Buy What You Know

I am asked frequently if stocks can continue to go up. Would that I knew. Bespoke Investment Group recently provided some insight as to where the current bull market ranks historically. Six years into it, this rally qualifies as the fourth-longest of the 33 Dow Jones industrial average bull markets since 1900.

Since the 2009 low, the Dow Jones industrial average has risen approximately 175 percent — the fifth-largest gain since 1900. That is a nice run, but Bespoke also notes that in the 1990s bull market, the Dow rose 400 percent. All the more impressive since interest rates were a good deal higher then

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The Motley Fool Blog Post

Dear Friends,

I am attaching a link for my blog post recently syndicated by The Motley Fool (TMF) investing education website.  I am pleased to be one of their syndicated bloggers and will be contributing regularly to their site which distributes articles to AOL and Yahoo Finance.  TMF is a well-established site that advances accessible investing information for individuals.

From the TMF website:  Founded in 1993 in Alexandria, Va., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world’s greatest investment community. Reaching millions of people each month through its website, books, newspaper column, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company’s name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king — without getting their heads lopped off.

I will continue to link all of my articles here except when they are repetitive.  (This post is modified and expanded from a previous post on Cisco Systems (CSCO)).

Thanks for reading.

 

 

WHY CISCO SYSTEMS MAKES SENSE FOR THE LONG-TERM

Rather than viewing the dividend as a surrender to growth, a growing dividend often indicates what management thinks about future earnings growth.

 

Cisco Systems (NASDAQ: CSCO) was one of the tech darlings of the 1990’s.  The stock rose 69,230% from its public offering in February of 1990 through 12/31/1999. That equates to a 94% annual return compared to 25.6% for the NASDAQ over the same period.  Then, as though on cue, at the dawn of the 21st century, the stock stalled out, tail-spun into a rapid descent and finally, flat-lined with little hope (or expectation) of robust future earnings growth or stock price outperformance.  From 12/31/1999 through 12/31/ 2011 CSCO generated a total return (which includes price movement and dividend income) of -61.9% or a loss of just over 7% per year.  Compare this to the return of NASDAQ for the same period–a decline of 16.9% or -1.4% per year (again including price and dividends).  When it comes to CSCO and all fallen-angel growth stocks for that matter, investor emotions have run the gamut from love to disappointment to hate and finally, neglect.   So why buy CSCO now?

 

The company surprised investors in May of this year when management reported better than expected FY Q3 earnings.  The stock rallied dramatically on the news and is up approximately 24% year-to-date through May 31–the bulk of that return coming after the earnings report.  Cisco CEO, John Chambers, normally strikes a conservative tone.  On the May 15th earnings conference call he was surprisingly upbeat about the company’s prospects, “Cisco is executing at a very high level in a slow, but steady economic environment…We are starting to see some good signs in the US and other parts of the world which are encouraging.”   In subsequent interviews Chambers stated that although the pace of technological change is increasing, CSCO has historically taken advantage of change to transform the business and trounce the competition.  “Usually, when things are toughest for us is when we work harder and surprise people.  That’s when they should be betting on us.” That kind of optimism bodes well for future growth.

 

CSCO management and the board of directors initiated a dividend in 2011 and the quarterly dividend has gone up three-fold since then resulting in an expected yield of 2.8%. (The S&P 500 currently yields 1.3%.)  When rocket-propelled growth stocks mature, the declaration of a dividend is often perceived by investors as a declaration of surrender to future growth opportunities for the company.  But, in fact, often at this point in the company’s growth, the dividend  signals what management and the board think about future earnings growth.  In other words, he dividend is frequently established as a portion of  what management and the board believe is sustainable, long-term earnings power.  John Chambers joined a dignified group of corporate managers when he said as much about a dividend increase in August of 2012:  “We wanted to send a message to shareholders.”

 

Slowing growth does not have to be a death knell for future stock price performance.  Nor does the initiation of a dividend. The market is full of many companies who have successfully made the transition from growth to value stock and have gone on to generate solid performance.  Coca Cola (NYSE: KO) is one such company.  But let’s consider International Business Machines (NYSE: IBM) another company like CSCO which managed the maturation process but also dealt with the additional burden of shifting technological trends.  After maturing from Nifty-Fifty growth stock darling to mature, old-fashioned computer company, IBM spent a decade in exile just as CSCO did.  But the company transformed its underlying business and eventually earnings growth as well as the stock price accelerated once again.  Another consolidation in the early 2000’s and yet another surge (see the 10 year performance chart for IBM).  Buying great companies for the long-term may not result in year-to-year outperformance but over the long-term, it frequently pays off.

 

With a price/earnings ratio of 11.5x next year’s earnings which is a discount to competitors’ Qualcomm (NASDAQ: QCOM) and Juniper Networks (NASDAQ: JNPR), a dividend yield double that of the S&P 500 and a company executing extremely well in a difficult global economic environment, CSCO is the kind of long-term investment idea investors should consider owning for the long-term.

More From Chapter One of THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING

In September, 1988 I made two noteworthy and illustrative investment decisions.  

When our first child was born I purchased one share of IBM stock.  It was a symbolic action really.  I thought it would be fun to hang the certificate on his wall and use it as an object lesson to teach him about things economic.  Before I could get the share framed, I misplaced it and so the lesson was, for the most, part lost.  But I correctly left the investment alone and each quarter the dividend paid by the company was reinvested in an incremental share of IBM stock.  Twenty-four years later, that approximately $100 investment has returned 1020% or 10.6% per year.   During that period there have been two colossally devastating bear markets that frightened investors mistakenly into cash all the while our little share of IBM plumped and expanded like bread dough.  Though market corrections punched down the dough a few times, fueled by the yeast of earnings (which produce stock price growth and dividend payments) our value has grown at a pace far exceeding the rate of inflation and the return on savings or money market accounts.  For all of you stock market skeptics, it is also important to note that the return on the S&P 500 over that same period is a respectable 797% or 9.9% per year.  Simply investing in the stock market index produces enviable returns as well.  The chart looks equally compelling over ten, twenty and twenty five years.  I chose the time period featured below because it represents my actual experience.  But, time matters to investors; even if your timing is not perfect and you purchase shares before a market correction or a prolonged period of unimpressive returns (as I did, note IBM’s modest appreciation for the first ten years) over an extended period you will be asking yourself only one question:  Why didn’t I buy more?  Today, that one hundred dollar share of IBM is worth over $1,300.00.

 

Contrast that investment to another I made at the same time.  Two weeks after my son was born I was scheduled to make a presentation to Federal Express at their offices in Memphis, Tennessee.   None of my business suits fit and I was not going to be caught dead in a maternity outfit after the fact.  Especially the maternity clothes available to working women in the late 1980’s (but that is a story for a different book).  I rushed to the mall  and bought almost the first thing I found: a knee-length cashmere sweater that draped discreetly over the extra pounds and looked remarkably professional.  I wasn’t looking for cashmere and had no idea of the expense or the impracticality.  All I cared about was that it fit. I signed the receipt without looking, dashed back home and packed for the trip.  Dressing for the big event the following afternoon,  when I removed the tag, I saw the price for the first time: $1099.00.  One thousand ninety-nine dollars!  I was due in the hotel lobby in fifteen minutes.  

I still have the sweater.  It is wrinkled and bally as only cashmere can be and sports a few moth holes.  I obviously don’t wear it anymore, but I keep it as a reminder.  Had I invested that $1,099.00 in, say, IBM stock as I did for my son,  my investment would be worth $11,430.00 today.  Instead of a ragged and useless old sweater I would have a nice little nest egg set aside.      

 

It is important to understand that there was a real cost a real and an opportunity cost of my perilous sweater purchase.  To calculate the true cost of that poor choice I would have to consider the dollar amount spent ($1099.00), plus tax of approximately $80.00 and credit card interest of close to $220.00–I didn’t have the heart nor the means to pay it off at once–and the opportunity cost.   Think of opportunity cost in dating parlance as the one who got away.  It is the cost of not doing something or at the very least not doing the right thing.  When compared to the investment in IBM I might have made, the opportunity cost of my decision to purchase the sweater was $11,430.00 in foregone appreciation, added to the real cost of the sweater for a total cost of $12, 829.00.  That foolish and impulsive decision still echos.