Enslaved by Consumption author, Dominico Johnston, sits down and discusses his newly released work. Engage your mind and your pocket book.
I encourage you to read the New York Times piece about a recently published book titled, Paying for the Party by Elizabeth Armstrong and Laura Hamilton.
The study is a great example of how the misuse of debt can be extremely detrimental. It’s even more concerning because this is yet another cycle in play that drags young adults down and hinders their ability to thrive.
For students that are not from fiscally well-off families, keeping up with the college Jones’ can be a disaster. College is expensive enough, but when you add the frat/sorority fees, spring break and other trips, bar tabs and other forms of entertainment that go along with running with the ‘in crowd’, the results can be financially disastrous.
Using debt without a clear and sound directive can be a poison to any person or business. When it happens to a young adult straight out of high school, it’s a sure fire way to create disillusionment and stunt ones full potential to thrive in the ‘real world’.
If your a fan of dramatic television series, such as the Sopranos, you probably watch or at least are aware of Mad Men. Mad Men is a hit television show that is carried by AMC Network (American Movie Classics). Next month will launch Mad Men’s 4th season. It is a popular show that is changing the face of AMC. If you’re an investor, or a viewer, this change is good.
The AMC Network (AMCX) was spun off from Cablevision last year. Until the last few months the stock has traded in the 30’s and now it has risen into the 40’s. The stock is poised to continue its run because of a specific even that is occurring. On March 25th AMC will premiere the first episode of Mad Men’s 4th season. The season will span 13 episodes and will most likely draw higher ratings than the previous seasons and further intrench the show into popular culture. All this means more profits for the network.
If you wish to learn more about how popular the show is click here.
Last year I released an investing e-book titled, Event Driven Investing. The example of Mad Men plays nicely into the strategy I outline in the book. This event is known, but not something that all investors are aware of already. As the premier approaches more chatter will be made and thus more eyes will be focused on AMC as an investment.
To learn more about event driven investing and how you can profit from the strategy, Event Driven Investing – Increasing Returns and Lowering Risk on the Road Less Traveled is available now for the very affordable price of $3.99.
Disclosure: No Position
What you will find inside…
- Perspective & an investment play on the worlds growing need for food.
- An updated model investment portfolio.
- Discussion about American Tower Corps recent appreciation in the wake of a weak market.
- A perspective and guide regarding what you need to start doing today if you are serious about becoming wealthy.
What you will find inside…
- Perspective & an investment play on the developing world’s infrastructure growth
- Updated model investment portfolio
- Explanation of shareholder yield in relation & why it matters when evaluating a company
- Understanding what actually constitutes a deal in the personal finance section
What you will find inside…
- Model investment portfolio
- A perspective on the market
- Investor guidance in wake of a regulation shift
- Timely personal finance advice
Do yourself a favor and give it a read today.
Revenues and earnings are nice numbers to quote, but often free cash flow (FCF) is a more valuable number for investors when evaluating a business. FCF can be a very powerful tool when evaluating a business. One area where FCF can hamper one’s investment analysis is when a business engages in a major capital project. The capital expenditures will be taken from the FCF value and could possibly drop FCF significantly quarter from a previous quarter.
To work around this weakness of FCF evaluation, it is sometimes more applicable to look at a company’s operating cash flow (OCF). OCF does not take into account capital expenditures and thus will provide a clearer picture of any changes in cash from actual operations.
When a company is growing capital expenditures can be very high. Such activity will drive down FCF. Under the assumption that the capital expenditure are being spent wisely, you would not want to hold such actions against a company. Therefore, focus on OCF when you know new capital intensive projects are going on.
A couple weeks ago I wrote about the significance of the dividend growth rate for long-term investors. Since that time I’ve given more thought to the subject. It should not be forgotten that companies that are able to consistently raise their dividend distribution are demonstrating, through tangible actions, that their company is a success.
One area that new and experienced investors worry about is earnings. First, investors worry about positive earnings because we all want to be part of a company that is alive and not moving towards death. Second, we want to believe that the earnings we’re being told about are legitimate. Yes, the number looks great, but is it an accounting scheme or is this some oddity that we’re not aware of? No one wants to be deceived.
A company that has a history of growing its dividend yield has demonstrated growth and earnings legitimacy. If you’re looking at historical data to evaluate a company, a growing dividend is a very strong sign that the company has a business model that has been proven successful.
In my previous example I looked at Pepsi, which had an extensive track record of dividend increases. When a company is able to year over year boost its dividend distribution, it’s showing real performance. Sure dividend payments can be maintained and even grown for a short period, if a company has a large cash holding, but after a few years reality will set in. In such cases you may have a company with an enormous dividend yield based on its current offering price. Why would this be the case? It would be the case because its payout ratio indicates that the dividend it’s paying is unsustainable! Unsustainable dividends do not increase the demand for a stock.
Look at the World Wrestling Entertainment Company (WWE). The company’s payout ratio has for over a year has been astronomically high (near 300%). The earnings of the company have not been sufficient to cover the quarterly dividend distribution paid out (.36 per share). To continue the dividend payout the company’s founders reduced the dividend amount paid to their class B shares and reallocated the dividend funds to the class A shares. This worked out great for a while, but when you’re not bringing in enough money, eventually the cosmetics ware off. The most recent quarterly dividend payment from the WWE declined from .36 per share to .12 per share.
What is stated above may sound confusing, yet it’s not. When earnings come out you will typically see in a press release a figure quoted saying something like, “…in the 3rd Quarter X company earned .xx cents per share.” Okay, great information. Now, go and look at what they have historically paid per quarter as a dividend. Is the amount paid per quarter as a dividend more or less than the earnings per share? If the earnings are less than the dividend a red flag should go up.
I know a lot a investors have a fear about the legitimacy of companies for sale on the public market. To a certain extent this fear is healthy. One way to help negate such fear is to fish in the waters of companies that have a track record of increasing their dividend payments. The longer the track record typically the better, but if I was pushed to say, I’d go with 5 years or more of annual increases to feel pretty comfortable with the legitimacy of a company’s dividend growth.
The simplest answer I could give someone if I was asked, “How do you know X company is legitimate?” would be to say “X company has increased its dividend distribution for Y years now.” Certainly there are other things that need to be evaluated when considering buying a company, but if you want something quick and dirty; look at the dividend track record and determine where it shows growth or not.
Note: If you’re looking at companies that do not pay dividends this obviously will not work.
Disclosure: No Position
Thinking of making an investment in a business? If so, it’s wise to consider what products and/or lines of service the business maintains. Do these lines fit well with its core competency (what it does/knows best)? When you find that the answer is “no”, then a yellow or red flag should pop-up in your mind.
A business that ventures into other products or services that do not sync-up with their main line of business can be a dangerous distraction. With limited resources in materials, money and time, a business must have a clear justification for delving into an area that they aren’t experts in.
In the video example, the dairy has a revenue stream from natural gas production. This is not something their business is built to do, but it turns out that their footprint (physical location) is on accessible natural gas reserves. In their case, a 3rd party has done the development and is responsible for the distribution of gas. Therefore, they’re collecting money, but not having not worry about operations. This is a case where an unreleased business venture is a clear positive for the future profitability of this business.
Many other businesses that venture into areas that are outside their core competnency are not as lucky as the dairy in our example above. Often you will see companies lose sight of their main purpose and goal. Through other business ideas they become distracted and use precious resources on an area they aren’t fit to succeed in and often weaken their position where they do have an advantage.
It pays to have good management/ownership that has a strong sense of purpose and mission. Without this necessary focus, it’s not very difficult for a good business to lose its way and compromise itself in an environment where competitors are lurking around every corner.
Return on Invested Capital
When you or a company you own are considering taking on a new project, you must consider what the expected return on invested capital (ROIC) will be. By taking such steps you will be able to see if the project makes financial sense and determine if, from you other alternatives, the project is the most financially attractive.
The general formula for calculating ROIC is (Net Income – Dividends) / Invested Capital. Invested capital can be a building, equipment, another company…
When thinking about net income it’s important to make sure you think of all the costs that need to be considered. As an investor, it’s also important to understand the nature of the net income. By that I mean, making sure you’re not looking at a net income figure that has some form of special one time event that either makes the number look really good or really bad.
When considering a project, you need to consider the opportunity cost. What am I giving up to do X? This applies to personal businesses as well as stock ownership. You always want to be in a position as an owner where the funds of the company are being used in the most effective way possible.
Things to consider: initial project cost, expected life of the project, maintenance costs of the life of the project, and how the expected income compares against the identifiable costs. Then looking at alternatives and comparing their profitability to the project being considered.