Power of Dividends

Yesterday, Corning announced it was raising its dividend by 50% and would buy back up to $1.5 billion in stock.  The stock was up over 7% on the day.  We are quite pleased by the announcement as we have felt for some time the company has the capacity to return more money to shareholders.  We also think a higher dividend forces more discipline on the company management.

Importantly, we think that investors view dividend increases as meaningful signals by management  of how they view the company’s prospects, given that companies are loath to cut dividends. When we talked with Corning’s Investor Relations department several years ago about the dividend, they pointed to that very issue as why they were unlikely to raise the dividend--they did not want to be in a position where they may have to cut the dividend in a difficult business environment. We hope this indicates Corning is more positive with its outlook.

We look forward to additional signals from other company managements.

Disclosure: As of this date, the authors and clients of Harvest Financial Partners own Corning.  Positions may change at any time. This is not a recommendation.  This blog is for informational purposes only.

Retirement Planning

Jim on retirement planning from the Bankrate website.

The Debt Ceiling Debate in Washington

Below is an email we sent out to our clients earlier in the week:


We have had a few questions recently about the debt ceiling debate in Washington. The most frequently asked question concerns what impact the failure to raise the debt limit might have on portfolios we manage. Our expectation is that it would have a minor impact on the investments we hold. We should emphasize that we expect a debt ceiling deal to be made and a delay of a week or so past the August 2 “deadline” does not equate to a default. A delay could lead to a partial government shutdown as outgoing payments must equal the $200 billion the government collects in monthly tax revenues, rather than the approximately $280 billion the federal government spends per month now.

Turning to the investments, the stocks we own either directly or through mutual funds are almost exclusively high quality companies with strong balance sheets. We would expect that they would ride out this period with relatively limited impact on their operations. Some of the companies do a substantial amount of work with the federal government and so might see a short-term revenue hit. We believe that even these companies have the financial wherewithal to manage through that period and ultimately would collect any money owed to them. It is also worth noting, we have had a number of stocks we own directly, hit our target sale prices so we have been selling and allowing cash to build up in our portfolios. This gives us flexibility going forward.

As far as fixed income goes, we primarily own high quality corporate bonds of similarly well managed, conservatively financed companies. We expect no issues in collecting our interest and principal payments from them. Another area of the fixed income market we have invested in, more as a cash management tool, has been callable agency bonds. Again, we think ultimate collection of interest and principal due is not at risk. Our worst case scenario would be, in an effort to conserve cash, these agencies of the federal government might not call their securities (meaning buy back their bonds prior to the maturity date) even though it would make financial sense. This would lead to a modest increase in the average maturity of our bond portfolios.

While the future is unknowable, we believe we are well positioned to ride out this period. Overall, we have cash available for opportunities that a market dislocation might provide and we feel good about what we own.

Interview

We were interviewed by the Wall Street Transcript this month.  Here it is for your review.Harvest Financial Partners June 2011 Interview

Best Buy

We run a model portfolio for a service called Covestor.  They asked us to discuss a recent purchase in the portfolio, so we described why we bought Best Buy. Below is the post with a few minor alterations.

Jim Wright and John Fattibene of Harvest Financial Partners manage Covestor’s Domestic Dividend model, which seeks to invest in high-quality, well-managed companies that pay a dividend. They recently added Best Buy (NYSE: BBY) to the model, so we asked them to share their reasons for the transaction. Their response follows.


We bought BBY because it met our 3 criteria:
1)  The company pays and has been growing its dividend. With a very low payout ratio, we think the dividend should be stable and will continue to be increased.
2)  Best Buy is the largest electronics retailer in the country. While there has been some shift from buying electronics in stores to buying online, we still believe there is a significant part of the population that needs help and wants to see the product before purchasing. Best Buy also has an internet presence. We also like the fact that since electronics continue to shrink, BBY is looking at shrinking its store size.
3)  We bought BBY when it was selling at a low multiple against forward earnings. The company also generates a lot of free cash (cash available after expenses and capital expenditures).
Finally, we felt the company was washed out as it has dramatically underperformed the market over the last year.  We think it represents a terrific value and assess its fair value to be considerably above its trading price.

(Disclosure: As of this date the authors and clients of Harvest Financial Partners own Best Buy. Positions may change at any time. These are NOT recommendations. This blog is for informational purposes only)

Jim on Bankrate's website

Jim was interviewed for a series where real advisors give real advice to fictitious characters.  Jim helped out Sam Merlotte from the series True Blood.  Check it out here. 

We Have Been a Fan of Abbott for Some Time Now

Barron's wrote about Abbott Labs in this weekend's edition.  We agree that it's undervalued and while love might be too strong a word, we have liked it for some time for many of the same reasons pointed out in the article. 


Principals and clients of Harvest Financial Partners own ABT.  Positions may change at any time.