Newsletter - March 2nd, 2024

Dear Reader,

Attached is our latest list of stocks passing value screens (low P/E, low EV/EBITDA, etc.), which don’t meet our investment criteria - and our reasoning.

This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.

For reports of stocks that pass our quantitative and qualitative standards:

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Dividends: Daniel Peris Interview

A minority shareholder profits on his investments in only one of two ways: 1) Dividends and 2) Capital gains. Assessing a company's track record and prospects for dividends is the only course under the investor's control.

Daniel Peris - a fund manager at Federated Hermes and author - provides insights on dividends. Some notes below:

2:45 Historic Anomaly

Peris elaborates why the current lack of dividends in the US is a historic anomaly.

Business ownership has always entailed an income stream. This is true of commercial real estate, farmland, etc. It has been true for 5,000 years of commercial history - in contrast with the last 30 years in the US. Not taking cash distributions isn't natural.

He posits that one reason is the persistent lowering of interest rates over 40 years since the early 1980s, which lowered income thresholds for investors. Further, the persistent rise in US stocks muted investor protests.

However, the recent increase in interest rates, and change in buyback taxation laws, could point to a greater demand for dividends.

12:00 Commodities/Gold/Art/Cryptocurrencies

Participants in the above markets know there's no income stream, and are speculating on changes in price. This is in contrast to business ownership where investors look to the business for their investment results - not Mr. Market.

It certainly is a strange business where you have to sell a portion of your business to participate in its rewards. Imagine not being able to enjoy the fruits of your vineyard without having to sell a portion of it.

Arguments on control of the timing of taxation (dividends vs. capital gains) is a secondary consideration.

27:45 Retention value

Some managements claim that shareholders' money is better off in their hands because they can create more in market value per $ of retained earnings than they pay out in dividends.

This must be tested by examining long-term market returns - but even if they pass this test, this would require dependence on future stock price movements for stock sales and therefore, income.

If a small investor were to pursue this policy, he'd need cash reserves for 5+ years to ensure he's not at the mercy of the market - for he cannot rely on management to repurchase stock when the market is low (management may have better investment opportunities then).

28:45 Check on management waste

It's human nature to treat other people's money more casually than their own. Requiring reasonable dividend payouts acts as a check on mismanagement of shareholder capital - your capital that you've subcontracted to management.

32:15 Speculation vs. Investment

Speculation in share prices depends on other people; Dividends depend on business earnings and liquid assets, which is consistent with an investment mindset.

38:00 Stagnating share prices

High dividend payouts aren't the reason for stagnating share prices, lack of reinvestment opportunities are. Meaninglessly retaining earnings isn't the solution - instead, it's likely to lead to discounting of cash in management hands.

42:15 The role of diversification

Businesses will have their ups and downs and dividends may be cut, even to zero, in some cases. The investor can simply solve this problem by investing in 20-50 securities - thus evening out the instability and enhancing the consistency of his income stream.

Diversification will allow him to invest in cyclical companies - and also in companies that have recently cut dividends as they may offer substantial investment value.

45:45 Variances

Variances in dividends are usually far smaller than variances in share prices. We have a certain bias towards tools that help ignore Mr. Market - allowing share prices to take care of themselves. Dividends certainly aid this mindset.

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We give substantial weight to dividend payouts. This is because most 'value'/distressed stocks that we're interested in don't have attractive near-term growth prospects. Management's appropriate course of action, after reserving adequate amounts for business survival, is to pay out excess funds to shareholders.

In such stocks, we value buybacks equally because they enlarge our stakes at bargain prices.

If management doesn't distribute sufficient amounts to shareholders, there's a fundamental flaw in the shareholder-management relationship. A minority shareholder can't change this situation - but he can avoid entering unwanted situations in the first place.

We focus on situations where management has demonstrated a minimum level of shareholder orientation.

For our stock reports:

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Wish you an excellent week ahead.