World Beta Blog

Long time readers know that I think the singular focus on dividends is one of the biggest mistakes an investor can make when selecting stocks.  With the dividend tax rate set to increase at year end, the US will soon have one of the highest tax rates on dividends in the world at ~45% with the Affordable Care Actand and Pease limitation on itemized deductions.  HT:  Sober Look, JP Morgan

What happens when governements of the world jack up dividend tax rates (especially when they are higher than capital gains)?  No surprise, fewer companies pay dividends, and those that do pay out less in earnings as dividends…

In over half of the past forty years, dividends have been taxed at higher rates than long-term capital gains, with the exception of 1988-1997, and 2003-present.  While this disadvantage was slightly improved by the recent Bush tax cuts, and while there are some foreign countries that do not have inferior tax treatment for dividends, the number of companies paying dividends has, nonetheless, declined from nearly 100% to around 66% for the largest stocks in the U.S.  (Another concise summary of dividend paying stocks is the 2001 French Fama paper “Disappearing Dividends:  Changing Firm Characteristics or Lower Propensity to Pay?”)

A recent paper by Jacob and Jacob (2011), “Taxation, Dividends and Share Repurchases:  Taking Evidence Global,” examines 6,416 companies across 25 countries and find that relative tax rates are hugely important.  They state, “Our results show that dividend and shareholder taxation are important determinants of corporate payout internationally in the past 20 years. In countries and years in which dividends are taxed favorably relative to capital gains, firms are more likely to pay dividends, and the amount of dividends is greater.  Conversely, in countries and years in which capital gains receive preferential tax treatment over dividends, firms are more likely to repurchase shares to pay out cash to investors.”

Source: Standard and Poor’s, Political Calculations blog

A more holistic approach to investing based on various routes of distributing cash flows (commonly known as shareholder yield)  makes much more sense to me, and has historically beat the pants off any dividend strategy.  Check out my friend Wes’s paper, and hopefully soon our book (Nov 1?).

A simple yearly rebal, mkt cap weighted, of various yield strategies below.

– Various Measures of Cash Flow Yields, 1982-2010.  

Source: Gray, Vogel, “Enhancing the Investment Performance of Yield Based Strategies” (2012) 

Thompson has a great site where they do a monthly chart summary.  Check it out:

A few books on the way and/or on my shelf:

The Value Investors: Lessons from the World’s Top Fund Managers

The Checklist Manifesto: How to Get Things Right

Antifragile: Things That Gain from Disorder

Every year I do a table that updates endowment and pension returns over the year prior.  Since most funds fiscal year ends June 30th, we should have results trickling in in the next month or two.  For a primer on why these funds are going to never ever hit their 8% target read these two pieces:  8%?  Try 4% and What if 8% is Really 0%?  I also liked Bogle – The Lessons of History. ( I was considering titling this post “The Revenge of 60/40” in reference to an old post from 2009).

US Stocks:  5.45%

Foreign Stocks:  -13.38%

US 10 Year:  16.28%

REITs:  12.65%

Commodities:  -10.74%

60/40:  10.41%

Ivy buy and hold allocation from book:  2.15%

Median public pension: 1.15%

CalPers:  1%

Stanford:  1.0%

Yale:  4.7%

Harvard: -0.1%

Penn:  1.6%

MIT:  8.0%

Duke:  1.0%

UVa:  5.1%

Here is also a cool list of outsourcing firms for endowment management from Charles Skorina:

From my buddy Wes at Turnkey Analyst - four blog posts that give a sneak look at his upcoming book (I’ll update as they come out):

This post is the first in a series that will discuss Turnkey Analyst’s approach to finding the holy grail of quantitative finance – a robust, reliable method of identifying low risk, high quality, undervalued stocks that generate market beating returns.

Part 1 - Avoid Loss

Part 2 – Find What’s Cheap

Part 3 – Find High Quality Firms

Part 4 – Success

I’m headed to Livingston, Montana this weekend to go flyfishing with the Fabers, and then off to Chicago early next week for meetings and to speak at the Morningstar ETF conference.  (Also the following two weeks will include Scottsdale and Seattle.)

Let me know if you’re around!

I was going to make the below an issue of The Idea Farm, but there is so much content I want to pass along right now I figured I would post it here.  I have considered moving The Idea Farm mailing from once a week on Sunday to “whenever something interesting crosses my desk” (but still only maybe 1 or 2 emails a week).  What do you prefer?

I’ve had an  ebook written for about a year on the topic of Shareholder Yield, and hopefully it will be out in the next month or so.  Long time readers of the blog will be familiar with the concepts of shareholder yield and net payout yield (combining dividends & net buybacks as a more holistic measure of cash flows to investors).

The coming tax hikes for dividends for the top tax bracket is a massive negative for dividend stocks that is still not appreciated in the hunt for yield.  With all of the money rushing into high yield stocks the valuation discount that high yielders have enjoyed to the broad market has compressed to near zero.

Here is a great series from FactSet titled Dividend Quarterly that is worth a read.  From the report:

2012: External Factors Have Muted the Threat of a Tax Hike

Is the market now showing a reversal of the trends experienced in 2003? Not particularly. As previously reported in “Dividend Quarterly”, the P/E valuations of dividend stocks have actually increased relative to non-dividend stocks. The trailing price to earnings ratio (P/E) for non-dividend stocks (15.6) led the P/E of dividend stocks (13.5) by only 216 basis points at the end of Q2 2012, which is substantially lower than the 20-year monthly median of 1,343 basis points. Excluding months when non-dividend stocks had a negative P/E ratio, the premium at the end of Q2 marked the fourth smallest in the past twenty years (on a monthly basis). However, valuations in dividend stocks could be elevated because interest rates are historically low and investors are interested in higher-yielding securities.

While it is difficult to isolate changes in valuation due to fear of dividend tax increases from changes in valuation due to investors’ surging demand for higher yields, the long-term impacts that followed the signing of the dividend tax cut in 2003 may indicate how companies will respond to higher dividend taxes. The response could include a reduction in the number of dividend payers or a decline in the number of companies increasing DPS year-over-year, which is especially plausible since both metrics are at multi-year highs. The proportion of dividend-payers in the index broke the 80% threshold for the first time in the 2000’s in Q1 2012, and Q2 2012 had the largest number of companies increasing TTM dividends per share in at least 20 years (296) in the S&P 500.

At least one company has publicly commented on how an increase in the tax would affect the dividend decision. Darren King, CEO of Laboratory Corp. of America, said on a July 19th earnings call that a rise in the potential marginal tax rate on dividends “…really takes away from the attractiveness of a dividend. So some of it [the decision to pay a dividend] is going to depend on what are – what is Congress and the Executive Branch going to do…”.

 FactSet Dividend Quarterly: January 2012

 FactSet Dividend Quarterly: March 2012

 FactSet Dividend Quarterly: June 2012

 FactSet Dividend Quarterly US: September 2012

And there is also Buyback Quarterly

 FactSet Buyback Quarterly: January 2012

 FactSet Buyback Quarterly: March 2012

 FactSet Buyback Quarterly: June 2012

And info on uses of cash

FactSet Cash & Investment Quarterly: January 2012

 FactSet Cash & Investment Quarterly: March 2012

 FactSet Cash & Investment Quarterly: June 2012

And lastly the hedgies

 HEDGE_FUND_OWNERSHIP_Q212.pdf 

I’m driving down to Newport Beach today for the Index Universe conference tomorrow.  Drop me a line if you’re around!

Revisiting Kat’s Managed Futures and Hedge Funds: A Match Made in Heaven

From the paper:

“The benefits of allocating to alternatives with a sizable percentage allocated to managed futures are quite compelling. As the contribution to alternatives increases, all four moments of the return distribution benefit:

1) Mean return increases
2) Standard deviation decreases
3) Skewness increases
4) Kurtosis decreases

Overall, our analysis is best summarized by the following quote from Dr. Kat (regarding his own findings almost 10 years ago): “Investing in managed futures can improve the overall risk profile of a  portfolio far beyond what can be achieved with hedge funds alone. Making an allocation to managed futures not only neutralizes the unwanted side effects of hedge funds, but also leads to further risk reduction. Assuming managed futures offer an acceptable expected return, all of this comes at quite a low price in terms of expected return foregone.”

Abstract:      

In November 2002, Cass Business School Professor Harry M. Kat, Ph.D. began to circulate a Working Paper entitled Managed Futures and Hedge Funds: A Match Made In Heaven. The Journal of Investment Management subsequently published the paper in the First Quarter of 2004. In the paper, Kat noted that while adding hedge fund exposure to traditional portfolios of stocks and bonds increased returns and reduced volatility, it also produced an undesired side effect – increased tail risk (lower skew and higher kurtosis). He went on to analyze the effects of adding managed futures to the traditional portfolios, and then of combining hedge funds and managed futures, and finally the effect of adding both hedge funds and managed futures to the traditional portfolios. He found that managed futures were better diversifiers than hedge funds; that they reduced the portfolio’s volatility to a greater degree and more quickly than did hedge funds, and without the undesirable side effects. He concluded that the most desirable results were obtained by combining both managed futures and hedge funds with the traditional portfolios. Kat’s original period of study was June 1994-May 2001. In this paper, we revisit and update Kat’s original work. Using similar data for the period June 2001-December 2011, we find that his observations continue to hold true more than 10 years later. During the subsequent 10.5 years, a highly volatile period that included separate stock market drawdowns of 36% and 56%, managed futures have continued to provide more effective and more valuable diversification for portfolios of stocks and bonds than have hedge funds.

Back in June we did a blog on some of the most interesting new companies being run by brilliant entrepreneurs (also older, lifestyle post here).  Below is an update with a few interesting websites from Time Magazines 50 Best Websites 2012:

Learnist:

Everybody knows enough about some topic — be it English, science, yoga or bourbon — to teach other people about it. Every topic is covered by content scattered around the web. And the idea behind a new site called Learnist is to give everybody a spot to teach through curation. The site, which is also available as an app for iPhone and iPad, features user-created lessons that bring together web pages, videos, Google e-books and other items on a specific topic. At the moment, only a relatively small group of people approved by the site — including some real teachers — can create these “learnings,” but anyone can check them out.

Devour:

No mere mortal could ever watch all the videos on YouTube. Even the ones actually worth watching. And that’s where Devour comes in. Its simple, clean design puts the 15 top-trending and most fascinating clips right in your face. 

Songza:

When you’re listening to online music, you can painstakingly create your own playlists.  Or you can drop into Songza, where the hard work of constructing playlists is done by the site’s music experts, and the only technology they use is their own good taste. The Music Concierge feature lets you choose a scenario (such as “Cooking Breakfast” or  ”Unwinding After a Long Day”) and helps you narrow in on a genre (like “Smooth Rockabilly” or “Frat-Rap House Party”). 

If This, Then That:

If This Then That helps wrangle together all the apps and websites you use on a daily basis, conjoining them like the cutest two-faced cat imaginable. The site thrives on those tiny yet tedious tasks you probably do without even realizing. Do you favorite a tweeted article and then send it to your Instapaper account? Take a photo using Instagram and then send it to Gmail to print later? One popular recipe can check the weather at a certain time and text it to you. 

Coursera:

Once upon a time, the only way to take a course taught by a professor employed by a great university was to attend a great university. With Coursera, you don’t have to leave your seat. Instructors from Princeton, Duke, Caltech and 13 other schools conduct online classes on everything from math to music, complete with video lectures, quizzes and homework.  And the site is free — no scholarship required.

Uncrate:

 Every day, Uncrate publishes sexy pictures and brief write-ups of stuff that guys might want to buy. What kind of stuff? Everything from a Sam Adams beer milkshake to an Adirondack chair made out of whiskey barrels to the most powerful car Peugeot’s ever produced. You can read the site in blog format or Pinterest-style grid view. It’s good manly fun to peruse, whether you’re actually shopping or just daydreaming.

Read more: http://techland.time.com/2012/09/18/50-best-websites-2012/#ixzz26wF5VEzr