How to get rich... Why dividends are so important... Double your income over the next five years... This business is benefiting from low natural gas prices... Foreigners dump Treasurys... You don't watch the news...
In today's DailyWealth, Porter describes "the only sure way to get rich in stocks." He explains the investment strategy Warren Buffett used to become the world's richest investor. And it's not simply buying "cheap" stocks...
We've described many times how our government's crushing debt load will inevitably result in a currency crisis and a period of blistering inflation. To profit during the inflation crisis on the horizon, you must understand the difference between traditional value investing (buying a dollar for 50 cents) and how Buffett made his fortune...
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In short, the secret to Buffett's approach is buying companies that produce huge returns on tangible assets without large annual capital expenditures. He calls this attribute "economic goodwill." I call it "capital efficiency." |
Porter's written about capital efficiency many times over the years. He wrote a great Digest essay on the topic last October. And the latest issue of Stansberry's Investment Advisory is dedicated to the topic... In the issue, he calls it "the best way to get rich."
Porter uses Hershey – which he believes will be "one of the greatest investments" of his career – as an example of a capital-efficient business...
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Over the last two years, [Hershey's] share price is up 60%, versus the S&P's 20% return. Hershey recently hit my first price target of $60. More important to me, it continues to increase its dividends. What did I see that the market (and some of our subscribers) missed? |
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Since 2005, Hershey had repurchased more than $1 billion worth of its own stock – more than 10% of the company, in addition to paying large ($200 million-plus) cash dividends. It has paid 325 quarterly dividends in a row – 81 years. It has increased its dividend payout every year since 1974. |
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On a combined basis (dividends and buyback), the company pays out a remarkably large amount of the cash it produces. For example... in 2008, the company produced a little more than $500 million in cash from operations. It spent nearly $300 million on dividends and share buybacks. (It also repaid $128 million in debt.) |
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Hershey can afford to return so much capital to its shareholders because it requires little capital to grow. Over the last 15 years, the company's annual capital spending has remained essentially unchanged. In 1997, the firm invested $172 million in property and equipment. |
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By the end of 2010, its annual capital budget had only increased to $179 million – essentially unchanged. Meanwhile, cash profits had reached nearly $1 billion – growth of nearly 200%. This is the beauty of a capital-efficient business: While sales and profits grow, capital investments don't. |
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And that leads to the real secret – the most important investment secret you will ever be told. Some companies, like Hershey, can increase the percentage of their earnings they pay out as they grow. Let me make sure you understand this... The size of the payout Hershey makes to investors doesn't merely increase on a nominal basis along with sales... It increases as a percentage of the company's gross profits. |
In short, capital-efficient companies earn large returns on tangible assets without large capital expenditures. And they can increase their returns without big increases to capital spending. As a result, they can pay the excess returns out to shareholders via stock buybacks and dividends. The secret to these excess returns is a strong brand... People are willing to pay more for products they love (think Coca-Cola).
The dividends you receive from these businesses could soon increase... Standard & Poor's analysts expect S&P 500 companies to pay more than $260 billion in dividends this year, surpassing the record $247.9 billion paid out in 2008. Even at record-high nominal payouts, the payout ratio (the percentage of earnings paid out as dividends) of S&P 500 companies is currently at a record-low 27%, according to Wells Fargo analysts. Historically, payout ratios have averaged 53%. So earnings growth has outpaced dividend increases... And that means your favorite dividend-paying stocks could soon be paying out a lot more...
To start building a portfolio of solid, dividend-paying stocks, we recommend you read The 12% Letter, written by Dan Ferris. Dan's newest issue is due out tomorrow after market close. I spoke to him today, and here's what he had to say...
I've been doing research and picking stocks professionally for almost 15 years. I've seen a lot of investments go right, and a few go wrong. The thing I want most in any company I buy is a competitive advantage... one that's going to last for years... The company we're buying this month has a huge position in cost-advantaged land that no other company can duplicate.
To learn more about The 12% Letter and gain access to his next issue as soon as it's available, click here.
As a Digest reader, I hope you've noticed the "New 52-week high" bullet we publish everyday just before our mailbag... This snippet is simply a list of our recommended stocks that are currently hitting new highs.
One stock we've seen dominating the 52-week high list (including today's) is Westport Innovations (WPRT). Frank Curzio recommended the natural gas engine manufacturer to his Small Stock Specialist subscribers one year ago. Shares are up 180% for his readers. And Frank says they still have upside from here. Here's what he told subscribers today...
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Westport has a near-monopoly on the market for natural gas-powered engines. It has partnerships with virtually every major truck manufacturer in the world, including Cummins (U.S.), Weichai Power (Asia), and Volvo (Europe). |
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More important, the industry has experienced a fundamental shift over the past six months. Not only have the costs to manufacture natural gas engines declined, but natural gas prices have also plummeted. Trucking operations can now save 50% on fuel costs by using natural gas rather than gasoline or diesel. |
Despite the recent surge in shares, Frank believes Westport could run significantly higher. You see, Westport is still a relatively small company ($2 billion market cap). That's about 10% of the market cap of Cummins, the world's largest independent maker of diesel engines. Frank says it's just a matter of time before every heavy-duty trucking fleet switches to natural gas. Sticking with diesel will cost them millions of dollars each year in fueling costs.
Westport will not be the only winner benefiting from this megatrend. Frank just wrote a 12-page report highlighting several stocks with triple-digit upside potential. It's titled: "Massive Rollout of American-Made Fuel Begins Now... How We Make Huge Profits From This Long-Term Trend." We'll publish this special report on Friday. To make sure you don't miss this report, you can sign up for Frank's Small Stock Specialist letter here...
For more than a year now, we've been developing a new daily trading service – DailyWealth Trader – that will help introduce readers to the strategies and ideas that have helped make Jeff Clark, Doc Eifrig, and Brian Hunt some of the most successful analysts and traders in the industry.
For the past few weeks, we've been giving Alliance readers a "sneak peek" at DailyWealth Trader... and we're hearing about a big benefit of getting a trader's look at the market every day...
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Excellent addition! Today's note is a type of advice that I like... I'm tracking all your recommendations, and sometimes trying to do short term trades on top of long term holdings. – Noam |
This is the "sweet spot," as Alliance member John B. put it. We're helping readers pinpoint the best time to put their money to work in long-term ideas.
On Monday, for example, DailyWealth Trader noted one of Dan's favorite holdings.
It's a "budding" member of the World Dominator group. It has a massive global footprint in the beverage business... and several unassailable brand names in its portfolio. It's also absurdly cheap... a true no-brainer, according to Dan.
Last summer, however, shares were slammed in the general market decline. They fell more than 25%. They've since bounced... and are staging a rapid recovery. Just the other day, they hit an important "technical" level on the chart, signaling that more gains are coming... And that's what we showed in DailyWealth Trader.
Of course, in DailyWealth Trader, we can't go into the details of a company's balance sheet, we're not analyzing its cash flow, and we don't have space to explore its market position. That's what Dan does so well. For serious long-term investors, that's indispensable information. And buying on Dan's recommendation or buying six months later isn't going to make much of a difference in the outsized returns this company should produce over the next few years.
But for folks with a shorter-term timeframe, waiting until the market tells you a stock is ready to move higher can save a lot of frustration with "dead money" holdings. So if you like to trade with a portion of your portfolio... or if you're looking for precision timing on your entry points for long-term holdings... DailyWealth Trader will be a fantastic resource
For now, this service is still only available to Alliance members. But we'll be sharing more details – including live trading updates from DailyWealth Trader – in the coming weeks.
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New 52-week highs (as of 2/14/12): PowerShares Buyback Achievers Fund (PKW), PowerShares Ultra Technology Fund (ROM), V.F. Corp (VFC), Westport Innovations (WPRT), Prestige Brands Holdings (PBH), Enterprise Products (EPD), Wal-Mart (WMT), and Philip Morris International (PM).
It seems most of you don't enjoy the mainstream... And you're obviously reading our newsletters... Thanks. Send your feedback, good or bad, to feedback@stansberryresearch.com.
"While I'm at work I'll sneek a peek at Yahoo Finance just to get an idea of what the market is doing. I get amusement on how there is ALWAYS a cause-and-effect for every move in the market... I mean, who comes up with these? What's not funny is how many people believe that the headlines really tell the story.
"I used to be one of them. I thought it was my 'job' as an educated American to keep current on everything happening in order to make rational editorials on current day events. Now I use the headlines as my daily dose of the comics and get my news from the S&A Digest. By the way... 'money honeys and male models working the teleprompters,' I laughed all night over that!" – Paid-up subscriber Herman
Sean Goldsmith
New York, New York
February 15, 2012