Saturday, July 7, 2012
I filled in for Porter this week on the Stansberry Radio podcast show, which you can listen to here.
Host Aaron Brabham asked me about World Dominating Dividend Growers (WDDGs), which set me off for about 10 minutes at the beginning of the program.
I talked about how stocks like Coca-Cola, Wal-Mart, Microsoft, and Intel make more money than they know what to do with.
This is a critical point... one that could keep you out of a lot of losing stocks and keep you in winning ones. Here's why...
I want you to stop right now and ask yourself what a stock is...
It's a piece of a business. A stock is equity in a business.
Well, OK... what is equity?
Equity is a residual claim on the assets and earnings of a business. The word "residual" is really important. It means equity holders – shareholders – get whatever is left over only after everybody else gets paid.
Only after all the expenses of the business are paid – all the executive salaries and bonuses, all the utility bills, employee wages and benefits, interest, taxes... everything – does the equity holder get anything. So... what you really want when you own equity is a company that has a lot of cash left over after it's paid everybody else.
Take Microsoft, for example. After paying all the bills and reinvesting in the business during the first nine months of fiscal 2012 (ended June 30, 2012), Microsoft generated more than $22.2 billion in free cash flow. THAT's what I mean by having lots of cash left over after paying everybody else.
Public companies have to report how many times over their earnings cover their interest and other fixed charges, like leases. Last year, Microsoft covered its fixed charges 81 times over. THAT's what I mean by having lots of cash left over after paying everybody else.
Microsoft has nearly $60 billion in cash and investments on its balance sheet. THAT's what I mean by having lots of cash left over after paying everybody else.
If you want to know how to get a quick read on whether a company generates more cash than it needs, just go to its cash flow statement. Subtract "additions to property and equipment" from "operating cash flow." (Sometimes that first number will simply be called "capital expenditures.") The resulting number is called "free cash flow." In many cases, free cash flow won't even be a positive number. In most other cases, it'll be pretty small.
I used Microsoft as an example, but free cash flow is a big number with all WDDG stocks. If they don't generate gobs of free cash flow, they're not allowed on the list.
If you're holding equity in a business that doesn't generate lots of free cash flow, you have some explaining to do. At least be honest enough to admit you're not investing. You're speculating. Equity without free cash flow is little more than a bet that the assets will be worth more in a liquidation than what you paid. Maybe it's a bet the business will one day generate a cash profit. Either way, it's more a statement of hope than one of understanding.
A lot of people buy equities without having any clue of what it means to be an equity owner. Now that you know what it means... what are you going to do about it? Are you going to make darn sure the businesses you invest in are generating lots of free cash flow after they've paid everybody else?
Well, we've got a whole list of companies that generate more free cash flow and do it more consistently than any other companies in the world – our WDDGs. These companies are the world champion generators of extra cash flow. And they use that extra cash flow to pay out higher and higher cash dividends to shareholders every year.
Most of these companies buy back lots of stock every year, too. That makes the remaining shares more valuable. It cuts a growing pie into larger slices. They shower shareholders with gobs of cash every year. Few companies do that consistently, year after year, for decades on end.
Investors say they're worried about safety today. There's no way anyone can tell me Microsoft isn't safe. Its cash and investments generate extra cash that more than pays the interest on its debt. It doesn't get much safer than that. And Microsoft is just one of 11 WDDG stocks we've covered...
The 12% Letter is the one and only place where you can get our full list of WDDGs. Right now, two are selling for less than their maximum buy prices. Both are the No. 1 companies in their industry. They've dominated their industries for decades and show no signs that'll change anytime soon. They sell simple products used every day by tens of millions of people all over the world. And they pay out their extra cash flows in higher and higher dividends every year, year after year, for decades on end.
The 12% Letter is really inexpensive, just $39 for the first year. That's less than $0.11 a day. And remember... you can get your money back any time within the first four months if you decide it's not for you. We do that because we want you to be happy with our work. It's the only way we do business around here. To get The 12% Letter without sitting through a long promotional video, click here.
Date Range:6/28/2012 to 7/5/2012
Date Range:6/28/2012 to 7/5/2012