March 31, 2010
Yes, cash is king, but it certainly does no good under the mattress! One of the most cash rich sectors out their are the industrial. This is an over-weighted sector for us and one of our favorite names is Illinois Tool Works (ITW). In addition to it’s 2.6% dividend yield, this cash rich company ($2.53 free cash flow/sh)has been a master at cutting costs in the downturn and is on it’s way to positive revenue growth in 2010. Even though companies have been keeping lean inventories, at some point they will have to do restocking. GM has recently reported a sales increase of 11.5% in February with some new products selling out! ITW will benefit from all of this. Even if interest rates do move up and cramp economic growth, you have a cash rich company paying you a dividend while you wait. As long term investors, our minimum time horizon is 12-18 months. Our target price is 15x 2012e of $4 or $60. that’s a 20% upside plus the 2.6% dividend yield.
March 26, 2010
Not surprised by Ben Bernanke’s comments yesterday that the economy is fragile and will keep interest rates low for an indefinite period of time. I have to say that “indefinite period of time” phrase is a little spooky to me. Interesting that it took the market a few hours to figure out that low interest may not be a good thing in this case if the economy is still struggling. This confirms our thesis that the economy and hence markets will be choppy this year. Futures are up this morning, but my guess is it’s more of a reaction to some resolution of the debacle in Greece.
How do we play this market? We suggest a mix of stocks (dividend paying, of course!) in different sectors. We like KO (Coca-Cola) and INTC (Intel)to balance out the portfolio. You will find that on days when the market is strong, INTC will perform better than KO and the opposite is true on weak days. Dividends are important to us, but we also want to see future catalysts for growth in our investments.
KO – Stock has a 3% dividend yield (50% higher than the S&P!), over $1.00 in free cash flow/sh and only 17% debt to total cap!
1. Company focus on improving product mix like vitamin waters and healthy alternatives.
2. Attractive exposure to emerging markets.
3. Strong focus on cost controls.
INTC – 2.8% dividend yield, 5% debt to total cap, 13.4x 2010 est versus 14.8x for the S&P 500.
1. Strong demand for consumer items like computers, digital tv and cell phones continues even in a moderately growing economy.
2. Operating margins moving back to previous high levels.
3. As economy recovers, we can potentially see an increase in eps growth rate.
March 18, 2010
We at CAIM LLC hope you enjoy hearing our views about the markets and dividend paying stocks. Our first blog starts with our overall view of the economy, markets and investing. We look forward to hearing your comments!
We believe the worst of the recession is behind us and we have started to move into a recovery phase. Throughout the year we expect to get conflicting data causing us to question whether we double dip or move into the expansion phase. Just last week we had great retail sales numbers , up .3% (up >8% ex autos) and unemployment claims dropped 6,000. This week the trend continued for another drop in unemployment claims, marking 3 weeks in a row of improving numbers. So, what’s the flip side? Consumer sentiment and confidence numbers continue to lag.
Can the markets continue to go up without the participation of the individual investor? Our expectations are for a choppy market in 2010. This will be caused by conflicting economic data, risk in overseas markets (like Greece) and the outcomes of political reform in Washington. Our target for the S&P 500 is 1280 based on an eps estimate $77.50 (First Call) and a p/e of 16.5x. This earnings estimate is 20% higher than last year. We expect corporate profits to do well and believe the individual investor will start to slowly move into the market this year due to the lack of returns in bonds and cash.
At Caim LLC, we favor dividend paying stocks that also have growth potential. Our discipline is based on companies that have low levels of debt and positive free cash flow. For example, we like companies such as Intel (INTC) and Coca-Cola (KO). Both companies pay dividends 50% higher than that of the S&P 500 and almost 300% more than money market funds!
More on stocks in our next blog!