I Make Some Changes May 10, 2013Posted by shaferfinancial in Uncategorized.
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As a disciple of Warren Buffett, I make few changes to my investments. I find great companies and stick with them forever if I can. So, in fact, I haven’t made any changes to my fundamental positions since 2010. In 2009 and 2010 I was able to initiate a position in MMP and add to my HCN and Berkshire at good prices. Since then I have stood solid with my portfolio.
However, as readers note, I have had my HCN on watch because the dividends have not increased at a rate I am happy with. I have owned shares since the early 2000s and it has been a big winner for me since then. I still think it is a solid dividend choice, but the price has recently gotten extremely rich.
I always have a list of companies I follow. One that I have been looking to get into is Cisco Systems [CSCO]. The price of Cisco has fallen to less than fair value in my estimation, so I decided to liquidate 25% of my HCN and use those funds to initiate a position in CSCO. This is part of my dividend producing portfolio, so in reality it is just an exchange of part of my capital from HCN to CSCO.
Initially, the exchange will cost me some in dividends as when I sold the HCN, the dividend yield was 4.2%, while when I bought CSCO, the yield was 3.4%. However, I expect Cisco to increase dividends at twice the rate as HCN going forward.
Cisco System Inc. (CSCO) is the worldwide leader in the development of Internet Protocol-based networking products. The corporation has been generating solid profits over the last few years. It has also almost $50B in cash on the books. In 2011 it started paying dividends, which have almost tripled since then. It’s payout ratio is 25%. The P/E was less than 12 when I purchased. The earnings increased 27% last year and is expected to increase 21% this year.
All this indicates that it is a good value, with a strong ability to increase dividends in the double figures for the foreseeable future.
1. Solid Management
2. Good Products
3. History of profitability
4. Moat???? Not really.
5. Margin of Safety. Undervalued by perhaps 20% to 30%
6. Dividends? Short history of paying dividends. Small payout ratio. Large amount of cash on hand.
7. Free Cash Flow Margin: 22% [Indicates a cash cow]
So, in short it produces loads of cash, has a cash horde of $49B+, and produces good products and services with solid management.
A note on HCN. Had I given up on HCN and took all my profits, you could have surmised I felt a fundamental issue with it. But, because I only sold 25% of it, you can see I am still positive the stock, just paying close attention to the dividend increases.
The second move I made was to initiate ownership in a growth stock. This is a much riskier move and is somewhat out of character for me. But, I have had my eye out for technological changes that could have far reaching consequences and therefore create opportunity for outsized rewards. One such technology is 3D printing. 3D printing has been around for about 8 years now. However, it is just now starting to become readily adapted by a wide variety of user groups from manufacturing, architecture, medicine, design, etc. If you haven’t seen it, it is pretty cool.
You use CAD software to design your product, and then the 3D printer creates the model or product in an additive process of laying down successive layers of material. This differs from the traditional subtractive process of starting with a block of material and cutting it down. This process reduces waste and lowers cost because of its efficient use of material. Recently, the printers have come down in price to make it possible to have one on your desktop. Our local High School has one.
But the question I have been asking is to how to properly access this technology through an investment. The hardware companies are already richly valued with PEs in the 80s and 90s. I can’t get myself to pay that much for a company that is likely to see their profit margin drop tremendously, maybe even to 0 like regular printers over the next decade. Then it occurred to me that this is a classic “Gillette” situation. Gillette makes no money selling razors, but has a huge profit margin on the razor blades. Once you buy their razor you need to get replacement razors forever.
So my search brought me to the software companies that create the software used in all these applications. Hence Dessault Systemes [DASTY], one of two market leaders in 3D software. They are a large French company [$14B market cap], that is traded on the pink sheets in this country. There P/E is still a little rich at 34, but no where near as high as the hardware companies. It pays a small dividend [.8% yield]. It has been profitable for a long time now and has established itself in multiple software markets. Having said all that, I still think it is a risky move. I look to see it continue its double digit returns on earnings over the next 5-10 years, as Europe and Asia recover from the recession. If it does this, then I will be happy. It also appears to be increasing dividends substantially and I hope management continues on this vein. Of late, DASKY has been picking up small boutique software firms, consolidating their strengths. They create software for the so-called smart grid that is building around the world. And designer of wind turbines use their software to design the blades. They develop software for nuclear power plants that are big in China as well as hydro power construction software. Aerospace and automobile manufacturing has used this software for years, but there are many new markets emerging which are using the software; China, India, etc.
So even though my search was for 3D printing technology, I ended up with much more diverse company. A much more mature company. Yet, a company that is providing software for cutting edge technology in diverse fields all over the globe. I don’t expect it to move much over the next few years, but have high expectations for the positive movement in the decade.
Magellan Midstream Partners 1st Quarter May 9, 2013Posted by shaferfinancial in Finance, Uncategorized.
Tags: Magellan Midstream Partners 1st Quarter, MMP
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MMP continues to perform well in the 1st quarter of 2013. Generally, 1st quarters aren’t great quarters for the pipelines companies as demand is at its lowest for both gasoline and diesel. However, net income went to $113.5M from $93.5M for the 1st quarter of 2012 a 21% increase. Much of this increase is due to hedging activity. Bottom line is that operating margin was up $9.6M from the year before. There was higher shipping volumes and higher tariff income from the year before. The transportations and terminal revenues were up $7.7M from the year before. Refined product shipment went up 13%. Note, the LongHorn run has just come on line after the 1st quarter so it has no effect on these numbers. Butane blending revenues were down year on year. Expenses were up this quarter and reflects normal maintenance due, but is not a permanent increase, but a periodic expense.
They have increased Distributable Cash Flow guidance by $10M to $580M a record for the company. There are two growth components that should be realized. The Long Horn line reversal has come on board and should be at capacity by the 3rd quarter. And new 800 miles of pipeline has been acquired pending regulatory approval. MMP plans to spend $900M in projects for 2013. There is also consideration of increasing the Long Horn capacity from 225,000 barrels a day to 275,000 barrels.
They have increased their debt load in order to lock in favorable terms for the planned projects.
They state they are still projecting a 10% increase in dividends for both 2013 and 2014. Reading between the lines, they are being conservative with these numbers.
The value of the stock continues to increase. Year to date it is up 22%. It is up 50% in the last year. Dividends are up to $.5075 per share for the 1st quarter, up 25% over the last year.
The valuation is a little rich for me now, so I won’t be adding to my position. However, my yield to cost is now approaching 16%, so I am very satisfied with this investment.
HCN 1st Quarter Results May 8, 2013Posted by shaferfinancial in Finance.
Tags: HCN first quarter results, Health Care REIT [HCN]
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Heath Care REIT had a solid, yet unspectacular quarter.
FFO increased 5% from the year before
FAD increased 4% from the year before
There was $2.6B in investments made in the quarter
Same store NOI increased 3.5%
5.6% growth in senior housing
Private pay to 82% from 73% the year before
Dividend increase of 3.4% from 1st quarter 2012.
It is this last number, dividend increase that is concerning to me.
I look to see my dividends increasing at much higher rates than 3%, more like double that amount.
The company is still offering guidance of increase of FAD 5-8% for the year. I am looking for the later number.
The value of shares has gone up 12.6% since the first of the year. Frankly, I think it has gotten a little expensive, so I am considering selling a small portion. I will monitor it closely over the next few months for a selling opportunity. I might have missed this opportunity as it has pulled back 2% over the last couple days. I have another couple stocks on my watch list.
Berkshire Hathaway’s 1st Quarter May 7, 2013Posted by shaferfinancial in Finance.
Tags: Berkshire Hathaway, My portfolio BRK
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One should never take too much stock into a single quarters results, whether they are good or bad. I caution you on this up front.
Berkshire Hathaway had a blow out quarter. It is really hitting on all cylinders at this point. Only real issue is that Buffett still hasn’t found that big deal for all his cash.
Net earnings came in at $5.017B a 49% increase from the 1st quarter last year. Net cash flow from operations was $6.055B an increase of 30% from the last year. Berkshire now has almost $50B in cash waiting for that correct deal. What this means is what I have been saying about Berkshire for a couple of years now is that the company is a cash flowing machine. Net earnings per share was $2,977 a rise of 51%.
Shareholder equity went up to $198B an increase of 6% for the quarter. A $12B dollar investment in Heinz will close in 2013 as soon as regulatory approval is received.
The price of the stock has risen to $165,000 [$110 for Bs]. This is a 23% rise year to date and a 33% rise over the last year. I no longer consider it severely undervalued, but now just undervalued. Still is a buy in my book with room to run, especially if it continues its earnings power for the next couple quarters.
Financial Planning and You April 2, 2013Posted by shaferfinancial in Finance.
Tags: Personal Finance, retirement planning
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I’m going to make this very short.
If you follow the strategies that are suggested by the main stream financial planning industry you can expect to have the same results as their clients have had over the last 20 years because they haven’t changed much in their advice.
The results are out their for everyone to see:
Median Net Worth in 2010: $77,300
For the 55-64 age group median net worth was $179,400
Half of American families don’t have a retirement account, for the other half the median amount in it is $44,000. For those in the 55-64 age group the median amount in a retirement account is $100,000. For those in the 80-90% income group, a group that averages $114,000 of family income, the median amount is $88,000.
Now, the financial planning industry blames the American public for not being moral enough to follow their advice about retirement savings. The truth is that the advice given is not working for a variety of reasons from technical to psychological. So if something is not working why do you not change your strategies to something that does work?
Ask yourself if you are ready to explore something different that has proven to work?
Health Care REIT Annual Report- 2012 Edition March 13, 2013Posted by shaferfinancial in Finance.
Tags: Health Care REIT [HCN]
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I have been buying HCN REIT since the late 1990s. Over that time the company has made some distinctive changes which culminated in $4.4B in new investment properties last year. Over the last several years they have been disposing of their stand alone skilled nursing facilities and purchasing more private pay oriented assets. They concentrate on assets in large metro areas, located in higher end neighborhoods and encompassing health campuses. So far, the changeover is about complete. During this time period the growth of dividends has been sub-par in my opinion averaging 2.8% growth over the last 10 years. However, with timely buys I have been able to obtain a 16% yield on cost. Let’s look at what 2012 bought us?
FFO [Funds from Operations] increased to $3.52 from $3.41 in 2011. A rise of 3%.
FFD [Funds Available for Distribution] increased to $3.11 from $3.00. A rise of 4%. The payout ratio remains at 95% [90% required].
Net Income to Common Shareholders rose to $.98 from $.90 a 9% increase.
Quarterly dividend distribution rose to $.765 from $.74, a rise of 3.4%.
Increased same store NOI by 4%. Senior housing operating portfolio rose 8.6%.
Private pay mix up to 79% from 71% in 2011.
Debt remains around 40%.
I consider the strategy employed over the last few years very important to the future of the company. Moving from low-return skilled nursing facilities highly dependent upon government reimbursement to medical office buildings, clinics, campus style senior housing, etc. with private pay is likely to raise income faster than the government reimbursement and is a winning strategy over the long run. Last year they started a buy-out of Sunrise Senior Properties which was completed in January. These are high level properties with rents 100% higher than average. They are located in major cities like London, Montreal, Boston, and Los Angeles. The expected unlevered yield is 6.5%.
Because of the implementation of the strategy HCN is suggesting that FAD should rise 5-8% in 2012.
That is what I am looking for in terms of rising dividends going forward. I have been paying close attention to the ability of HCN to raise dividends over 5% annually going forward and would like to see it get closer to 7%. Despite my success with this company, I would consider moving my money into more productive areas if the dividend increases remain less than 4% going forward. I know part of the issue with the rising dividends was the 2008-2010 real estate issues and recession. Now that most of that is behind us and the new strategy is implemented, I expect higher rates of rising dividends.
The stock price rose 14% over 2012. It has risen another 5.6% since the first of the year.
With my 16% yield on cost and the 14% rise in value the total return for me last year was 30%. For initial investors starting in 2012, it was 20% with dividends included.
Berkshire Annual Report 2012 March 4, 2013Posted by shaferfinancial in Uncategorized.
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My largest holding remains Berkshire Hathaway. It sets the base for my investing portfolio, so I watch it very closely. Of course, I am always amused at how the media react to it.
As reported by the media, net income for the year was up 45% from the previous year. However, much of that was on increases in the derivative values. Income from operations was up 17% year to year. That is a healthy number. As I have mentioned over the last 4 years, Berkshire is a cash flowing machine. On top of that 17% increase is an increase in the float to $73 Billion. Float is money that can be used to invest today that will be paid out in the future for the insurance policies.
Buffet breaks out the business into 4 parts:
For the 10th straight year there was an underwriting profit. This profit was $18.6 Billion pre-tax from $2.48B the year before. The aforementioned float was up to $73B. So in short, the insurance business at Berkshire is uniquely profitable and generating that free capital for expansion/investment of $73B. Really couldn’t ask for more.
This is mainly BNSF and MidAmerican Energy. MidAmerican’s earnings rose to $1.32B from $1.2B, while the railroad [BNSF] earnings rose to $3.3B from $2.9B year on year. Solid increases for both.
Retail, Manufacturing, Service
Income rose in this category from $3.0B to $3.7B. They represent $22.6B of assets which earned 16.3% after tax. I will take that too.
Finance and Financial Products
This includes Clayton homes which services mortgages and several other companies. Net income rose to $848M from $774M.
This area gets the lion share of attention. But it has become a smaller part of the Berkshire picture over the last 20 years. The year end value was $86B up from $77B the year before. The much maligned derivatives have become worth more and more as the indexes they are based on have gone up. If they had to pay out at the end of last year [they actually won't be settling up until 2018-2024]. it would have cost Berkshire $3.9B, less than the $4.2B they received for them originally.
Buffett increased ownership in what he calls the big 4. Berkshire now owns 8.7% of Wells Fargo, 6% of IBM, 8.9% of Coca Cola [Through stock repurchases] and 13.7% of American Express. Buffett points out that Berkshire received $1.1B in dividends from these 4 companies, yet the share of income was $3.9B.
Total cash at the end of the year was $47B. $12B of that was recently invested in a partnership that will own Heinz Co.
Berkshire’s stock price rose 23% in 2012. It closed today at $152,995 another 9% increase since the first of the year. I will be keeping this stock and perhaps adding on to my ownership in the near future.
Magellan Midstream Partnership reports annual results February 13, 2013Posted by shaferfinancial in Finance.
Tags: Magellan Midstream Partners, MMP in 2012, my investments
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MMP had a very strong year. Operating profits went up to $552m from $523 in 2011. Annual net income went from $413M to $435M for 2012. Diluted net income per partner was $1.92 and increase of $.09. Total volume of product shipped went from 418m barrels to 482m barrels. There were increases in margins along the entire business model that led to the record earnings. The distributable cash flow per partner went up to $2.51 from $2.39 in 2011.
Magellan continues to expand having spent $365m on projects in 2012. That will double in 2013. The Longhorn pipeline is expected to come on line in mid-March building to capacity by the third quarter of 2013. The Double Eagle joint venture is also expected to be on-line in March.
Management expects a 10% increase in distributable cash flow in 2013 followed by another 10% in 2014.
The dividend was increased to $.50 per unit for the February distribution. Annualized, this is 23% higher than the beginning of 2012.
For the calendar year MMP went from $34.44 a unit to $42.29 a 23% increase.
It currently sits at a little over $50 per unit.
My concerns with this investment have increased. First, it has certainly done what I purchased it for, which is to increase it’s dividend. Current yield to cost is 16.5%. The increased valuation has also been remarkable. That is what has got me a little worried. It is performing on all cylinders now, but what of the future. It has a history of transporting refined products coming from outside the US. However, the trend is for less foreign oil and more domestic. So can it change its business model to accommodate this? Will we overbuild storage capacity as has happened in the past? What of the decrease in gasoline usage?
If management is able to increase distributable cash 10% for the next two years, that would allay some of my worries, but it is still bearing being watched closely.
End of Year Review January 2, 2013Posted by shaferfinancial in Finance.
Tags: Berkshire, HCN, How I did in 2012, MMP
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Well it has been a good year for my investments.
Berkshire Hathaway went up around 20% for 2012. It pays no dividends so that was all capital appreciation.
HCN REIT appreciated 14% and paid out and additional 6% in dividends for an annual return of 20%.
Magellan Midstream Partners [MMP] went up 31% for the year and paid dividends of 4.3% for a total return of 35%.
My EIUL had a 13% return.
My real estate at least didn’t go down and might had risen a few percentage points.
So overall pretty good.
Remember, I am following a dividend strategy with HCN and MMP, so I am more concerned with increasing dividend payout for those two, which they did. Still not convinced the dividend will rise at a high enough rate for me on HCN so I am keeping a close eye on it.
BRK still undervalued according to my analysis, so has upside potential.
More detailed analysis of these three stocks once end of year results are reported.
Have a great 2013.
Warren Buffett sees value in Berkshire Hathaway December 12, 2012Posted by shaferfinancial in Finance.
Tags: Berkshire Hathaway, Warren Buffett latest stock buy
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Warren Buffett and the board of directors of Berkshire Hathaway have raised the mark for repurchasing Berkshire Hathaway shares to 120% of book value from 110%. They purchased a significant amount of “A” level stock [9200 shares] from the estate of a long term holder. For those keeping track at home that is over $1.2B of stock from one estate!
Obviously, he is bullish on this stock at this level. I agree with him. Berkshire continues to produce cash at an alarming rate. Book value continues to increase. However, he has been searching for another blockbuster deal and has not been able to close one in a while. Would expect that to happen at some point in 2013.
Looking forward to analyzing year end data and reading his always fun annual report. As soon as I do, I will report my thoughts for you. I continue to hold substantial amounts of Berkshire in my portfolio.