The economic plates are shifting. While we sit and argue about abortion and immigrants, our GDP has remained flat for a decade. China’s has soared to now rival the United States. That is not to say that America is finished. If progressive politics can replace the internationalist gridlock that corporate America has on the Congress, we might see new opportunities ahead. The next Google. The next Space X. Solar power. The modern power grid. Wind and water energy. Newer more efficient cars and trains. All of this has been held up in a political climate where narrow social agendae are grinding the wheels of government to a halt. Where to invest in this climate?
A portfolio should be holding more American Depository Receipt (Foreign) stocks (ADR)s. Even with taxes and fees, there are opportunities and yields on dividends that position portfolios well to
Right now there are good value opportunities in Europe, Latin America, Australia, and Asia.
Out of Australia comes Alumina LTD ADRs (AWC) – A linked aluminum supplier to giant Alcoa (AA), which we also hold and like, Alumina Limited’s sole interest is a 40% stake in Alcoa World Alumina and Chemicals, or AWAC, the world’s largest alumina producer. Alcoa Inc. owns the 60% balance. The stock, trading at lows in the high 2’s right now, is worth a fair market $10/share, and puts out an 8.6% dividend. The pricing is in response to the processed metal’s falling price, but reports continue to show that aluminum forward growth generally looks good as new technologies need more lighter materials with which they can be built. Alcoa posted a loss for the quarter, but still beat analyst numbers. Remembering that we buy big companies on bad news this is an area where there is some profit to be made by adding stock to the dog pound with good yields, good management, and sound balance sheets that survive turbulent times.
Europe’s bad news continues to put pressure on even the best companies. Utilities and telephone companies and other large, necessary, stabile entities with good cash flow and reasonable debt tend to be safe havens during turbulent times. They pay good dividends. They have predictable revenue streams in that regulation by governments usually provides operating parameters.
We’ve seen a nice turnaround in British Telecom (BT) over the last few years, and locked in double-digit yield on our dividend based upon the purchase price. We’ve bought France Telecom (FTE) and continue to acquire it here and there as its 12.1 to 13.5% dividend is appealing, and there isn’t any particularly compelling bad news in the company’s news itself to suggest any danger to the dividend at this time. Even if they cut it in half, though, 6.5% would still be a far better return than we can find in bonds or (stop laughing) at the banks.
We’re looking at a smaller presence in Telefonica SA (TEF) for much the same reason. The Spanish telephone company hold telephone companies in Latin America and Europe.Telefonica has more debt than the others, and will be divesting some of its non-core assets over the coming months, but we expect that to help, not hurt the bottom line on debt retirement.
Both are posting yields in the 11-13% range, which far outstrips a bond, with far better liquidity and the likelihood that both operators will do reasonably well enough as the economies of Europe recover over the next 5-6 years to at least warrant the pickup of our minimum 17% discount to the fair market value of the stock in appreciation, possibly better, plus the dividend. Dividends can be cut, but at the moment it still looks secure.
The other avenue to look down are in any company which own raw materials and precious metals or minerals. Most are highly undervalued right now, but as the recovery rolls out, they will all do well. BHP Billiton (BHP), Alcoa (AA), and even more obscure oil or resources trusts.
Cross Timbers Royalty Trust (CRT), pays a monthly dividend in the 8.8% range. It has virtually no liabilities. Other than the oil drying up in their various lease lands, the risks are relatively borne by the company doing the drilling and the pumping. Their stocks cycle in price as optimism and pessimism about oil prices surge like the tides. CRT is a domestic trust that pulls in money from lands it leases to others. A downward move in the long term would be based on decaying proven reserves. If you invest, make sure you read their reports to see what their forward projections on proven reserves are. If they have less than 15 years, the stock should already be in price decay. Great Northern Iron Ore (GNI) which we bought as a temporary refuge last year, has started its decay as the trust winds down. The interest rates are spectacular to the price, but its a comet not worth chasing as the principle will be impacted.
The Genius Guide to Value Investing 