I go full into Energy and high dividend stocks! November 20, 2013Posted by shaferfinancial in Finance.
Tags: AWLCF, BRKB, diversification, HCN, my portfolio, SDRL, SFL
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I have now added another stock to my portfolio with funds from selling some of my HCN.
Before I go into this stock, I want to talk about my strategy.
Frederick Holverson is a Norwegion billionaire that has made his money off of oil drilling.
The companies he controls are all stockholder friendly, believing in returning profits, via dividends to its ownership. His companies are well managed and probably the best of the drillers out there. I believe that the worlds thirst for oil is not going to go down anytime soon. So this means that the non-traditional oil discoveries will have to be drilled and used. This nontraditional drilling is sand and deep sea drilling. As this is dangerous work, there is always the risk of spills and explosions that could severely hamper profits. So there is risk I am assuming. However, with the high dividend yield I am being paid well for this risk. Obviously, the larger the companies the least the risk for spills/explosions. So I have entered into this market with 3 different size companies, that engage in basically the same idea, drilling and transportation of oil.
Basically I have dramatically increased my dividends over the last few months.
The new company I took a small position in is AWLCF. It has two drilling rigs in the North Sea.
These rigs are hired out to major companies on contract for 2 and 4 years at current rates. Both rigs were recently refurbished. The company believes these rigs will last for 18 more years. It currently pays a 20%+ dividend. Note this is a risky play, but it is only a small position for me. I just received my first dividend from them of $1.10 per share!
Just so it is clear with all the changes I made here are my current positions:
Berkshire Hathaway 61% of portfolio
SFL 14% of portfolio
HCN 11% of portfolio
SDRL 10% of portfolio
AWLCF 4% of portfolio
My yield on cost of the 4 dividend producing stocks I own are 16%.
Current combined yield of my dividend producing positions is 9%.
And finally, I have a concentrated portfolio dominated by BRK. Owning 5 stocks enables you to diversify away systematic risk of .43. For comparisons sake owning 20 stocks allows you to diversify away .56 and the most you can diversify away at 400 stocks owned is .61. You should not copy my strategies unless you understand the risks you are taking. The tradeoff in diversification versus quality is one that is not given much thought by investors but is discussed by Warren Buffett. Is the extra systemic risk reduction from owning more stocks worth moving down to your 10th, 12th, 20h, or even 400th best picks? For me, it is not. Now I will probably end up with around 10 dividend producing stocks at retirement. At that point I have reduced systemic risk by .5 which is 82% of all that is possible.
Let me know what you think????
Musings on Berkshire Hathaway November 14, 2013Posted by shaferfinancial in Finance.
Tags: Berkshire Hathaway, my portfolio
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At the quarter end Berkshire Hathaway was up 11% in book value year on year.
It continues to produce cash flow at an astounding rate.
Operating companies were generally up 5-10% in profits, year on year.
Insurance underwriting was down from the quarter before. [Buffett warned his stockholders that this would happen as hedge funds move into reinsurance and pricing deteriorates. Berkshire does not write business if the price is not adequate. This is a cyclical issue.]
Berkshire is poised for another major purchase with $40B in cash.
So basically, it is status quo for the company.
The stock price went down some but has stabilized at $172,000-$175,000 [B-$112-116]
I think with a P/E of less than 15 and a price/book of 1.36 I think it has some room to run.
I have found with my 15 years of ownership of this stock that when investors react to small issues is the time it is most undervalued. Investors reacted to the decreased underwriting profit. They acted like it was some kind of surprise when Buffett himself predicted it.
I think a reasonable assumption going forward is for slightly above 10% returns on book value for the next decade [with some dramatic ups and downs because of the mark to market issue].
When we have another recession Berkshire will again be in position to pick off some seriously undervalued assets and loan money to solid companies dealing with transient issues in exchange for outsized returns.
I have sold a small portion of my Berkshire Holdings at $117 to invest in other opportunities, but it still remains a core holding for me. There will be no changed for me in that.
Food for Thought November 13, 2013Posted by shaferfinancial in Finance.
Tags: Food for Thought on Finances
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Just thought I would add some thoughts for people.
Many critics of Life Insurance as a savings vehicle like to think that mutual fund companies are not making as much profits off their products as insurance companies.
But, if this is so, why have almost every life insurance company moved strongly into offering mutual funds? I mean why would you risk cannibalizing your high profit margin life insurance/annuities for low profit margin mutual funds? Answer: You wouldn’t.
Logic: companies have a similar profit margin between mutual funds [even so called low cost funds] and life insurance/annuities.
Logic: all financial products have costs that allow for companies to make a handsome profit. Assuming one successful product is better than another because the company is willing to accept lower margins is foolish.
Most people ignore the “actual” returns folks get from mutual funds [even those low cost ones].
Why? Because everyone thinks they will be above average.
Logic: People overestimate their ability to withstand market downturns.
Logic: Avoid products that put market risk [large downturns] onto the consumer.
Anytime both the government and Wall Street are telling you what is best for you to do you should be very skeptical.
Logic: Assuming corporate interests and the government together are capable of giving good advice is crazy.
Logic: Run from any plan that has both the government giving you “breaks” and corporate interests [Wall Street] administrating said plan.
Have a great day!
More Changes to MY Portfolio October 2, 2013Posted by shaferfinancial in Uncategorized.
Tags: HCN, health care REIT, Magellan Midstream Partners, MMP, my portfolio, SFL, Ship Finance International
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This is apparently the year for changes for me. Magellan Midstream Partners [MMP] has been a stock I have owned since 2009. I bought it when the values of all stocks, including MMP, were undervalued. The yield when I purchased it was around 8.8-9%. Since I purchased the stock price has more than tripled. The price has gotten so high as to push the yield to 3.7%. Generally, I purchase these types of stocks for the dividend, and the dividend has gone up quite a bit [$.355 per share to $.5325]. I believe the dividend will continue to rise, although not as fast as the last 4 years. I think this is still a good stock to own. But, there is no doubt in my mind that it is overpriced.
So I sold my entire position at $55.35. I had another stock on my buy list that had a dividend yield of over 10%. So I took the funds from the MMP sale and bought Ship Finance International [SFL] at between $15.30 and $15.35. In essence I tripled my dividend income from this position. I also had some funds from selling some of my Health Care REIT [HCN] position, which I put into SFL.
On first blush one would thing that this is a very risky stock to own because of the 10.4% dividend yield. But, I believe that to be inaccurate. SFL is another company associated with Frederick Halvorson, the Norwegian Billionaire. It makes it money by purchasing large ships and doing long term leases with companies that use them. Originally, it was dominated by leases to another Halvorson company, but has since built and leased many ships to other companies. So, the risk of any particular company not being able to make its lease payments is significantly lower. Many of the ships are leased out to the largest companies in the world. It has a mix of ship types ranging from suezmax to car containers. It currently has 8 off shore oil vessels of which 3 are leased to SeaDrill, another of my holdings.
Of the leases, 68% have over 10 years left and another 27% from 5-10 years. That means stable income to support the dividend. The one company that is in some financial peril that leases, Frontline, if default occurs the vessels have scrap value that would cover the remaining financing on those ships. I believe that is what has scared investors and driven the price down.
The company has 4 container ships currently being built to be delivered in 2014 and 2015. It also acquired another company, West Linus, for $600M. So there is expected growth.
They do use leverage in their business model. But most of their financing is long term in nature and available to them. They currently have a positive net cash flow of over $100M after interest and loan amortization from 2012 projects.
The company does aggressively pay a dividend due to Halvorson family majority ownership which dictates aggressive dividends. I like that. But, the downside is that you could have some quarters that they have to decrease dividend due to performance.
I feel confident that the business model can maintain the dividend over the next 10-20 years. Because of the return of profits to stockholders with the dividends, I do not expect the stock price to appreciate. But, I will take the dividends and reinvest into the company creating increasing value in that way.
Bottom line, there is more risk here than in either MMP or HCN, but not significantly more. I am getting paid handsomely to assume the risk. I am very comfortable with these changes.
Step Up and Lock In: A strategy that works September 23, 2013Posted by shaferfinancial in Uncategorized.
Tags: Equity Indexed Universal Life
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The insurance industry has found a winning strategy for folks looking for reduction of market risk and good returns.
This strategy can be found on both the Equity Indexed Universal Life Product and the Fixed Indexed Annuity Product.
They credit interest in both these products the same way. Each year you are credited with an interest amount that is connected to a stock index or group of indexes. But, you never receive a negative interest credit. You do have a “cap” on how high the interest credit can be. So each year you get an interest credit that is somewhere between 0 and the cap rate. Now here is the important part; you are then locked in with that value. You never lose it, no matter what happens in the market.
This strategy produces more value on a year to year basis for those who intend to use the funds at some time in the future by eliminating the “sequence of return risk” that plagues market driven products. It also eliminates the scary downdrafts in value that lead to fear selling and major mistakes. These products are superior “retirement income” products to any alternative current active in the market [with the exception of real estate investing, but real estate investing means taking on more risk].
You need to ask yourself why you haven’t been “sold” these products by your current financial advisors. If you are still investing in market driven products like mutual funds for your retirement income, you need to really think about why you are taking on that risk. You need to ask your current advisors about “sequence of return risk” and the Dalbar Studies. It’s as simple as that.
Health Care REIT [HCN] September 18, 2013Posted by shaferfinancial in Uncategorized.
Tags: HCN, health care REIT, investing, my portfolio
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I have owned this stock for well over 12 years. And I have been gradually concerned with the dividend. Not that there is concern of it’s ability to make the dividend payment, only that it has not increased its dividend at a high enough rate. Given that background here are the last quarters particulars.
2Q13 normalized FFO of $0.93 per share, a 4% increase versus 2Q12
2Q13 normalized FAD of $0.82 per share, a 4% increase versus 2Q12
2Q13 same-store cash NOI by 3.8%, including 8.4% growth in the seniors housing operating portfolio
Increased private pay mix to 82% in 2Q13 from 74% in 2Q12
Issued 23 million shares of common stock, generating $1.7 billion of proceeds in May
Received $366 million in proceeds on dispositions in the first half of 2013, generating $52 million in gains
Completed gross new investments of $1.5 billion in 2Q13 and $959 million in 3Q13 to-date
Expanded international portfolio with $1.3 billion investment in Canada with Revera in May and $213 million
investment in the U.K. with Avery Healthcare in July
Completed final tranche of $4.3 billion investment with Sunrise Senior Living in July
As you can see, they are steadily increasing their income from operations and funds available for distribution at a 4% rate. It increased the dividend to $.765 an increase of 3.8% over last year.
In essence during this time of low interest rates, and high acquisitions they are able to increase their dividend at a rate lower than 4%.
For me, this is not good enough. I would want to see a 6-8% increase going forward. Simply put the company is positioning itself well for the future, de-leveraging over the last 5 years, and making high quality acquisitions; but not increasing its dividend at a rate it should. It is a conundrum for me and my portfolio.
The other thing happening it is highly valued. So I decided to sell 25% of my holdings. I will probably sell another 25% as we go forward unless the value dips significantly.
The question for me is not how it has done in the past [my yield on cost is over 15%], but where to put my money for the future.
Next post will describe what I did with the proceeds. Let’s just say I more than doubled my dividends!
Minnesota Life Equity Index Universal Life Policy Gets Better September 12, 2013Posted by shaferfinancial in Uncategorized.
Tags: EIUL, Equity Indexed Universal Life, Finance, Minnesota Life, retirement income
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My #1 rated EIUL is currently The Eclipse by Minnesota Life. This month it improved the future performance by adding in a interest bonus. As usual they accomplished this in a way that allows for better performance and safety. Since inception 11 years ago this has been the top performer in the industry. I think this change keeps it there. Also of interest is that the change applies to anyone that currently owns the policy.
The way the bonus works is that a bonus interest is added to the account value every year after year 10. The bonus is calculated by adding up the previous 10 years worth interest credits and multiplying by 1%. Once the bonus is received it is then counted in the addition for all future years so it is a compounded interest credit.
The company has calculated that this will raise the accumulated cash and potential distributions by between 13% and 18%. I ran my first illustration using the bonus and it really adds value. Obviously the longer you have to get the bonus the more value.
I also recently had a very good underwriting decision for a client, the best I have seen for this particular situation.
When I look at which EIUL to suggest to clients I look at the entire picture:
- Retroactively added in a benefit to existing policy holders;
- Added in a bonus that provides additional performance along with safety; and
- Great underwriting decisions for clients.
Three more reasons to keep Minnesota Life #1!
Changes for my portfolio. Lesson learned. August 28, 2013Posted by shaferfinancial in Uncategorized.
Tags: changes in my portfolio, DASTY, investing, my portfolio, SDRL
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All summer long it bothered me. While I was on the Oregon Trail, I kept thinking that I had broken my investing rules for stocks. Last May I purchased stock in a company called Dassault Systems [DASTY]. It wasn’t a huge buy for me, but was significant enough to bother me. You see I broke my rules. For the last few years I practice a value investor strategy that buys for the dividend stream. This stock had a P/E ratio of 38 and a measly .88% dividend yield when I purchased it.
I loved the story though. There is a new technology coming on called 3-D printing that is revolutionizing manufacturing. I wanted a way to get involved. And Dessault Systems is a leading software company that writes the software underpinning 3-D printing. So the story was good for me.
Out on the trail though it bothered me. So, when I got back I sold. Fortunately, in the 3 months it went up and I booked a 11% profit. Not bad for a mistake!
Lesson learned. Don’t forget your own rules! Don’t be afraid to shed mistakes.
The next stock on my list was bought. I always have a list of stocks I am looking at.
This company is called Sea Drill [SDRL]. Sea Drill is the brainchild of Norwegian billionaire Frederik Halvorson. By its name you can tell it is a deep sea oil drilling company. It currently operates a fleet of 64 various drilling operations. But the real exciting point is that they have in process $8B in new drilling units. So not only is its fleet the newest of all the drillers, it has a major expansion coming on board. It has an order backlog of over $19B. And currently is very profitable. The only negatives on the books is a high level of debt and the dividend coverage ratio is 135%. But, I think that is really an accounting issue more than anything else. I am accepting that dividend risk over the long term positives of this stock. [While I was writing this they announced a dividend increase from $.88 to $.91].
More detailed on this stock will come at the next quarter numbers, but for now:
My purchase price $43.35.
Dividend Yield at time of purchase 8.3%
P/E at time of purchase 18.
Cisco Reports August 27, 2013Posted by shaferfinancial in Uncategorized.
Tags: CISCO, Cisco Reports, my portfolio
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One of my newest acquisitions is Cisco Systems (CSCO). It it the smallest percentage of my portfolio. What attracted me to the stock was the free cash flow, the amount of cash on hand, the increasing revenue growth, and the potential for significant dividend increases over the next few years.
The latest quarter has produced earnings up 11% over the 4th quarter of last year. Total revenue growth was 6%, so the company was more efficient dealing with that growth. The company made $4B in cash and returned about half of that to shareholders by both dividends and stock buy backs.
The business continues to be a market leader in switches and saw a dramatic increase in cloud data revenue. They have purchased several companies which give them the technology to move into the cloud space. Emerging market business improved 8%, but there is considerable weakness in Asia. They are laying off 4000 people as they change their business structure with the fast moving market.
So, in short Cisco had a excellent quarter, continuing to create free cash flow, acquiring strategic companies, moving into future technology areas and making profit.
I bought this company in May at $20.83 and it now sits at $23.83 an increase of 14%.
The dividend was not raised this quarter. But with those results I think it will be raised soon. Stock buy backs continue which will increase the value of my shares and should increase the dividends further.
Berkshire Hathaway; 2nd Quarter 2013 August 22, 2013Posted by shaferfinancial in Uncategorized.
Tags: Berkshire Hathaway, Berkshire Hathaway 2nd Quarter, my portfolio
Berkshire remains by far my biggest holding. Here is a brief description of it’s 2nd quarter.
Ultimately, all companies are judged on profits or earnings:
Net Earnings 2nd Quarter= $4541 an increase of 46% over the year before.
Because of the derivatives owned and the accounting of it individual quarters can vary considerably.
Net Earnings Quarter 1 and 2 2013= $9,433 an increase of 48% over the year before.
Since Berkshire now owns outright many businesses and those wholly owned businesses are now a bigger profit center than the investment portfolio, earnings from operations becomes a more important metric to pay attention to.
Earnings from operations 2nd Quarter= $3,919 an increase of 5% over the year before
Earnings from operations Quarter 1 and 2= $7,701 an increase of 21% over the year before
All three major categories [insurance underwriting, insurance investment income, non-insurance businesses] have improved compared to 2012.
I have commented that Berkshire is a cash flow machine.
For the first 6 months of 2013 net cash flow from operating activities was $12.944B an increase of 36% from the year before.
Warren Buffett has been putting capital to work as the cash/cash equivalents has dropped to $35B from $46B.
Since Berkshire’s investment portfolio still obtains the majority of attention some comments are in order.
The investment portfolio still is highly concentrated:
Even though it owns 42 stocks for an approximate value of $89B, the top 5 stocks make up 72% of the value of its portfolio. These stocks are Well’s Fargo [WFC], Coca-Cola [KO], International Business Machines [IBM], American Express [AXP] and Proctor & Gamble [PG]. The only stock of the big five that any action occurred last quarter was purchasing of more Well’s Fargo.
Also must be noted that 2 of the big five are financial companies. Stocks many “experts” still warn against owning. 2 produce staples that are used by folks around the world and 1 is a tech company.
Given the size of the portfolio it is hard to imagine a more concentrated portfolio is possible.
There is in every quarter breathless discussion of what Warren buys and sells, but it is really much about nothing because most of the action in the portfolio is on the tail end [the bottom 20% of value].
To this end it initiated positions in Suncor Energy [SU]and Dish Network [DISH] and continued unwinding positions in Moody’s [MCO] and Kraft, Inc. [KRFT].
The stock price at the end of the 2nd quarter was $169,622 an increase of 27% from the end of 2012.
Currently the stock price is $172,385. At that price the P/E is 15.8.
Given the growth of earnings and cash flow Berkshire still remains undervalued in my opinion.
This is a long term hold for me that was acquired from approximately 1997 until 2009.