Tuesday, November 24, 2009

Trip to Uganda

I spent 19 days in Uganda in November looking for birds. This is a brief description of the trip for those who might be interested in visiting Uganda.

Uganda is a great place to visit if you are a nature lover. I visited six national parks while I was there and several other nature areas also. It was an adventure of a life time. I tallied about 420 different bird species, 5 chimpanzees, one Puff Adder, and many monkeys, antelope, elephants, giraffes, hipos, Cape Buffalo, dragon flies, butter flies, but very few mosquitos. November is part of the 2nd rainy season of the year which begins in October. It did rain about every day while I was there but only for about one or two hours. While it is raining, that is a great time to drive to the nearest bar and have a Nile Special if there is a bar handy. Much of the time there is not. It is best therefore to take a couple along to enjoy during the lunch break. Uganda has excellent beer, but hands down Nile Special was my favorite.

My trip was arranged through Birduganda.com. They handled everything. My itinerary was custom designed to my specification with some suggestions from Herbert the director of Birduganda. I was presented with two options for accommodations--luxury and utilitarian. I chose the latter. To my surprise utilitarian was not all that utilitarian. At QE national park I ate my meals at the lodge where Queen Elizabeth stayed in 1954. It is first class. However, I did have my room down the road about 300 yards at a very nice hostel that was suitable for my needs.

My birding guide was Robert Byarugaba who lives in Buhoma. He is a top notch guide. You can find him on the internet at robertbirdguide@yahoo.com. Telephone is 256-782-029-054. My driver was Gordon Gongo. He lives in Kampala and is on the internet at gordon.gongo@yahoo.com. I suppose that a very adventurist person might attempt driving in Uganda himself. But the roads are not what one might be accustomed to and road signs are not something one generally sees in Uganda. Gordon also makes a really great beef stew, one of the best meals I had while in Uganda and great vegetable soup also. Uganda is not a large country and most of the interesting places are in the west and southwest. But the roads are in many places rutted dirt and I do not think we averaged more than 20 mph, so distances seem at least three times longer than in the US.

The money situation in Uganda is somewhat interesting. The currency is the Uganda shilling which exchanges at about 1900 to the dollar at this writing. A beer costs about 3000 shillings at the better establishments. But that is not what is interesting. What is is that national park entrance fees are for foreigners are in dollars not shillings. They average is about $30 a day but does vary by park, so when you arrive at Entebbe do not covert all of your currency into shillings. You will need a substantial amount of U S dollars also. Another interesting situation is that one is not allowed to walk any trails in a national park unless one has either a local park guide or an armed guard. A tip is expected for these functionaries at the end of the trip. A guard might expect 10,000 shillings. A local guide who is knowledgeable maybe 20,000 shillings for a full day. The guards carry AK47s but I am suspicious that they may not carry any ammunition.

Of the total time I was in Uganda, there was only one day which was a disappointment. That was the trip to Kaniyo Pabidi which is part of Budongo Forest Reserve. Birding there was extremely disappointing with only one new species seen. We did see a Chimpanzee there however and Robert also saw two Blue Duikers, an extremely small antelope of the forest. I missed both. There are several species that are supposed to be easy to see there but we had no luck at all attempting to call them in. My personal recommendation is to spend ones time at more productive locations such as Murchison Falls just north of Budongo. The Royal Mile at Budongo is an exceptional birding site and should not be missed.

One of the national parks that I visited is Semliki. It is somewhat off of the beaten path and receives only about 2000 visitors a year. That is somewhat unfortunate because it is one of the more interesting national parks and encompusses an environment not encountered elsewhere in Uganda--very tropical. One of the highlights of the Semliki trip was seeing a Puff Adder close up. It was brought to our attention by the commotion that the birds were making. Robert showed it to me and I thought it was a log lying on the ground. Then the log began to move--very slowly. Puff Adders are not fast snakes. The snake we did not see at Semliki but which is supposed to be common there is the Black Momba.

The other place worth some note is Mabamba Swamp on Lake Victoria a couple of hours from Entebbe. This is the home to the Shoebill and many other water and swamp birds. The Shoebill is one of the prize birds of a Uganda bird trip. Uganda is the only easy place to see this bird, easy being a relative term. There are two places in Uganda where it is usually seen--Mabamba and Murchison Falls NP. We saw four Shoebills there and many other birds besides.

Monday, September 28, 2009

What should one invest in during retirement?

Investing during retirement entails different criteria than investing during ones productive years. There are three paramount criteria that retirees need to consider when considering their investments--current income from their investments, safety of their capital, and protection against inflation.

If a person retires at age 65, that person can reasonably expect to live another 20 years. If we assume historic rates of inflation, in 20 years prices will be somewhere between 2 times and 3.5 times greater than they are today. Those are the previous 20 year inflation rates during the past 50 years in the United States. If one does not take inflation into account during ones retirement, the consequences could be considerably unpleasant as one approaches the grave.

Many investment advisers suggest a rather conservative investment philosophy for retired persons. Let's review a couple just to get a flavor of what conventional wisdom suggests. Vanguard Retirement Income Fund VTINX allocates 65% bonds, 29% stocks, and 5% short term investments. Its average return since inception is 3.39%. Its current yield is 2%. Fidelity Freedom Income Fund FFFAX allocates 60% bonds, 21% stocks, and 19% short term investments. Its average return since inception is 4.82%. Its current yield is 2.95%.

When one considers the current yield of these retirement funds, their asset allocations, and their returns one must question the wisdom of their philosophy. With historic inflation rates running at a minimum of 3.5% annually and as high as 6.5% annually over a 20 year period this investment philosophy is not going to yield sufficient returns nor yield sufficient income to last a 20 year term for the average retiree who is dependent on his retirement income and social security.

One of the common rules of thumb for retirees is that they can withdraw 4% of their retirement capital annually and have it last about 25 years. There are web based retirement tools to show the user the amount that can be withdrawn monthly assuming an initial amount at retirement and an expected life span. Unfortunately, many of these tools make assumptions that may not be correct and they do not allow the user to adjust the assumptions.

A simple calculator can be found at this link. Too simple.


I believe a better strategy is to allocate more to quality equities that have a history of increasing their dividends. Generally speaking that will accomplish two goals. It will provide over time an increasing income and the increasing dividends generally will support an increasing value of ones assets. Investing in bonds accomplishes neither. That is not to say that bonds have no place in ones retirement portfolio. They do add some stability to ones assets during market turmoil, which they did during these previous two years. Some of them did anyway. Some did not. Only the very highest quality bonds actually added to stability. The rest did very poorly.

Let's look at several examples of high quality stocks that have a history of increasing their dividends.

McDonalds Corp--MCD--10 years ago paid a dividend of 0.20 a share. Today it pays 1.63 a share. Ten years ago its average price was 42.50 a share. Today its price is 57.00 a share.

Procter & Gamble--PG--10 years ago paid a dividend of 0.64 a share. Today it pays 1.64 a share. Ten years ago its average price was 45.00 a share. Today its price is 58.00 a share.

Coca Cola--KO--10 years ago paid a dividend of 0.64 a share. Today it pays 1.52 a share. Ten years ago its average price was 60.00 a share. Today its price is 53.00 a share. But recall that 10 years ago we were at the peak of the bull market. KO has indeed during the last 10 years depreciated somewhat in value.

Chevron--CVX--10 years ago paid a dividend of 1.24 a share. Today it pays 2.53. Ten years ago its average price was 44.00 a share. Today its price is 71.00 a share.

Each of these companies pays a dividend of more than 3% annually, more than either of the two mentioned retirement income funds pay. They also each has a long history of raising their dividends annually.

This is not a full proof investment strategy. There are risks involved. One is that one of these companies that has had a history of raising its dividend might fall on hard times and not be able to do so. One might even have to cut its dividend. Bank of America recently was among companies that annually raised its dividend. But it recently had to drastically cut its dividend. A strategy to mitigate the impact of such an action is for one to invest in a diverse holding of stocks. It is generally suggested among asset allocation strategists that one should invest in no fewer than 20 different companies in a variety of industries.

One might ask why it would not be an appropriate alternative to invest in a blue chip mutual fund as such a fund should be composed of such stocks. One reason is that the term blue chip has been mis-applied by the investment communities in recent decades to include companies that have no claim to such a title. Another reason is that mutual funds feel themselves obligated to invest in a wide variety of companies. There are not that many companies that actually meet the qualification of quality companies that increase their dividends, maybe 50 to 100. Most mutual funds own many more than that number so they have to reduce their investment standard.

There are mutual funds that have a strategy of investing in dividend paying stocks. Several index funds come to mind. One is Wisdom Tree Large Cap Dividend--DLN. Its current yield is 3.3%. Unfortunately, the quality of some of its holdings leaves a great deal to be desired. One of its largest holdings is Bank of America, not a stock that one might choose to invest in. It currently holds stock in about 288 different companies. Considering there are only about 315 large cap companies, they are not all that selective in which ones they choose.

It would be a mistake to invest all of ones assets in only this type of companies. Indeed one should choose some bonds and also some other types of equities also. A diversified portfolio has a greater chance of limiting risk than one that is not. But I believe that for someone in retirement it is a better strategy to allocate a larger portion of ones assets to these types of stocks than to invest a large portion in bonds or in other types of equities.

Saturday, September 19, 2009

Closed end mutual funds

There currently are three different types of mutual funds one can invest in--open end mutual funds, exchange traded index funds, and closed end funds. This is a discussion of closed end funds.

Closed end funds are bought and sold on stock exchanges very much like exchange traded index funds. As of this posting there are about 630 different closed end funds available. Very similarly to open end mutual funds they come in a wide variety of different types. Some are municipal bond funds, some taxable bond funds, and others covering a wide variety of equity investment categories.

There are several specific differences between closed end funds and open end funds however.

First they are traded on the stock exchanges. As a result they do not necessarily trade at net asset value. In fact sometimes the price at which they do trade varies greatly from the value of the net assets. At the time of this posting, one astonishingly sells at a premium of 73% to net assets. Back in March 2009 it sold at a slight discount. It is not all that uncommon for a closed end fund to sell at a premium to net assets but the vast majority do not. Currently about 160 do and 470 do not. Occasionally, some closed end funds will trade at a substantial discount to net assets especially during market panics. During the March 2009 market panic there were many closed end funds selling at 20+% discounts to net assets. There are currently about 15 or so trading at such a discount perhaps for some good reason. However, if one can purchase a mutual fund at a substantial discount to net assets, one might give such a fund careful consideration.

A second difference is that most closed end funds are considerably smaller than most open end funds. the largest has $3.3 billion in assets. The median about $200 million in assets. The number of shares outstanding is generally a fixed number of shares. Unlike an open end fund, they do not issue new shares at public demand and they do not redeem shares at public demand. They do occasionally issue new shares to cover dividend reinvestment. And they do occasionally liquidate. There is one ramification of this aspect. That is that in general it is a great deal easier to manage a small mutual fund than it is to manage a larger mutual fund. Fidelity Contrafund has $51 billion in assets. American Funds Capital Income Builder has $75 billion in assets. With such a large asset base it is also more difficult to diverge from the market average. They are the market average. The two specifically mentioned have managed to diverge positively from the market average, but most have not.

A third difference is that many closed end funds employ leverage, which can work for them in a rising market but against them in a falling market. Not all do but many do. The leverage is in the form of preferred stock and usually represents 30-40% of capital. Many of these closed end funds had issued auction rate preferred stock. A result of the banking crisis was that virtually all of this type of preferred stock became untradable. This led to some difficulties for several closed end funds. Another difficulty many closed end funds encountered was that as the value of their assets decreased during the market collapse of 2008-9, their leverage ratios increased beyond the regulatory limits for their particular funds--33% for debt leverage and 50% for equity leverage. The drop in asset values ment that they had to reduce their leverage, which ment selling assets at distressed prices. Not a particularly good position to be in.

During more normal market conditions there is about $20-30 billion in new closed end funds issued on an annual basis. Recently there have been virtually none issued. Buying a closed end fund IPO is a loosing proposition in general. The IPO is generally issued at a premium of about 5% to net assets. Once the fund begins trading there is about a 80% probability that the market price will fall to about a 6-10% discount to net assets. There are certain exceptions to this generality. In 2006 Morgan Stanley China A Share Fund came to market. This particular fund invested in a market that virtually no other mutual fund invested in and a market closed to individual foreign investors--China A shares. The fund immediatedly soared to a premium and during 2007 returned 100%. It now sells at a very small premium of 3% but as resently as April 2009 sold at a premium of 30%.

There are two web sites that give a good statistical analysis of closed end funds.



Saturday, September 12, 2009

S&P 500 Index Funds

Index funds have become extremely popular during the past 10 years and the most popular of all are ones based on the S&P 500. As of this writing SPY, an S&P 500 index, is the most popular exchange traded index fund with $63 billion in assets. The next most popular is GLD with only $31 billion in assets. But that is only a small portion of the total amount invested in S&P 500 based index funds. Nearly every major fund company also offers one. The Vanguard S&P 500 index fund, the granddaddy of them all which started the trend on Oct 31, 1976, has $84 billion in assets.

There are basically three selling points proponents of the S&P 500 index funds use when advocating purchase. First is the low expense ratio. The Vanguard fund has an expense ratio of 0.18%. SPY has an expense ratio of 0.10%. The median expense ratio of mutual funds is about 1.5%. Second, is the tax advantage of index funds. Since these are unmanaged funds they are very tax efficient. There is very little realized year end capital gains with an S&P 500 index fund if any at all. Managed mutual funds very often have very large year end capital gains upon which taxes must be paid. Third is that 70% of all mutual funds have underperformed the S&P 500 index so it is better to just place ones money into that index fund than to invest in a managed fund.

What is not ever discussed are what the disadvantages of the S&P index funds might be. There are several that one needs to be aware of. First and perhaps formost is the fact that it is capitalization weighted. What that means to the investor is that even though one has an investment in 500 different companies, it is not an equal investment. The top 10 holdings account for 20% of the total assets of the fund. The top 50 holdings account for 48% of the assets. The other 450 the remaining 52%. One of the cornerstones of the theory of modern portfolio allocation, is the concept of rebalancing ones portfolio on a periodic basis normally annually or quarterly to increase ones return and decrease ones risk. Since the S&P 500 index is capitialization weighted, not only is it not rebalanced but one might argue that it is debalanced, if there is such a word. In other words as the price of stocks in the index rise, the index buys more of them relative to the ones that fall in price. That is the exact opposit of the concept of rebalancing. One can in fact visually see the difference to returns that rebalancing has in the past made. There is another index fund based on the S&P 500 that is equal weighted rather than capitalization weighted. It is RSP. It has not been in existance 10 years so we can not do a long term comparison. But over a 5 year period SPY has returned 0.44% and RSP has returned 2.23%. That is despite the fact that RSP has an expense ratio of 0.60% compared to an expense ratio of 0.10% for SPY.

The S&P 500 is based only on US based large company equities. It ignores foreign companies, most small capitalization companies, and investments in debt instruments. It actually does consist of a few small cap stocks, ones that are still in the index but have recently fallen on hard times. As of this posting these include Gannet, CIT, and KB Home to name a few.

Foreign equities as recently as 1970 accounted for about 30% of total world market capitalization. Currently they have risen to over 50% of total market capitalization probably closer to 60% currently. So in the past 40 years the U S equity market has declined by about 1/2 of the total world equity markets. That decline should be noted by investors. Another aspect that should be noted is that investor returns on foreign equities over the past 5 years have in many cases outpace returns of the S&P 500. 10 year comparisons can not be made because indexes of foreign equites have only recently existed. But here are a couple of comparisons. The 5 year return of the S&P 500 index is 0.44%. That of IEV based on the S&P Euro 350 index is 5.7% despite having an expense ratio of 0.60%. That of EAF based on the European, Far East, and Australian index is 5.4%. That of EEM based on an emerging market index is 16.4%.

When we compare the S&P 500 performance to that of the small cap index funds we again see a divergence in returns. For the five year period IWM based on the Russell 2000 had a return of 2.2%.

Another aspect of asset allocation that is ignored by many is that of investing in debt investments as opposed to equity investments. The classic concept is that equity investments will outperform debt investments over the long term mainly because one must expect a greater return for the greater risk of equity investments. Invariably investment professionals will advise young clients to invest most of their assets if not all in equities because even though there is a greater probability of suffering a loss over the short term over the long term equities will provide a greater return. Yet the results of portfolio allocation theory tend to somewhat refute this claim. And certainly over the last 10 years debt investments have outperformed equity investments. Almost every managed bond fund over the past 10 years has outperformed the S&P 500 index by a wide margin. Vanguard Long-term Investment Grade bond fund has yielded 8.5% annually on average since Sept 1973. The S&P 500 has returned 6.5% over the same period. Those returns are before taxes.

Another interesting comparison is that of the Vanguard Balanced Index fund to that of the S&P 500. The Balanced fund has returned 2.9% annually over the last 10 years opposed to - 0.86% for the Vanguard S&P 500 fund.

Saturday, August 1, 2009

Options for Investing in Gold

There is a great deal of interest in gold these days as an investment or a hedge against inflation and a debasing of world currencies. My purpose here is to describe some of the options available to investors. Perhaps investment is not the correct term for those who desire to purchase gold. It does not pay dividends. Unlike investments in common stocks, there are no earnings on which to base ones purchase price. Much of the rationale for the purchase of gold is based on the worry that perhaps other forms of storing value such as currency, savings accounts, and even other forms of investment will be worth much less in the future than currently due to governments debasing their currencies. Recently with the extremely large budget deficits being accumulated by government entities and the attempts to re-inflate the economy there is a great deal of basis for such concern.

Following is a discussion of alternatives available to those wishing to purchase gold or invest in gold as a hedge against inflation and the debasing of currencies.

First where are places one can purchase physical gold? One option is through dealers on Ebay. Every day there are a number of bullion bars and gold coins available for purchase. This is an attractive option for small quantity purchases of gold, but one needs to be careful about making such purchases and check the reliability of the dealers carefully. One also needs to refrain from bidding more than the gold is worth. This happens quite frequently on Ebay. Another option is through local coin dealers and also through coin shows that come to a near by town. Many times coins and bullion can be purchased at attractive prices by this means.

For larger purchases a good option is through one of the large volume coin dealers. Two that deal this way are Monex.com and Tulving.com. There is retail mark up on such gold purchases.

An option that has been available for a few years is an ETF that holds gold bullion. GLD is the ticker symbol. It currently has assets of about $31 billion and is 2nd largest ETF behind SPY. John Paulson, a prominent hedge fund manager recently holds nearly $3 billion worth of GLD his largest holding. Thre is also a closed end fund that holds gold bullion--Central Gold Trust GTU.

There are three other ETFs available that hold futures contracts on gold--DGL, UBG and IAU. UBG is by far the larger of the three with over $4 billion in assets.

Another option which if the price of gold were to increase dramatically is worth considering is an investment in gold mining shares. There are two diverences between investing in gold mining companies and investing in gold itself. First is that an investment in a gold mining company is by definition an investment whereas buying gold itself is not really an investment but more or less a hedge. 2nd is that such an investment is highly leveraged. Gold mining companies operate under a high fixed cost. Even the very largest, Barrick Gold, has a cost per ounce of $443 per ounce up 58% in two years. Many of the smaller miners have a much higher cost. What that means is that if the price of gold increases 10%, say from $950 an ounce to $1045 an ounce, then the profit per ounce for Barrick Gold increases from $507 to $602 an ounce assuming cost per ounce remains constant an increase of 38%. For higher cost producers it becomes a much greater increase. If of course the price of gold decreases, then many gold producers can loose money.

Here is a list of some of the gold producing companies.

Barrick Gold--ABX market cap $30 billion
Goldcorp-GG market cap $27 billion
Newmont Mining--NEM market cap $19 billion
Anglo Gold Ashanti--AU $13 billion
Kinross Gold--KGC $13 billion
Agnico Eagle Mines--AEM $9 billion
Gold Fields--GFI $8 billion
Yamana Gold--AUY $7 billion
Compania de Minas Buenaventura--BVN $6 billion
Lihir Gold--LIHR $5 billion
Randgold--GOLD $5 billion
Harmony Gold--HMY $4 billion
Eldorado Gold--EGO $4 billion
IAMGOLD--IAG $3 billion
Royal Gold--RGLD $1.6 billion
Allied Navada Gold-ANV $0.6 billion

There are a number of index funds and mutual funds that invest in gold mining stocks. Here is a list of some.

Market Vectors TR Gold Miners--GDX $2.6 billion
Powershares Global Gold and Precious Metals--PSAU $1.6 billion
Gabelli Gold and Natural Resouces--GGN $99 million
Tocqueville Gold Fund--TGLDX $550 million
Fidelity Select Gold Portfolio--FSAGX $2.4 billion
AIM Gold Fund--FGLDX $120 million
GAMCO Gold Fund--GOLDX $367 million
American Century Global Gold Fund--BGEIX $830 million
Evergreen Precious Metals--EKWAX $900 million
First Eagle Gold--SGGDX $1.6 billion
Franklin Gold and Precious Metals--FKRCX $1.8 billion
USAA Precious Metals--USAGX $1.2 billion

Saturday, July 18, 2009

Investing in China

The Chinese economy is growing at a rate of about 2 times to 3 times the rate of developed market economies. Consequently, the chances of making a buck on investments might reasonably be assumed to be better on investments in Chinese based companies than those of developed markets assuming the valuations of those companies are not unreasonable.

There are three principal methods that a US citizen can use to invest in Chinese companies. 1. U S listed Chinese companies 2. open end mutual funds 3. exchange traded mutual funds. There are quite a few Chinese companies listed on US stock exchanges. Among the larger Chinese Companies are the following which can be bought on US exchanges.

Aluminum Corp of China ACH aluminum mfg. 3.4 billion cap
Bank of China BACHY bank about 100 billion cap
China Life Ins. LFC life insurance 116 billion cap
China Petroleum and Chem. SNP oil and chemicals 72 billion cap
CNOOC CEO oil 52 billion cap
China Mobile CHL cell phone 190 billion cap
China Telecom CHA 31 billion cap

There are quite a few other Chinese companies listed on US exchanges. These are just a few.

There are about 8 exchange traded index funds available.

iShares FTSE/Xinhua China 25 index fund FXI 5.5 billion cap
PowerShares Golden Dragon Halter USX China Portfolio PGJ 232 million cap
SPDR S&P China etf GXC 180 million cap

The others are specialized and very small cap.

Among closed end Chinese funds which are traded as etfs are the following:

Greater China Fund GCH 202 million cap 10 year return 14%
China Fund CHN 400 million cap 10 year return 17%
JF China Region Fund JFC 60 million cap 10 year return 9%
Morgan Stanley China A Shares Fund CAF 270 million cap (this fund invests in A share securities that are not available to foreign investors generally) It has been in existance only 2 years.
Templeton Dragon Fund TDF 711 million cap 10 year return 15%

Among open ended funds:

Fidelity China Region Fund FHKCX no load 10 year return 8%
Guinness Atkinson Chin & Hong Kong ICHKX no load 10 year return 9%
Matthews China MCHFX no load 10 year return 14%
AIM China Class A load 3 year return 16% has not been in existence 10 years.

Wednesday, July 8, 2009

Master Limited Partnerships

Master Limited Partnerships (MLP) are companies that pay out all of their earnings in dividends. With this corporate structure they avoid paying taxes. In that respect they are somewhat similar to real estate investment trusts (REIT) which also pay out all of their earnings in dividends. Because of this the dividends under current tax law are taxed not at the reduced dividend tax rate but at the full tax rate. That is a very important consideration to keep in mind for both for for MLP and REIT. One of the consequences of this is that investments both in MLP and REIT are more suitable currently for tax deferred accounts rather than for taxable accounts. They are more suitable in both a traditional IRA and a Roth IRA as are also taxable bonds.

Most but not all MLP are pipeline companies. There are also a few propane companies, coal companies, and marine transport companies. In certain instances one can buy shares in either the Limited Partnership or the General Partner. The Limited Partnership pays in many cases an incentive to the general partner that increases with increased distributions reaching about 50% of the distribution amount at a certain point. In other words there generally becomes a point where the general partner takes home half the distributions.

Since limited partnerships pay out all of their income one thing to take note is that in order to build capital projects they rely on borrowed money. Consequently, many have very high debt to equity ratios. In other words some are very highly leveraged.

There are somewhere in the neighborhood of about 80 publicly traded MLP and their general partners which also qualify as limited partnerships themselves.

Since this blog format does not allow publishing data in columnar format, I am limited in that data that I can publish in an understandable manner. I will describe two of the MLP so the reader can become familiar with these investments.

The largest two MLP are Enterprise Product Partners LP ticker EPD with a market cap of about $11 billion and Kinder Morgan Energy Partners LP ticker KMP with a market cap of about $10 billion. In other words most are mid cap companies and some are small cap companies. The median market cap of the pipeline segment is a little less than $3 billion so indeed the average MLP is a small cap company.

EPD operates over 30,000 miles of natural gas, oil, and petrochemical pipelines. In additon they have natural gas processing plants and natural gas storage facilities. They have $18.4 billion in assets and $9.3 billion in debt or about 52% of capitalization. Their revenue is about $20 billion. The current dividend is $2.15 pershare or about 8.6% based on the current stock price of $24.85. The current PE ratio is about 14.2. During the past 10 years the company has increased the dividend annually at a rate of about 8%. EPS however have not increased at so steady a rate although over that period they did increase at about 9% annually. To be noted is that EPD has grown significantly due to acquistions. Their most significant being a $6 billion merger with GulfTerra in 2004. The company has a DRIP plan with a 5% stock discount which is also available through broker held shares.

KMP operates about 24,000 miles of natural gas pipelines also natural gas processing plants and storage facilities. They have $17.5 billion in assets and $10+ billion in debt or about 57% of capitalization. Their revenue is about $10.8 billion. The current dividend is $4.20 or about 8.3% based on the current stock price of $50.75. The current PE ratio is about 31. During the past 10 years the company has increased the dividend annually at a rate of about 12.4% but recently the dividend increase has been at a more modest rate of 8%. EPS has not had so great an increase over that time increasing only 4% annually. Cash flow has however increased more significantly growing at 14% annually.

Other notable pipeline MLP and general partners are BWP, BGH, CPNO, ETE, EPE, EPD, MGG, MMP, NS, OKS, PAA, SXL, TPP and WPZ. Among coal are ARLP, NRP, PVR. Among marine transport are CPLP, NMM, OSP, KSP, TOO, TGP. Among propane are APU, FGP, NRGY, SPH.

If you should choose to invest in a MLP, check carefully their debt load and their track record.

Sunday, March 1, 2009

Oil Company Valuation

One method available to value oil company stocks is according to their proved reserves. One thing to keep in mind though when doing so is that those proved reserves are an estimate. What I thought would be interesting is to see what the value of the proved reserves are for a few oil companies. What I have done is to take their stated proved reserves as BOE equivalents and determined what they are currently being sold for based on the market price of the stock as of Feb 27, 2009.

So here we go.

Anadarko APC $7.17/barrel
Apache Oil APA $8.04/barrel
Chesapeake CKH $4.41/barrel
Chevron CVX $15.65/barrel
Conoco COP $8.40/barrel
Devon DVN $7.99/barrel
EOG EOG $8.63/barrel
Exxon Mobil XOM $26.40/barrel
Hess HES $12.40/barrel
Marathon MRO $13.81/barrel
Noble Energy NBL $9.11/barrel
Occidental OXY $14.66/barrel
Talisman TLM $5.71/barrel
XTO Energy XTO $7.94/barrel

Of course there is more to evaluating an oil company than the cost of their reserves. There is also the cost of delivering that oil to market. I have not addressed that cost here. There are some interesting things to note here. A couple of the integrated oil companies are considerably more expensive per barrel of reserves than are the production companies. Of course they have a much larger invested capital than the production companies. But one must wonder whether they are perhaps over valued currently. The other thing of note is that the cost per barrel currently is between $8.00 and $9.00 a barrel for the majority with two notable exceptions--TLM and CHK. TLM is a Canadian company which has recently become subject to increased taxation. CHK has had some interesting problems including a CEO who unwisely leveraged his company stock and got it yanked out from under him by margin calls. Perhaps that is not the only unwise move he has made.

Saturday, February 21, 2009

Blue Chip Stocks

What stocks are in fact Blue Chip Stocks? I searched the internet but did not find a list of blue chips.

Let's first define attributes that a blue chip should have.

1. They should have a minimum market capitalization. I will say a minimum of $4 billion dollars.
2. They should have a history of increased sales and earnings going back at least 20 years. It can be somewhat difficult to find financial information for more than 10 years though but not completely impossible. Earnings growth should be significantly greater than the inflation rate.
3. They should have a sound balance sheet with a long term debt/equity ratio no greater than 0.50
4. They should pay a dividend although this could be argued perhaps passionately.
5. Return on equity of at least 15%

One important fact that needs to be stated is that a blue chip stock does not necessarily remain a blue chip stock. One such example would be U S Steel. For many years this company was one of the top blue chips. Not any longer.

Now for my list of what I would consider to be blue chip stocks.

JNJ Johnson and Johnson has a consistent history of increased earnings, sales, and dividends.

BDX Becton Dickinson ditto my comments on JNJ.

WMT Walmart has a consistent history of increased earnings, sales, and dividends except for last year when it did not increase its dividend.

PG Procter & Gamble There are several problems with PG. One is that it has had a history of borrowing lots of money and its d/e has often exceeded 0.50. It has also had more than a couple of earnings stumbles. But it does meet the criteria currently.

NKE Nike is a consistent performer with steady sales and earning growth. It has only in the past few year begun to increase its dividend on an annual basis. The company has virtually no debt. We will have to see how the recession impacts NKE. It may not be too pretty.

KO Coca-Cola has not had so consistent an increase in earnings as the companies above. 1999 and 2000 were disappointing years for KO but it did increase its dividend even in those years.

SYK Stryker has been consistent for the past 8 years but it had stumble in 1999. It has also had problems with anti-competitive behavior.

MCD McDonalds had a couple of stumbles back in 2001 and 2002 and during those years its roe and roa were not too good, but the company did increase its dividend during both years and has performed like a blue chip since.

And acouple of smaller cap stocks:

EXPD Expeditors International has been a steady performer in earning, revenue, and dividends. We will have to see how well it does during this recession. It will be tough.

FDO Familiy Dollar Stores does not quite meet the $4.0 billion market cap criteria. In general it has been a steady performer. It is a steady raiser of its dividend and although its earnings trend has had a few minor bumps along the way and its roe has not been consistantly above 15%, the company nevertheless on average has performed at blue chip standards.

How about some stocks that are on their way to becoming blue chips?

GOOG Google is a company that might eventually make the list. It has not been around long enough to have a decent track record. It has been growing revenue at a steady and remarkable rate and appears to be putting newspapers out of business. Also importantly it has been increasing shareholder equity at a remarkable pace.

And how about a few stocks that fall just a little short of being blue chips?

MSFT Microsoft would be by most standards a blue chip company, but not by mine. They have had a habit of wasting shareholder value by repurchasing company stock. Equity per share has remained constant for the last 10 years, actually has declined during the last 5 years.

Just because a stock might be considered a blue chip does not necessarily mean that it is a good investment. But currently the above stocks are certainly better investments than they have been for many years.