Blue chips that consistently generate profits...

Blue chips that consistently generate profits... Coca-Cola consistently rewards shareholders... An investing lesson from Warren Buffett... What Buffett is buying today... An improving economy...
 

 Last week, we told you about two blue-chip businesses that consistently generate profits... regardless of what is going on in the market.

 

In the September 29 Digest, we talked about Intel (INTC), the world's premier microchip company. Intel owns 98% of its market share and is poised to increase its dividend again as its free cash flow grows to $15 billion.

 

And in the October 1 Digest, we discussed cigarette giant Altria (MO). The company owns Philip Morris USA and controls 50% of the U.S. cigarette market. Altria also owns a 27% stake in the world's second-largest brewer, SABMiller.

 

These are some of the largest, highest-quality, most powerful companies in their industries. Buying them when they are cheap and holding on to them is the absolute best way to make money in the market.

 

 Another familiar blue-chip name continues to hit new highs while the rest of the market faces headwinds: $188 billion soft-drink icon Coca-Cola (KO).

 

Coca-Cola is the world's largest beverage company, with four of the world's top five soft drinks: Coca-Cola, Diet Coke, Fanta, and Sprite.

 

The company owns 17 brands worth at least $1 billion each, including many you're likely familiar with, like Schweppes ginger ale... Minute Maid orange juice... Powerade sports drinks... and Vitaminwater.

 

Over the past decade, Coke has held nearly 50% of the total U.S. soft-drink market and more than 25% of the world's market share, according to statistics firm Statista. The company's brand – one of the top brands in the world across any industry – is estimated to be worth close to $80 billion. Worldwide consumers drink 15.2 billion ounces of Coca-Cola products daily.

 

 Like many blue-chip companies, Coca-Cola sports consistently thick profit margins, gushes free cash flow, has a fortress balance sheet, generates consistently high returns on capital, and relentlessly rewards shareholders.

 

Coke has booked profit margins of nearly 20% over the last 10 years. It has generated between $46.5 billion and $48 billion in revenue every year since 2011 and $8 billion to $8.5 billion in free cash flow during that time frame. The company's balance sheet shows $90 billion in assets versus just $19 billion in long-term debt. Plus, few companies have rewarded shareholders better. Coke has paid a quarterly dividend since 1920 and has increased dividends in each of the last 52 years.

 

 Back in August 2010, Dr. David "Doc" Eifrig recognized Coke's value. He told his Retirement Millionaire subscribers to buy shares.

 

At the time, Coca-Cola paid a $0.91 annual dividend. Four years later, Coke has increased its dividend 34%... to $1.22 annually. Subscribers who took Doc's advice are already earning a 4.3% yield on their original purchase.

 

Plus, Coke is due for another dividend increase soon.

 

Coca-Cola also pays investors a "stealth dividend" in the form of share repurchases. The company repurchased more than 350 million of its own shares from 2008 to 2012. And Coca-Cola will be buying back a lot more shares in years to come... In late 2012, the company's board authorized a plan to repurchase up to 500 million more shares.

 

You can see why this is the best way to get wealthy in the stock market. Retirement Millionaire subscribers who bought on Doc's original recommendation are up 71%.

 

 Today, Coke trades for around $43 per share... right around where investing legend Warren Buffett purchased a $1 billion stake back in 1988, a 6.2% stake in Coke at the time.

 

Of course, shares have split two-for-one four times since Buffett's purchase. For every share he purchased in 1988, he now has 16. Every $43 he invested 26 years ago is now worth $879, including dividends... a compounded return of 12.3% a year.

 

When Buffett first purchased Coca-Cola shares, he locked in a 3% yield. Twenty-six years later, he's now earning 45% a year on his original purchase price.

 

 The greatest investor of all time buys stable businesses with bullish long-term prospects at fair prices and holds them... forever. So, what is Buffett doing with his money today?

 

Last week, Buffett announced that Berkshire Hathaway will buy Van Tuyl Group, the fifth-largest car dealership in the U.S. The name of the dealership will be changed to Berkshire Hathaway Automotive. He is looking to buy more auto dealerships across the U.S.

 

This purchase allows Berkshire Hathaway to take advantage of other businesses it already owns, like packaging auto insurance with Geico or financing through Wells Fargo.

 

Essentially, Buffett is looking to consolidate the U.S. car dealership market... a move that could trigger an avalanche of consolidation in the sector. By acting first, Buffett can hand-pick the top-quality firms.

 

Buffett is buying for one simple reason... money. There is a lot of profit in car dealerships. In 2013, the average U.S. dealership produced a 29% return on equity, according to the National Automobile Dealers Association.

 

One of the reasons profit margins at dealerships are high is because there are fewer dealers selling more cars.

 

According to the National Automobile Dealers Association, the number of new-car auto dealerships in the U.S. has fallen 43% since 1970.

 

Hundreds of dealerships closed following the financial crisis in 2009, when only 10.4 million automobiles were sold. This year, auto sales are expected to be around 16.3 million, according to an analyst from automotive-research company Kelley Blue Book. Part of the reason auto sales are up is because the economy is improving...

 

 As Doc pointed out in the October issue of Retirement Millionaire, "right now, the economy is only showing signs of health."

 

The job market continues to show improvement. The unemployment rate is now down to 5.9%. We realize some of that is attributed to a drop in the labor participation rate... but overall, things are still trending in the right direction. As Doc explained...

 

This month, orders of durable goods jumped to levels never before seen. Durable goods are big, expensive items that typically suggest rising confidence and business investment. The most recent numbers – which reflect purchases made in July – leapt to $300 billion. A large part of that comes from big orders for aircraft.   But here's the fun part... this has been such a long and slow climb out of the recession that we're only in the early stages of an economic recovery. The economy has a long way to run before it gets back to what economists consider its full potential.   Over the long term, the economy typically grows at about 3% per year. Of course, it doesn't grow at 3% each and every year. Rather, after a year or two of below-3% growth... it will grow quicker to make up the pace. Ever since the 2008 financial crisis and subsequent recession, the economy has had a tough time catching up. It may take a while for the U.S. economy to get back to its trend level, but it has a lot of potential growth waiting to fully bloom.

 

 

 New 52-week highs (as of 10/3/14): Invesco Value Municipal Income Trust (IIM), Coca-Cola (KO), Altria (MO), Nuveen Municipal Opportunity Fund (NIO), and W.R. Berkley (WRB).

 

 In today's mailbag, subscribers sent in their responses to Porter's discussion about "the drawbridge that's destroying America." We're sharing some of our favorites below. If you haven't weighed in on the issue, let us know what you think at feedback@stansberryresearch.com.

 

 "Porter, thanks for another great essay. I would like to add one more data point that changed in the 70's, the rise of the public unions. A government job used to mean a modest salary, and a secure modest pension. Now 'public service' means extraordinary pay for ordinary or modest effort (or virtually no effort if you a relative of the right 'kingfish' or if you kick back enough by buying golfing outing fundraiser tickets) and a gold plated retirement. I want to barf every time I hear 'public service', I call them the new aristo's (aristocrats), and our current democracy, 'government of the government, by the government, for the government.' My fond hope is that it 'will perish from this earth.'" – Paid-up subscriber Jack McLean

 

 "You left off one of the main reasons why the rift continues to open between rich and poor. It is that entitlement mentality. We are entitled to healthcare. We are entitled to a living wage. We are entitled to a big house. My parents were happily blue collar in 1965. 1500 sq foot house, two used cars (and having two was quite the luxury!), no air conditioning, a party line phone with one handset, a black and white tv, a 14cu ft refrigerator with an ice cube tray and the automatic filler was me, a washer and WOW a dryer, oh and no heath care at all except what they paid cash for.

 

"Today, my 'poor' tenants on disability live in a 1600 sq ft house, the air conditioner runs non-stop, they have a land line and two cell phones, 3 color tv's, a 21cuft fridge with ice and water in the door and his VA benefits pay for a wheelchair, a hospital bed and transport every time he has a doctor appointment. BTW, this disability is that his knees won't hold him up because he is just too damn fat. Her kidneys are failing because she drinks a gallon of Dr. Pepper every day.

 

"These people have far more than my parents ever did and they have literally wasted their lives complaining that they need more assistance. We've all (well, not ALL, but many) decided that we are entitled to Starbucks and Netflix and 2 new cars in the garage and a bigger house and, and, and... On the other hand, every immigrant I know, legal or not, works hard, pays taxes, saves money and is extremely grateful to have a roof over their head and enough food to eat. One of them came here 30 years ago with, literally, empty pockets and no command of English and is wealthy today. Why, because he plowed every extra dime back into his business and didn't buy the 'wants' until his family and retirement was taken care of and he could afford to splurge. Today, most people splurge first and save not at all.

 

"BTW, you can still get a bachelor's degree, even in crazy California for about $16,000. That means you take one year off between high school and college, work 40 hours a week at minimum wage, live at home and save your pennies. You will have enough money to get out of college debt free. That's the way we used to do it, before the government handed out 'free' money to go to school. There are many professions that still require a 4 year degree. If that's your passion, there's a way to get there without spending a fortune. You guys do great pointing out the fallacies that the left wing media tries to feed us daily. Don't fall victim to the fallacy that the wealth gap is caused solely by dropping off the gold standard." – Paid-up subscriber Alison Farrin

 

Regards,

 

Bill McGilton

Baltimore, Maryland

October 6, 2014

 

Why our in-house energy expert isn't worried about a 'fracking' ban...

 

Total U.S. oil production has soared in recent years, thanks to revolutionary technologies like hydraulic fracturing (or "fracking"). With that has come enormous controversy and debate.

 

In today's Digest Premium, S&A Resource Report editor Matt Badiali discusses the current state of U.S. oil production... and explains why he's not worried about a ban on fracking...

 

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Why our in-house energy expert isn't worried about a 'fracking' ban...
 

Editor's note: Total U.S. oil production has soared in recent years, thanks to revolutionary technologies like hydraulic fracturing (or "fracking"). With that has come enormous controversy and debate. In today's Digest Premium, S&A Resource Report editor Matt Badiali discusses the current state of U.S. oil production... and explains why he's not worried about a ban on fracking...

 

 

 I (Matt Badiali) don't think the shale revolution is some kind of short-term fad... and the numbers back me up on this.

 

With commodities, economics drive everything. If the economics don't work – like if oil companies can't make money drilling for oil – they'll stop. Right now, there is no stop in sight. We're closing in on 9 million barrels a day, up from 5 million barrels a day in 2008.

 

That's just astonishing. U.S. oil production is up more than 60% in a very short period of time.

 

 Right now, the Energy Information Administration (EIA), which is the U.S. government's oil industry watchdog, says the ceiling is more than 13 million barrels per day by 2036. That's amazing.

 

Every year, the EIA puts out a low-range, middle-range, and high-range estimate. To date, shale production has tracked the EIA's high range. Every year, the industry manages to produce more oil than the EIA expects. So we use the high end of the range for our predictions.

 

Energy analyst Daniel Yergin won a Pulitzer Prize for his book The Prize: The Epic Quest for Oil, Money, and Power. He thinks we're going to hit 14 million barrels a day. That's an impressive amount of oil. If shale were a short-term fad, the engineers and geologists wouldn't be making these kinds of predictions.

 

 There are two types of oilfields: conventional and shale. Conventional oilfields are like a glass of lemonade with ice cubes in it. You stick the straw in, suck the lemonade out, and you're left with a glass of ice cubes. Oil trapped in shale is caught in rocks that look like the pages of a book. It's good stuff, but it's trapped in these tight formations... So you have to do a little more work to get it out.

 

One of the ways we get the oil out of the rocks is called fracking. Colorado and California were flirting with bans on fracking. Parts of New York have banned fracking. But I don't see a fracking ban as a risk to the growth in oil production because right now, the growth is coming from North Dakota's Bakken Shale, southeast Texas' Eagle Ford shale, and western Texas' Permian Basin.

 

Those three big shales are going to drive growth in U.S. oil production with no problem at all. If they ban fracking in Colorado, it won't be a meaningful deterrent to our oil production growth.

 

– Matt Badiali

 

 

Editor's note: Matt just published a series of special reports detailing the absolute best way to invest in America's shale boom... including the five stocks you must own to participate in this megatrend over the next decade. You can gain immediate access to these picks with a risk-free trial subscription to the S&A Resource Report. It costs just pennies per day. Click here to learn more about this special offer.

Why our in-house energy expert isn't worried about a 'fracking' ban...

 

Total U.S. oil production has soared in recent years, thanks to revolutionary technologies like hydraulic fracturing (or "fracking"). With that has come enormous controversy and debate.

 

In today's Digest Premium, S&A Resource Report editor Matt Badiali discusses the current state of U.S. oil production... and explains why he's not worried about a ban on fracking...

 

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