Total Investor Yield
Posted by Eddy Elfenbein on February 19th, 2013 at 12:40 pm

I mentioned this before but Shawn Tully has an interesting article on the concept of total yield — the dividend yield plus buybacks.

As I’ve written many times before, I’m not a fan stock buybacks. As a shareholder, I’d much rather have the cash in hand. A major issue is that too many companies wash away any benefit of share buybacks with massive executive stock compensation.

In theory, I really like the idea of total shareholder yield, but I’m afraid that it needs to be adjusted to benefit companies that primarily use share repurchases to benefit shareholders. By the way, DirecTV ($DTV) is a good exmaple of a company that truly lowers its outstanding shares.

Inflation Is a Tax on Capital
Posted by Eddy Elfenbein on February 19th, 2013 at 11:36 am

Roben Farzad writes at Bloomberg Businessweek:

Longtime readers of BusinessWeek (now Bloomberg Businessweek) will recall its Dewey-Defeats-Truman moment: A 1979 A 1979 cover story that heralded the “Death of Equities: How Inflation is Destroying the Stock Market.” Inflation was the bogeyman of the late 1970s and early ’80s, an oft-cursed scourge to the average family’s buying power. The problem with BusinessWeek’s headline declaration is that it came shortly before the Paul Volcker Federal Reserve vanquished runaway inflation, setting up an 18-year bull market.

Since that bull maxed out 13 years ago, the market has pretty much gone to hell and back, twice. While inflation has been consistently in the low single digits, it hasn’t been as irrelevant as many investors imagine. Indeed, like termites coring out a wooden house, rising prices have already set them back a long way.

“Inflation,” says Crossing Wall Street‘s Eddy Elfenbein, “is a tax on capital and it slowly eats away at your portfolio. Even a low rate of inflation—say, 3 percent per year—compounds to 50 percent in less than 14 years. It’s proverbial running to stand still.”

In simple terms, if you were to take the Standard & Poor’s 500-stock index’s fin de siècle high and factor in the subsequent growth in the consumer price index, the market is 27 percent below its inflation (as the government defines it)-adjusted high. So much for the few percent we need to hit that market record you’re hearing so much about of late.

Is the Sequester Really Going to Happen?
Posted by Eddy Elfenbein on February 19th, 2013 at 10:51 am

We’re getting down to the wire and if nothing is done, automatic spending cuts will go into effect. The conventional wisdom seems to think the cuts will happen.

Fortunately, I have a better tool than the conventional wisdom and that’s the stock market. Here’s a look at the Spade Defense Index divided by the S&P 500. This is a key metric because much of the cuts will hurt the Pentagon.

Defense stocks started to lag the market at the beginning of the year, but have reversed course somewhat this month.

Medtronic Earns 93 Cents Per Share
Posted by Eddy Elfenbein on February 19th, 2013 at 10:35 am

The stock market is doing well this morning. The S&P 500 has been as high as 1,526.82, which is yet another multi-year high. The market is trying to extend its weekly winning streak to eight. This is a good way to start.

Investors have impressively run past a lot of minor negatives that easily could have hurt stocks in previous markets. The earnings news continues to be decent. The latest numbers show that 388 companies in the S&P 500 have reported Q4 earnings. Of that, 69.8% have beaten expectations. Compare that with the long-run average of 62%. Earnings are up 5.6% from one year ago, and 1.9% above expectations.

Our latest Buy List stock to report earnings was Medtronic ($MDT). For their fiscal third quarter, Medtronic earned 93 cents per share which was two cents better than Wall Street’s forecast. That’s an increase from 84 cents per share a year ago. Sales rose 2.8% to $4.03 billion which was $10 million below forecasts.

Medtronic once again reiterated their full-year earnings forecast of $3.66 to $3.70 per share. For clarity, Medtronic’s fiscal year ends in April. MDT is our first Buy List stock in the January-April-July-October cycle to report earnings. The shares are currently down about 3.3% although I don’t see why. In today’s earnings release, the CEO said:

“We are playing a leading role in transforming global healthcare by implementing our long-term strategies of economic value and globalization,” said Ishrak. “We are only at the beginning of establishing our track record, but we believe that crisp execution of both our baseline and long-term growth strategies, combined with strong and disciplined capital allocation, will enable us to create long-term dependable value in healthcare.”

Shawn Tully at CNN/Money makes a good point about Medtronic. The dividend yield is 2.3% and the repurchases come to 3.7% for a total shareholder yield of 6.0%.

Morning News: February 19, 2013
Posted by Eddy Elfenbein on February 19th, 2013 at 6:50 am

Merkel Cites East German Lessons for EU’s Problem States

German February Investor Confidence Jumps to Three-Year High

Draghi Seeks to Ease Talk of Global Currency War

Yen Rises After Aso Rules Out Japan’s Foreign-Debt Buying

Chinese Army Unit Is Seen as Tied to Hacking Against U.S.

Japan’s Orix Buys Dutch Asset Manager

Swelling U.S. Labor Force Keeps Fed at Ease

Get A Social Security Check? Treasury Says It’s Time To Go Electronic

Buffett Cash Makes General Mills to Grainger Target

Reader’s Digest Brand is Key to Strategy in Bankruptcy

Xstrata Unit Wins Environmental Approval For $5.9 Billion Philippine Mine

Novartis Scraps Non-Compete Payment to Departing Chairman

Paulson Leads Funds to Bermuda Tax Dodge Aiding Billionaires

Cullen Roche: Barron’s Doesn’t Do Monetary Realism

Credit Writedowns: Will The Corporate Sector Expansion Peak In Spring Once Again?

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Morning News: February 18, 2013
Posted by Eddy Elfenbein on February 18th, 2013 at 6:46 am

German Banks’ Use Of ECB Funds Drops Sharply In January

In Europe’s Tax Race, It’s The Base, Not The Rate, That Counts

Debt Bubble Born of Easy Cash Prompts Swedish Rule Review

China’s Yen For Currency Appreciation

“Nothing To Hide” In Helicopter Deal, India’s Prime Minister Says

Obama Faces Risks in Pipeline Decision

American Airlines Bankruptcy, Merger Deals Were Complex, Expensive

Independent News Plans $226 Million South Africa Disposal

Facebook, The Coolest Cutest Corporate Welfare Queen Of Them All

Tech Industry Sets Its Sights on Gambling

Danone Dairy Woes a Challenge for Peltz’s Heinz Playbook

Carlsberg Slumps as Brewer Scraps Medium-Term Margin Goal

Fooled By Facts

Howard Lindzon: My Kingdom For A Hedge!

Jeff Miller: Weighing the Week Ahead: Is the Housing Rebound for Real?

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Paperman
Posted by Eddy Elfenbein on February 15th, 2013 at 4:02 pm

January Industrial Production Falls 0.1%
Posted by Eddy Elfenbein on February 15th, 2013 at 11:09 am

Industrial production fell by 0.1% in January. Economists were expecting an increase of 0.2%.

Output last month was pushed down by a 0.4 percent drop in manufacturing production, which reflected a 3.2 percent decline in motor vehicle assembly. Manufacturing output had increased 1.1 percent in December.

Production at the nation’s mines fell 1 percent.

With industrial output weak, the amount of capacity in use fell to 79.1 percent from 79.3 percent in December.

Industrial capacity utilization — a measure of how fully firms are using their resources — was 1.1 percentage points below its long-run average.

Officials at the Fed tend to look at utilization measures as a signal of how much “slack” remains in the economy, and how much room growth has to run before it becomes inflationary.

The VIX Hits Six-Year Low
Posted by Eddy Elfenbein on February 15th, 2013 at 10:19 am

This morning, the Volatility Index ($VIX) got down to 12.25 which is the lowest reading since April 23, 2007.

DirecTV’s Outlook for 2013
Posted by Eddy Elfenbein on February 15th, 2013 at 9:21 am

After DirecTV ($DTV) reported great earnings yesterday, the stock opened higher, but the shares retreated throughout the day.

I think traders were unnerved by the company’s loss on Venezuela’s currency devaluation. According to the earnings call, the devaluation will cost DTV “approximately $160 million.”

Still, the company has a fairly upbeat outlook. DirecTV specifically said, “we’re forecasting earnings per share to be $5 or greater in 2013.”

Here are some key bits from the earnings call:

Next I would like to make a few comments about our consolidated outlook. Let me begin by providing some additional color on our EPS outlook for 2013. Depreciation expense at DIRECTV Latin America and DIRECTV U.S. will increase by roughly 30% and 10%, respectively, compared to 2012. In addition, our effective tax rate will also be a few percentage points higher in 2013 as our 2012 rate benefited from the completion of a prior year audit, and we don’t expect to have benefit going forward. As a result, we’re expecting our effective tax rate this year to be in the mid-to-high 30% range. Having said that, excluding onetime items such as the Venezuela pretax devaluation charge of approximately $160 million, our guidance that we provided at our Investor Day in December 2010 remains intact as we’re forecasting earnings per share to be $5 or greater in 2013. Free cash flow will likely come in lower than 2012 levels due mostly to the impact of the Venezuelan devaluation, as well as from higher taxes and interest. Cash taxes are expected to be higher in 2013 due to greater earnings before taxes, and a higher cash tax rate is expected to be in the mid-to-high 30% range, primarily due to an expected tax payment in 2013 upon the close of a tax audit, reversal of depreciation of benefits associated with prior year economic stimulus programs and the absence of a state tax credit carryforward that we had in 2012.

Finally, in terms of DIRECTV’s strategy for returning capital, I’d like to first point out that our top priority for creating shareholder value remains to reinvest in our businesses. And as you heard from Mike earlier, if opportunities do not arise that meet our regular strategic and financial hurdles, we will continue our capital allocation strategy for share repurchases as we believe DIRECTV stock remains significantly undervalued. As such, on Tuesday, our Board of Directors authorized a new $4 billion share repurchase program and terminated the balance of roughly $860 million that remained from the previous authorization. We’re expecting that this new authorization will provide sufficient funding to support our buyback program through early next year.

All in all, we entered 2013 from a position of strength, thanks to our strong balance sheet, cash flow, competitive position and quality subscriber base across the Americas. And if we accomplish all of our targets and deliver the expected financial results, I believe we will continue to lead the industry in revenue and earnings growth, as well as creating substantial shareholder value.