Chatting with Tom Keene about The Ownership Dividend

Yes, my room rater score in this video is 0 (though the spare office is consistent with being a thrifty dividend investor). But Tom Keene‘s enthusiasm for The Ownership Dividend (& in general for Routledge Business & Economics) and Paul Sweeney‘s call for more dividends from a tech giant make up for my lack of visuals in this Bloomberg Surveillance podcast from February 26. Thanks to the hosts for having me on. https://www.bloomberg.com/news/videos/2024-02-26/why-dividends-mean-more-than-stock-buybacks-video?sref=vBm6bz3t

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Has the spoken word replaced the written one?

To judge by the podcast-palooza that is the core of book marketing these days, the answer might be yes. While the podcasts are supposed to result in written-word (book) sales, I wonder whether listeners may be content to just listen to a lengthy interview with the “author.” (The nature of authorship changes in this context.) The definitive answer will be reflected in final book sales. The obvious paradox is that fewer sales will lead to fewer authors writing and being published in long-form. Then there will be fewer people to interview. The end might just be short-form bloggers being interviewed …

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The 2024 Presidential Election and the US Stock Market

I have a book coming out next month, about how the market is likely to evolve now that interest rates have stopped their 40-year decline. Rates stopped falling in 2020 (the 10-year Note), but the book’s actual publication is occurring in 2024, during a presidential election. (I write slowly….) In the book, I dedicate a chapter to questions of political economy. The chapter argues that investors are too siloed; they’re not paying enough attention to politics. Similarly, politicians have only a limited understanding and interest in the capital markets. That siloing is risky in the best of times; in 2024, …

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A dividend investor in a stock market ponders the calendar.

Another year has wrapped up. For professional investors, December 31 means the final calculation of total return for the year. That number goes into the record books, Morningstar’s database, and countless Powerpoint presentations. It is compared to prior-year results, and to those of benchmarks. Peer ranks are established, plaudits announced, and bonuses determined. The investment clock resets on January 1st, and we start the process anew, trying to achieve superior outcomes for another twelve months. But why do we measure the end of one year and the beginning of the next on these dates? It turns out to be completely …

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Where are the high-priced strategy consultants when you really need them?

So sorry to read about the travails of the McKinsey crowd. Our thoughts are with them and their families this holiday season, of course. The irony is that we are entering a period of decision-making in business when strategy consultants will be badly needed, and could make valuable contributions. That’s in contrast to the prior 40 years. It shouldn’t come as a surprise that decades of global neo-liberalism (~1980-~2020) was a golden age for pricey MBAs handing out cookie-cutter advice. Why wouldn’t it have been? The answers were often simple and the same: outsource to China, downsize in the US, …

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Coals to Newcastle?

Bringing coals to Newcastle. That’s what suggesting to UK readers that large, successful businesses would naturally distribute profits above their investment needs–that is, pay dividends–amounts to. It’s not really necessary to state it. Still, I’m grateful to Alex Newman /Investors’ Chronicle for the warm reception of the Ownership Dividend argument that the practice will be making a comeback in the US. Pierogies to Pittsburgh, anyone?

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Risk-free rates and chart crimes

The academics need to go back to the drawing board. In just over three years, the security used to determine the so-called “risk-free rate” part of the formulas used to value stocks and the market in general has fallen 25% to 75 cents on the dollar. (It is the 10-year Treasury dating from mid 2020.) Holders of that security take little consolation that over the next seven years, it will “pull to par” and recover its full nominal value. Risk-free my foot! Using the 10-year Treasury rate (along with the mystical & backward-looking ERP) as the basis for determining the …

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Do you own what you use?

The credit card advert shouts “2% back on purchases.” The dividend investor in a stock market pauses to think about the cash return on his or her everyday expenditures.  Let’s consider your monthly phone bill. It’s an easy case because all of your payment (minus taxes) goes to the company. (Lots of your regular spending goes through intermediaries; the end company only gets a portion of what the consumer spends.)  Let’s say you pay $100 per month to doomscroll. That’s $1,200 per year. What’s the cash return for that spending? The large phone company based in the northeast had revenue …

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My lost luggage and the global paradigm shift from efficiency to efficacy.

Or the what happens when you outsource your brand. For the past several years, I’ve been forecasting a paradigm shift in business practices from extreme efficiency (globalized supply chains, asset light business models, just-in-time everything, financialization of the capital markets) to much greater efficacy (more vertical integration, more control over supply and distribution chains, resulting in greater resiliency, all at the cost of some operating margin). So far, the argument has fallen on deaf ears. In fact, the opposite is true. Most companies continue to outsource core and non-core competencies and focus on maximizing their financials, not their value chain. …

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Avoiding Investment “Maginot Lines”

Russia’s invasion of Ukraine highlights how reality often moves far faster than the elaborate narratives and structures common in complex societies.  For instance, the intense debate about the pros and cons of Ukraine joining NATO has been going on for decades and peaked at the time of the invasion in early 2022. (See the attached Google Trends chart.) It is now utterly moot. Think about it: NATO was created to orchestrate a defense of Western Europe against a Soviet land attack, most likely through the Fulda Gap from the then East Germany. When the Soviet Union collapsed in the 1990s, …

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M&M Redux

As a dividend investor in a stock market, I usually find myself having to make my case as a distinctly minority approach to the stock market. Dividend-focused investing has been out of favor for decades, with an academic tradition leaning against a cash-based relationship to stock ownership dating back to 1961. Sometimes, however, the anti-dividend narrative comes in a form that is so crisp, clear, and well-argued that it serves equally well as a platform for pointing out why investors might consider the opposite approach… Managers of a quantitative investment strategy recently published a compelling piece showing that the dividend …

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Quarter-end reporting……

What’s the end of the second quarter mean for the dividend investor in a stock market? Not much. It is an opportunity to count the checks, compare the total with last year’s, and measure the growth rate. Is the cashflow less, more, or the same as expected? Does the multi-year income forecast need to be revised? Beyond that, there is the usual opportunity to maximize a portfolio’s cash NPV by taking advantage of the daily repricing, sometimes wildly, of income streams that don’t change much year-to-year. (Dividend growth tends to be steady; share prices are all over the place.) In …

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Thank you, AI

Dividend investors in a stock market normally see an increase in their yield on cost when their portfolio holdings periodically increase their distributions. This year, however, the dividend investor’s cash returns have gotten an extra boost from the AI stock frisson. By pushing down the prices of old-economy, major dividend payers without impairing their income trajectories, AI hysteria has increased the yield of these holdings for dividend reinvestment or new money. That is: income is going up, prices are going down, voila—rising cash returns! Sadly, such income “sales” cannot go on indefinitely. As dividends increase, the yield will eventually become …

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Capital, Labor and Stock-based Compensation.

The end of the neo-liberal global order will entail changes in the current alignment of Capital and Labor. I use those terms in capitalized form to evoke an earlier time and place where political economy was all about the relationship between the two. That is no longer even remotely the case. Three full decades of globalization and deregulation have meant that any presumed approximate balance between the two in the US has been long discarded in favor of a largely unfettered Wall Street. The upcoming refresh between businesses and their workforces will be the topic of many other books, but …

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Political Economy and the US Stock Market

Investors massively underestimate the importance of political economy. Our financial institutions rely on our political structures, and our political framework only really works because of certain underlying economic relationships. Separating the two realms is impossible. Think about how critical the rule of law, the inviolability of contracts, individual liberty, and an independent judiciary are for the functioning of capital markets. And in the other direction, private property, commerce, and entrepreneurship create the foundations for the liberal political order, meaning the representative democracies of the past two centuries. Adam Smith might be considered the first modern “political economist.” Karl Marx wrote …

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Your 2023 Market Outlook

Looking for a good guide to the markets in 2023? May I suggest Isaiah Berlin’s The Hedgehog & the Fox. Written in 1953 as a meditation on Lev Tolstoy’s approach to history, especially in War & Peace (1869), it’s as good a guide to investing as you’ll find anywhere. That’s because its about you; it is about self-knowledge. Interest rates, currencies, P/E multiples, etc will always come second to awareness of who you are, what you want, what really matters to you as an investor. Berlin draws on a fragment from an ancient Greek poet Archilochus that “the fox knows many …

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On crypto….

As the frisson of fury over SBF/FTX subsides, a few comments from a traditional dividend investor, cash-on-the-barrel, bricks & mortar business owner: 1. Distributed ledgers are not new. 2. A World Wide Web of servers is well-suited to implement distributed ledger technology that is faster and more expansive than could ever have been imagined prior to the internet. 3. Encryption of transactions in a distributed ledger system makes sense. 4. The full flourishing of this system will likely require an internal system of measurement, store of value, & medium of exchange. 5. Existing ones such as blocks of salt, strings …

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A nice write up….

A nice write up from James Faris of Business Insider. Behind a paywall, but makes the point that being a dividend investor/business owner in a stock market has its benefits. https://www.businessinsider.com/how-to-invest-2023-dividend-stocks-strategy-top-fund-manager-2022-12  

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US corporate margin reset

I’ve been highlighting the need for US corps to “reset” margins to make up for the excessively asset-light business models that have come to the fore the past three decades. Has the Great Reset begun? Perhaps. Empirical Research Partners, LLC has a report out today highlighting that Capital Expenditures are up 20% ytd for the S&P 500 vs. earnings that will barely be positive. Is this the beginning of that new spending? We shall see. If so, companies that can afford to invest during the downturn should do so. Those that can’t will continue cost-cutting/hewing to the prior model. On the capital …

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Down markets and higher returns.

The market has declined by 25% in nine months. No one is particularly happy about that, but the rapid reset of prices does provide an opportunity to remind investors about basic investing math. In this case, the issue is expected future returns after a sharp move in the market, either up or down. And that math is somewhat paradoxical.  Consider, for instance, investment in the income stream—the dividends—of a diversified portfolio of stable publicly traded companies. The cash yield at time of purchase in 2021 is 4%. Fast forward to September 30, 2022, and the price of the portfolio has …

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For want of a nail, a shoe was lost…

The United States has now had more than three decades of neo-liberal globalism which has favored outsourcing, off-shoring, margin improvement and earnings growth above all else. Encouraged by the capital markets, corporate America has privileged short-term efficiency over long-term efficacy.  Capital spending on hard assets is down as a percentage of sales; intangibles are up. A benign post-Cold War geopolitics and an addressable labor cost differential allowed us to import deflation. We’re not quite at the “virtual” enterprise level, but we’ve moved beyond the polite and acceptable “service” economy that replaced our prior “manufacturing” engine.  At the same time, declining …

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“Once more unto the breach, dear friends, once more.”

The universally respected and admired Michael Mauboussin has chimed in on the now political issue of share repurchase programs. His opinion piece in the FT this week in defense of them tries to clear up what he considers “confusion and sloppy thinking” critical of buybacks. Cliff Asness, his equally formidable ally in support of buybacks, has made similar points in print recently. Wrestling with either of these finance heavyweights is done at one’s peril. But I can’t help but add some additional color around their assertions from the perspective of a dividend investor. I’ve spent the past two decades competing …

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