Ask the Fool
Dividends in danger
Q: What should I think if a company pays out more in dividends per share than it has in earnings per share (EPS)? ñ P.W., Topeka, Kan.
A: It’s not a promising sign, so you should do more digging into the situation. Imagine Tattoo Advertising Co. (ticker: YOWCH), which has paid out $2 per share in dividends in the past year, but has an EPS of just $1.50 per share over that period. It may be safe for a while due to its cash hoard (which you can look up on its balance sheet), but no company would want to keep paying more in dividends than it’s generating in cash. That’s not sustainable.
If Tattoo Advertising is just experiencing temporary underperformance, the discrepancy might not be a big deal. But if its troubles are deeper, it’s likely to consider reducing or eliminating its dividend.
Remember, too, that earnings are not the same as actual cash generated. Due to various (legal) accounting practices, EPS can be manipulated. You’ll often get a better picture of how much cash a company is generating by studying its statement of cash flows.
To see which healthy and growing dividend payers we’ve recommended, take advantage of a free trial of our “Motley Fool Income Investor” newsletter at incomeinvestor.fool.com.
Q: What are the “trade date” and “settlement date” on my brokerage statements? — G.V., Watertown, S.D.
A: When you place an order to buy or sell a security with your broker, there will be a “trade date” and “settlement date.” The trade date is the date the order was executed; it counts for tax purposes. The settlement date is when the cash or securities from the transaction hit your account.
Meet Prem Watsa
While many have heard of Warren Buffett, few are familiar with Prem Watsa, CEO of Canada’s Fairfax Financial Holdings (NASDAQOTH: FRFHF), a company somewhat like Buffett’s Berkshire Hathaway, dealing in insurance and a variety of other businesses. Fairfax’s book value has grown by a compounded annual rate of 25 percent over a 25-year period. Like Buffett, Watsa has offered some valuable investing lessons. For example:
“Why do Roman bridges historically last for a long, long time? … The people who designed the bridges had to stand underneath it before the traffic went on. So they made sure there was a massive margin of safety.”
Ideally, we should buy stocks when they seem significantly undervalued, thereby including a margin of safety. Stocks that have gotten ahead of themselves may be just as likely to fall closer to their intrinsic value than to keep advancing. You can also make your investments safer by focusing on companies you understand and ones that seem strong (think low debt and growing revenue and earnings).
“Don’t ever think that the (stock) market knows more than you do about the underlying business. That’s the biggest mistake you can make.”
We small investors tend to put far too much faith in the market and “professional money managers.” Don’t assume that because your stock sank 20 percent in a week that you did something wrong, or that your company is going down the tubes. In contrast to what business schools all over the world like to preach, markets are inefficient. Many big drops are temporary. Keep up with your holdings, be informed, and have faith in your own judgment as you ignore the short-term twists and turns of the market and Wall Street.
“Predicting rain doesn’t count, but building an ark does.”
Fortify your investments so that you don’t get whacked by a flood. Keep short-term money out of stocks, and add bonds to your diversified portfolio as you near retirement. Keep learning about investing, too. (Motley Fool newsletters have recommended buying both Fairfax Financial and Berkshire Hathaway.)
My Dumbest Investment
Three bad rides
Worldcom. Williams Communications. Global Crossing. I rode two of these companies on their way up, more than doubling my money, and then rode all of them all the way down to zero. For a long time, they still showed up in my online portfolio, so I would get to look at them and remember, every time I logged in to my brokerage account. Buy and hold has its limits. — C., online
The Fool responds: You’re right. We like to differentiate between the common recommendation to buy and hold and a sounder variation on it: Buy to hold. In other words, don’t just buy stock in a company and forget about it for eons. Instead, buy with the aim or hope of holding on for a long time — but keep up with the company’s progress, too, so that you don’t end up blindsided by some troubling development.
Great fortunes have been made by people who hung on to stock in solid companies for decades, through many ups and downs. Just be sure a downturn is due to a short-term problem, not a long-term one.
Name that company
I trace my roots back to 1886, when an Atlanta pharmacist mixed a caramel-colored liquid with carbonated water and people bought it for 5 cents a glass. I sold about nine drinks a day that year, and now people around the world quaff more than 1.8 billion servings of my beverages each day. My 500-plus brands include Fanta, Sprite, Minute Maid, vitaminwater, DASANI, Barq’s, Dr Pepper, Evian, FUZE, Odwalla, Monster and Juan Valdez. More than 62 million people like me on Facebook. My stock has grown by 15 percent annually, on average, over the past 30 years. Who am I?
Last week’s trivia answer
I was born in 1983 and now rake in more than $4 billion annually, employing some 8,500 people. Based in California, I serve individuals as well as small and mid-sized companies worldwide, offering tax, business and financial management software and services. You might know my QuickBooks, Quicken or TurboTax products. I serve credit unions and banks, offer payroll processing, and even help farmers with crop pricing. I’ve helped more than 50 million people and am often listed as a great place to work. My stock has grown by an annual average of 13 percent over the past decade. Who am I? (Answer: Intuit)
The Motley Fool Take
With all the attention that computer-related companies such as Apple and Facebook are receiving these days, some have forgotten about or have written off Microsoft. It deserves some consideration, though.
Sure, there are valid reasons to worry about its future. It was late to the mobile scene, and few people even know about its app store. Perhaps worst of all, the PC market, where Microsoft has long been the dominant operating system, is ailing as consumers flock to tablets and other mobile devices.
Still, there’s a lot to like about Microsoft. It’s digging deeper into the cloud-computing and gaming realms, with its Windows Azure cloud platform and its new Xbox 720. Its Surface tablet’s market share is growing, too. Its Windows 8 system is in the works, and it remains a major force in business computing.
The company now has a broad reach, present across many forms of computing, such as smartphones, tablets, video game consoles, desktop operating systems and more. It may be able to boost its strength by consolidating some or all of these into a single big ecosystem, one that competitors might find it hard to challenge.
Better still, the stock seems attractive at recent levels, sporting a P/E ratio of 16, a forward-looking P/E of 9, and a dividend yield near 3.2 percent that it has been growing aggressively.