Always be bullish on America
“Any man who is a bear on the future of this
country will go broke.” ~ J. P. Morgan Sr.
The S&P500 index made new all time highs in November 2020. As J.P.
Morgan Senior said a long time ago; “always be bullish on America.”
It is time to pick another stock for the model crayon and monkey
portfolios in the monkey versus crayon project. This is the fourth time the "blindfolded monkey sticks a pin" in the quotation page of the newspaper. According to the rules set out
in the book “Beat the stock market casino” (available on Amazon) an US stock
can be picked again in this round. In the book there are also rules to follow
when to take profit in positions or in other words when it is allowed to sell.
This year it would have been tempting to add another rule for when one is
allowed to sell a stock. That would be when management uses the stock listing
as an ATM machine with free money for mainly the management itself.
Shareholders have been treated with contempt by the managements of a
lot of companies this year.
Ideally a listed share consists of a partnership between shareholders,
employees (this includes management) and clients. Stakeholder capitalism was
launched already in 1932 (see there is nothing new under the sun). Clients
should get products and services they are happy about. Employees should get
good quality of life jobs with a risk free salary every month on their bank
account. Shareholders should get a good absolute long term return (dividends
plus capital gains after tax and other costs) for the risk they are taking.
The most important job of management is to allocate capital long term
in the best way so that the stock can compound at the highest annual growth
rate.
Warren Buffett has said that each dollar of retained earnings should
deliver at least a dollar of market value for a good business.
If that is the case it is best for the long term investor to have no
dividend at all so the quality company can really let the retained earnings
compound and grow the company over say a 30 year period. For a bad business
that is not the case. Ideally a bad business spends the earnings in the form of
dividends or maybe share buybacks.
A dividend is part of the capital allocation process. If the company
can re-invest the profits profitably enough a zero dividend is optimal. When
companies cannot find ways to re-invest profits profitably enough, dividends
are one of the ways companies have to return money back to the owners of the
company the shareholders.
So the assumption is the dividend paying company is not a growing
quality company, but rather a cash cow. The dividend paying company would piss
the money away if the earnings would be retained or if management tried to make
acquisitions. When a company starts to pay dividends, shareholders like a
stable to rising dividend, but shareholders absolutely hate dividend cuts. In fact
there are plenty of shareholders that just sell all their shares in a dividend
paying company on any dividend cut announcement of a dividend paying company.
Managements should be conservative with raising dividends. Managements should
only pay a regular dividend they feel confident they would never ever have to
cut. Managements should pay regular dividends they can afford to pay out in good and in bad times. Special dividends and share buybacks offer enough ways of returning excess
money to shareholders outside of the regular dividends.
The first thing a lot of chicken managements did in 2020 was to cut the
dividends. Why? Let's face it a recession was long overdue in most developed markets and should not have been a surprise to anyone after 10 good years. The second thing a lot of those chicken managements did was raising
cash by selling new shares on the stock market. The dilution of earnings per
share by selling new shares is devastating for the long term annual growth rate
the stock can compound at. The first and the second point can be proof the
management of the stock is misusing their power and using the stock listing as
an ATM machine. When managements use the stock listing as an ATM machine they are basically just running the company to fill their own pockets. It might be good for shareholders to then just do the “Wall
Street Walk” and just sell out and exit the position. The position is likely
not in a strong quality compounding company anyway if the first or the second
action has been taken by management.
Some European regulators forbid bank and insurance companies to pay out
dividends this year. Regulators did that despite knowing the fact that a lot of
retired people rely on exactly those dividends to deliver the income to live on
in retirement. In America banks need to get permission for their dividend
payments from the FED every year. This brings much more stability and it
clearly a one of the reasons why American bank stocks are far superior compared
to European bank stocks.
For some stocks the only reason to invest in them from a shareholders
perspective has been their dividend yield.
Take away or cut the dividend and guess what happens?
The reason to hold those stocks has now disappeared and the stocks in
question goes down a lot. Just look at the 2020 charts of Lloyds Banking Group
PLC, Royal Dutch Shell PLC, WFD Unibail Rodamco NV or Lucas Bols Amsterdam BV
for an example of that.
Unibail’s CFO’s and CEO’s compensation increased over 45% since the
acquisition of Westfield while the share price tumbled over 85%. Oyat has a
good article on the shambles of Unibail’s management on the SeekingAlpha
website. Overly indebted companies together with incompetent management can
easily implode. Some things never change.
Another example of clueless management is the 2016 acquisition of BG
Group by Royal Dutch Shell for a cool $70 billion, only for Royal Dutch Shell
management deciding in 2020 it wanted to run a net-zero emissions energy
business by 2050 or sooner. You can’t make it up.....
According to the source “S&P Dow Jones Indices by the 14th
of July 2020 in the S&P 500 index 63 companies had reduced or suspended
their dividends. In Europe the dividends cutting/suspending situation was much
worse in 2020. The FT, Citywire and Telegraph all have articles out this year
on the internet that dividends in North America and Asia were more resilient
than in the UK and Europe. The FT also had an article on the 8 of September
2020 that businesses in Spain, Italy, the Netherlands and the UK were more
likely to cut dividends than executive pay this year. Even worse the management
bastards in Europe gave themselves nice bonuses over the 2019 performance, but
had no shame cancelling the final dividends based on the profits of 2019 in the
spring of 2020. Not exactly a partnership right?
Hence the title of this blog; “Always be bullish on America”!! In the
UK and Europe you are simply more likely to invest in companies with failing
business models, terrible regulators and companies where management runs the
companies only for themselves. Good luck with that. In the United States (US)
the dividend yield are lower than in Europe, but the dividend payments are more
consistent and more reliable. The lower dividend yield is also an indication the
US has higher quality better compounding listed companies than Europe for the
long term investor.
Luckily it is time to select an US investment in the newspaper for our
strategy.
In 2020 a new record was set for how much money has been taken to save
a human life year in terms of the cost of the medicine. The costs were much
higher for the Corona virus than even the most expansive cancer medicine you
can think of...
“Don’t talk to me about appealing to the
public. I am done with the public, for the present anyway. The public reads the
headlines and that is all. The story itself is fair and shows the facts. That
would be all right if the public read the facts. But it does not. It reads the
headline and listens to the demagogues and that’s the stuff public opinion is
made of.” ~ J. P. Morgan Sr.
Either those costs for the Corona virus will come down or the costs for
other medicines can go up as societies seem to have valued a human quality of
life year much higher than historically been the case. At a minimum this new
found pricing power should mean medicine costs and healthcare costs will not go
down. So for the Crayon portfolio the choice goes to UnitedHealth Group Inc.
(UNH) for this stock pick round.
Don’t ask why. Just know this is the company that has been bought by
Holland Park Capital London Ltd. Talk is cheap. Holland Park Capital London Ltd
is putting its money where its mouth is. The skin in the game as per Mr. Taleb
has bet on UNH.
The Monkey portfolio got itself a new newspaper on the 5th of December
2020 and the marker was dropped on the quotation page of the US stock listings
in the FT newspaper. The monkey choice went to Philip Morris International Inc
(PM).
Time in the market, stock selection and diversification are more important than timing
the market. Both portfolios are not diversified yet, but with now four holdings
each are slowly getting somewhere. Let’s
have a quick look at the performance. Clearly performance is not statistically meaningfully after only a 1.5 year investment period. After about 5 years that should have changed.....
The Crayon portfolio is trucking on nicely. Performance versus the
S&P 500 is good and all three stocks (MSCI, ASML and Ashtead) are
contributing nicely. The Crayon portfolio is heavier invested in $ earners in
America than the Monkey portfolio. The Crayon portfolio is also a higher growth and a lower dividend portfolio than the Monkey portfolio. That is probably part of the reason the
Crayon portfolio is performing better.
The Monkey portfolio is still unhappy. Deutsche Telekom is in the plus,
but Cisco and Lloyds are still in the red. Performance versus the S&P 500
is bad for the Monkey portfolio. Hopefully with four positions the Monkey portfolio can start to dig itself out of the hole.
