Sub 1% interest rates... Doc's 3M pick... Blue chips are soaring... Doc and Sjug's housing bet looks good... Social-networking bubble is bursting...
Interest rates on five-year certificates of deposit (CDs) – a popular savings vehicle in the U.S. – dropped below 1% for the first time on record.
The national average for a five-year CD is 0.99%, according to data from research firm Market Rates Insight. Compare that to August 2000, when the average interest rate for a five-year CD was 6.25%.
CDs, like savings accounts, are insured by the Federal Deposit Insurance Corporation. But they typically carry higher interest rates because the depositor agrees to lock up his money for a period of time (in this case, five years). In other words, 0.99% is about the best you can hope for when putting money in the bank. That's why so much money is rushing into bond funds (which we discussed yesterday).
It's a sad state of affairs, considering the government says inflation is running around 2%. Assuming those inflation numbers are correct (we believe the real number is more than double the government figures), you're losing 1% of your purchasing power every year. And you'll likely lose that money until the government increases the federal-funds rate, which it's pledged to keep near zero percent until late 2014.
These dismal interest rates on savings accounts and most bonds are why we've been urging readers to buy blue-chip equities with solid yields. While inflation hurts savers and bondholders… companies like Coca-Cola can increase prices to offset inflation. And they pay solid and growing dividends (the growth in which outpaces inflation in many cases).
One of these companies, 3M – which Dr. David "Doc" Eifrig recommended to his Retirement Millionaire subscribers in November – hit a 52-week high yesterday. 3M is a multinational conglomerate with brands like Scotch tape and Post-it Notes. As Doc wrote in his November issue…
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Today, [3M] is a well-diversified technology company... It makes abrasives, adhesives, filters, drug delivery systems, cleaning products, and even the granules for roofing shingles. This broad array of products results from 3M's long-standing philosophy that nourishes new ideas: Management encourages cross-division sharing and "bootlegging" of each other's ideas to create new products. |
In addition to its diverse product lineup and global footprint, Doc liked how 3M treats its shareholders…
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3M also has always rewarded shareholders. It currently pays a dividend yielding 3% and has increased its dividend for 53 consecutive years. This is the 12th-longest streak of any stock I know. It's a good sign we'll get rewarded if we buy the stock. |
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Management agrees with us... 3M is on pace to buy back about 3% of its stock this year. It will pay for the buybacks with operating cash flow, which averages around $5 billion a year (slightly greater than its net income). Since its capital expenditures equal about 20% of that, 3M has plenty of cash to keep buying stock and paying dividends. A payout ratio of only 37% means our dividend will likely stay safe and growing in the next decade. |
Retirement Millionaire subscribers are up 21% on the recommendation (including $1.73 a share in dividends). 3M yielded 3% when Doc recommended the stock last November. Today, due to price appreciation, the dividend yield is 2.6% (still roughly a full percentage point above 10-year Treasury yields). And in the first quarter of this year, 3M increased its quarterly dividend by 7% to $0.59.
Over the past few years, we've stressed the importance of owning high-quality, dividend-paying companies like 3M. With interest rates at record lows, we believed buying blue-chip dividend-payers would become a "fashionable" thing on Wall Street. Our editor in chief, Brian Hunt, called it the "dividend magnet." Companies that pay healthy and increasing dividends would attract yield-thirsty money, sending share prices soaring.
As you can see from the charts below, our theory was correct. The stalwarts have soared over the past two years. Here's a chart of one of the world's best dividend-paying stocks, cigarette-maker Altria. It currently yields 4.7%.
And here's a chart of another World Dominating company with a healthy dividend – the world's largest retailer, Wal-Mart. The stock currently yields 2.1%.
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Wal-Mart and Altria are mainstays of the 12% Letter and Extreme Value portfolios... and showing gains for those subscribers.
Home Depot – the largest U.S. home-improvement retailer – announced yesterday that second-quarter profit increased 12% to $1.53 billion year over year. That beat analyst estimates. The company attributed the strong quarter to customers spending more on remodeling projects.
Sales at stores open at least one year – a key retail metric – increased 2.1%, the fifth-straight quarterly increase. The number of purchases rose 0.6% to 374.9 million in the quarter. And the average transaction value rose 1.8% to $55.02 year over year. Put simply, more customers are visiting the store and spending more money than they did at this time a year ago.
Home Depot also raised its annual profit forecast to about $2.95 a share, up from a previous forecast of $2.90.
This is great news for Steve Sjuggerud and Doc Eifrig, who are both bullish on housing. Home Depot is a proxy for the U.S. housing market. As more houses are built or remodeled, Home Depot makes more money. And according to the company's annual forecast, it believes the trend is up for the year. For more on Steve and Doc's bullish housing thesis, you can read the August 10 Digest.
While the market is rewarding high-quality companies with solid dividends, it's punishing some speculative Internet companies that enjoyed a lot of hype a few months earlier.
Shares of daily-deals website Groupon plunged more than 23% today after the company's quarterly sales missed expectations. The company also gave a cautious earnings outlook. Shares are trading at a 52-week low.
We were skeptical about Groupon before the company went public. We believed the myriad of "social-networking" companies going public (like Zynga, Facebook, and LinkedIn) was a sign of a bubble.
As longtime readers know, we avoid initial public offerings in general. These hype-driven offers are usually overvalued from the beginning. The valuations for these new technology companies were particularly absurd... For example, Facebook went public at around 100 times sales.
Internet retailing giant Amazon, on the other hand, trades for less than two times sales. And it's one of the greatest online businesses in history.
Before these companies went public, we wrote…
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Folks are paying through the nose for social networking businesses. But when has anything like this ended well for the gullible, fleece-able hordes of desperate gamblers in the stock market? I can see them all lining up to get their Facebook, Groupon, and LinkedIn IPO shares – sold by investment bankers whose job is to get the most absurdly high valuation possible for their clients' stakes. |
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What about competition? Is there some reason a dozen smart kids with computers can't replicate these businesses in a week or two? There are no barriers to entry. There is no reason for a premium valuation. There's no intellectual property, licensing, FDA trials, or anything else to prevent competitors from springing up like mushrooms after the investment bankers make it rain. |
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Anyone who knows anything about business valuations knows it's difficult, and sometimes impossible, to value a young business in a new industry. And don't tell me the investment bankers are experts at this. They're not. They specialize in commission generation, not business valuation. Trusting their valuations is like driving blindfolded. You will crash, guaranteed. – S&A Digest, January 6, 2011 |
Since going public, these stocks have been disasters. Facebook is down from a peak of $45 a share on its first day of trading to less than $21 today. Groupon is down from an offering price of $20 to $5.80 today – a 71% decline. Zynga, the online game creator, went public at $10 a share. Shares are trading at $3 today.
Even at today's price, we prefer blue chips with strong yields to these fallen Internet angels.
New 52-week highs (as of 8/13/12): 3M (MMM), GenMark Diagnostics (GNMK), and Philip Morris International (PM).
One subscriber wrote in to tell us how a strategy based on dividend-paying stocks has worked for him… and with a question about Jeff Clark's charts. Send your comments and questions to feedback@stansberryresearch.com.
"I subscribed to your newsletter following a late night viewing of your 'End of America' video. Having majored in economics, it just made too much sense and, so, I found a partner whose advice and logic I could trust.
"At 27, I don't have much disposable income (yet) to play with, but what I've learned from your newsletter has energized me. Over the long haul, my goal is to continue building my positions in WDDGs 10, 15, 25 shares at a time. These companies can be pricey, but for good reason; they are simply the best companies to own.
"Wal-Mart is probably my proudest acquisition to date. At roughly $64/share, I just couldn't convince myself to buy; I could get twice the shares of Microsoft and spread my broker's transaction cost even more. Then, it happened... THE SCANDAL (insert gasp here)! This was a 'put your money where your mouth is' kind of moment. Mr. Ferris wasted no time letting us know that people were overreacting, and I agreed. If I actually believed what you and your team had been preaching the whole time, this was an opportunity to get in when everyone else was bailing. So I did, at just under $59/share. CHACHING!!! I'll NEVER sell those shares.
"Now, I plan on taking a step back from building my positions in WDDGs to use my funds to sell puts. The goal is to build up cash to invest in 'don't miss' opportunities when they come around. Looking forward to learning more about that, as well as buying bonds. Have you written reports detailing bond buying strategies, or where the best place to look for these bond opportunities is?
"Also, Jeff Clark uses a lot of charts and lines and colors (oh my!), but I don't have the slightest clue on how to read them. Any recommendations on how to find a simple, yet thorough explanation of how I can read and use these charts in my own research more regularly? Thanks for everything. Keep doing what you're doing." – Paid-up subscriber Jeff Reynolds
Goldsmith comment: Thanks for the note, Jeff. And congratulations on your success. We're always gratified to hear from subscribers who've made money using our strategies. As for help deciphering Jeff's charts… we made our Common Sense Guide to Technical Analysis available to all subscribers. It's a great place to start.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
August 14, 2012