Monthly Update: January 2014

Portfolio Activities
     $1,700 deposits into Investing account
     $325 deposits into Lending Club account
     Sold HAS +43% gain
     Sold OHI +0% break even
     Bought 174 shares of CIG @ $5.78
     Bought 16.63 shares of VTR @ $60.12

Portfolio Income
Dividends
     MDT: $1.49
     SPLS: $2.43
     WMT: $2.10
     ARCP: $2.67
     PSEC: $7.50
     NDRO: $4.16
     JNK: $1.42
     PCY: $1.94
     Interest from cash: $0.46
Rental Income
     Townhouse 1: $855

A big fat $2,025 was made in deposits this month. The extra money came from selling unused vacation time back to my company. Several coworkers have mentioned that I need to go travel some. I do enjoy weekend trips but a week long trip somewhere for 5 days of hotel plus meals, airfare and activities for 2? When I also add in 5 days of extra pay (vacation sellback + working it normally)? I just look at them and say "Do you know what I could do with $1,500?"

I made some portfolio changes. I sold HAS for profit taking and it was looking really toppy. It had broken below its 50 day SMA (simple moving average) and other companies were talking about the struggles they had over the Christmas holiday.  I wanted to be sure I kept that +43% gain and looking at today's price action, it was the right call.

I sold OHI and bought VTR. OHI is a fine REIT and it was a tough decision to sell this one. However when I compared the two fundamental wise VTR seemed like the better deal.

I gave up 1.5% in yield but VTR is more diversified having retirement homes, assisted living homes, and medical office buildings (MOBs). Think of MOBs as the little business parks and buildings that your dentist and chiropractor is in. I have no idea what impact the Affordable Care Act will end up being but seeing as how OHI was only assisted living homes funded by Medicare I think VTR is going to have diversification.
The pullback in its historic price range gives a lot of upside whereas OHI is the most overvalued its ever been. That's not to say its actually overvalued but time and the market will tell.
Additionally, with concerns about rising interest rates, REITs got hammered in 2013 except for OHI. They may or may not have a pullback but VTR already had theirs so I'll play it safe.

I also bought CIG which is a Brazilian hydroelectric power company. That one is odd, interesting, and hard to evaluate. Last year it had a 20% cash dividend plus a 10% stock dividend. The stock dividend needs some explaining. In the U.S. we would call it a stock split and its no net gain as the stock price changes to reflect the new shares. CIG created more shares and gave them out. However in talking with CIG investors that qualified for the split, they received 30% more shares. I bought on the day of the split to take advantage of the drop in share price but the price only dropped by 20%, a 10% net gain for existing shareholders. As I mentioned in my review of CIG, U.S. financial services and websites have a very tough time tracking CIG. So for a 30% net yield between cash and stock, I'm willing to put in the extra time.
As with most foreign companies, they pay a semi-annual dividend. April and December, so you have plenty of time to research this one and I will definitely be reporting their activity on my blog.

January was a real busy month as I also returned to Lending Club. I originally tested them in 2009 and 2010 but I didn't like the search and sorting software on the trading platform so I left with the intent of returning when they improved. They have and I did. I haven't discussed it yet because of Q4 earning season taking my blogging time. IBM, CIG, MCD down and AAPL, STX, RKT, POT, SPLS already reported and I have yet to review them. I have lots of thoughts and ideas about Lending Club that I will share with in February.


Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Warren Wednesday: 1960

I am surprised at the response I am getting from my Warren Wednesday posts. Several people asked last week "Where is my Warren Wednesday!". I'm glad to see that these are being enjoyed...

1960
Written: Jan 30, 1961
Length: 8 pages
Source: RPCPA.com
S&P 500 return: -2.97% (Dow was -9.6%)
Buffett's return: +22.8%
Major events: The first CERN particle accelerator became operational in Switzerland. Interesting to know we had these back then. 
Colonialism is on its death bed with Chad, Niger, and most of French Africa getting independence from France, the Congo gets independence from Belgium, and Nigeria from the U.K. Sadly this year also begins the cycle of military dictators taking over these countries in coups.
Elvis Presley is honorably discharged from the military and begins his music career.
The laser is first patented.
Harper Lee writes, To Kill a Mockingbird.
OPEC is formed.
Domino's Pizza was founded. Hey what can I say, I love going to Dominos' website, they ask if I want to order the same thing as last time and I one click purchase a $6 pizza to be delivered!

This letter I found incredibly interesting as Buffett goes into great detail about his large position that had 35% of the partnerships assets that he mentioned in the previous year. He exited that position and talked about it.
Sanborn Map Company made extremely detailed maps. The map of Omaha would weigh 50 lbs. This company made maps for utility and insurance companies. Now these insurance companies relied on this company so much that they had worked their way into 9 of the 14 director spots so as to protect themselves. However they only had a total stock ownership of 46 shares. Two other board members were a banker with 10 shares and Sanborn's attorney also with 10 shares. The company had 105,000 shares at the time. Quite the different make up of board of director stock ownership then we have today.

Back in the 1930s, Sanborn was doing great but business started to slow down. So they started buying other company stocks and government bonds so they could use the dividends and interest to pass on to their shareholders and keep them happy while their own business of mapping struggled. By 1958 when Buffett enters the picture the stock could be bought for $45 however they owned $66/share of investments. So Buffett steps up and buys 22.8% of the company and says "We should split the company and let investors cash out if they want." The insurance company board members could have cared less because their interests were not aligned with Sanborn. They just wanted to get rid of this noisy Buffett guy. Investors were given the opportunity to cash out by redeeming their Sanborn shares for these other company stock and US bonds. If my numbers are right then those that cashed out (including Buffett) ended up getting $76 worth of investments. The company was left with about $12/share of bonds. Buffett even got all the stocks and left the bonds. It sounds like the shares were retired because Buffett talks how the remaining shareholders were happy with a higher EPS and higher dividend rate. They probably weren't happy a couple years later when they found out those stocks they gave away were the only thing keeping the business going.

Its interesting that this is the sort of thing we hear Ackman and Icahn do now a days. I knew Buffett was on various boards of companies over the years but nothing like this.
Analyzing this investment though I can see why Buffett went in heavy with a 1/3rd of his portfolio. It was a no brainer since it was essentially buying investments at $0.50 on the dollar. If someone offered to sell you Coca Cola (KO) stock for $19 today how much of your money would you put in? Even if the company ended up not splitting the company, when you buy a company for less than 0.5 P/B it's hard to lose money.

Buffett then comments that this was the need for secrecy in what was going on with the partnership money. He calls the above scenario a "control situation".

In overall market news he comments that the majority of all investment firms were +/-5% of what the Dow did. Even back then fund managers couldn't consistantly outperform.

Buffett is all about benchmarking. He says he would rather lose -15% when the market lost -30% then have a winning +20% year and the market also did +20%. As he goes on to say "Unless we do achieve this superior performance there is no reason for existence of the parnterships.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Company Review: McDonald's (MCD)

McDonald's has had incredible dividend growth and has been a staple in many dividend investors portfolios. I've owned them for several years though only since 2012 in the blog portfolio. I think they are in for some struggle though in the short term. Their payout ratio is capped out and they are cutting back on their share repurchase program next year because they expect sales and free cash flow growth to be negligible.

McDONALD’S (MCD)

Last Updated: Q4-2014

Description: McDonald’s Corporation franchises and operates McDonald’s restaurants in the global restaurant industry. These restaurants serve menu at various price points providing value in 119 countries globally. All restaurants are operated either by the Company or by franchisees, including conventional franchisees under franchise arrangements, and developmental licensees and foreign affiliated markets under license agreements. Under the conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and decor of their restaurant businesses, and by reinvesting in the business over time.

How do they make money: Selling fast food meals to consumers.

Key Brands: McDonald’s.

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Company Overview

United States

Europe

Asia-Pacific, Middle East, Africa (APMEA)

Japan: 30% of APMEA revenue but only 15% of income.

70 million customers a day

81% stores franchise. Highest profit margin is at franchises.

“Three Global Priorities” as long term goals

Optimize menu

Modernize customer experience

Broaden accessibility

Risks

None

Competitors

The Wendy’s Company (WEN)

Burger King World (BKW)

Yum! Brands (YUM)

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Company Fundamentals

Fastgraphs Review: MCD has the name and history to be able to follow its P/E history as fair value instead of the Fastgraphs value. This is common with mega-cap companies. In MCD's case 17 P/E is fair value. I'll look to add at $91 which is fastgraph's fair value as that seems to be when larger pullbacks and bottoms form.

Company Stats	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014e	5y Avg	10y Avg
Share Price	$33.85	$44.33	$58.91	$62.19	$62.44	$76.76	$100.33	$88.21	$97.03	$91.49	$90.76	$71.55
EPS	2.04	2.3	1.93	3.76	4.11	4.58	5.27	5.36	5.6	6.1	5.382	4.105
EPS Growth	-	12.75%	-16.09%	94.82%	9.31%	11.44%	15.07%	1.71%	4.48%	8.93%	8.32%	15.82%
P/E	16.59	19.27	30.52	16.54	15.19	16.76	19.04	16.46	17.33	15.00	16.92	18.27
P/B	2.8	3.5	4.4	5.2	4.8	5.5	7.1	5.8	6.4	6.2	6.2	5.17

EPS growth is still incredible for a mega-cap company of MCD’s age.

Dividend Stats	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014e	5y Avg	10y Avg
Dividend	$0.67	$1.00	$1.50	$1.62	$2.05	$2.26	$2.53	$2.87	$3.12	$3.20	$2.80	$2.08
Dividend Yield	1.98%	2.26%	2.55%	2.60%	3.28%	2.94%	2.52%	3.25%	3.22%	3.50%	3.09%	2.81%
Share buyback %	0.00%	1.76%	3.30%	5.76%	3.52%	2.50%	3.35%	2.45%	1.09%		2.35%	2.64%
Div Growth	-	49.25%	50.00%	8.00%	26.54%	10.24%	11.95%	13.44%	8.71%	2.56%	9.38%	20.08%
EPS Payout Ratio	32.84%	43.48%	77.72%	43.09%	49.88%	49.34%	48.01%	53.54%	55.71%	52.46%	51.81%	50.61%

Dividend growth will need to be slower at the 5y average to let EPS catch up.

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Earning Report Notes

Q4 2013

EPS: +2%

U.S.: -1.4%

Europe: +1%

APMEA: -2.4%

China: -0.4%

2013: Revenue: +2%

EPS +4%

U.S.: -0.2%

Europe: 0%

APMEA: -1.9%

China: -3.6%

Margins: 18.4%

Opened 1,400 new stores. 275 in China.

Remodeled 1,529 stores

2014: $5.0b to shareholders ($4.9 in 2013)

~$3.3b dividends

~$1.6b share buybacks (significant drop but glad they are not sacrificing the dividend. Next year dividend raise will be small)

Tax: 32%

Focusing on McCafe coffee line.

Planning 1,500 - 1,600 new restaurants

US 250, Europe 320, APMEA 830 (300 in China)

1,000 remodels. This number has been consistent for several years (1,000 - 2,000)

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Company and Industry specific commonly used acronyms and terms

None

Resources

Company Website: http://www.aboutmcdonalds.com/mcd.html

Investor Relations: http://www.aboutmcdonalds.com/mcd/investors.html

Morningstar: http://quotes.morningstar.com/stock/s?t=mcd

Transcripts: http://seekingalpha.com/symbol/mcd

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.