Poor Coke... The U.S. dollar ruled in November... Genius world... John Q. Citizen buys in a frenzy... Praying to go broke... Best bet: World Dominating Dividend Growers... China's knees buckling...
It must be boring to work for Coca-Cola. Its core franchise is so good, it's virtually impossible to change it without alienating your customers. For the holidays this year, Coke rolled out a new white can. The can was part of Coke's campaign to save polar bear habitats.
I saw the white cans at the grocery store a week or so ago. It took me a minute to realize the can had regular Coke in it. I thought it might be a new flavor or a new diet version.
Well, I'm not the only one who was confused. Some folks thought it was Diet Coke and didn't realize it was regular Coke until they drank it.
Coke says it's going back to the red can, the one we all know and love. It's not as bad as when they rolled out New Coke back in 1985 and lost a huge chunk of market share. But it's another example of how deeply cemented in our psyches that red can and its sugary, artificially colored contents really are. Coke isn't just the world's biggest beverage brand. It's also the most widely recognized brand of any kind in the world.
No wonder Warren Buffett loves this company so much. It's not a product. It's a religion. L. Ron Hubbard said, "If you really want to get rich, don't start a company. Start a religion." Coke is a religion. And if the company makes any changes to its caramel-colored sugar water or its packaging, the customers revolt.
And looky here... shares of the Church of Coca-Cola are trading for a little more than 12 times earnings (cheap!) and yielding a little less than 3%, with a dividend that grows every year like clockwork. Not bad...
Coke is a real product. If you change it, customers freak out. The U.S. dollar is created out of thin air. It can be stretched out of all recognizable shape, and everyone acts like it hasn't changed at all. (And they're right. It was garbage at its inception, and it's garbage now.)
Bloomberg reports that in the month of November, the dollar index return beat stocks, bonds, commodities... just about everything. Investors were frightened by the European debt crisis and sold those other assets. And when they needed financial refreshment after wearying losses, they imbibed... yes... U.S. dollars. When folks get scared and sell, they still get back dollars. I can't believe this'll last forever, persistent as it still may be...
Gosh, weren't we all smart yesterday? Couldn't you just feel the IQs soaring all around the world? All the numbers in our accounts were green when we logged in. Everything went up. What a beautiful day! We're geniuses!
The S&P 500 was up 4.3%. The Dow Jones Industrials were up more than any day since March 2009. Wonderful as it all was, for the life of me, I can't imagine the mindset of those buying in a frenzy yesterday.
I'm inclined to agree with Ron Paul, the Texas congressman who's running for president. "Fiat money caused this European crisis and the financial crisis before it," Paul said in a statement posted on his website. "More fiat money is not the cure."
I'm not sure how anyone could come to any other conclusion... which makes yesterday's rally a head-scratcher. When governments start printing, shouldn't we all sell?
Government interventions never fail to fail. But the pervasive belief in their efficacy is no mystery. It's simply human nature. The French economist Frederic Bastiat said government is the great fiction by which everyone attempts to live at the expense of everyone else. Most folks are happy to take their share of newly printed dollars.
So when central banks print money, at the obvious behest of governments, to bail out big businesses and foreign governments... the markets go euphoric, with every Ameritrade accountholder buying like there's no tomorrow, hoping to cash out soon with a big win. We'll find out sooner or later that all the big Wall Street banks were buying like crazy yesterday, too. That's to be expected. They owe their existence to fiat currency. They're like fiat currency priests, paying homage to Pope Bernanke, spreading the unintelligible Latin word to the benighted masses, who might lose the faith if they heard it in their own tongue.
Or maybe I credit the masses too much. Maybe they're faithful followers, levered to the hilt, just like the big banks. Maybe they don't merely love low interest rates and quantitative easing. Maybe an easy-money policy is their only chance of feeling rich.
That's a sad commentary, isn't it? That so many people are praying for more money to be printed, so they can have a free ride? It's like praying to go broke so you can get a relative to bail you out. Or perhaps it's more like having gone broke and badgering your relatives until they cough up a bailout for you... which you proceed to spend on iPads and iPhones.
So... what do you do with your money at a time like this? I am convinced more than ever that you should put the bulk of your equity portfolio into the stocks I refer to in my 12% Letter advisory as World Dominating Dividend Growers (WDDGs).
They're World Dominating because each one is the No. 1 company in its industry. Wal-Mart is the World Dominating retailer. Coca-Cola is the World Dominating beverage company. Microsoft is the No. 1 PC software firm.
And I call them "Dividend Growers" because they raise their dividends every year, usually for decades on end. Procter & Gamble, the World Dominating consumer products company, has raised its dividend for 57 straight years. Johnson & Johnson, the health care giant, has raised its dividend 48 years in a row.
And yes, all our WDDG picks have raised their dividends at inflation-beating rates over the last 10 years. One raised its dividend 20.7% this year alone. Another just raised its dividend by 25% a couple months ago. And we're not talking puny 1% current yields. We're talking plump 3% and 4% yields... which will keep growing until one day, you're earning a double-digit yield over today's share price and are likely holding onto a big capital gain as well.
WDDGs are insanely difficult to compete with. One of them has a 90% global market share... another controls 80% of its market. Some get the bulk of their revenues from a dozen or more products that are No. 1 or No. 2 in their global markets. Imagine trying to compete with that! Everywhere you try to sell your wares, you hear the equivalent of, "No thanks, I'm a Coke drinker and I'm never changing."
Many WDDGs have balance sheets loaded with cash and little debt. They're the safest businesses in the world. They're a lot safer than the U.S. government's Treasury obligations. As the government continues printing money to bail out every big bank and failed government, Treasury coupons won't grow like WDDG dividends. They'll lose value, likely sticking you with a capital loss in the process.
But WDDGs will continue raising their dividends at inflation-beating rates. You'll be fully taxed on Treasurys, and you'll generally pay the 15% tax rate on dividends. Which would you rather buy? A 10-year Treasury note yielding 3% and virtually guaranteed to pay you back in weaker dollars? Or Johnson & Johnson common stock yielding 3.6%, with the dividend growing by more than 11.5% over the last 10 years? The J&J shares are a no-brainer.
Yesterday's massive central bank intervention into the global economy isn't really a surprise. We know governments have zero incentive to allow a default. They'll always paper over their problems with more funny money. That, believe it or not, will make the WDDGs look even better than they already do, compared to most stocks and bonds.
Inflation will make it harder for corporations to make money on new investments. So they'll pay out more profits in dividends, having nothing better to do with their money. When the great equity bubble was at its peak more than decade ago, dividends went out of style. As stock market valuations have come down, they're becoming more and more important. After all, if you can't count on the market to rise, you have to make money somehow. So you go for dividends. The WDDGs gush huge cash flows more consistently than any other companies. They'll have a greater ability to grow their dividends faster than inflation over the next several years.
And if you want to get a look at what you can expect from stocks over the next several years, just look at the 1970s. From 1974 through 1984, the Dow Jones Industrials Average traded at less than 10 times earnings on average. That's really cheap, as investors demanded higher returns to compensate them during those inflationary years following the total elimination of the gold standard for the U.S. dollar in August 1971.
My list of World Dominating Dividend Growers is a principle feature of The 12% Letter. I sent my subscribers an update yesterday, featuring five WDDGs now in buying range.
To access The 12% Letter and discover the full WDDG list for yourself, click here.
If somehow WDDG stocks don't appeal to you (perish the thought!)... here's an unconventional idea...
"This is the best time to get into the parking market," says John Roy, co-author of The Ultimate Parking Business Buyer's Guide.
Not many people think of parking lots when they're considering commercial real estate investments... They rarely come onto the market. And when they do, they're usually expensive. But the rout in commercial real estate is driving prices down on these turnkey businesses.
There are almost 250 million registered U.S. passenger vehicles, and they're parked 96% of the time. The U.S. parking industry generates $25 billion-$30 billion annually, according to the International Parking Institute. Buying a parking lot in the right location can get you a stable, growing stream of income over a long period of time. A $1 million lot will provide around $45,000 a year in revenue (a 4.5% return) with little upkeep.
We saw this coming... A key Chinese manufacturing index fell in November, proving China is not immune to global financial crises. An index measuring activity in the manufacturing sector, released today by the China Federation of Logistics and Purchasing, fell to 49 last month from 50.4 the previous month. A reading below 50 means contraction. Another purchasing managers' index, from HSBC, fell to 47.7, from 51 last month.
Also, Chinese home prices fell for a third month in November as developers cut prices to move inventory, according to SouFun Holdings, the country's biggest real estate website owner. Home prices fell 0.28% last month, following a 0.23% drop in October. And prices dropped in 57 of the 100 cities SouFun tracks, including in each of the 10 biggest cities.
China's first easing in three years was not in vain... After years of trying to cool prices, the country is giving in to inflation.
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New 52-week highs (as of 11/30/11): Abbott Laboratories (ABT), McDonald's (MCD), Altria (MO), Philip Morris International (PM).
Wow! Great stuff in the mailbag, with plenty of stories from IBM and the airline industry. We'd also really like to know what sorts of investments you're most interested in these days. Please write us at feedback@stansberryresearch.com.
"I am an Alliance member who has worked for IBM for 17 years. I have always felt that IBM has very smart people at the top of the business. There is never any question that they look to maximize the stock price (of which they own a bunch). The company has long demonstrated a strategic plan for the future. They are moving to be a software and services company. This is demonstrated by the constant acquisitions of software companies and the willingness to trade hardware profit for services business.
"IBM's technology investment has proven superior to its competitors (HP & Sun). The PWC acquisition helped elevate our position in many accounts, but we still struggle competing against Accenture at the top level of many companies.
"The one thing I find discouraging is that (like many other public companies), there is such an overwhelming focus on current period results. Ten years ago, it was accepted that we pushed to get business in December that may otherwise occurred in the following year. Then we moved to having a quarterly focus. Today, people are measured by the month. It is not unusual to discount a product an additional 10% to get the business in November that was planning to occur in December. That mentality comes from the top and following it is not optional. The lives of anyone associated with sales are made pretty miserable at the end of the month/quarter/year. This includes all of the administrative support people who are working well past midnight on December 31 to make sure we record every possible dollar of business. This entire process has trained our customers to hold out until the last minute for a better deal.
"IBM has been taking the necessary steps to get lean for the past 15 years. It appears they are now getting ready for lean times. So much of our business is tied to the big banks. It looks to be a challenging few years join forward. I just expect that we will be working late into the night on New Year's eve trying to get one of the banks to sign a deal." – Paid-up subscriber Pete
"My experience as an IBMer of 37 years (now 22 years retired) proved to me that I worked for the greatest company in America (maybe even the world) There are many reasons for IBM's success, such as investment in research, resulting in it being the leader in new patents for over two decades.
"I feel that it's three core principles of customer satisfaction, employee morale, and reasonable return to shareholders have been a hallmark of this company. In recent years, the wording has been revised to more accurately the changing environment, but essentially the same principles.
"Mr. Buffett is correct when he says he believes what he is told from IBM management. The company is most trustworthy.
"As an aside, as an employee, I was allowed to purchase shares at 85% of the market price. Is that being fair to employees or what?" – Paid-up subscriber Norman W. Paris
"You asked for responses from people who had experiences working for companies like IBM or American Airlines.
"In 1973, I was hired as a pilot for Eastern Airlines, who at the time was the number 2 airline in terms of passengers carried. I loved flying airplanes and the company treated its employees well. However, it was heavily indebted and burdened with uncompetitive labor contracts. The Unions were constantly fomenting unrest buy trying to convince workers that management was abusing them.
"In the late 1980s, after unsuccessful attempts to revise labor contracts, the airline was sold to Texas Air, a company with a reputation for tough dealings with labor unions. The new owners told the unions that we will either fix it (meaning reduced labor costs) or tank it. The IAM (machinists union) announced a strike and ALPA (the pilots union) said that pilots would not cross the picket line.
"At the union meetings, ALPA was quite open about their position that a substandard pay scale could not be allowed at a major airline like Eastern because it would threaten the industry standard wage scale. We were promised that if we fell on our swords and Eastern failed, that the union would make sure that the new owners of the airplanes and routes would hire us. This, of course, never happened and only a tiny percentage of Eastern pilots got jobs with other airlines. The bankruptcy was devastating to most Eastern pilots because not only had we lost our jobs, but our careers as well. This is because the industry operates on a seniority system and even if a pilot found employment with another airline, he would be forced to start at the bottom, regardless of experience or qualifications. An interesting side note is that a substantial minority of pilots thought that going on strike was stupid, but they knew that if they cross a picket line and become a 'scab' their life thereafter will be miserable due to retribution from the union brotherhood.
"In my case, being middle aged, I was not interested in starting over with another airline and it is unlikely that they would hire someone my age anyway, so I was forced to make a career change. I started my own business and thankfully it has prospered. I am far wealthier than if I had stayed with the airline. I also found that I was a better businessman than pilot and that I was much happier when I had direct control of my working life.
"If there is a moral to this story it is that sometimes a catastrophic life changing event can be beneficial. Perhaps another lesson is that you should never believe that a union is looking out for your best interest. They are self-serving institutions that have seriously degraded our competitiveness resulting in the loss of a great many jobs and, in some cases, the loss of entire industries.
"I have benefited from your sage investment advice and I particularly enjoy Porter's commentary." – Paid-up subscriber Bob Searls
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
December 1, 2011