Originally posted October 22, 2021. 

Supply chain disruptions and rising raw materials costs are eating into profitability and resulting in shortages of products for many firms. Procter and Gamble is not immune to rising prices and supply chain disruptions, but strong brand value and impressive scale have enabled the company to navigate the environment better than some. Price hikes are being passed onto consumers and P&G is finding a way to keep its products in stock by leveraging its scale. Sharon Terlep writes in The Wall Street Journal:

Procter & Gamble Co. said that it expects solid sales and profit growth over the next nine months, even as costs for everything from warehouse space to raw materials rise faster than the consumer-products company expected.

From furniture makers to grocers, the world’s biggest companies are using their deep pockets, sprawling global operations and commanding market share to insulate themselves from the global supply-chain meltdown.

They are also flexing their pricing power, taking advantage of consumers’ willingness to pay up for higher-end products.

P&G, maker of Tide detergent and Crest toothpaste, said Tuesday it will start charging more for razors and certain beauty and oral care products, price increases that come in addition to earlier moves to start charging more for staples from diapers to toilet paper.

The company said its sales and profit goals for the year remain intact, as it has managed to keep products in stock.

“To the consumer, it looks like we’re in good supply,” P&G Finance Chief Andre Schulten said in an interview.

A Case Study in Dividend Success

At Young Research, when we look for dividend stocks for the Retirement Compounders, we favor companies with strong balance sheets, stable businesses, a healthy dividend yield, and a history of increasing dividends.

What does that look like in practical terms? While the ideal company financial position for the RCs can vary by industry and sector, Procter & Gamble serves as a nice case study in dividend success.

A Strong Balance Sheet

We look for companies with strong balance sheets because financial strength provides flexibility during tumultuous times in the business cycle.

Procter & Gamble (P&G) has one of the strongest balance sheets among large U.S. businesses. Its debt is rated Aa3/AA- by Moody’s and S&P. Only about 2% of firms in the S&P 500 have a credit rating as good as P&G’s.

P&G’s debt after backing out cash on the balance sheet is about equal to the company’s cash flow before taxes and interest. In other words, P&G could theoretically pay off its debt in a little longer than one year if it used all cash for debt reduction.

With a balance sheet that strong, P&G could fund its dividend for several years even if it runs into a rough patch.

How could P&G fund the dividend during a rough patch? For starters, there is $10 billion in cash on the balance sheet. Assuming a rough patch for P&G caused profit margins to go from 19% today to zero, P&G could fully fund a year’s worth of dividend payments with cash on the balance sheet. The second line of defense for the dividend would be for P&G to borrow money. P&G could easily borrow 2-3 years’ worth of dividend payments without losing its investment-grade rating. Obviously, the definition of a rough patch can vary, but in the scenario outlined above, P&G could have a 3–4-year rough patch without putting the dividend in jeopardy.

Business Stability

P&G’s dividend reliability is also bolstered by the nature of its business. Toilet paper, diapers, toothpaste, and cleaning products are staple purchases for most consumers. That is true whether the economy is in boom or bust. Stable businesses tend to be better equipped for long-term dividend payments and dividend growth than cyclical businesses.

Dividend Payout Ratio

When possible, we also favor companies with modest dividend payout ratios. The payout ratio is the percentage of net earnings paid to shareholders in the form of dividends. Firms with lower payout ratios can more easily continue to pay and raise dividends even during a business downturn. If a company has a payout ratio of 100%, any drop in earnings will either require the company to reduce the dividend because the earnings aren’t there to support it, use cash on hand, or borrow money.

Procter & Gamble pays out about 60% of its earnings to shareholders in the form of dividends. That means earnings could fall by 40% without requiring alternate means to fund the dividend. In practice, for many industries, we compare the dividend to free cash flow instead of earnings to get a truer picture of the payout ratio. P&G looks even better on that metric.

The Dividend

Next is the dividend and the dividend policy. Everything else equal, higher dividend yields are better than lower dividend yields, and a stronger commitment to the dividend in the form of a long record of dividend payments and a long record of dividend increases is better than a weaker commitment to the dividend.

• P&G shares yield 80% more than the S&P 500
• P&G has paid a dividend every year since 1891
• P&G has increased its dividend for 66 consecutive years

The Model of Dividend Success

With a strong balance sheet, a stable business, a modest dividend payout ratio, and an enviable dividend track record, P&G truly is the model of dividend success.

“The following post is by E.J. Smith, at YourSurvivalGuy.com. There was a time when I would point investors to low-cost index funds, but as you can see, that ship has sailed.” — Dick Young

In an excellent review of a festering problem in the market today, Randall Smith of The Wall Street Journal, outlines the $1.3 trillion Vanguard Total Stock Market Index Fund (VTI), and the growing importance of the CRSP U.S. Total Market Index to the future of markets.

What’s concerning to Your Survival Guy is that the top 10 companies of the CRSP U.S. Total Market Index comprise a quarter of its value. Does anyone remember the plight of the Nifty 50 in the 70s? When people fell out of love with the Fifty, the S&P crashed 48.2% from early January 1973 to early October 1974.

The problem with indices or lists is they’re always evolving. Names come and go. Do you really want to hitch your life’s savings to a Total Stock Market Index that’s so top heavy?

Action Line: This is a stock picker’s market. I want you to get paid no matter what in the form of dividends, regardless of what prices do. Stocks have a history of doing nothing for longer than you care to remember. If you need help building an investment plan that’s right for you, I would love to talk with you.

Not only do they have a history of doing nothing for long stretches of time, but names are also replaced with more frequency than one cares to remember.

Smith explains here how oblivious the public is to the massive movements of the VTI, and the CRSP U.S. Total Market Index, writing:

Everyone knows the New York Stock Exchange. And its rival, Nasdaq.

But there is a mutual fund that invests in stocks based on a relatively unknown market index that has grown so large it might be considered a third stock market unto itself.

That fund is the $1.3 trillion (yes, trillion, including all share classes) Vanguard Total Stock Market Index Fund (VTSAX) and its exchange-traded-fund shares. The fund, from Vanguard Group, now accounts for 10% of all assets in U.S. stock mutual funds and ETFs in the market, according to Morningstar Inc. No other mutual fund or ETF comes close to it in asset size. The next largest is an $821 billion Vanguard S&P 500 index fund.

The paradox is that this biggest beast among funds is tied to the most unassuming of stock indexes—the CRSP U.S. Total Market Index, developed at the University of Chicago’s Booth School of Business.

While many investors may not be familiar with CRSP, the influence of the index and the Vanguard fund is felt minute to minute on Wall Street. Traders say they sometimes check the Vanguard fund’s ETF version, with the symbol VTI, to get a better idea of what is happening in the market overall, since it effectively covers more stocks than any of the three major indexes—the Dow Jones Industrial Average, S&P 500 index and Nasdaq Composite.

“When the stock market is open, VTI gives you a better picture of what it’s doing than anything else,” says Rick Ferri, an investment adviser in Georgetown, Texas. The CRSP, he adds, “drives this gigantic mutual fund, and most of the general public doesn’t even know that CRSP exists.”

Originally posted on Your Survival Guy.

Vanguard is owned by the funds managed by the company and is therefore owned by its customers.

Companies faced with limited supplies of raw materials and rising costs of goods are narrowing down the models of products they make to only the most profitable. That usually means that they are building the higher-end, pricier models in their product portfolios, leaving families with lower earnings unable to find cheaper alternatives. The Wall Street Journal reports:

Anthony Coughlin’s appliance shop has little trouble filling orders for high-tech washing machines or designer ovens. More difficult: satisfying customers on the hunt for bare-bones, low-budget machines.

“There was a day when a customer could walk in the door and buy a secondary piece or a landlord special and have 100 options to choose from,” said Mr. Coughlin, a co-owner of All Shore Appliance in Port Washington, N.Y. “Now it’s more along the lines of, we explain to the customer what we have.”

As the global supply-chain crisis snarls production and bloats manufacturing and shipping costs, companies that make products from lawn mowers to barbecue grills are prioritizing higher-priced models, in some cases making cheaper alternatives harder or impossible to find, company executives, retailers and analysts say.

Some are pushing upscale products in an effort to make up for added labor, shipping and manufacturing costs. Whirlpool Corp. WHR 0.06% , maker of washing machines, KitchenAid mixers and other home appliances, said in July it would shift toward higher-price products as part of a plan to help cover rising costs.

Auto makers and other companies, faced with strapped suppliers, are directing limited parts to their highest-margin products.

“A combination of inflation and scarcity is pushing manufacturers toward higher-priced goods,” said David Garfield, head of the consumer-products practice at consulting firm AlixPartners. “If a manufacturer can’t get enough parts to make all the product they’d like, they may make more of a premium product to protect their profitability.”

The shift to upscale products comes in addition to other steps companies are taking to recoup costs and get as many products as possible to consumers. Across industries, manufacturers of products from toilet paper to televisions are raising prices, winnowing product assortment and imposing purchase limits on retailers.

Supply-chain bottlenecks, worsening as the pandemic persists, have led to extensive congestion at ports as well as soaring costs for transportation and raw materials. Meanwhile, manufacturers, retailers and consumers are getting hit by higher inflation, expected to last well into next year.

A cheap outdoor grill, for instance, might be tougher to track down. Weber Inc. WEBR -3.49% generally builds its less expensive models in China, while the company’s U.S. operations supply the bulk of the company’s product line, which tends to come with higher price tags, Chief Executive Chris Scherzinger said in an interview. Because port slowdowns in China have delayed the shipment of goods from the country, products made there are less readily available than U.S.-built options, he said.

Mr. Scherzinger said, however, the bigger factor driving stronger sales of more premium options is that consumers are favoring pricier grills as they spend more time at home and outdoors amid the pandemic. “Whatever we can’t offset through productivity, we have the ability to go to the market and offset that with price,” he said.

Back in 1971, I had just started in the institutional research and trading business on Federal St. in Boston. Our firm traded and researched gold shares. I would in fact shortly be on the way to London to begin research on a lengthy gold study. This presentation by Claudio Grass published on LewRockwell.com is pretty much as I remember events, and is a great summary of the facts and events of that time. He writes (abridged):

This year marked the 50th anniversary of President Nixon’s decision to unilaterally close the “gold window”. The impact of this move can hardly be overstated. It triggered a tectonic shift of momentous consequences and it changed not just the global economy and the monetary realities, but it also shaped modern politics and severely affected our society at large.

The Nixon Shock

In July 1944, representatives from 44 nations convened in the resort town of Bretton Woods, New Hampshire, to figure out how the global monetary system should be structured after the end of the war. The US took the clear lead during these talks, exploiting the considerable leverage it had over other countries devastated by WWII or even still occupied by Germany. After all, at that point, Americans were the creditors of the world and had accumulated tons of gold throughout the 1930s and during the war, as the US was widely seen as a safe haven amid the conflict and uncertainty that prevailed at the time. 

Indeed, the Bretton Woods system didn’t last long. It wasn’t fully implemented until 1958 and by the mid 60s it was already obvious that its days were numbered. The US gold stockpiles were dwindling as European central banks soon began redeeming their dollar claims, and there were real fears that US gold holdings might eventually be exhausted. Also, the Bretton Woods system, even though it was “managed” and much weaker form of the classical gold standard, did still at least partially keep government spending and deficits in check, something that Nixon resented, especially with a view to the next election. 

Indeed, the Bretton Woods system didn’t last long. It wasn’t fully implemented until 1958 and by the mid 60s it was already obvious that its days were numbered. The US gold stockpiles were dwindling as European central banks soon began redeeming their dollar claims, and there were real fears that US gold holdings might eventually be exhausted. Also, the Bretton Woods system, even though it was “managed” and much weaker form of the classical gold standard, did still at least partially keep government spending and deficits in check, something that Nixon resented, especially with a view to the next election.

And yet, there were a few voices that spoke out, for common sense and Reason. As the Cato Institute outlined, “Milton Friedman wrote in his Newsweek column that the price controls “will end as all previous attempts to freeze prices and wages have ended, from the time of the Roman emperor Diocletian to the present, in utter failure.” Ayn Rand gave a lecture about the program titled “The Moratorium on Brains” and denounced it in her newsletter. Alan Reynolds, now a Cato senior fellow, wrote in National Review that wage and price controls were “tyranny … necessarily selective and discriminatory” and unworkable. Murray Rothbard declared in the New York Times that on August 15 “fascism came to America” and that the promise to control prices was “a fraud and a hoax” given that it was accompanied by a tariff increase.” 

Claudio Grass is an independent precious metals advisory based in Switzerland.

Click here to read about how to invest in gold. 

My recent study covers four of the most widely owned equity-based mutual funds.

1. Vanguard Equity Income
2. Vanguard Dividend Growth
3. T. Rowe Price Dividend Growth
4. Fidelity Dividend Growth

Here’s the 10-year compounded growth rate for each:

• T. Rowe Price Dividend Growth 12.0%
• Vanguard Dividend Growth 12.0%,
• Vanguard Equity Income 11.7%
• Fidelity Dividend Growth 10.0%.

Today, each of these four multi-billion dollar funds has become far too big to allow crafting a portfolio with a suitable number of stocks that would meet my criteria. There are simply not enough publicly owned candidates.

Note how the long-term returns for all four of these funds are basically the same. In fact, the numbers for two are precisely the same.

Given these insurmountable roadblocks, your proper option is to stick with individual stocks.

For over three decades my family-owned investment firm has managed individual retirement portfolios (both current and future), comprising individual stocks (as well as bonds) meeting the rigorous dividend criteria I have written about since the early 1970s.

Each hand selected stock must pass my dividend tests of quality, seasoning, and liquidity.

Throughout my career, I’ve considered most of the advice given to individual investors as B.S. 

I’ve been in the professional investment advice advisory industry since 1971, when I first started speaking at major money conferences around the world, trying to help investors separate the investment chaff from the wheat.

In the mid 90s, Money Magazine did a feature on the five largest circulation individual investment newsletters, and rated each A–F. 

Money handed out only one A grade. Yes, to my investment newsletter, Richard C. Young’s Intelligence Report.

Not long thereafter, with Matt and Becky in college, it seemed like a good time for Debbie and me to buy V-Twin Harleys to help us to see and understand the country from a different angle. We also bought a pink Conch cottage 90 miles from Cuba, in Key West, the Southernmost spot in the U.S., where we’ve been for almost 30 years. That’s also when I pretty much retired from dealing with the public.   

Along the way I have researched on many subjects, my prime targets being retirement investing and our personal health. Listed here are my three recent favorite health books. I strongly urge you to consider investing in all three for your own health and longevity.

1. What Your Doctor May Not Tell You About Hypertension – Mark Houston, MD
2. Grain Brain – David Perlmutter, MD
3. The Paleo Cardiologist – Jack Wolfson DO, FACC

 

The world has learned over the last year just how important computers are to the modern auto industry, as shortages of vehicles, or of vehicles with certain options, have been created by a lack of chips to put in vehicles at the factory.

An average 2021 automobile has around 1,400 chips in it. With so many chips necessary for each automobile, the shortage is going to take a toll on the industry, cutting the production of an estimated 3.9 million vehicles this year.

Part of the problem with chips is that factories are expensive, costing around $15 billion to build. And, they take a long time to complete, at around 5 years.

With computer chips becoming ever more integral to automobiles, and shortages hurting production, Ferrari has named Benedetto Vigna, currently a divisional president at STMicroelectrics, a French-Italian semiconductor manufacturer, its new CEO. The WSJ reports:

In announcing the appointment, Mr. Elkann cited Mr. Vigna’s “deep understanding of the technologies driving much of the change in our industry.”

The global chip shortage that has led to production delays in the auto industry is expected to continue for months to come. That has called into question the auto sector’s rebound as the severity of the coronavirus pandemic recedes in many countries.

The pandemic’s economic fallout has hit orders for Ferraris and other luxury cars. Ferrari issued a profit warning in May, saying that because of the pandemic it wouldn’t meet profit targets it had set for itself for next year. The company pushed back the target to 2023.

Mr. Vigna follows on the heels of Louis Camilleri, who ran Ferrari starting in July 2018 following the sudden death of Sergio Marchionne, who was CEO of both the fabled sports car maker and the former Fiat Chrysler group, now part of Stellantis NV.

Back in February, I wrote to you about how I started in the institutional research and trading investment business at Model Roland & Co. on Federal St. in Boston in August 1971. Just up the street from Model were Fidelity Investments, and Wellington Management, both of whom I called on from my very first hours on the job.

Over five decades ago, Ned Johnson, aka “Mister Johnson,” ran the show at Fidelity. At Wellington, Jack Bogle, “Mr. Mutual Fund,” had not yet left Wellington to start Vanguard.   

My focus in the initial going was international research and trading, and remains so today all these decades later.  I still consider Fidelity and Wellington the industry leaders.

Both firms feature great cultures, industry-leading technology, well-rounded investment programs for individuals, families, and small businesses–the type of folk I hoped to be associated with throughout my investment career.     

Not a business day goes by that one of my associated companies is not involved with one or more of Fidelity or Wellington’s services.

I never would have expected, as I started out in August 1971, that I would be working with Fidelity and Wellington for over 50 years.

In Wellington’s case it, to this day, manages hundreds of billions of dollars in blue-chip, “prudent man rule” quality investment mutual funds. 

In the early ’90s, Wellington’s chief investor relations officer informed me that I directed more mutual fund assets Wellington’s way in a given year than did the rest of the combined American investment newsletter industry.

And now in 2021, with our little family investment management company requiring a cutting-edge custodian for our $1.3 billion-dollar conservative Boston-style management company we, not surprisingly, rely on Fidelity. 

Your Survival Guy, hard to believe, joined my family business over two decades ago. But before that, he was at Fidelity which he too recalls as being run like a family business. This week he explains Fidelity’s unique positioning during the pandemic.

In Rhode Island, you’ll find a company that embraced the suburbs long ago, Fidelity. The company maintains a sprawling campus in Smithfield, RI, and will soon be hiring many young Rhode Islanders to fill out an expansion. Rachel Nunes reports for Patch:

Fidelity currently employs 3,200 people in Rhode Island, and the new positions will add 500 over the coming fiscal quarters.

“Fidelity Investments is excited to grow our footprint and expand our existing regional site in Rhode Island,” said Mark Barlow, the company’s senior vice president of personal investing. “We’re increasing the number of client-facing associates to support not only unprecedented customer growth and engagement, but also our associates who work hard every day to help our clients. Expanding in Rhode Island gives us access to a talented and educated workforce in the Ocean State to fill these positions that are new to this market for us.”

Applicants to the new jobs will not need to be licensed financial professional, Fidelity said. Instead, the company is looking for candidates with “strong customer-service skills, including those working in industries like hospitality and retail that may have been hit hardest by the pandemic.”

That’s just a small part of why Fidelity is number one.

Action Line: If you haven’t already escaped the city, consider a trip to the country today to scope out your future.

P.S. Read more about how I got my start at Model Roland & Co. back in 1971, and gold’s 50-year price explosion.

Lumber prices are breaking records. First position Spruce-Pine-Fir futures are trading at over $1500/metric ton. Perhaps the most frightening aspect of the spike in lumber prices is that builders have been able to pass them on to customers. The Fed should be very worried about the rapid rise in prices going directly to consumers. The central bank’s policy of low interest rates for longer could buckle under the pressure if inflation heats up faster than expected.

Ryan Dezember reports in The Wall Street Journal:

The Fed last week recommitted to near-zero interest rates, which have fueled the red-hot housing market. Rising home prices and low rates have also helped existing homeowners refinance mortgages to pocket cash without adding much to payments. Mortgage-finance firm Freddie Mac estimates that Americans last year withdrew nearly $153 billion from their homes in cash-out refinancings. Vacation options were limited by the pandemic and a remodeling boom ensued.

Demand hasn’t been diminished by soaring prices, mill executives say.

“The prices appear to be passing on,” Canfor CEO Don Kayne told investors Friday. Canfor, which owns mills in northwest Canada and throughout the U.S. South, notched quarterly records in sales and profit. “So far we haven’t seen the resistance that you would expect.

Builders including PulteGroup Inc. and the Howard Hughes Corp. say they have offset higher prices for lumber as well as for other building materials by raising home prices without slowing sales. NexPoint Residential Trust Inc. investment chief Matthew McGraner assured shareholders that high lumber prices weren’t eating into the apartment owner’s margins. “Any additional costs, we’ve been able to pass on to the tenants,” he said.

At a recent investor conference, Lowe’s Cos. finance chief David Denton said the home-improvement chain and its rivals weren’t waiting to see if the run-up in lumber prices would be short-lived before raising prices.

“That largely gets passed on pretty much real-time into the marketplace and you’re seeing that across the industry,” he said.

There is likely a storm coming in commodity prices. Young’s World Money Forecast is your port in a storm. Click here to sign up today for regular updates.