US IRA Withdraws, Financial and Investment Definitions and Books

This week’s blog is a hodgepodge of financial topics: US Individual Retirement Accounts (IRAs), several financial and investment definitions and some favorite financial and investment books that I have read and recommend.

I don’t like to write US-centric blogs (about 40% of my readers are outside the US), but I have been reading lately in newspapers and internet articles about older US workers (50 or older) who have lost their jobs and need to take money out of their traditional IRAs just to be able to pay their living expenses (to pay their mortgage, buy food, support their families). They are having to pay a 10% penalty fee for making an early withdrawal before reaching 59½ years of age. Many of these articles talk about the problem but will not tell you the methods you can use to withdraw the money from your traditional IRA without incurring the penalty fees. The following are some methods to get around the early withdrawal penalty:

• You can withdraw money toward qualifying school cost. For example, you need to go back to school to increase your job skills or your child is in college. You could use your traditional IRAs to pay for the school expense and use non-IRA money for your living expenses.

• There are a number of hardship cases for penalty-free early withdrawals from your traditional IRA, for example:

◦ Total and permanent disability

◦ Payment of medical insurance while unemployed

◦ Medical expenses that exceed 7.5% of adjusted gross income

For example, you could use your traditional IRAs to pay for your medical insurance payments and your non-IRA money for your living expenses.

• The IRS has a rule called 72T. Using rule 72T eliminates the 10% early withdrawal penalty for traditional IRAs. The withdrawal must continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever comes last. For example, by using a 72T calculator (http://www.dinkytown.net/java/Retire72T.html) you can see that if you are single, 56 year old and have $500,000 in your traditional IRA using the fixed amortization method your yearly payout would be $25,168 (monthly payout of $2,097).

Please consult with your tax advisor or the IRS before deciding on what is the best method for you so you won’t have to pay the 10% early withdrawal penalty. You will still need to pay income tax on the withdrawn money. The major drawback is you are depleting your retirement accounts and will have less money for when you retire.

Paul’s Gang financial and investment definitions:

Quality of Profit: High quality of profit means a company is increasing profits by increasing revenue (sales) and controlling cost. Low quality of profit means a company is increasing profit only by decreasing cost and not by increasing revenue. Methods of decreasing cost include decreasing labor cost (reducing the labor force), capital cost, Research and Development (R&D), etc.

Company worth more in its parts than the whole: If a company sold its parts (business units) it would be worth more than its market capitalization. For example, if a company has one business unit that is losing money, possesses high liabilities, has slow growth (compared to the overall company), etc., it could be decreasing the stock price of the company (which would decrease the market capitalization). The company could sell the business unit and increase the stock price and market capitalization. Another example could be that the company has a very profitable and fast growing business unit as compared with the rest of company; that business unit may be worth more than the original company market capitalization. The company could sell the business unit or could do an Initial Public Offering (IPO) to create a new company separate from the business unit.

Arrow in my Quiver: When you find a high quality investment opportunity, stock, ETF, etc. but the micro and/or macro economic factors are not favorable to the investment, you put the investment into your quiver waiting for the right economic environment. When economic factors change you check your quiver to see if you have any investments that are favorable to the new economic environment. If they are you pull the arrow from your quiver and make the investment.

In closing, Paul’s Gang recommends the following financial and investment books. If you are interested, click on the link to get a review of the books from the Amazon website:

The Ascent of Money: A Financial History of the World
The Big Short: Inside the Doomsday Machine
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)
Die Broke: A Radical Four-Part Financial Plan
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Intelligent Investor: The Classic Text on Value Investing
The Millionaire Mind
One Up On Wall Street : How To Use What You Already Know To Make Money In The Market
Security Analysis: The Classic 1934 Edition

Please chime in with comments about early traditional IRA withdraws, what are your favor financial and investment books, future blog ides, etc.

© 2010 Paul Cusick

Investing in Possible Buyout Companies #2

This is the second in my series of blogs on investing in possible buyout companies. I did a lot of work data mining financial data this past week (market cap and dividend yields are for the week of September 6, 2010). I started by reviewing companies that would be in a position to buy companies because they have sufficient cash. I evaluated the top 50 companies listed on US stock exchanges by total amount of cash or cash equivalent on-hand based on their latest filings, deleting all financial companies for example, insurance providers, banks, etc.

I found some interesting data on the top 50 non-financial companies:

• Total market cap: $3.75 trillion

• Total cash: $628.5 billion

• Total debt: $852 billion

• Average dividend yield: 1.70% (the dividend yield is less than the S&P 500 index yield of 1.91%).

Table 1 - Top 15 non-financial companies by total cash or cash equivalent. This list includes 7 technology companies, 4 healthcare companies, 2 energy companies and 2 companies with part of their business in financial services (Ford and General Electric).

Company Name Market Cap Total Cash
(US $ billion) (US $ billion)
1. General Electric (GE) 165.07 73.85
2. Cisco Systems (CSCO) 117.06 39.86
3. Microsoft (MSFT) 207.34 36.56
4. Google Inc. (GOOG) 148.01 30.06
5. Ford Motor Company (F) 40.58 30.05
6. Apple Inc. (AAPL) 235.53 24.29
7. Pfizer (PFE) 131.27 19.27
8. Johnson & Johnson (JNJ) 161.69 18.90
9. WellPoint (WLP) 20.95 18.59
10. Oracle (ORCL) 121.96 18.47
11. Intel (INTC) 100.89 18.30
12. Hewlett-Packard (HPQ ) 92.69 14.72
13. Amgen Inc. (AMGN) 50.33 14.52
14. Exxon Mobil (XOM) 308.31 13.27
15. Chevron (CVX) 154.92 13.22

Table 2 - Top 15 non-financial companies by total cash or cash equivalent minus total debt. This list includes 10 technology companies, 3 healthcare companies, 1 consumer company and 1 energy company. It’s interesting to note that the top 5 companies are technology companies.

Company Name Market Cap Total Cash - Debt
(US $ billion) (US $ billion)
1. Microsoft (MSFT) 207.34 30.59
2. Google Inc. (GOOG) 148.01 30.06
3. Cisco Systems (CSCO) 117.06 24.58
4. Apple Inc. (AAPL) 235.53 24.29
5. Intel (INTC) 100.89 15.89
6. WellPoint (WLP) 20.95 9.29
7. QUALCOMM (QCOM) 65.12 8.69
8. Johnson & Johnson (JNJ) 161.69 7.25
9. Dell Inc. D(ELL) 23.96 7.18
10. Humana Inc. (HUM) 8.61 6.97
11. Amazon.com (AMZN) 61.45 4.98
12. eBay Inc. (EBAY) 30.88 4.90
13. Motorola (MOT) 18.27 4.79
14. Nike (NKE) 35.75 4.56
15. The AES Corp. (AES) 8.73 4.31

Table 3 - Top 10 non financial companies by percentage of total cash minus debt dividend by total market cap. This list includes 7 technology companies, 2 healthcare companies and 1 energy company.

Company Name Market Cap Cash - Debt/Market Cap
(US $ billion)
1. Humana Inc. (HUM) 8.61 80.95%
2. The AES Corp. (AES) 8.73 49.31%
3. WellPoint (WLP) 20.95 44.34%
4. Dell Inc. D(ELL) 23.96 29.96%
5. Motorola (MOT) 18.27 26.22%
6. Cisco Systems (CSCO) 117.06 21.00%
7. Google Inc. (GOOG) 148.01 20.31%
8. eBay Inc. (EBAY) 30.88 15.86%
9. Intel (INTC) 100.89 15.75%
10. Microsoft (MSFT) 207.34 14.75%

These are very interesting tables. The first and second tables show companies that have the cash to buy other companies. The third table is also very interesting in that it shows companies that could be bought by other companies for their cash (or they could use their cash to buy companies). If you review these tables it shows why most financial analysts expect technology, energy, healthcare and commodities companies to lead the buyout surge in the coming years. These sectors are shielded more from the current financial downturns, depending less on discretionary consumer income.

The overall weak economy will aid companies that want to buy companies for 2 major reasons. The first reason is that many companies are undervalued (pre current financial downturn) and companies with high credit ratings can get very low-cost debt financing. Companies with a lot cash and low debt have high credit ratings (just like consumers). For example, in early August 2010 IBM issued a $1.5 billion note. The 3 year note had a coupon rate of only 1%. On August 4, 2010, a 3 year US government treasury note interest rate was .86%. For the risk of buying a IBM 3 year note you only get an additional 14 (.14%) basis points of interest rate versus the risk free 3 year US treasury note (the US treasury has a printing press to print money and IBM does not). This is one of the reasons that IBM’s CEO said IBM will be an aggressive buyer of companies over the next 5 years, spending around $20 billion to acquire companies.

In a future blog I will be reviewing companies that have a history of buying companies. For example, Cisco and Intel have been very active in acquiring companies in the past couple of years as opposed to Apple which historically has not acquired companies. I will also review what companies are possible buyout candidates by business sector, market cap size, etc.

Please chime in with comments about what companies will buy out other companies, what companies / business sectors will be good buyout candidates. Is this a good investment strategy?

© 2010 Paul Cusick

Investing in Possible Buyout Companies

Over the next several blogs I will be looking at how to invest in companies that are possible buyout candidates. Excluding the financial service companies, the world’s 1000 biggest companies by market capitalization have almost $3 trillion (with a ‘t’) of cash or cash equivalent on-hand based on their latest filings. The buyout deals in August 2010 totaled over $285 billion, the largest month of 2010 (over 68% of the deals were cash only). There is lot cash available to buy companies over the next several years.

What can companies do with their cash?

• Increase Research and Development (R&D), sales force, etc.- For example, companies could increase their R&D budget to develop and improve existing products by hiring new employees, hire more sales people to increase their market share / revenue, etc. Companies are very reluctant to hire new fulltime employees in the current micro/ macroeconomic environment.

• Start or increase dividend payout – Companies could start paying dividends or increase their dividend payout to investors with their excess cash. For many tech companies for whom buying companies has not gone well in the past this may be a better use of the cash. In the US starting in 2011 the tax rate could more than double for high earners whose dividend payouts are in taxable accounts.

• Increase capital or infrastructure expenditures – Spend money to get new hardware/software, build a new office building, buy new equipment, etc. to increase the efficiency of the company workforce, expand the business etc.

• Buy companies – Buy companies which can improve a company’s overall business.

• Invest the cash – Companies could continue to invest their cash or equivalent in this period of historic low interest rates. In the US there has been talk that the federal government may start taxing their excess cash to encourage the economic recovery. This would force the companies to invest their money for example in capital or infrastructure expenditures, hire new employees, etc.

Why do companies buy other companies?

· Increase market share of current business

· Increase overall revenue and revenue growth

· Eliminate a competitor

· Get into a new business sector

· Acquire the company’s assets - For example, key technology, management talent, customer list, support contracts, etc.

I will be researching what companies have the most cash available to buy other companies and have a history of doing so, what sectors (type of business) and what type of companies (for example market capitalization size), are possible buyout candidates and writing blogs on what I find out.



This is an exciting investment area that may have the best investment return opportunities over the next two or three years. I will use a limited amount of my investment portfolio to invest in possible buyout candidates (around 5%). Please do your own research before making an investment. Maybe I should start a hedge fund looking for possible buyout candidates?

Please chime in with comments about what companies will buy out other companies, what companies / business sectors will be good buyout candidates. Is this a good investment strategy?

© 2010 Paul Cusick

High Dividend Yielding Stocks

I am on the hunt for high dividend yielding stocks like the five Natural Gas (NG) and Oil producing Canada Trust companies (thanks Fullstacks and Mr. C.) that I started buying in 2004. For example, Penn West Energy Trust (PWE) and Pengrowth Energy Trust (PGH) were paying a 16% dividend in 2008. In less than five years the dividend payout would have exceeded your purchase price of the stock (rule of 72). After several years of paying a high dividend, two of my Canada trust companies were bought out for cash that exceeded my purchase price by over 50%. With the decrease in price of NG and Oil and the change in the Canada Trust tax law decreeing that, beginning in 2011, they will be taxed like other corporations, they have either lowered their dividend yield or stopped paying them (if they have become corporations). Currently PWE’s dividend yield is 8.8% and PGH’s yield is 8.3%. Starting in January 2011 with the change in the Canada tax law they’ll no longer be required to pay out 90% of their profits every month in dividends (this is similar to US Real Estate Investment Trust).

The following are my criteria for selecting companies that are paying high dividend yields (that shouldn’t be forced to reduce or stop dividend payout in the future and might be potential buyout candidates):

• Stock market capitalization greater than 2 billion US dollars. This would be defined as a mid cap company.

• Current dividend yield greater than 4.5%. Current Dow Jones Index (DIA) yield is 2.68% and S&P Index yield is 2.03%.

• Growth of dividend yield over the last 5 years greater than 6%. The company is continuing to increase their dividend payout over a defined number of years.

• Earnings Per Share (EPS) projected over the next 5 years should be greater than 8%. A trend indicating profit in the future will allow them to increase their dividends.

• Revenue growth over the last 3 years should be greater than .5%. This will indicate whether the profit growth is ‘quality’ profit growth (they are increasing revenue and controlling cost and not just reducing expenses to increase profits).

• Dividend payout ratios and insider (employees) percent of stock ownership. Dividend payout ratios (lower is better) is a good indicator of the company’s ability to continue to increase dividend payouts in the future. If insiders own a larger percent of the stock they are much more likely to continue to pay dividends since they get the same payout as you. The higher the insider ratio the better it should be for the stockholder.

• Industry sector. I am excluding Financial and REITs companies from the analysis so as to concentrate on companies in industries that can continue to grow with the current or future micro and macro economic conditions.

I utilized stock screeners to select companies to review. After trying a large number of stock screeners I chose the Fidelity stock screener (you need to have a Fidelity account to use it). It could perform each of my criteria except for dividend payout ratio (I will need to conduct research on the companies selected using the other criteria). The following companies were selected (listed from the highest rated by the Fidelity tool to the lowest):

· Compania Cervecerias Unidas S.A. (CCU) - The current dividend yield is 3.7%. There has been large increase in the stock price over the last 2 months at the end of the second quarter (June 30, 2010) the stock price was $43.09 and is currently around $58 (the stock screener tool used the end of second quarter dividend yield of 4.66%). CCU is headquartered in Chile and is a beverage company that principally engaged in beer production and distribution in Chile and Argentina. It also produces and sells wine, soft drinks, mineral water and other beverages. CCU has had 15% revenue growth over the last 3 years and dividend growth over the last 5 years of 20%. Its dividend payout ratio is outstanding at 38% and 21% of shares are owned by insiders. With future EPS growth over the next 5 years of 14% CCU should be able continue to increase its dividend payout. This was the highest rated selection by the Fidelity stock screener tool.

· Veolia Environnement (VE) – The current dividend yield is 5.2% and the stock price is around its 52 week low. VE is a France based company that provides environmental management services to individual, government and commercial customers worldwide. Its dividend payout ratio is high (not good) at 95% and 11% of its shares are owned by insiders. VE has had 10% revenue growth over the last 3 years and forecasted EPS growth of 10% over the next years.

· Paychex, Inc. (PAYX) - The current dividend yield is 5.2% and the stock price is around its 52 week low. PAYX provides payroll, human resource and benefits outsourcing solutions for small to medium size businesses in the US and Germany. By outsourcing to PAYX, their customers avoid employing fulltime employees to perform the activities. This is a growing trend in US business. Its dividend payout ratio is high (not good) at 94% and 10% of its shares are owned by insiders.

· Westar Energy Inc (WR) The current dividend yield is 5.2% and the stock price is around its 52 week high. WR is an electric utility company that is based in Kansas, US. It produces electricity from various sources, for example coal, natural gas and wind. Its dividend payout ratio is 78% and 1% of its shares are owned by insiders. Its EPS growth over the next 5 years is forecasted at 9%.

· RPM International Inc. (RPM) - The current dividend yield is 4.9%. RPM conducts manufacturing, marketing, and sales of various specialty chemical products to industrial and consumer markets worldwide. Its dividend payout ratio is 59 %( which is good) and 1.5% of its shares are owned by insiders. With future EPS growth over the next 5 years of 10% RPM should be able to continue to increase its dividend payout.

· Alliant Energy Corp. (LNT) - The current dividend yield is 4.5% and the stock price is around its 52 week high. Alliant Energy Corporation operates in electric and gas utility businesses in the United States. The company, through its subsidiary, Interstate Power and Light Company, engages in the generation and distribution of electric energy; and the distribution and transportation of natural gas in Iowa and southern Minnesota. Its payout ratio is 169% and 1% of the shares are held by insiders. This was the lowest rated company.

CCU’s business is staple goods such as beer, wine, water, etc. Staple goods sales and earnings growth tend to remain constant in good or bad economic times. During the current recession staple goods companies’ revenue and profit will remain stable (this can be used as a hedge against recession). Argentina’s and Chile’s forecasted 2010 and 2011 GDP growth is two times the US and this will help to continue to drive CCU revenue and profit growth. They have had a high ‘quality’ of profitability, their profit is growing at the same time their revenue has grown (their revenue has not remained the same; they have increased profit by cutting expenses, i.e. workers). At this time I will not buy CCU but I am putting it on my watch list waiting for a pullback of the stock price. The stock price is at a record high and has doubled in less than 20 months. In the event of a stock price a pullback I will re-evaluate my position. CCU could be a possible buyout candidate in the future.

I love water companies and VE provides water environment management services around the world. VE’s business is a growth industry around the world and especially in the emerging countries like Brazil, Russia, India and China (BRIC countries). The demand for safe and fresh drinking water will only continue to grow since currently there is a shortage. Clean fresh water is becoming blue gold (I used to use “blue oil” before the BP fiasco). There will continue to be large demand worldwide for years to come. I have owned United Utilities (UUGRY.PK) for the last 7 years and it’s currently paying a dividend yield of over 8%. UUGRY.PK is a water utility in England and also provides water management services worldwide. I will need to do more research on VE since it is at a 52 week stock price low.

You should research each of the companies that I talked about yourself before you making any decisions to buy the stock.

If you are planning to make your high paying dividend investment in a taxable account you should be aware of possible changes to qualifying dividend tax rate in the US in 2011. See my blog: http://paulsgang.blogspot.com/2010/07/investment-us-tax-changes-for-2011.html. In 2011 qualifying dividends will revert to their pre-Bush tax rate i.e. ordinary income based on your highest tax bracket. Bush’s tax cut of 2003 changed the qualified dividends tax rate from ordinary income (your highest income tax bracket) to the same as capital gains (15% for most people). Your tax rate could be as high as 39.6% if you are a high income earner. Congress could change it to be the same as long-term capital gains – 20% for most taxpayers – but I think it’s more likely they will not take action and it will return to the ordinary income rate of your highest tax bracket.

Please chime in with comments about the high dividend yielding stocks that I wrote about in my blog. Which ones, if any, would you buy or wait for a pullback in price? If you have any ideas about future blogs please add a comment. If there is any interest I could write about the 12 stock screener tools that I used with a quick evaluation of them. I am also starting to think about companies that would be good buyout candidates and in which sectors they might be (i.e. cloud computing). Companies in the US have over $2 trillion cash in the bank available for buying companies, capital improvements, increasing dividends payouts, etc.

© 2010 Paul Cusick