Berkshire Hathaway Dividend Flirtation. Warren Buffets Last Genius Move For Investors $BRK

Logo of the Bill & Melinda Gates Foundation. Source: Bill & Melinda Gates Foundation 2007 Annual Report (Photo credit: Wikipedia)

So after the big annual meeting Warren Buffett chief cook and bottle washer over at Berkshire Hathaway (NYSE:BRK.B) is starting to talk dividend. All this after being disdainful of dividends from Berkshire and wanting to invest all the cash because he could do the best job. Now that the end is near, even with a mild form of prostate problem, Warren Buffett is facing his own mortality and wondering what can be done to keep his money machine going.

Buffett watchers know he has donated the bulk of his holdings to Bill and Melinda Gates Foundation. You can hear the IRS crying right now. Anyway the money will not go to Washington DC. When you think about it it’s almost tea-party like in avoiding government and doing as you wish. Anyway Bill and Melinda Gates will be spending their funds on a vast amount of hopefully worthwhile projects. If the stock does not pay a dividend than you will eventually have to sell significant portions. The foundation becomes a net seller and the market sees them coming with an onbalance sell program which will depress prices or at best keep the share prices from appreciating.

Solution: declare dividends which hopefully increase over time quelling the desire to liquidate. Genius move for the long-term investor. The charitable foundation looking for liquidity events can find one every ninety days as dividends are deposited into their bank accounts.

A little bit of Buffett hubris comes into play. You see under that old dog Warren Buffet you did not need or look for a dividend. You let it ride all the way. It was a statement of support to forgo the dividend. Now with the new managers coming on board the dividend becomes important and Buffett does not say trust them. He did say trust me. But he is not saying trust them.

But this is still all speculation. The dividend is a conversation about next years possibility. The investment world will change. But the shareholder interests will eventually need to be aligned. Wonder if Warren and Bill were talking it over in that Netjets ad where they sit in a very comfortable executive jet eating jelly beans. If either of you two read this post a response would be most appreciated.

George Gutowski writes from a caveat emptor perspective.

Yelp Long Hard Slog Local is Not Easy $YELP

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Yelp (NYSE:YELP) came out with earnings and as a new company of course prints red ink. No surprise. It also more or less promises to be near break even very soon. Still no surprise. Investors need to understand local is a long hard tough slog. You need critical masses in each market. If you are good in San Francisco it does not help someone in Miami. If anything if the experiences are not similar customers will become suspicious. Then you have the mediocrity factor. When too many people are raving about tha same thing it does not matter any more. You might even lose the cool.

George Gutowski writes from a caveat emptor perspective.

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Qualcomm & Apple`s Cash Distortion. Will Rising Interest Rates Create a New Bank. $QCOMM $AAPL

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Qualcomm (Nasdaq:QCOM) announced pretty good earnings but fessed up to probable delays in delivering chip sets for Apples (Nasdaq:AAPL) brand spanking new G5 iPhone. The market sells off in classic knee jerk reactionary mode. Take a look at something else on Qualcomm`s balance sheet. Cash and marketable securities now clock in at around $26 Billion which equates to 25% of their market value. The cash is starting to be so big it needs to start doing some heavy lifting. So if you believe interest rates are poised to start increasing, which I do, a new strategic new source of income is about to manifest.

Can you see a 2% increase in yield on cash and marketables. Sure no problem as long as Qualcomm is not a long bond investor which it isn`t. The 2% increase kicks out $520 million in EBITDA. Looking at it another way it`s about 12% of last years earnings. 12% for risk free and near effort free return. If the cash and marketable securities portfolio cannot yield an extra 2% in a rising interest rate environment then the whole cash position strategy will come into question.

Speaking of Apple, who drinks very similar cool-aide to Qualcomm you have a similar cash and marketable position, about $26 billion. But the two market caps are wildly different. Much has been made of Apples king of the world market cap. Qualcomm comes in at a very pedestrian $100 Billion give or take. An extra $520 million effort less risk free at Apple will not be kicked out of bed. But it just will not have the same impact relatively speaking.

Pressure will build for both to deploy cash more productively. As  yields rise investors will be able to find better uses for cash. Currently cash held directly by investors or held in corporate bank accounts of investments do not yield much. Therefore the pressure to do something clever is near non existent. The pressure for cleverness will grow as interest rates rise and cash loses it`s commodity value and becomes capital again.

George Gutowski writes from a caveat emptor perspective.

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Monsanto Make Me Believe Increase Dividends $MON

Flowers from a garden in Monsanto, Portugal (Photo credit: Wikipedia)

Monsanto Company (NYSE:MON) recently announced encouraging financial news. Improved profitability, improved cash flow and improved cash position all stacking up quite nicely. OK so now what. If management wants to maximize shareholder wealth and keep the long-term buy and hold investor interested they’ll need to boast the dividend and engage the market with promises of a certain payout. Currently they are offering a 1.56% dividend yield. Not exactly attracting the yield hounds is it? A major competitor Dupont (NYSE:DD) has roughly the same market cap with a 3.19% market yield. Looking further Syngenta (NYSE:SYT) with a slightly smaller market cap offers a 2.3% dividend yield.

Monsanto is unlikely to engage in serious financial engineering and repurchase very large quantities of its stock so as to back into a growing EBITDA. So the next logical financial move for Monsanto is to seriously increase its dividend in the very near future. Despite the nice earnings surprise analyst consensus has not shifted wildly. The official lists of institutional shareholders have the usual listing of index fund but a notable lack of yield and or dividend investors is prevalent.

When comparing Monsanto’s shareholder base you’ll note a real decrease in holdings by large value funds. Note the behaviour one would expect from an improving story. Check out Dupont in the very same category and you’ll find growth in this category. Large value investors are more attracted to DuPont than Monsanto. If management decides to walk the dividend walk they will have to transition their MD&A to a more robust level. Currently they present like a marketing company talking about margins and market segments on a macro-economic level.

If Monsanto cannot transition to a dividend yield senior the company will stay as an ag driven cyclical dependent on the weather and crop commodities futures.

George Gutowski writes from a caveat emptor perspective.

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Alcoa Delights Investors With Shiny Q1 numbers. Careful How You Giggle! $AA $RIO

Alcoa - Expo Alumínio 2010 (Photo credit: industriabrasileira)

Alcoa (NYSE:AA) printed black ink delighting investors and surprising analysts. Consensus was for red ink. essentially the market for aircraft grew enough to overcome beer can disappointment. But lets take a close look at some of the individual components and determine if this is really a blue chip or just yesterdays floozie with a run in her stockings.

1. 9 percent drop in the realized price of aluminum and a 13 percent drop in the realized price of alumina, year-on-year. Hard to rejoice and see increasing wealth when the commodity price is dropping substantially.
2. Capital Expenditure has dropped and much capacity which was marginal at best was closed. Nice work. But what about improvements and expansion. The emphasis seems to be on how much they have cut not how much they have added. Healthy vibrant propositions will be adding, expanding and growing in some fashion. Not present in the current scenario.
3. According to  Klaus Kleinfeld, Alcoa Chairman and Chief Executive Officer, “Performance rebounded strongly this quarter due to our proactive cash  sustainability actions, our relentless focus on profitable growth, and stabilizing markets.” Buzz word city for the CEO. Exactly what is a cash sustainability action? Also what markets are stabilizing and what markets are you exiting.
4. At the same time Alcoa is forecasting a world-wide global aluminum deficit and is forecasting global aluminum demand 2012 growth of 7 percent. That is absolutely critical to hit your numbers in the future.
5. BTW short-term borrowings has sky rocketed, cash has dipped slightly but long-term debt has plunged dramatically. This means we need to see some refinancing and stretch out the debt payments.
6. Oh wait a second do you think Alcoa is going cap in hand to the debt markets and trying to refinance. The story is so much better if a loss was expected but no wait a strong Q1 was printed making the future picture very cozy and bright. Hmm

Now compare to another formidable aluminium player. Rio Tinto (NYSE:RIO) who swallowed up Alcan. Of course Rio Tinto is much more diversified and does not seem to have the same legacy costs as Alcoa seems to be solving. Also in the money talks and b**sh*t walks department Rio tinto has a $100 Billion market cap and pays a 3.5% dividend yield. Alcoa is a puny $11 Billion market cap and only pays a 1.29% dividend yield. So when Klaus Kleinfeld speaks Rio Tinto may only listen with one ear.

George Gutowski writes from a caveat emptor perspective.

George Gutowski also spent much of his formative time lending money and he has to tip his hat to Alcoa on timing. This is the oldest trick in the book. N’est ce pas.

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Apple Declares Golden Apple Dividend But it’s Not a Dividend Stock $AAPL

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The long-awaited dividend announcement came down from the Apple Tree. Apple (Nasdaq:AAPL) will skim a little bit of cash and line the pockets of investors. The dividend yield at the currently stratospheric price point is just under 2%. If you are a true dividend oriented investor this will not turn your head. Yield hounds who must surely know rising interest rates and probably inflation are just around the corner will not be truly impressed with a 2% yield.

Coupled with the cash dividend will be a share buy back to fund employee share purchase plans. A nice touch of financial engineering. Can you blame them everyone else is doing it? This allows them the flexibility of manufacturing EPS.

The market is applauding for now. But this is not the Golden Apple as everyone contemplates. True dividend paying stocks return capital to their shareholders in a defined and systemic manner.   Dividend levels while not contractual obligations become matters of trust. When dividends are reduced or cancelled share values erode deeply reflecting the drastically eroded business model. Dividend payout ratios are usually established in advance. Apple has done of these things. The dividend is being justified as something that will not erode the pile of cash that Apple has accumulated. No one is looking at dividend coverage ratio’s and assessing business risk. So therefore Apple is still not a dividend stock.

You would not set your stock selection screens for a 2% dividend  yield and then hit the buy button.

Microsoft (Nasdaq:MSFT) with 50% of Apple’s market cap has a dividend yield of approximately 2.5%. Microsoft’s cash balance is around $52 Billion. Yet Microsoft is starting to be viewed as a senior with an established cash flow base from its Office Product and enterprises services. There is real pressure on Microsoft to act more like a utility and pay up. Microsoft has made a few acquisitions and is probably glad the Yahoo thing (Nasdaq:YHOO) didn’t real work.

Apple has had to eat its own babies to develop new compelling products. Microsoft has eaten the neighbours children several times over and can point to a more entrenched product line. Apple is one marketing failure away from disturbing their slavish clientale. Microsoft can launch Vista and shrug off the problem.

The real comparison is IBM (NYSE:IBM) Big Blue currently has a dividend of under 1.5%. The market cap is just behind Microsoft and the cash balances are nowhere near what Apple or Microsoft have to offer. In short they are a dividend stock. The CFO   needs to watch earnings and cash flow to ensure he can cover the dividend. Apple simply is not in that category.

Which is why Apple has Golden Apples but not Golden Dividends.

George Gutowski writes from a caveat emptor perspective.

Anheuser-Busch Dividend Promises are Sweet Dreams But are They Premature? $BUD

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Anheuser-Busch (NYSE:BUD) recently slipped in a very big promise for the shareholders. Subject to a vote at the upcoming annual shareholders meeting the dividend will be substantially increased. Felipe Dutra – CFO ended the last conference call with this little tidbit. Well of course the shareholders are going to reward themselves. This is like raw meat in front of a shark.

Readers should note the prepared remarks on the conference call all revolved around the market share and product margins the company is enjoying. Felipe Dutra almost looked like a last-minute act added on after the program had been printed. Increasing the dividend is laudable but the financial factors are formidable.

This company is hugely leveraged. Approximately one-third of its market cap is debt. Admittedly the cash flow driven by growing margins and increasing market share is growing nicely. But the maturities are monumental. An approximate $35 Billion level of indebtedness will not disappear over night. Starting to engage shareholders and creating expectations of increasing dividends may be pre-mature. If consumption of beer hiccups for whatever reason the Anheuser-Busch could not borrow to maintain the dividend.

Debt holders would most certainly look at decreasing or eliminating the dividend as a way to protect interest and principal payments which are contractual obligations. Any stutter on the dividend front would cause dividend investors to lose confidence for extended periods of time. Felipe Dutra did not elaborate other than saying cash flow is improving so now we want to pay attention to dividends.

Cash flow looks good when you have bet on every number on the roulette wheel. All the major growing countries have significant marketing investments. Anyone familiar with portfolio theory will understand there will be surprises and disappointments. You just do not know where they will be.

So investors have a quandary. If you are dividend oriented do you buy now and experience increasing dividends at the risk of market failures? The entry point will develop if as and when you see Anheuser-Busch accelerating debt repayment in any number of ways. Management will want to convert principal and interest payments into dividends as quickly as possible, If we truly have a cash flow rising situation they will accelerate debt repayment and enhance the cash flow increase while building cushion in the EBITDA.

Some say the debt market never gets it wrong. With about $35 billion in debt they are the canary in the mineshaft.

George Gutowski writes from a caveat emptor perspective.

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H&R Block Stuck in Muck. Poor Marketing DNA is Achilles Heel $HRB

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H&R Block Inc (NYSE:HRB) issued Q3 numbers and proved they were stuck in the muck and did not have a break out strategy in place. Death and taxes are inevitable. H&R Block is not able to differentiate themselves from the other myriad tax prep services. H&R and the industry is transitioning from physical walk-in store fronts to on-line services. The transition seems to be following the model many newspapers have. Poor and slow.

Yet they manage a 5% dividend yield which allows many investors to hold their nose while they wait for something better. The question becomes what is better. Currently they make a few nickels by financing tax refunds. This attracts a low-end financially desperate consumer who lives from pay cheque to pay cheque. How do you sell these consumers more financial services? They tend to be maxed out on plastic. The up-sell potential is narrow.

Taxes are the nexus of personal financial planning. Taxes are a highly charged political football. Yes vanilla tax prep is a commodity business. So why not attempt the classical marketing exercise of product extension and attracting a larger more profitable ticket. Admittedly much of the board and senior executives are newly installed. But you do not get a sense of financial services marketing in the career DNA’s or recently appointed individuals.

Also you do not see or hear of any R&D product development style spending. You do not hear about strategic reviews. You do not hear or see any signs of  thinking beyond the current products. There seems to be a lack of urgency.

In the meantime investors are being paid to wait. The current 5% yield looks attractive. But as the company starts to spend on new product development or tries to acquire its way out of the current problems the dividend coverage will become stressed. The concept of steadily increasing dividends will not manifest as the company hits potholes.

So watch the strategic development of this company. If they stay narrowly focused on the low-end they face the transition risks as they migrate from physical to on-line. As they maintain their dividend yield they may become attractive as a take over candidate to another financial services oriented company who wants to offer a tax prep services to capture their client holdings.

George Gutowski writes from a caveat emptor perspective.

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Domino’s Pizza Conflicting Financing Activities. How Many Toppings are Available? $DPZ

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Domino’s Pizza (NYSE:DPZ) came out with some boomer numbers and rewarded shareholders with a huge gap up. The press release was very light on the nitty-gritty. The press release was also very light on competitive conditions, sustainable and unsustainable factors as well as what may be expected from competitive forces. Investors must assume the competitors will try to fight back sooner rather than later. However in the meantime investors have bid the stock price up to 52 week highs. At the same time a new financing has been announced. Shareholders have been promised a special dividend.

The financial skeptic in me always finds is curious when companies announce a financing but never disclose the interest rate or the interest rate formula to be used. Debt markets are never wrong. So a perception of risk would work its way into the newly set interest rate. Domino’s seems to have side stepped the issue.

Speaking of debt Domino’s has worked down a huge debt load for the past few years and is still faced with a mountain. Look carefully at the sources and uses of cash. The two main categories are either debt/lease repayment and share buy back. Domino’s cannot sustain both at the levels shown for the past two years. They simply do not generate sufficient cash flow. Financing issues aside they will find it difficult to maintain capex spending to keep their stores fresh and attractive.

George Gutowski writes from a caveat emptor perspective.

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Union Pacific good news but leaves out a few items. Some cause for long term concerns. $UNP

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Union Pacific (NYSE:UNP) release good news and watched their stock trade at 52 week highs. The earnings release was very abbreviated in comparison to the earnings call. Management was more forthright on the conference call which is always annoying. But other than that everything is really good. I mean really good. They could not find one issue which was a problem.

So here are a few skeptical issues to worry over.

Firstly when you look at capex by managements admission 50% of the expenditure is replacement items. Replacing worn out track and equipment is always good but when 50% is just replacement you need to have disclosure on the capex program. How much track and equipment needs to be replaced and what kind of schedule are we looking at both in time and money. Good operating results and safety compliance is driven by adequate  capex in equipment refresh programs. Management was not even close to discussing these points.

Secondly the projected dividend yield is about 2.14%. The dividend has just been increased. the stock is trading at the 52 week high. What will management need to do to increase the dividend to keep the yield conscious investor happy with increasing dividends. Think about the dividend issue in the context of 50% of capex going on simple track replacement and not to revenue enhancement.

George Gutowski writes from a caveat emptor perspective.

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