and first two quarters of 2011 has seen its operating income decline substantially, which is not a good sign for investors.  Operating expenses continue to slowly trend upwards.  The company is heavily off it’s 52 week high and has recently made an acquisition of an outdoor lighting company.  No telling how long before they reach back into the heightened level they previously reached in late 2010.

In closing, though the projected bulk in market growth of LED lights is likely to come in 4-10 years, you have to wonder how these companies and/or divisions will fare after the boom.  I am sure the technology will continue to improve, but to what degree?  After most businesses/consumers/governments have adopted these bulbs, it will be about 20 years before they need a replacement.  If that holds true, then we will certainly see a boom and bust period for LED manufactures.  In this case, I would expect the bust to be quite apparent…but maybe we’ll get too caught up in the moment?

Rare Earth Elements

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In the last year or two you may have heard the term “rare earth elements” thrown around.  Rare earth elements include a number of elements most have never heard of like, Neodymium, Praseodymium and Europium, to name a few.  These elements are vital in the construction of products, such as electric motors, hard drives, cell phones, cameras, batteries, fluorescent lights…

Today around 97% of all Rare Earth Elements are controlled by China.  This puts other markets at a clear disadvantage.  No only do other markets lack the resources, but they must pay heavy premiums because China has decided to reduce the amount of rare earth element exports.  These restrictions are projected to increase hard drive costs 5-10% this year…no telling what it will do to other consumer goods that rely on such materials.

One interesting occurrence in the rare earth arena is a company based in Canada named Rare Elements Resources (REE).  REE owns a property called Bear Lodge in northern Wyoming.  The property has been tested and shown to be one of the highest grade deposits of rare earth elements in the U.S.  The site has great potential.

The key word in REE’s picture is potential.  They have not yet started mining, but their company has a market cap of over $350 million.  They are sitting on many precious items, but have yet to produce the product.  As we know, the market is forward looking and the potential of REE’s property is being priced into their stock’s price.

As an investor, I would play this stock based on monitoring positive news or negative news coming from oversees (China).  I would be less inclined to hold this as a long-term play.  The restrictions China is imposing could loosen and thus would cause the Bear Lodge property to look less as a vital resource to investors.  On the other hand, a long-term play could enable investors to profit from a potential buy-out.  I doubt many, if any, investors have an idea of the likelihood of a buy-out, but a larger company may seethe company’s assets as a worthwhile investment.  In such a case investors would be rewarded with a premium.

Rare earth elements is an interesting field, especially when considering China’s strangle hold on the market and the increasing need of goods to contain such elements.  I would look at event driven catalysts to guide your investing decisions.