TIP OF THE WEEK - Why you should purchase rolls of nickels from your bank.

Why you should purchase rolls of nickels from your bank.

Jason Brizic

February 17^th, 2012

Gresham’s law states that “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”  This is what happened to the 90% pre-1963 silver dimes and quarters in the US.  It has happened to copper pennies.  And it is about to happen nickels.

http://en.wikipedia.org/wiki/Gresham%27s_law

Americans had the opportunity to buy and hold 90% silver coins before 1963 cheaply.  Those that did so were smart.  Gresham’s law took effect.  You will almost never happen upon a 90% silver dime or quarter anymore.  Most of them have been picked out of circulation.  Today, the 90% silver coins are valued for their metal content and not their face value anymore.  You have an opportunity to buy nickel at less than spot market price.  You can resell them later at a profit. 

The composition of the US nickel has been unchanged since the end of WWII.  The nickel is 75% copper and 25% nickel.  It costs the US government 11.2 cents to produce the 5 cent nickel.  They are broke and they need to cut government costs wherever it is easiest.  The voters don’t care about the composition of the coinage.  So, the US government is proposing changes to the composition of the nickel.

http://money.cnn.com/2012/02/15/news/economy/pennies_nickels/

The website www.coinflation.com calculates the daily metal value of all US coins.  The metal inside a nickel is worth 5.6 cents.  Nickel is selling for $9.07 per pound and copper is selling for $3.78 per pound in commodity markets today.  Buy low at 5 cents and sell high at 5.6 cents.  That is a 12.68% return on invested capital at today’s prices.  However, there is no market for coinage nickels right now because there is only one type of nickel.  You will have to wait to make any money off Gresham’s law.

The potential return on investment (ROI) is much higher.  About a year ago when nickel was selling for over $10.00 per pound and copper was over $4.00 per pound the metal in a single nickel was worth 6.2 cents.  That is a ROI of 24%.

The long term prospects for the price of copper and nickel are up.  Central bank monetary inflation will continue to erode the purchasing power of the dollar.  The price of nickel and copper expressed in dollars will continue to increase with monetary inflation.  A relapse of the world economy into recession will have the opposite effect on the price on copper and nickel.  So, in the short term the price of nickel and copper will go down, but long term the price will go up.

Buy nickels in two dollar rolls from you local bank.  You don’t have to sort nickels since there is only one composition of nickels in circulation.  The pre-1982 copper pennies are worth 2.5 cents (150% ROI), but you have to find them and separate them from all the zinc pennies.  That is a very labor intensive process.  I performed a test.  It took me one hour to sort through $10.00 of pennies.  Only about 15% were copper pennies (Gresham’s law again).  1 hour of labor yielded $1.50 in copper pennies worth $3.75 in metal.  Time is money.  I could have bought $100 in nickels in five minutes at a bank and been done with it.  No sorting necessary.  The best part is that your nickels are always worth their face value.  It is a guaranteed investment so long as you are patient.

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Is Japan Next? No, Rest of the PIIGS Are Next.

Is Japan next.pdf Download this file

A friend of mine sent me an article from Fortune.  The article asked the question if Japan is next to suffer a sovereign debt crisis.  I think the rest of the PIIGS will suffer before Japan, but Japan’s and the USA’s day of reckoning is coming at some point.  The full article is here with my comments and explanations why I believe this to be the case.

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A First Look at Duke Energy (DUK).

Today I take a look at Duke Energy (DUK).  This article should be read in conjunction with my article on Progress Energy (PGN) because Duke Energy is trying to merge with Progress.

http://www.myhighdividendstocks.com/category/stocks-that-pay-small-dividends/progress

This is the eighth in a series of fifteen articles on stocks liked by Seeking Alpha contributor Insider Monkey.  Most of his dividend stocks have a yield between 4% - 5%.  I view these stocks as potential buys in the upcoming worldwide recession.  To discover the value price for Duke Energy, read on.

Duke Energy (DUK)

Share price: $21.42

Shares: 1.333 billion

Market capitalization: $28.55 billion

Bonds outstanding: They have $4.5 billion in outstanding bonds.

What the company does - Duke Energy is one of the largest multistate holding companies of regulated electric and gas utilities, with regulated utilities in the Carolinas, Indiana, Ohio, and Kentucky that deliver electricity to about 4 million customers and deliver natural gas to 500,000 customers. Duke's competitive generation and power retailing business operates primarily in the Midwest, and its international energy segment owns and operates hydroelectric generation assets in Latin America.

Morningstar’s take - Pending necessary regulatory approvals, Duke is poised to become the largest regulated utility in the United States following its announced merger with Progress Energy PGN, which is expected to close at the end of 2011.

DIVIDEND RECORD – Duke was a dividend grower from 1987 – 2005, then they cut the dividend from $0.32 per quarter to $0.21 in 2005.  The dividend has grown back to $0.25 since then.

Dividend: $0.25 quarterly

Dividend yield: 4.6% ($1.00 annual dividend / $21.42 share price)

Dividend payout ratio: 72% using Google Finance’s recent EPS of $1.38 OR 88% using the average earning power of $1.13 per share

EARNING POWER – $1.13 per share at 1.333 billion shares

(Earnings adjusted for changes in capitalization)

	EPS	Net income	Shares	Adjusted EPS
2006	$1.57	$1,863 M	1,188 M	$1.40
2007	$1.18	$1,500 M	1,266 M	$1.13
2008	$1.07	$1,362 M	1,267 M	$1.02
2009	$0.83	$1,075 M	1,294 M	$0.81
2010	$1.00	$1,320 M	1,319 M	$0.99
2011 (est)	$1.43	$1,911.21 M	1,333 M	$1.43

	EPS	Net income	Shares	Adjusted EPS
2011 Q1	$0.38	$511 M	1,331 M	$0.38
2011 Q2	$0.33	$435 M	1,333 M	$0.33
2011 Q3	$0.35	$472 M	1,333 M	$0.35
2011 Q4 (est)	$0.37	$493.21 M	1,333 M	$0.37
2011 total (est)	$1.43	$1,911.21 M	1,333 M	$1.43

Six year average adjusted earnings per share is $1.13

Consider contrarian buying below $9.04 (8 times average adjusted EPS)

Consider value buying below $13.56 (12 times average adjusted EPS)

Duke Energy is currently trading at 18.9 times average adjusted EPS.  This stock is still priced for investment, but it’s pretty close to speculative pricing.

Consider speculative selling above $22.60 (20 times average adjusted EPS)

BALANCE SHEET – Shareholder equity is very stable, but I’m a little concerned about the low current ratio of 1.23 and quick ratio of 0.42.   Where will Duke Energy get money to cover current liabilities?  Their

Book value per share: $17.10

Price to book value ratio: 1.25 (under 1.0 is good) ($21.42 / $17.10)

Current ratio: 1.23 latest quarter (over 2.0 is good) ($6,273 M current assets / $5,115 M current liabilities)

Quick ratio: 0.42 (over 1.0 is good) ($2,178 M cash / $5,115 current liabilities)

Debt to equity ratio: 0.77 (lower is better)

Percentage of plant, property, and equipment compared to total assets: 68.9%

CONCLUSION – Duke Energy is trying to merge with Progress Energy (http://www.reuters.com/finance/stocks/DUK/key-developments/article/2441001 ).  Mergers typically involve large sums of debts which erodes shareholder equity.  I would wait to buy the combined company after some combined analysis confirms a value price.  However, if the merger fails, then don’t buy Duke above $13.56.  The stock is currently too close to speculative pricing and the lack of current assets gives me pause.  Europe is already in recession and China has a looming recession (http://teapartyeconomist.com/2012/02/13/chinas-imports-fall-indicating-an-economis-slowdown/ ).  A worldwide recession will ensue and drop stock prices everywhere.

DISCLOSURE – I don’t own Duke Energy (DUK).

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First Look at Lorillard (LO). Do You Want To See An Ugly Balance Sheet?

Today I take a look at the third largest tobacco company in the USA, Lorillard (LO).  This is the seventh in a string of fifteen articles I’m writing covering 15 stocks recommended by Seeking Alpha contributor, Insider Monkey.  Most of his stocks are in the 4%-5% dividend yield range.  I look at these stocks as potential buys at the next stock market bottom.  So far most of these stocks should only be bought near their 2008 – 2009 lows to get the best yields and potential price appreciation.  Some of them shouldn’t be bought at all.  Lorillard’s negative equity puts it in that category.

Lorillard (LO)

Share price: $121.77

Shares: 132 million

Market capitalization: $16.07 billion

Bonds outstanding: $2.5 billion.  Big bonds due in 2016 and 2019-2020.  These bonds will threaten the dividend.

What the company does - With annual sales topping $4 billion in 2010, Lorillard is the third-largest cigarette manufacturer in the United States. Its flagship brand, Newport, claims a 13% share of the total cigarette industry and a 36% share of the menthol category. The firm also competes in the nonmenthol premium category with much smaller brands Kent, True, and Satin and in the discount segment with Old Gold and Maverick.

Morningstar’s take - We think Lorillard possesses a wide economic moat because of the extraordinary strength of Newport, its flagship menthol brand. However, with 90% of its volume generated in the menthol category in 2010 and the threat of Food and Drug Administration regulation still present, the firm could be vulnerable to unfavorable regulatory developments.

Here is a Seeking Alpha article on this risk: http://seekingalpha.com/article/360571-hesitant-on-lorillard-i-suggest-philip-morris

DIVIDEND RECORD – Lorillard started paying dividends in 2008.  Its dividends have grown from $0.46 in 2008 to $1.55 in 1Q 2012.

Dividend: $1.55 quarterly

Dividend yield: 5.1% ($6.20 annual dividend / $121.77 share price)

Dividend payout ratio: 77.5% using recent reported EPS for 2011 OR 86% using the average adjusted earning power per share of $7.20

EARNING POWER – $7.20 per share at 132 million shares.  The inept management has been buying back shares and issuing debts which is destroying the balance sheet.

(Earnings adjusted for changes in capitalization; Lorillard has been buying back shares since 2008)

	EPS	Net income	Shares	Adjusted EPS
2006	$4.75	$826 M	174 M	$6.26
2007	$5.16	$898 M	174 M	$6.80
2008	$5.15	$887 M	172 M	$6.72
2009	$5.76	$948 M	165 M	$7.18
2010	$6.78	$1,029 M	152 M	$7.80
2011	$8.00	$1,116 M	132 M	$8.45

	EPS	Net income	Shares	Adjusted EPS
2011 Q1	$1.71	$248 M	145 M	$1.88
2011 Q2	$2.05	$291 M	142 M	$2.20
2011 Q3	$1.94	$267 M	137 M	$2.02
2011 Q4	$2.30	$310 M	132 M	$2.34
2011 total	$8.00	$1,116 M	132 M	$8.45

Six year average adjusted earnings per share is $7.20

Consider contrarian buying below $57.60 (8 times average adjusted EPS)

Consider value buying below $86.40 (12 times average adjusted EPS)

Lorillard is currently trading at 16.9 times average adjusted EPS.  This stock is still priced for investment, but it is creeping toward speculative pricing

Consider speculative selling above $144.00 (20 times average adjusted EPS)

BALANCE SHEET – Lorillard has one of the ugliest balance sheets I’ve ever seen outside of financial institutions.  This is how you destroy shareholder equity.  And there is no reason for it either.

Book value per share: ($11.46)

Price to book value ratio: N/A because of negative equity (under 1.0 is good)

Current ratio:  1.73 (over 2.0 is good)

Quick ratio: 1.10 (over 1.0 is good)

Debt to equity ratio: (lower is better) N/A because of negative equity

Percentage of property, plant, and equipment compared to total assets: 8.7%  ($262 M / $3,008 M total assets)

CONCLUSION – Lorillard pays a decent dividend with a yield of 5.1%.  The company’s dividend payout ratio is somewhere in the 77% - 86% range depending on how you calculation and this matches the company’s payout goals according to the most recent earnings conference call.  The stock’s price is still investment quality at only 16.9 times earning power.  So far so good, but then we come to the company’s balance sheet.  It is absolutely horrendous.  There is no reason to buyback share to produce negative share equity.  I’m also disturbed by the small 8.7% percentage of real assets as a percentage of total assets.  I wouldn’t consider buying Lorillard unless the share price dropped down below $60 like they did in 2008 – 2009.  I don’t own companies with negative equity.

DISCLOSURE – I don’t own Lorillard (LO).

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TIP OF THE WEEK: The Federal Reserve Is Not Holding Down the FED Funds Rate, But I Know Who Is.

The Federal Reserve Is Not Holding Down the FED Funds Rate, But I Know Who Is.

Jason Brizic

February 10^th, 2011

The Federal Reserve pretends to control interest rates through the use the FED funds rate.  http://www.federalreserve.gov/monetarypolicy/openmarket.htm

I see this all the time in financial articles.  Pick any of these articles (http://tinyurl.com/7vurwdx) and you will see moronic language like this:

“Federal Reserve officials said they expect short-term interest rates to stay close to zero "at least through late 2014." The Fed has been trying to give more explicit guidance on what it expects in the future as part of a broader move to greater transparency.”

The FED claims that it is holding this key interest rate low until at least 2014 using the federal funds target rate.  Here is the definition of the FED funds rate from its Wikipedia entry:

In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets.^[1][2]

The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.

The commercial bankers (aka depository institutions) have decided not to loan out all the money the FED created for them during the bailouts of 2008-2009.  They are holding over $1.5 trillion dollars in excess reserves.

Therefore, they don’t need to make overnight loans to one another to satisfy the legal reserve requirements. These bankers are scared to make loans in this horrible economic environment.  I don’t blame them for being scared.  They have decided to park the money back at the FED and the FED is paying them 0.25% interest to store it for them.  This has caused the federal funds effective rate to drop to 0%. 

The FED could get the banks to lend the $1.5 trillion dollars into the economy by imposing a fee on excess reserves.  But that would create hyperinflation in the money supply and prices would rise over 100% in a few months.  The FED doesn’t want that to happen, so they pretend to be in control of the federal funds effective rate when the terrified bankers really are.  The bottom line is that there will be no economic recovery until bankers increase their lending.  That means we will experience a double-dip recession regardless of what happens in Europe or China.  I’m waiting for much lower stock prices to buy high dividend stocks with earning power and strong balance sheets.

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Economic Uncertainty

Are you paying too much money for stocks?  I see many companies that fund their dividends through additional equity offerings.  AGNC comes to mind.  Where do you think the proceeds are going in some of these high dividend stock equity offerings?  Here is a clue.

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Kinder Morgan Energy Partners (KMP). Building for the Bust.

Today I’m taking a look at Kinder Morgan Energy Partners (KMP).  This the sixth article out of fifteen covering a dividend stock list recommended by Seeking Alpha contributor Insider Monkey.  Most of the companies were 4%-5% dividend yielders.  I think the Kinder Morgan Energy Partners is way overvalued by the market.  See my quick look analysis below for details.  KMP spends a lot of money on capital expenditures to expand its revenue in the future.  They are focusing on the infrastructure necessary to export liquid natural gas to Asia (meaning China).  China is going to have a large recession because they are trying to use Keynesian mercantilist economic policies to achieve their 8-9% growth.  I think their capital projects won’t be as profitable as the CEO hopes they will be.

Kinder Morgan Energy Partners (KMP)

Share price: $86.98 closing price yesterday

Shares: 333.02 million

Market capitalization: $28.97 billion

Preferred stock: This company has a huge preferred dividend that takes away from what is available to the common share dividend.

Bonds outstanding: $13.7 billion.  Look at all that debt coming due between now and 2022!

What the company does – Kinder Morgan Energy Partners is one of the largest master limited partnerships, engaged in the transportation and storage of energy commodities.  It operates more than 37,000 miles of pipelines for oil and natural gas transport.  It also owns 180 terminals that can handle and store liquids, gases, and dry-bulk materials, such as coal.  As a partnership, the company pays no corporate income tax, but its tax burden flows through to individual unitholders.

Morningstar’s take – Our chief critique of Kinder Morgan Energy Partners has been that the burden of incentive distributions to its general partner will make it difficult to maintain its high historical distribution growth.  We’ve argued that the increasing drag of the “GP burden” will make it challenging for Kinder to target distribution growth rates in excess of 5%--and we may have been mistaken.

DIVIDEND RECORD – Kinder Morgan Energy Partners is a steady dividend grower.

Dividend: $1.16 quarterly

Dividend yield: 5.3% ($4.64 annual dividend / $86.98 share price)

Dividend payout ratio: 2,900% using the lastest Google Finance EPS of $0.16 –OR- 314% using the average adjusted earning power of $1.48 for common shares

EARNING POWER – $1.48 six year average adjusted earning power per share of common stock

(Earnings adjusted for changes in capitalization)

	EPS	Net income	Shares	Adjusted EPS
2006	$2.04	$972 M	225 M	$2.92
2007	($0.09)	$590 M	237 M	$1.77
2008	$1.94	$499 M	257 M	$1.50
2009	$1.18	$332 M	282 M	$1.00
2010	$1.40	$431 M	307 M	$1.29
2011 (est)	$0.38	$124.13 M	333.02 M	$0.37

.

	EPS	Net income	Shares	Adjusted EPS
2011 Q1	$0.18	$57 M	317 M	$0.17
2011 Q2	($0.19	($62 M)	321 M	($0.19)
2011 Q3	($0.25)	($84 M)	331 M	($0.25)
2011 Q4 (est)	$0.64	$213.13 M	333.02 M	$0.64
2011 total (est)	$0.38	$124.13 M	333.02 M	$0.37

Six year average adjusted earnings per share is $1.48

Consider contrarian buying below $11.84 (8 times average adjusted EPS)

Consider value buying below $17.76 (12 times average adjusted EPS)

Consider speculative selling above $29.60 (20 times average adjusted EPS)

Kinder Morgan Energy Partners is currently trading at 58.7 times average adjusted EPS.  This is highly speculative pricing.

BALANCE SHEET – A mountain of debt

Book value per share: $22.93

Price to book value ratio: 3.79 (under 1.0 is good)

Current ratio: 0.46 (over 2.0 is good)

Quick ratio: 0.36 (over 1.0 is good)

Debt to equity ratio: 1.54 (lower is better)

% of assets made up of property, plant, & equipment: 65%

CONCLUSION – Kinder Morgan Energy Partner is an speculatively priced stock at 58.7 times average earning power.  It has a nice dividend yield, but it can’t afford to pay that dividend by and measure other than issuing more debt and stock.  If you buy KMP at its current price, then you will be paying almost 4 times its book value.  I wouldn’t even consider a second look at KMP until the price falls down to the $22.93 - $17.76 range.

DISCLOSURE – I don’t own Kinder Morgan Energy Partners (KMP).

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