Classic Pepsi Cans

The Board of Directors of PepsiCo, Inc. (NYSE: PEP) today declared a four percent increase in the company’s annual dividend, from the current annual rate of $2.06 to $2.15 per share on PepsiCo common stock. It is the company’s 40th consecutive annual dividend increase.

The quarterly dividend of $0.5375 is payable June 29, 2012, to shareholders of record on June 1, 2012.

For the prospectus and other information on the Fallen Angels Income Fund (FAINX), please click here.

An added short-term bonus will be the addition on Phillips 66 to the S&P 500, joining ConocoPhillips in the index.

At the same time, the new Phillips 66 will join its parent, ConocoPhillips, in the S&P 500, replacing supermarket chain SUPERVALU(SVU). In a cascading series of changes, SUPERVALU will move into the S&P MidCap 400, replacing American Greetings(AM), which will move into the S&P SmallCap 600, replacing The Standard Register(SR).

Source:
Phillips 66 To Be Added To S&P 500 After April 30 Spin (Stock Spin Offs)

The prospectus for the Fallen Angels Income Fund (FAINX) can be found here.

Target covered calls and April option expiration

The rally was gathering steam and I wanted to let our positions run. Plus, our positions were not stretched enough were I would normally look to sell a covered call. With Volatility declining too, the premiums just weren’t enough to entice me to trade. So I sat, except on one position, Target (TGT).

Target is a position in our Enhanced Dividend Income Portfolio and a position in the fund I now manage, The Fallen Angels Income Fund (FAINX). For a prospectus and other information on The Fallen Angels Income Fund, click here.

By the end of February, Target (TGT) was the one position that looked stretched. It’s RSI was in overbought territory, the MACD looked like it had peaked and was about to roll over, and the stock had moved so far from its moving averages that it looked perfect for at least a consolidation move. Target begged to have a call written against it and I did at a strike of $57.50.

Then the stock proceeded to trade higher.

Chart courtesy of Stockcharts.com

Our timing on the trade was off. Even though our covered call immediately went in the money, we we’re OK with it. Our fair value on Target (TGT) is about $57 per share and we can do a lot worse than buying a stock when its undervalued and selling it when it becomes fairly valued. Granted, I didn’t want to have our position in Target called away just yet, we already have plenty of cash on the sidelines, about 12% in the Income fund and 10% in the Enhanced Dividend Portfolio. Plus, in the Fallen Angels Income Fund (FAINX), we still have a few closed-end fund positions that I would rather sell if we needed the cash for a better investment opportunity.

Our cash concerns were put to ease as the overbought condition in Target began to unwind. The stock fell back below our Call’s strike price and the option expired worthless last week.

Tobin’s Q stands at 0.87, as calculated from the latest Flow of Funds Report. The Q ratio is a tool to value the broad market but I don’t like to use it as definitive tool as to whether or not the stock market is over or under-valued. I prefer to use the Q ratio as a measure of risk versus reward. What type of real returns can I expect from the stock market if I put my money to work today?

To help answer this question I take Professor Robert Shiller’s historical data on the S&P 500 and generate total annualized real returns for rolling periods of 10 and 5 years. I then compare these returns to Tobin’s Q. The charts below are the results.

The first chart is Tobin’s Q with 10 year annualized total real returns for the S&P 500.

Click image to enlarge.

The second chart is Tobin’s Q with 5 year annualized total real returns for the S&P 500.

Click image to enlarge.

On both a 5 year and 10 year annualized basis the potential total real returns at today’s level of Q look very low. The range is high single digit returns at best and negative returns at worse with the most likely outcome somewhere in between.

However, stocks don’t exist in a vacuum. How does the risk/reward profile of the stock market compare to other investment options? U.S. Bonds, Commodities, etc.? Given the zero rate environment, equities, even with their potential low real returns, could still be a better choice than something like U.S. treasuries which are almost guaranteed to produce negative real returns.

At the Columbia Investment Managers Association Conference hedge fund manager Dan Loeb layed out a few of the lessons he has learned as a professional investor and Market Folly was there to capture them.

One of my favorites is Dan thoughts on value investing.

Let’s not delude ourselves; some of us are just buying really crappy companies at low prices. Don’t make excuses for making bad investments at apparently cheap valuations. He’d rather pay up for a better business that has some growth.

It reminds me of one of Warren Buffett’s favorite sayings, “I would sooner buy a great business at a fair price than a fair business at a great price”.

My other favorite lesson from his speech is Dan’s thoughts on “stinky stocks”.

When your first reaction to a pitch is that’s a terrible stock or industry, those have often been some of their best investments. He considers that a positive when it’s something in an out of favor industry. Auto parts in 2009, European banks in beginning of this year.

Read the rest of Dan’s lessons here.

Lessons Dan Loeb Has Learned As An Investor: CIMA Conference (Market Folly)

Bank of New York Mellon (BK) is one the world’s largest custody banks and it is a position in our strategic dividend strategy and in our mutual fund, The Fallen Angels Income Fund (FAINX). Bank of New York Mellon is first and foremost a position in both strategies because we believe it to be undervalued. Second, it is a position in both strategies because of its current dividend and the potential for Bank of New York Mellon to grow its dividend.

Like our position in JP Morgan Chase (JPM) the Bank of New York Mellon passed its stress test last week and can return more capital to shareholders.

Bank of New York Mellon Corp. (BK), the world’s largest custody bank, said its board authorized the repurchase of as much as $1.16 billion of common stock following the Federal Reserve’s test of how the bank would fare in an economic decline.

We like the use of capital to buyback shares when the stock is cheap but we’re a little disappointed that we’ll have to wait at least 12 more months before the bank raises its dividend.

Source:

BNY Mellon to Buy Back as Much as $1.16 Billion in Stock (Bloomberg)

JP Morgan (JPM) is a position in our strategic dividend portfolio and a position in our Fallen Angels Income Fund (FAINX). The equity portion of the Fallen Angels Income Fund and our strategic dividend strategy focus on finding not only undervalued dividend paying stocks but stocks that have the potential to grow their dividend.

Entering this year we saw the financial sector, predominantly the large banks, having the potential to greatly increase their dividend payouts. They just needed to pass the Federal Reserve stress test and get any new capital plan approved by the Fed too. JP Morgan did both.

JPMorgan, the biggest U.S. bank and arguably one of the strongest, kicked off the releases by announcing that it had been cleared to raise its dividend by 20 percent and spend as much as $12 billion buying back stock this year and $3 billion more in the first three months of 2013.

Fed Stress Tests an Investor Payday for Some (Reuters)

The 20% increase will raise the quarterly dividend up to $0.30 per share. At today’s prices JP Morgan’s dividend yield will increase to 2.68%. The $12 billion stock buyback will also reduce the current outstanding float by 7% at today’s prices.

The latest Flow of Funds Report was released by the U.S. Federal Reserve last week and from it we can update Tobin’s Q. From table B.102 we take line #35 “Market Value of Equities Outstanding” and divide it by line #32 “Net Worth (Market Value)”.

Tobin’s Q is now registering at 0.87.

One of the drawbacks to using the Q ratio is it is not a timley measurement. This Flow of Funds Report covers the 4th Quarter of 2011 and the “Market Value of Equities Outstanding” does not capture the recent price gains in the equity markets.

Even using equity prices from the 4th quarter of 2011, Tobin’s Q remains above it’s long-run fair value of 0.65 as calculated by Andrew Smithers and Stephen Wright in their book “Valuing Wall Street : Protecting Wealth in Turbulent Markets“.

Exelon (EXC) has been a recent laggard in both our strategic dividend portfolio and in the equity portion of the Fallen Angels Income Fund (FAINX). Besides depressed natural gas prices and a renewed negative sentiment on nuclear energy, Exelon’s share price has been dragged down by the on-hold status of its potential merger with Constellation Energy (CEG).

As with all utility mergers, it is a long process of review by the regulatory agencies but that overhang has been removed. The Federal Energy Regulatory Commission approved the merger late last Friday and the $7.9 billion merger closed yesterday.

The stock price reacted strongly to the news.

Chart courtesy of Stockcharts.com

Exelon was already the nation’s largest supplier of nuclear energy, supplying 17% of energy to the mid-west and Atlantic area and almost 4% of all U.S. electricity. Adding Constellation Energy (CEG) creates an even larger utility giant. Constellation Energy is the largest retail power supplier; it supplies about 14% of all energy to the commercial and industrial market.

The merger approval is a positive long-term catalyst for Exelon and so far it’s provided a short-term one too.

Hewlett-Packards printing division continues to decline

Almost a year ago I discussed what I see as the Holy Grail of investing. Being long disruptive technologies while being short the disrupted technologies. Being perfectly positioned for both long-term trends.

What did I see as a disruptive technology?

Tablet computers, Apple’s (AAPL) iPad.

What technologies and companies would tablet computers disrupt?

Printing and companies heavily reliant on printing. Companies like Hewlett-Packard (HPQ).

Tablets, by providing an easy and intuitive way of viewing documents are reducing our need to print. And by increasing demand for ebooks, digital magazines, and digital newspapers tablets are reducing commercial printing demand too. As The Financial Times reports, printing is in danger of no longer being the cash cow it once was for Hewlett-Packard (HPQ).

Significant declines in profit margins in its services and imaging and printing divisions compared with a year before also pushed down profits, leaving HP with a 44 per cent decline in net income for the period, to $1.5bn.

Imaging and printing sales are down 7% from a year ago.

So how has a long position in the leading tablet maker, Apple Inc., paired with a short position in Hewlett-Packard (HPQ) worked out?

Pretty well.

Chart courtesy of Stockcharts.com

Is Hewlett-Packard’s destiny the same as the last great buggy whip maker? No.

Hewlett-Packard still still has other divisions to drive their business and they still have many years to use the remaining cash flow from their printer division to help fuel their turnaround. Plus, there will still be demand for printing. Even if printing were to completely disappear, it takes a good amount of time for old dominant technologies to die off. The last typewriter factory just shut down last year.

Hewlett-Packard is definitely a Fallen Angel now and has found its way into the portfolio of Baupost Group, the large value based hedge fund run by Seth Klarman. However, the trend is set, printing demand is in decline and Hewlett-Packard will need to find a new cash cow.