Monthly Archives: March 2017

A Stock to Get the Dividend

Dividends are an important part of investing for long-term growth, but the mechanics of how they’re paid can be confusing for investors of any level. The one question I hear most often about dividend stocks is: When do I have to buy a stock in order to receive its dividend payout?

The answer is a bit complicated. This date is not included in the company’s announcement of a dividend, and it’s not published on the quote pages of TheStreet, Yahoo! Finance or even the expensive Bloomberg terminal on my desk.

Over a decade ago, I coined the term “must-own date.” Terms such as “record date” and “ex-date” are commonly thrown around in dividend parlance, but the must-own date provides the simple answer that most folks want: the date by which they need to buy a dividend stock.

Here’s how to determine the must-own date for any dividend so that you’ll never be confused by this important question again.

When most dividends are announced, the company generally says it is “payable to shareholders of record as of” a certain date. This is useful information, but investors often mistakenly assume that the record date is the date by which they need to purchase a stock in order to receive the dividend.

You see, stock trades actually settle three days after the fact, even if you’re a frequent trader who buys and sells the same stock several times a day. That means that you need to buy a stock three days before the record date in order to qualify for the dividend.

Further complicating matters, the ex-date falls two trading days before the date by which you need to be a shareholder of record. We’ve established that the must-own date falls three days before the record date, so simple subtraction means that you must buy a stock one day before it goes ex-dividend.

Invest Internationally From the USA

With the emergence of capitalism in China and explosive economic expansion in Latin America (to name just a few growing markets), if you only invest within the United States, you will limit your investment portfolio to only a small percentage of the global asset class of equities. However, international investing is for neither the faint of heart nor the inexperienced investor.

When it comes to global equity plays, there are several things that must be understood before making your first trade. Please note: The following is based on several years of equities work in Tokyo, Hong Kong and London, followed by ten years at Merrill Lynch managing the company’s equity swap business.

 

Four Things to Consider Before You Invest Internationally

1. Local knowledge matters: To best understand the culture, customs, current events, fads and politics of a nation, you need to physically be in the country. Being local will provide the ultimate environment for research and better timing for investing. 2. No two markets are alike: Different countries’ markets command different multiples, and investor demand varies. Here are some reasons for this:

  • Monetary and fiscal policy will vary from country to country.
  • Yield curves vary as well.
  • Investment activity is influenced by different groups. For example, in some countries, pension plans play a far greater role in the markets. In other countries, individual investors are a more prominent force.
  • The stage of economic growth (whether the economy is emerging, expanding, mature or contracting) affects the country’s growth and risk outlook. (See “Emerging Markets Are Not a Monolith”.)

3. Companies vary — even within the same industry: An American retailer may be quite different from, say, a Japanese retailer. If you don’t believe that, then compare the shopping experience at Macy’s ( M) with that at Mitsukoshi. 4. The impact of foreign exchange (FOREX): When you invest overseas you are investing in two assets: the underlying asset stock or bond and the country’s currency. The changing relationship between countries’ currencies will have an impact on direct investing in a foreign security. I will discuss this in greater detail a little later in this article. Other factors to consider when investing internationally include the global differences in accounting and taxes.

 

Three Ways to Invest Internationally

Here are three effective ways to invest internationally from within the United States.

 

1. Country-specific or regional funds:

Through Internet-based “long distance” research, it is far easier to gauge how the broad market will fare in (for example) South Korea or Italy than to do so for individual companies like South Korea-based Samsung or Italy-based UniCredito Italiano. Most countries have a benchmark index like the Nikkei 225 in Japan or the DAX in Germany. In addition, many international investors will use the MSCI set of international indices as guideposts for foreign invsting. Once you decide on a country or region to invest in, there are two effective ways to play country funds: exchange-traded funds (ETFs) or closed-end mutual funds. This strategy of understanding and investing in an entire country’s or region’s economy, market or foreign exchange is a less complex and less risky endeavor than taking a more precise position in an individual foreign company.

Get TheStreet Quant Ratings

When you’re evaluating a dividend-paying stock, your primary focus has to be the viability and sustainability of the dividend itself. Not rain nor sleet nor dark of night should stand a chance of keeping that courier from delivering a payment to your account every year.

The clearest danger to a dividend is a lack of cash flow. When a company has weak cash flow, the dividend is among the first costs to be cut — because this at least allows the company to appear to be bolstering that key metric. But a dividend stock that stops paying its dividend is of little value to anyone’s portfolio.

 

For example, in the energy sector, companies such as Chesapeake Energy  (CHK) and Linn Energy (LINE) were forced to eliminate their dividends recently, while industry bellwethers, Chevron (CVX) and ExxonMobil  (XOM) have maintained, if not increased, payouts.

 

How do you find a “safe” dividend? Seek out companies whose operating earnings and cash flow can cover their annual payments at least two times over. It is possible, in the near term, to raise capital through debt or equity offerings to prop up dividends, but most companies would not sustain this practice for more than a quarter or two.
It also helps to take a look at a company’s dividend history. It’s impossible to predict the future from the past, but some companies have exhibited a strong tendency to raise their payouts annually. For example, Dover (DOV) and Procter & Gamble (PG) have each updated their quarterly dividends for 59 consecutive years. 

Read an Income Statement

The most recent installment of the Finance Professor kicked off our look at how to start analyzing the financial statements of public companies. We covered where to locate a company’s financial information and reports, and what to look for once you find this data. Now we’re going to take the next step in this series of lessons and focus in on how to read a company’s income statement (or profit and loss statement, the P&L).

 

Mind the GAAP

Income statements will vary from company to company and industry to industry. As such, the statement might seem like one big salad of information that we must learn how to sift through to better understand a company’s operating results. However, there is one constant that always guides us in the preparation and understanding of financial statements such as the income statement. This constant is the application of generally accepted accounting principles, or GAAP. GAAP is a standard that must be followed by all companies (public and private) in order to receive the unqualified independent auditor’s report that I discussed last time. We rely on the auditor’s report to confirm a company’s adherence to GAAP or alert us as to the deficiencies of its financial statements in terms of accounting standards. Accounting standards are quite complex and in the United States are the responsibility of the Financial Accounting Standards Board (FASB). For the individual investor, it is more important to be assured that the company you hold in your portfolio is in compliance with GAAP than to understand the intricacies of the accounting standards.

 

Section by Section

Let’s first start in the top section of this income statement, with revenue (or income). Please note that within revenue you have two different classifications: sales (e.g., “Sales by Company –operated restaurants”) and revenue (e.g., “Revenues from franchised and affiliated restaurants.”) While sales and revenue might seem like identical terms and are frequently used interchangeably, there are some subtle differences to be aware of.

 

Sales vs. Revenue

Some companies act as direct sellers to the public and, concurrently, as suppliers to wholesalers or other distributors. Other companies use franchisees to distribute their product. Sales represent direct sales to the public or distributors. In McDonald’s case, these are sales that McDonald’s makes at company-owned restaurants. Revenue represents income streams from nondirect or ancillary sources. For McDonald’s, this would be fees earned from franchisees that operate their own McDonald’s branded restaurants. For another take on the difference between sales and revenue, let’s take a quick look at BJ’s Wholesale Club. BJ’s direct sales to customers would be viewed as sales, while the fees it earns from its members’ annual membership dues would be viewed as a revenue item.

 

Operating Costs and Expenses

The next section of the income statement deals with a majority of the costs and expenses associated with the operation of a company’s business. The description of such expenses will vary from company to company, but we can divide them into several general categories:

 

Cost of Sales:

This line item represents the expenses incurred by the company to produce and deliver the product or service to the customer. For McDonald’s, this would include, but is not limited to, the cost of its hamburgers, French fries, beverages, labor, utilities, occupancy (rent and depreciation) and paper goods. A retailer such as CVS Caremark describes these costs as “costs of goods sold, buying and warehousing costs.”

 

Selling, General and Administrative Expenses (SG&A):

These are expenditures related to the management of the overall company, which cannot be directly linked to product sales or the delivery of services. This will include items such as corporate overhead, legal, accounting,Sarbanes-Oxley compliance, management, stock based compensation, advertising, marketing, travel, entertainment and licensing expenses.