Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Game of Life - 19 Oct 2014 17:30

Tags: income life risk

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My oldest child is now 16 and just a few years away from being an adult. This got me thinking as to how she should be prepared for life which further led me to see how life in some ways is similar to a game. Their are always pieces in play and you need goals and strategies to succeed.

Odds are Against You

If you talk to a financial planner, the pieces you should have on on the board are really simple; you get a full-time job, max out retirement savings and build-up an emergency cash fund equivalent to 6 to 12 months of income. It is their belief that these are all the pieces you need to succeed in the game of life. We can call these pieces “Team Income & Assets”. Below is a summary of the pieces you are expected to place onto the game of life:

Team Income & Assets

  1. Full-time Job
  2. Emergency Savings
  3. 401K
  4. Roth IRA
  5. Social Security

But life is not as simple as financial planners lead you to believe. The opposing team we will call “Team Liabilities & Risk” and they have a heck of a lot more pieces to play with:

Team Liabilities & Risks

  1. Student Loans
  2. Rent
  3. Utilities
  4. Internet/Cable
  5. Food & Living Expenses
  6. Healthcare
  7. Maintenance (auto, home, etc…)
  8. Credit Cards & Loans
  9. Taxes
  10. Misc Insurance (auto, renters, etc…)
  11. Wedding Expense
  12. House down payment
  13. Kids
  14. Mortgage
  15. Unemployment
  16. Disability
  17. Kids College
  18. Caring for Elderly Parents
  19. Retirement

Now this is completely lopsided, 5 versus 19! How can you win with such a diverse team constantly attacking your 5 pieces?

Leveling the Playing Field

When I started off life no one told me that the opposing team would have so many pieces on the board and to make matters worse the longer you were in the game the greater the risks became. Unlike my introduction to life, I can now bestow unto my child the wisdom of my life experiences. First lesson is explaining the enemy pieces on the board. Second is to change how many pieces we have on the board.

It makes sense if you are being attacked by a diverse set of pieces that you also get a diverse set of pieces to effectively combat that onslaught. Three of your five pieces are focused on long term retirement so they sit on the game board and do nothing until the end of the game. That leaves just two pieces to carry the burden for most of your life! To change the odds in our favor we we can add some more pieces by diversifying your income. Here are the additional pieces we can possibly add:

Team Income & Assets Additions
6. Dividend Growth Investing
7. Real Estate Investing
8. Money Lending
9. Part-time Job
10. Part-time Business
11. Royalty or Residual Income
12. Annuities

Dividend Growth Investing – I personally love this one because it is available to everyone regardless of your social class, race, or ethnicity. You can start with just $50 and grow from there. Dividend growth allows for a passive income stream that can be used to help during times of unemployment, help pay some of your child’s college expenses, or fund your retirement. What is even better, the longer you employ DGI the more powerful piece you have to use in the game.

Real Estate Investing – This is another great source of income and there are two approaches to achieving. The first is physically buying and maintaining property while collecting rental income. Though this approach does require effort and may not be for everyone so the second approach for people that do not want to be bothered with property maintenance or collecting past due rents is to buy shares in Real Estate Investment Trusts (REITS). REITs provide the benefit (via dividends) of income but the REIT firm is burdened with the hassles of property maintenance and rent collection.

Money Lending – Sites like “Lending Tree” have opened up a new investment trend where you can lend money directly to another person at a set interest rate. Downside is you bear the risk of loan defaults. An alternative to directly lending money is buying shares in companies that do this for a living. Types of companies you can invest into are Business Development Companies (BDCs) and Mortgage REITS (mREITS).

Part-Time Job or Business – This used to be an old go to but for some reason has become an overlooked alternative. My belief is you can approach this in two ways. The first is short term that is aligned to a specific goal where all the money earned from a part-time job goes towards paying off debt or creating savings to invest in other income producing assets. The second approach is long term where you find a part-time job that you personally enjoy that not just adds additional income but could provide personal satisfaction.

Royalty or Residual Income – It is amazing the sources of royalty income available. If you are talented you can get royalties from music, art or video. You can write a book or e-book, publish photos, or even start a website with advertising. I’m sure there are other sources but these are the few I am aware of.

Annuities – These get a bad rap for their high expenses and loss of assets after you (or your spouse) passes away. But a small annuity can fit into your retirement planning as they offer a simple lifetime payment. The problem with stock, bond or even real estate investments is that you have to always monitor and adjust in order to keep your portfolio relevant. Though what would happen if you lost the capabilities to manage investments (think Alzheimer’s) or worst yet you died and your spouse has to figure it out. A small annuity income stream would help lessen the burden during these times.

Adding these 7 additional pieces to the board it is now 12 versus 19, a much fairer fight by any means.

Summary

Unfortunately I figured out the rules for the game of life pretty late and I am currently working to get some of these pieces on the board. On a more serious note, life is not a game but a true struggle of ups and downs where people really can get hurt. Financially speaking, I truly believe growing multiple sources of income and having the right insurance packages (home, life, etc…) is the key to reducing the risk in one’s life. While I am a big proponent of dividend growth investing it is not the only strategy I employ for achieving goals. Lastly, do not let fear and saving rule your life. Remember to take some time out and enjoy life. - Comments: 0

JM Smucker's (SJM) Review - 04 Oct 2014 18:30

Tags: sjm smuckers stock_review_2014

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When one thinks of JM Smucker’s (SJM) the first thing that comes to mind is peanut butter & jelly. And why not, JIF is the number one selling peanut butter brand and their jellies are also near the top.

But SJM is much more diverse than that. Some of their other major products include Pillsbury, Crisco, Hungry Jack, Folgers coffee, and Keurig coffee lines Dunkin Donuts and Millstone. Interestingly it is SJM’s coffee lines that have provided much of their earnings growth of the last few years.

Operating in the consumer goods segment it is easy to assume that SJM is a dividend growth company and your assumption would be correct. SJM has annually increased dividends for the last 12 years. So the next questions are; is the current dividend stable and are growth rates sustainable.

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Dividend Growth Rates (per share)
1-Yr 3-Yr 5-Yr 10-Yr
11.5% 12.4% 11.8% 9.5%

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Looking at some of my quick screening criteria for a DG stock we see some solid numbers:

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Dividend Growth Rate Debt/Equity Ratio
Criteria SJM Criteria SJM
>= 7.2% 11.5% < 1 0.46
Dividend Yield Payout Ratio
Criteria SJM Criteria SJM
> 3% 2.6% < 70% 47.6%

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The only weakness on the initial screen is that the current dividend rate of 2.6% is below the 3% criteria.

Looking at earnings over the last 5 years we have positive earnings growth since 2011.

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Earnings Per Share
2014 2013 2012 2011 2010
EPS $5.42 $5.00 $4.06 $4.05 $4.15
EPS YoY Growth 8.4% 23.15% 0.2% -2.4%

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Looking at different price to earnings ratios and again we see positive signs that the stock is adequately priced and even lower than the industry average.

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Price to Earnings Ratios
P/E (trailing 12 months) 18.37
P/E (forward 12 months) 15.39
P/E 5 year average 18.34
P/E industry average 20.06

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On the surface, SJM’s numbers per share indicate a strong dividend grower. Yet, per share data can be somewhat misleading when factoring in share buybacks or additional share distributions. SJM’s share buyback program has reduced outstanding shares from 118,951,434 in 2010 to 104,332,241 in 2014 (a reduction of 12.3%). With slightly more than 12% of outstanding shares removed from the market it is not hard to see how this clouds our ability to see the true financial health of the company. To look past share buybacks it pays dividends (pun intended) to analyze financial statements.

First up is earnings and revenue:

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2014 2013 2012 2011 2010
Earnings $565.2M $544.2M $459.7M $479.5M $494.1M
Earnings YoY Growth 3.85% 18.38% -4.12% -2.95%
Revenue $5,610.6M $5,897.7M $5,525.8M $4,825.7M $4,605.3M
Revenue YoY Growth -4.86% 6.73% 14.5% 4.78%

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Unlike the per share numbers the financial statements are showing growth trends that aren’t that attractive. In the prepackaged food industry it is not uncommon to experience temporary periods of declining revenue growth, you see similar declines in companies like Kellogs (K), ConAgra (CAG), or General Mills (GIS). But, what all these companies have in common is their ability to invest in new products, advertising and/or acquiring other businesses to increase revenue and earnings.

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Looking at SJM investments; they are introducing 125 new products in the upcoming 2015 fiscal year and made a significant acquisition of Enray, Inc and Silocaf of New Orleans, Inc. These acquisitions will increases their product offerings in grain & coffee segments. In SJM’s latest 10Q filing they entered into a definitive agreement to acquire Sahale Snacks, Inc., a leading manufacturer and marketer of premium, branded nut and fruit snacks, for approximately $80M. So we see evidence that SJM is investing in new products and acquisitions as their primary strategy to grow earnings and revenue over the long term. What I expect from SJM in the future (2016 and beyond) is a scale down of new products and focus on improving operating costs to further increase earnings and margins down the road.

Of course buying back shares, developing new product lines or acquiring other business units is never free and is typically funded via long term debt agreements. Looking at SJM’s long term debt levels they have increased from $2.07B in 2013 to $2.28B in 2014 (an increase of 10.5%). While this may seem alarming it does make sense to aggressively borrow now while rates are low. Additionally, even with the rise in long term debt their debt to equity still stands at a respectable .46 (any number below 1 is strong) and current ratio is 1.6 (anything above 1 is a good signal).

SJM’s future growth is not guaranteed and comes with risks. SJM’s product lines are dependent on agricultural supply. A dry year or drought, like what was experienced over the summer of 2014, can drive commodity prices drastically upwards and considering much of their product depends on fruit and coffee beans it is not hard to understand how a bad growing season will impact earnings.

Another area of risk is a strengthening dollar. In the latest 10Q filing, SJM ‘s earnings on international sales were $35.4M versus sales of $298.3M in comparison to last year’s performance of $43.1M earnings and revenue of $300.1M. What we see is that in 2013 14.36% of sales went to earnings while in 2014 it dropped to 11.86%. Most of the decline was due to exchange rates and a strong dollar. With the U.S. Federal government scaling back their bond purchasing program over the next year it could very well be a catalyst for the dollar being even stronger in 2015 further hurting their earnings growth.

One final area of the financial statements to look at where share buybacks cloud your view is the actual dividends paid or as I like to call it The Real Dividend Growth Rate.

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2014 2013 2012 2011 2010
Annual Dividends Paid $238M $222.8M $213.7M $194M $166.2M
Dividends YoY Growth 6.8% 4.25% 10.15% 16.72%

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Actual dividends paid growth rate is significantly lower than the per share growth rate. Buybacks appear to contribute from 21% to 43% of dividend per share growth. Without significant earnings/revenue growth the current dividend is reliant on a combination of share buybacks and increasing the percentage of earnings paid in dividends (currently 47.6%).

In summary, the company has a strong balance sheet, well managed debt and a deep pipeline of new products to help increase future revenues. Yet for all of its strengths, rising agricultural commodity prices and a strong dollar will continue to hurt overall earnings growth. With a 47.6% dividend payout and continued share buyback program there is still some room to grow the dividend per share in the near term and I see an annual growth rate low of 5% and high of 8% that can be achieved without significantly growing the payout ratio above 60% over the next three years. Additionally I see no signs that he dividend will be suspended, cut or completely canceled in that time either. Based on retaining the existing dividend payout and reduced potential growth I would be interested buying if the stock price drops to below $98 a share to align with my long term DGI goals.

Note: I do not own this stock at time of this writing. - Comments: 0


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