Facebook bids to keep data privacy case from EU's top court

DUBLIN (Reuters) – Facebook bid on Monday to block referral of a landmark privacy case to Europe’s top court by requesting a last-ditch appeal, seeking to avoid a potential ban on the legal instrument it uses to transfer users’ data to the United States.

Silhouettes of laptop users are seen next to a screen projection of Facebook logo in this picture illustration taken March 28, 2018. REUTERS/Dado Ruvic/Illustration

The case, taken in Ireland by privacy activist Max Schrems, is the latest to question whether methods used by technology firms such as Google and Apple to transfer data outside the 28-nation European Union give EU consumers sufficient protection from U.S. surveillance.

A ruling by the European Court of Justice (ECJ) against the legal arrangements could cause major headaches for thousands of firms, which make millions of these transfers every day.

The Irish High Court this month ordered the case to be referred to the EU’s top court to assess whether the methods used for data transfers – including standard contractual clauses and the Privacy Shield agreement – were legal.

A Facebook lawyer asked for the referral to be delayed to allow Ireland’s Supreme Court to decide if it would accept an appeal. Facebook would seek an accelerated referral to the Supreme Court so that it would take days not months to decide on whether to allow an appeal, said lawyer Paul Gallagher.

Gallagher said one of the grounds for appeal was the question of whether the EU’s General Data Protection Regulation, to be implemented from May 25, would render the case moot or irrelevant.

A lawyer for Ireland’s Data Protection Commissioner, said there was no precedent in Ireland for such an appeal and said such a move would simply delay a question, which is of “huge urgency” for people across the EU.

“Millions of people’s data are being transferred and are potentially being adversely impacted by the lesser protections in the United States,” the lawyer, Michael Collins said.

Sean O’Sullivan, representing Schrems, said his client like millions of other Europeans, faced potential “continued unlawful processing of his data” if the Irish appeal was to go ahead.

The case was taken in Ireland, the location of Facebook’s headquarters for most of its markets outside the United States.

The judge earlier said the case raised well-founded concerns that there was an absence of an effective remedy in U.S. law compatible with EU legal requirements. She did not indicate when a decision would be made on whether to allow a referral to the Supreme Court.

Reporting by Conor Humphries; Editing by David Goodman and David Stamp

Too High, Drunk, or Sleepy to Drive? One Day Your Phone Could Know

On a breezy evening this past weekend, I sat out on my patio, lit a sizable joint, and took little drags from it til the burn line singed my fingertips. When I stood up I was stoned, and I knew it; I rarely smoke pot, so when I do I really feel it. But how high was I, really? I reached for my phone, logged into an app called Druid, and took a five minute test. When I finished it gave me my results, which appeared in red:

Your DRUID impairment score is 50.3. This suggests you are at a moderate level of impairment… you should avoid driving until your impairment decreases.

I was satisfied with the app’s assessment. (I’d taken the test multiple times while sober, and my baseline score is typically around 37.) Content to avoid leaving the house, I went inside, made a bowl of cereal, and watched the latest episode of Westworld.

According to University of Massachusetts Boston psychologist Michael Milburn, Druid worked exactly as designed. “I developed the test from a careful examination of the driving impairment literature, building it around things like hand-eye coordination and divided-attention tasks that can suffer under the influence of alcohol and cannabis,” he says. His app is one in a growing group of phone-based tests designed to gauge how messed up you are. Such a test would be particularly valuable for pot-smokers, and for law enforcement in recently weed-legal states. There’s no breathalyzer for marijuana, and consumers and cops are years from having a biomarker for how ripped you are, let alone whether you’re good to hop behind the wheel of a car.

So the police rely on other, observable measurements, like field sobriety tests. What apps like Druid presuppose is that such tests could eventually live on our phones, their microphones and sensors gauging not just whether we’re too high to drive, but too drunk, too sleepy, too medicated, too demented, or too otherwise cognitively impaired. The goal, in essence: A universal, phone-based driver fitness test.

Researchers are pursuing the idea from all angles. At last week’s 2018’s Experimental Biology conference in San Diego, researchers led by University of Chicago psychologist Harriet de Wit unveiled a prototype app called Am I Stoned? (screenshots of which appear below), designed to gauge a user’s elevated state by assessing cognitive speed, reaction time, fine motor ability, and memory. Last September, researchers at Worcester Polytechnic Institute and Boston University received a half million dollar grant from the National Institute on Alcohol Abuse & Alcoholism for the continued development of AlcoGait, a smartphone sensing app that analyzes your walking pattern with machine learning algorithms to detect how drunk you are.

These mobile-friendly tests use your phone’s sensors to detect impairment. De Wit and her colleagues developed Am I Stoned? using ResearchKit, an open source platform Apple released in 2015 to help researchers conduct large-scale studies using ubiquitous iOS devices. “It’s a real challenge,” de Wit says, “to translate these tasks into an app.” Fortunately, Apple’s kit includes more than a dozen prefab “Active Tasks”—tests that leverage the touchscreens, accelerometers, microphones, and gyroscopes on users’ phones to test things like range of motion, balance, memory, reaction time, and dexterity—to which de Wit and her team added some custom-made assessments. Other apps, like Druid and AlcoGait, are bespoke, built entirely from scratch.

At CU Boulder, where researchers are performing some of the first studies on the sensorimotor and cognitive effects of commercial marijuana, scientists led by Cinnamon Bidwell are using an iPod touch to test motor control, balance, response to external stimuli, memory, and attention. The gadget runs a pair of tests designed by Colorado State University physiologist Brian Tracy, an expert in motor control and the detection of movement. “We’re measuring very fine grained, specific cognitive functions and motor functions that could eventually inform what goes into more broad-use apps,” Bidwell says. “But we need to start in the lab, because the data piece is critical.”

What she means is that researchers still don’t know how much tapping a screen can tell you about your level of impairment, or, by extension, your ability to negotiate traffic.



“The biggest challenge is going to be figuring out exactly which perceptual, cognitive, and motor abilities map onto driving performance,” says experimental psychologist Jennifer Campos, chief scientist at the Challenging Environment Assessment Laboratory. The facility is home to the iDAPT DriverLab, the most powerful driving simulator in Canada. It combines a modified Audi A3, a 360-degree projection system, and a seven-degrees-of-freedom motion system to simulate an incredible range of conditions and driving scenarios. You can drive in the rain, or stare down the glare of oncoming headlights—all in an environment tightly controlled by researchers. And while Campos declines to specify any upcoming experiments, she says you can count on the sim being piloted by stoned test subjects in the not-too-distant future.

But even once you’ve identified which abilities correlate most strongly with driving performance, there are several other challenges to deal with. For instance: Not all of alcohol’s effects will overlap with those of marijuana, or painkillers, or sleep deprivation. And who’s to say your phone’s sensors can pick up those effects? “If you created a Venn diagram of the testable impairments associated with different causes, you might end up with a big section in the middle full of overlapping effects,” Campos says. “It could be the case that, in the future, what we’ll end up with is a core set of perceptual, cognitive, and motor abilities that are sensitive to detection via some kind of app—but I still wouldn’t feel confident asserting that a priori, without mapping them individually.”

What’s more, the skills required to operate a car safely—like gauging the speed and position of other drivers, recognizing the sensitivity of your vehicle’s brakes, checking your blind spots before changing lanes—are different from the abilities required to perform those skills—dynamic visual acuity, normal motor function, and focus. Your eight year old with no knowledge of local traffic laws could probably pass a field sobriety test, but he’s got no business behind the wheel of your family sedan.

And then there’s the design of the sobriety tests themselves. The ideal solution may be a test that runs in your phone’s background (like AlcoGait) and alerts you whether you’re fit to drive. But for apps like Druid and Am I Stoned, which require user interaction, developers will have to make sure users can’t improve through practice. You want the test to evaluate your perceptual and cognitive abilities—not how good you are at taking the test. And of course, anyone taking a sobriety test is going to bring their A-game. “Even with severe alcohol impairment, people can overcome that impairment momentarily by focusing,” de Wit says. “So vigilance is really hard to measure with a brief task of any kind.”

Milburn, for his part, actually encourages Druid users to practice his test while they’re sober, to establish a reliable baseline score. He says he’s done his best to avoid over-familiarity by designing unpredictability into Druid’s assessment. (When testing reaction time, for example, the shapes that users are instructed to tap appear on screen in random positions at random intervals.) He’s working with police departments in Massachusetts and Washington state to further validate the test during so-called wet lab exercises, in which police cadets practice performing field sobriety tests on drunk volunteers. “But the data I’ve collected so far do not show any significant practice effects,” he says.

I’d been practicing with Druid sober for about a week before I used it stoned this past weekend. The first few times I tried it, my score improved by a couple points as I became familiar with the tests—but on the dozen sober tests I’d taken since, my baseline had remained stable. Only after lighting up did my score jump by close to 15 points into an impaired range. Sample size of one and all that, but if Druid and its ilk are any indication, portable field sobriety tests are coming. That’s good news for users, and good news for law enforcement. “This whole app thing started out as an intellectual exercise, but it’s really become much more than that,” Milburn says. “I think it has immense potential—I think it can save lives.”

More Weed Science

Space Photos of the Week: ESA's Gaia Tallies Up Our Milky Way

This brand-new image of our Milky Way was released this week by the European Space Agency’s Gaia project. In just this one long galactic strand, Gaia has counted 1.7 billion stars. Such findings make up the most accurate and comprehensive survey of our galaxy in astronomical history.

Does this photo make you dizzy? Saturn’s rings are known to bedazzle, and this image is no different. The particles that make up the rings have extreme variations in size: Some are as big as mountains, while others are smaller than a grain of sand. The Cassini spacecraft snapped this pic in 2009, which has been enhanced with red, green, and blue filters to reveal the natural color and variation in the rings.

Poor Uranus is the butt of every planetary pun out there, and the latest news doesn’t lag behind either. New studies show that this cool and distant planet smells like sulphur. Fart jokes aside, confirmation of the presence of this chemical in the atmosphere tells scientists a lot about the birth and growth of Uranus. (You should grow up, too.)

Humans have only been to Mars in sci-fi books and movies for good reason—getting anywhere in space is a logistical and engineering challenge. But scientists really want to study Mars well before humans ever set foot there, so a new project in the works at NASA and the European Space Agency is looking at how we might get a sample of Martian soil back to Earth. It would require one feat that has never been attempted: launching a rocket from Mars.

Last week this “tiny” section of the Sun erupted in arches of highly charged particles—loops shaped by the solar magnetic field. For a sense of scale, NASA added an image of Earth, and given the size of these active bursts, we’re lucky to have 93 million miles between us.

This is not the kind of aurora photo you’re used to: In the bottom of the frame, synaptic connections of lights illuminate North American cities, while the cloudy section at the top is the aurora itself. Seeing it in black and white shows off textures we might not otherwise see when the aurora is in true color. This photo was taken by the Visible Infrared Imaging Radiometer Suite, an infrared instrument aboard a satellite cruising over the continent.

T-Mobile agrees to acquire Sprint

(Reuters) – T-Mobile US Inc agreed on Sunday to acquire peer Sprint Corp, in an all-stock deal that will combine the third and fourth largest U.S. wireless carriers and is expected to attract regulatory scrutiny over its impact on consumers.

Smartphones with the logos of T-Mobile and Sprint are seen in this illustration taken September 19, 2017. REUTERS/Dado Ruvic/Illustration

The agreement caps four years of on- and off- talks between the companies, setting the stage for the creation of a carrier with 127 million customers that will be a more formidable competitor to the No.1 and No.2 wireless players, Verizon Communications Inc and AT&T Inc.

U.S. regulators, which have challenged in court AT&T’s $85 billion deal to buy U.S. media company Time Warner Inc, are expected to grill Sprint and T-Mobile on how they will price their combined wireless offerings.

The breakthrough in the companies’ negotiations, first reported by Reuters on Thursday, came after T-Mobile majority-owner Deutsche Telekom AG and Japan’s SoftBank Group Corp, which controls Sprint, agreed on a structure that will allow Deutsche Telekom to continue to consolidate the combined company, which will have a market value of over $80 billions, on its books.

Deutsche Telekom will own 42 percent of the combined company.

Sprint’s and T-Mobile’s first round of merger talks ended unsuccessfully in 2014 after U.S. President Barack Obama’s administration expressed antitrust concerns about the deal.

Under U.S. President Donald Trump’s administration, regulators have continued to fret about consumer prices. The U.S. government has opened a probe into alleged coordination by AT&T, Verizon Communications and a telecommunications standards organization to hinder consumers from easily switching wireless carriers, a person briefed on the matter said earlier this month.

The second round of talks between Sprint and T-Mobile ended in November over valuation disagreements, although Deutsche Telekom CEO Tim Hoettges, left the door open at the time, saying: “You always meet twice in life.”

Since then, Sprint’s shares lost about a fifth of their value amid questions about how the company can compete effectively under the weight of its long-term debt of more than $32 billion.

Softbank has been looking to trim its own debt as well, which reached 15.8 trillion yen ($147 billion) as of the end of December. It has said it is planning to raise cash by taking its Japanese mobile phone unit public this year.

Failure to clinch a deal last November left SoftBank CEO Masayoshi Son, a dealmaker who raised close to $100 billion for his Vision Fund to invest in technology companies, in search of other options for Sprint.


Even though Sprint’s customer base has expanded under CEO Marcelo Claure, growth has been driven by discounting. Analysts say that, without T-Mobile, Sprint lacks the scale needed to invest in its network and to compete in a saturated market.

T-Mobile has fared better than Sprint, even if it remains a distant third to Verizon and AT&T. It has managed to score sustained market share gains, as innovative offerings, improving network performance and good customer service attract new customers, according to Moody’s Investors Service Inc.

T-Mobile became the first major U.S. carrier to eliminate two-year contracts, a shift quickly embraced by consumers and copied by competitors. The company has also badgered rivals with its unlimited data plans.

Both Sprint and T-Mobile are far behind Verizon and AT&T in upgrading their network to accommodate next generation 5G wireless technology. Even after their merger, the combined company’s budget to invest in 5G will be smaller than Verizon or AT&T’s.

However, Sprint and T-Mobile hope the deal will give them more firepower to participate in auction for spectrum to develop 5G. They plan to participate in a spectrum auction in late fall.

Reporting by Greg Roumeliotis in New York; Editing by Lisa Shumaker

Everyday Low Prices: Walmart Is On Sale, Too

One of the biggest challenges for publicly traded companies is their “obligation” to meet quarterly results. It’s unfortunate, because companies can potentially be perpetual entities, and to have to manage to a quarterly number often leads to myopic decision making that leads to poor long-term performance. On the other hand, if a company is implementing a transformational change that will create shareholder value over the long run, but will cause the company to miss quarterly numbers, the stock will get hammered.

When this happens, provided the company is financially stable, has a solid business model, and prospects for its “new direction” are attractive, a price decline in the stock is a buying opportunity. That’s precisely what we see now in Walmart (WMT). It has declined by more than 12% in a month, and frankly I believe its investments in e-commerce, exclusive brands, and expanded products will pay dividends in due time. The recent earnings miss was primarily due to one-time items and a slight hiccup in operations that comes with a new strategy. Online sales growth of 23% disappointed investors after growing by 50% the prior quarter. Walmart learns fast and I’m confident those minor mishaps will be become immaterial if not disappear altogether as the transformation into an omni-channel retailer evolves. The forecast for online sales growth in 2018 is 40%

Not only is the company playing offense against rivals Amazon, Target (TGT) and Costco (COST), it is also taking on hip start ups like Blue Apron (NYSE:APRN) and established omni-channel retailers like Williams Sonoma (WSM).

Multi-Channel Groceries

The expansion of the grocery business puts Walmart on a collision course with Amazon (NASDAQ:AMZN), which is nothing new, but certainly adds yet another dimension to the competition. The interesting thing is that Amazon started as an online retailer and is moving to bricks and mortar while Walmart is doing the opposite. I’m certain the optimal business model is somewhere in the middle.

Walmart is expanding its online grocery business. It will use personal shoppers and third-party delivery services and customers can either have them delivered to their home, for $9.95, or swing by an outlet and pick it up without even getting out of the car. This service should be available at 2,200 stores by the end of the year, which includes more than 40% of US households. And the Walmart promise of everyday low prices applies to online orders too where prices are the same as those in the store.

Walmart currently has more than 18,000 personal shoppers that go through a rigorous training program designed to help them select produce and meat for either delivery or pick up orders while the previously mentioned fee applies to a minimum order of $30.

Greg Foran said,

We’re serviing our customers in ways that no one else can. Using our size and scale, we’re bringing the best of Walmart to customers across the country.

Meal Kits and Cookware

For busy professionals or families who prefer to eat out or cook “efficiently,” the company has rolled out meal kits to 2,000 stores and made them available through its online grocery delivery service. This service will compete directly with Blue Apron and will likely cause a shift in the balance in subscription-based meals toward grocery retailers. Walmart’s meal kits range from $8-$15 for two people, compared to Blue Apron, with prices starting at $9.99 per serving.

And if that’s not enough to make Blue Apron subscribers switch over, Walmart also launched a new line of cookware products by Buzzfeed’s Tasty, which can be used to prepare either meal kits or one of the several thousand recipes provided by Tasty. The launch of its own exclusive cookware brand touches on the strategy used by Williams Sonoma, which sells its own brands sold exclusively in-store or through the company’s own website.

Like Tasty viewers, our customers are looking for inspiration and want to have a little fun in the kitchen. Through our unique partnership, we’re making it easier than ever to do that. Customers can now shop for all of the items featured in a recipe on the Tasty app through Walmart and prepare a delicious meal using our new Tasty cookware. – Steve Ronchetto, Vice President, Cook and Dine, Walmart U.S.

What’s the big deal with meal kits? Whether it’s a fad or not we won’t know for some time, but the facts are that meal kit spending has been growing three times as fast as other food retail channels. The advantage for grocery retailers like Walmart compared to Blue Apron is that Walmart can shut that business down relatively easy if the trend reverses, but Blue Apron is done if that’s the case.

More Private Brands

Walmart also launched four new apparel private brands. These new brands enhance Walmart’s apparel category and makes its product selection more stylish at a still low price. Acquisitions like Bonobos and ModCloth bring unique, private-branded products to the customer shopping experience. In addition, partnerships like the agreement with Lord & Taylor will help create specialty experiences that complement the assortment with more brands customers want.

The Elephant in the Room

With all the talk of Amazon taking over the world, it’s not hard to realize why we tend to forget just how big Walmart is. Walmart revenues reached $500 billion in 2017, compared to $177 billion for Amazon. Net income? Walmart had three times the net income of Amazon. And free cash flow was $18 billion compared to $6.5 billion. In other words, the fear instilled in others by Amazon may just as easily come from Walmart.

Growing Pains

It’s somewhat ironic to say that Walmart, with its massive size, is going through growing pains. But it is, particularly as it relates to its online business and new ventures into groceries, private branding, etc. I believe investors punishing the stock for an earnings miss is just at short sighted as company management focusing on quarterly earnings in lieu of long-term shareholder value.

There are some challenges, however. Analysts say the Jet.com site isn’t reaching consumers outside urban areas, making its 40%-plus online sales growth forecast optimistic. But Walmart says it’s shifting its strategy to focus more on its flagship website and will lower spending on Jet. It will incorporate Jet’s smart-cart technology into its e-commerce operation to potentially capture greater unit sales – a result that Jet’s technology has been able to drive.

There also are challenges related to the bullseye on its back for being the single largest non-government employer in the world. Recent actions may alleviate some of the pressure from activist and labor groups. It paid more than $1 billion in February and March to their hourly associates in addition to their previous salaries. They also are increasing the minimum wage to $11 and expanding maternity and parental leave benefits. On February 1, the company also implemented an adoption assistance benefit of $5K per child.

I’m starting to wonder if I shouldn’t have interviewed with the recruiter back when I was graduating with an MBA.

Walmart’s operating margin also has been steadily decreasing over the past three years and the retailer reported a 5.6% decrease in its operating margin at the end of fiscal 2017. However, Walmart’s operating margin (TTM) of 4.48% beats the industry average of 3.65% and it remains greater than Costco’s operating margin (TTM) of 3.17%. The EBT margin has been declining for the past four years and this is partly due to its strategic shift. Capital spending has declined slightly from 2015 but also shifted from new stores and clubs to remodels, customer initiatives, and e-commerce.

Source: Walmart 2017 Annual Report

It has already introduced facilities like “in-store pickup,” “same-day pickup” and “mobile checkout.” It is further testing novel concepts like “digital shelves” for ensuring stock availability. Some of the Walmart stores have been equipped with smart devices that not only help customers search the right products but also enable them to order an out-of-stock item. The company has begun to deploy in-store robots that move around to check incorrect prices, missing price tags and out-of-stock merchandise.

As for margins, process automation is just one of the factors that will help Walmart with its operating expenses while logistics will continue to play a greater role in achieving operational excellence as customers have begun to prefer “same-day” and “on-demand” delivery models. To sustain its cost competitiveness, Walmart has begun to scout for logistics partners that will help it to curb “last mile” costs in the urban markets. It is already well known for its state of the art transportation and infrastructure system so the last mile is the “cherry on top.” Recently, it acquired Parcel, a startup logistics company, to offer same-day delivery to its customers in New York City. The benefits of these initiatives may not be realized quickly as the costs of reengineering are high but again, the long-term looks promising.

Our Take

What’s not to love about the company? Its boring, low-cost strategy may be the primary reason why it still may not be viewed as a technology company – yet its competing against Amazon, which although is in the Consumer Cyclical sector is still included in the infamous FANGs and has a bit more cache than an old stalwart like Walmart.

Is it cheap? Probably not, but comparisons to history are somewhat irrelevant. I’m not saying that a PE multiple of 27 looks reasonable for Walmart. Its five-year average PE multiple is 16 and I would certainly prefer to buy it at a PE of 16 than 27.

But at a forward PE ratio of 18, it starts to look interesting. Part of the big spike in the PE multiple was due to a decline in EPS (see above), and analysts are forecasting $4.93 EPS for 2019. While analyst consensus price target is $105, our price target is closer to $118. While long-term investors should worry less about entry and exit points, we believe this is a good entry point for short-term investors attempting to time their investments.

Walmart also pays a 2.4% dividend yield, which of course, Amazon does not. But to be clear, I’m not suggesting that Walmart is a better investment than Amazon, I only draw comparisons to bring to light that Walmart is no slouch and that Amazon’s dominance of so many other retailers doesn’t apply here. Quite the opposite perhaps, as Walmart begins to encroach on Amazon’s turf.

Disclaimer: Please note, this article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It’s intended only to provide information to interested parties. Readers should carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances.

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SA Roundtable: How Are Dividend Investors Handling Volatility?

The market volatility we have seen so far in 2018 has been the topic of many a discussion here on Seeking Alpha and in the media at large. Not surprisingly, though, there is one group that seems unshakable despite the market madness – dividend investors. Their focus on income appears to help them be better able to manage stocks’ ups and downs with aplomb, and, in many cases, hold on for the long haul while continuing to sleep well at night.

We asked several of our dividend-focused authors on the Marketplace to weigh in on how they’re handling the markets’ mood swings, where they’re seeing opportunities for the remainder of 2018, and their current best dividend ideas.

Here’s our panel:

Canadian Dividend Growth Investor, author of DGI Across North America

David Alton Clark, author of Discovered Dividends

Dividend Stream, author of Streaming Income

Double Dividend Stocks, author of Hidden Dividend Stocks Plus

Fredrik Arnold, author of The Dividend Dog Catcher

George Schneider, author of Retire 1 Dividend At A Time

Richard Lejeune, author of Panick High Yield Report

Rida Morwa, author of High Dividend Opportunities

The Dividend Guy, author of Dividend Growth Rocks

The Fortune Teller, author of The Wheel of FORTUNE

Seeking Alpha: U.S. News recently published this article, dubbing 2018 a “record year for dividend payouts.” Are you finding that playing out in your portfolio? If so, what sectors or companies seem to be delivering most on those payouts?

David Alton Clark: 2018 is shaping up to be a great year for finding fresh high yield dividend plays. The Discovered Dividends High Yield portfolio currently yields 10% on average. There are outstanding high yield income selections in most sectors. The beaten down MLP sectors offer the most bang for your buck at present, I surmise. Nonetheless, not all high yield opportunities are created equal. You must perform rigorous due diligence to ensure the risk is worth the reward.

Double Dividend Stocks: Certain Energy/Basic Materials stocks and Financials have been upping their payouts in 2018.

Fredrik Arnold: The best payouts are found in REITs, Energy, and Industrials.

George Schneider: We are finding this year to be one of consistent dividend growth. Off hand, the tobaccos, like Altria (NYSE:MO) and Philip Morris (NYSE:PM) are handing us hefty increase on the order of 6.1% and 3%, respectively, more than enough to keep us ahead of inflation.

Richard Lejeune: Dividend yields have become very attractive in several sectors, but especially so for midstream.

Rida Morwa: We are seeing strong dividend growth in many of the high yield sectors we cover, including Property REITs and the highest quality Midstream MLPs. Furthermore, many equity closed-end fund (CEFs) that invest in growth stocks are seeing increased dividend payouts. We recommend that high-yield investors have some exposure to these equity stock CEFs in order to achieve diversification. As an example, two equity CEFs that we have been recommending to our investors are Liberty All-Star Equity (NYSE:USA), trading at a 6.3% discount for a yield of 10.7%, and Adams Diversified Equity (NYSE:ADX), trading at a 14.6% discount for a yield of 9.3%. Both of these CEFs have been increasing their payout over the past two years.

At High Dividend Opportunities, we follow a value approach and target stocks and securities trading at attractive valuations, and as a result, we tend to target those CEFs that at trading at a higher than average discount to their peers. Diversification into equity CEFs has been key to successful high-yield investing as it has resulted in lower portfolio price volatility and an improved performance. This comes at a time when many of the traditional high-yield sectors have underperformed the markets in the past 12 months.

The Dividend Guy: My investment strategy revolves around dividend growth. Instead of looking for high yielding companies, I’m picking strong dividend growers. Many of my holdings increased their payout with double-digit numbers last year. The most prolific sector in this regard is definitely the technology industry. “Tech stocks are only good for young investors with no income needs.” This classic thinking about the tech industry cannot be further from the truth today. Companies like, Cisco (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT), and Texas Instruments (NYSE:TXN) increased their dividend by 70.59%, 82.61% and 121.4% respectively over the past 5 years. If you want a sneak peak of what will happen in a decade from now, let’s take a look at how an “older” tech stocks dividend list turned out. You will be surprised to see how much dividend growth there is in this sector!

SA: Has this year’s market volatility impacted your investing approach at all? Why or why not?

DAC: Not really any strategy changes. I still look for high-yield, dividend-paying securities trading for favorable valuations regardless of market conditions. The opportunities definitely change when entering the late cycle as we are. As interest rates rise, growth stocks with valuations based on cash flows 5 to 10 years out lose value as the increased interest rates reduce the value of future cash flows. Value stocks tend to perform better in the late cycle. We are returning to a market environment where one in the hand is worth more than two in the bush. For the last 10 years the smart play was to bet on two in the bush that time has come to an end. High multiple stocks are now vulnerable to multiple compression. The current economic expansion is at 105 months, making it nearly the longest in history. The longest economic expansion was 120 months back in the ‘20s. President Trump’s pro-business agenda could be the factor that keeps the expansion going for at least another year or two. So, I feel there are still plenty of great opportunities out there today. Nevertheless, with renewed volatility in the market today, it is more important than ever to prudently allocate capital. You must have courage in your convictions when initiating a new position in times such as these.

DDS: Those 2% down moves can offer better buying opportunities, when a target stock falls even further on a negative market day.

Higher volatility also opens up other investing strategies as well, such as options selling.

Dividend Stream: I’m looking at dividend growth right now. With interest rates ticking higher and higher, bonds are becoming more and more competitive vis a vis stocks. An increasing payout is one important way that dividend-paying stocks can differentiate themselves from bonds in this environment. As I’ve told my subscribers, now is not really the time to be ‘reaching for yield.’ Instead, now is the time to be getting into companies with growing dividends, and growing earnings fundamentals to back them up, and cushy dividend payout ratios.

FR: In a buy and hold strategy, volatility only happens once a year upon portfolio review.

RL: The Panick High Yield Report has a flexible approach towards high yield investing. As the name suggests we look at the most oversold sectors where there can be investor panic. Midstream issues are currently quite depressed despite strong oil prices, growth and other positive fundamentals.

RM: The markets have not been favorable to many of the traditional high yield sectors, which include Property REITs, Midstream MLPs and Business Development Companies (or BDCs). The reason can be attributed to high investor fears in relation to rising interest rates and a flattening yield curve, as the media keeps reminding us that this could be a sign that a recession is coming down the road.

We totally disagree, as the media experts keep looking through the rear view mirror rather than looking through the windshield in order to forecast the future. We continue to believe the economy will keep strengthening going forward, into the year 2020 at least. As a reminder, the International Monetary Fund (the IMF) has forecasted that global economic growth to be at 3.9% in 2018 and 2019, which is the fastest growth since the financial crisis. A growing economy, higher corporate earnings, and tax reforms will slowly shift the yield curve, and we expect it to steepen with the 10-year treasury breaching 3.25% this year and 3.5% in 2019. Corporate earnings will continue to accelerate as we have been seeing this quarter, which should be a tailwind for equities in general. So do not expect the yield curve to remain flat for a long time. The long-term trend for equities remains strongly to the upside.

TDG: To be honest, I didn’t feel the volatility in my portfolio too much. I continue to follow my investing strategy to the dot and don’t mind the current market noise. Dividend growth investing is all about the length of time you are invested and the power of compounding interest. Back in September 2017, I invested an additional $100K in the market and I don’t regret it at all. My portfolio is still in positive territory, and I’m cashing dividends in the meantime.

The only thing I could say is that I wish I wasn’t fully invested already because there are some great opportunities on the market!

The Fortune Teller: Since we entered this year with a more defensive mode than we had in 2017 – volatility for itself hasn’t changed our thinking, but rather strengthened our take about 2018 being a more difficult year to navigate through. Over the past few months, we have been buying mostly into more defensive sectors/segments and the higher volatility hasn’t impacted that approach because we are bracing for – rather than fighting against – a higher volatility.

SA: What metrics or criteria are you currently using to evaluate your dividend investments? Why are these most important to you?

Canadian Dividend Growth Investor: For DGI Across North America, I maintain a list of quality U.S. and Canadian businesses with sustainable payouts because getting stable income is one key benefit of holding these companies. A company with growing profitability is generally preferred (over one that has stagnant profitability) because it implies increased dividend safety and the potential for future dividend growth.

DAC: The three main factors I like to see prior to putting money to work in a dividend-paying security are a solid long-term growth story, stable predictable cash flow, and a history of returning capital to shareholders. Furthermore, the factors that determine whether or not to buy any security, dividend payer or not, are assessing the market macroeconomic and geopolitical state of affairs, sector and industry status, individual stock technical and fundamental indicators, as well as having a company-specific product or service catalyst. The dividend yield should be the last thing you consider, the icing on the cake so to speak.

DDS: Dividend coverage is very important to us. If a company isn’t covering its payouts, we dig further, and see if this is a temporary timing issue.

For example, a company may have acquired new assets, which aren’t fully integrated yet, but the company is still paying increased interest charges for the new assets.

FR: Key metrics are: Price; Dividend; Gains. Additional metrics are: 1 year price target; dividend increase longevity; analyst ratings (1 buy to 5 sell); Extraordinary events, e.g: mergers, acquisitions, spin-offs, sale, etc.

GS: We are most interested in CAGR, compound annual growth rate as well as metrics that indicate cash flow covers dividends, including FFO and AFFO. As dividend income investors, our main concern is that our income grows, year to year, larger than inflation. Those in retirement must always be vigilant about this. If this metric is ignored, the investor in retirement without other sources of income can easily find himself/herself falling behind the inflation eight ball, able to buy less and less goods and services in retirement.

RL: My focus is on cash flow type metrics such as DCF (distributable cash flow). DCF works better for sectors such as midstream than GAAP (Generally Accepted Accounting Principles) earnings. An oil or natural gas pipeline system will tend to increase in value as it matures and more production is connected. This results in higher DCF. For GAAP accounting purposes the same asset would be depreciated (lose value) over time.

RM: First, we are “value investors” before being high-yield investors, and one of our most important criteria is “low valuations.” Basically, our strategy includes buying undervalued stocks with a positive company-specific outlook and solid sectors’ fundamentals. Each sector in the high yield space requires a different valuation method. For example in the case of Property REITs, we tend to look at Price/”Funds from Operations” (or FFO). In general, a Price/FFO ratio of below 10 times is attractive. For Midstream MLPs, we look at the Price/”Distributable Cash Flow” (or DCF). A Price/DCF ratio of 8 times or lower is attractive for us. Value investing reflects a practical, down-to-earth attitude, and it is a strategy that has proved to pay-off handsomely for long-term investors.

TDG: The most important metric for me is the company’s dividend growth. My 7 investing principles are built around this metric. I follow the company’s revenue and earnings trend and make sure its payout and cash payout ratios are in line. My objective is to pick companies that show strong growth vectors to support their dividend growth policy.

TFT: First and foremost we are always looking at the dividend coverage, expecting/hoping for a no cut as a starter. Having said that, valuations of income plays have gone down quite substantially over the past (almost) two years so in many cases we find ourselves (looking for and) finding a wide margin of safety that allows for us to invest in companies that otherwise may have not moved through our filters solely based on the dividend coverage metrics.

SA: Where are you seeing opportunities for the greatest dividend growth through year-end?

DAC: Dividend growth requires EPS growth. The sector I see growing EPS the most over the next 12 months are the energy and tech sectors. Nevertheless, the banking sector could be the big dividend growth sector through year end. This is due to the fact that the Fed will most likely allow the banks to return a much larger portion of EPS to the shareholders. We will find out in June how it turns out. For example, Bank of America (NYSE:BAC) currently has a payout ratio of just 19% implying there is plenty of room for the dividend to grow, and Moynihan has pretty much stated that is their number one goal.

DS: Regarding dividend growth to year-end, I am not exactly sure. However, I believe the greatest dividend growth over the next few years will come from companies that are leading the way in the ‘digital transformation.’ The implementation of AI, ‘deep learning,’ and automation is transforming business across industries. E-commerce is a big part of that, so is the growth in mobile data traffic, but really, this is a trend that is manifesting itself in a myriad of ways.

My focus for the foreseeable future will be to find the dividend-payers among these companies. I strongly believe the greatest dividend growth and earnings growth will come from these names. As an income investor, one of the biggest challenges is to be forward-looking. After all, dividend payers tend to be companies in the mature part of their life cycle, but a portfolio full of declining businesses can be hazardous to your long-term wealth.

DDS: The Financials and Energy/Basic Materials sectors should hold some attractive dividend growth opportunities in the balance of 2018.

FR: Opportunities for dividend growth are found in low-priced, beaten-down stocks with steady dividends and great future business potential.

GS: In our subscription newsletter, we’ve been guiding subscribers in a way that creates their own dividend growth, even if a particular company does not provide it organically itself. This is accomplished by buying companies on sale (REITs have been on sale for many months). Buying at deep discounts to 52 week highs give us greater value, increased potential for greater capital gain, and automatic boosts to yield and income.

RL: The market is not currently rewarding dividend growth for high yield issues. The focus is on companies that can maintain high dividends while reducing balance sheet leverage.

RM: Since early 2017 “growth stocks” have strongly outperformed “value stocks” (or cheap stocks with a low valuation ratios), and notably value dividend stocks. Investors have been under-allocating Property REITs, BDCs and Midstream MLPs in favor of growth and momentum stocks such as Technology and FANG stocks (FANG being Facebook, Apple, Netflix and Google). This has resulted in some over-stretched valuation in growth stocks at the expense of high-dividend stocks. In fact, many of these sector are trading today at their lowest valuations in years and currently presenting some unique buying opportunities. We would like to say that it is very likely that it is one of the best time to load-up and start building a portfolio. Of course, as prices retreat, yields go higher, and this has resulted some highly attractive yields that investors can lock in today. Our “Core Portfolio” is currently yielding 10.5% with some of the best names in the high yield space.

TDG: I think tech stocks will continue to dominate the market in terms of dividend growth (not yield, obviously). The old techs have plenty of cash in their bank account, they are in the process of repatriating a part of their cash offshore, and they have been more than generous in the past few years. There will be several double-digit dividend growers in this sector in 2018.

TFT: Financials remain a top sector for us because the rising yields and the trading activity. The improved profitability is likely to allow financials (mostly lenders) to increase payouts and we remain bullish on the sector for the rest of 2018.

SA: If you could give your younger investing self one piece of advice about dividend investing, what would it be?

DAC: To get started earlier! When I first began investing in stocks in the mid-’90s, my portfolio was primarily oriented towards growth stocks rather than dividend stocks. Over the years, the percentages have shifted towards mostly dividend-paying stocks. My father was a stock broker and told me early on that dividends account for a significant percentage of the total return in stocks. In fact, for the past 80 years, dividends have accounted for over 40% of the S&P 500’s annualized total return. Since 2002, dividends have accounted for about 30% of the S&P 500’s annualized total return. That is a substantial portion of the total returns. Even so, I still have a certain portion of my portfolio dedicated to growth/speculative equity boosting opportunities for diversification purposes.

DDS: Don’t chase yield. Determine if the dividend is well-covered. If it isn’t, look for more solid alternatives.

Always reinvest the dividends, if you don’t need the income.

When asked what was his favorite invention of mankind, Albert Einstein replied, “Compound Interest!”

FR: Start investing and learning the nuances of dividend investing at age 10.

GS: The best advice I would give to my younger self, if I could avail myself of Michael J. Fox’s time machine, or Stewie’s time traveler, would be to simply invest sooner, invest regularly, and invest the largest sums possible. In truth, this is what I actually did from the time I was 11, investing all of my earnings from being a weekend rocker with my band. I never stopped the investing habit and have continued this approach all my life. So, actually, if I had the chance, I’d tell my younger self, “Good job. It all paid off.”

RL: In the aftermath of the financial crisis I was actively trading many bank stock preferred stock issues and baby bonds at around 20 cents on the dollar. While I did very well with those trades, I sure wish I had held them longer.

RM: Successful investing requires discipline and a long-term view. This is specially true for “value investing” as some stocks tend to fall out of favor for a significant period of time. In this case, bargain hunters should remain confident that they are holding stocks that are cheap, and keep focusing on the fundamental as they tend to almost always prevail. Another advice is to keep well-diversified across all sectors in the high yield space as this results in stronger performance and lower price volatility.

TDG: Start today. The best timing to invest your money is yesterday, the second best is today, and the worst is tomorrow. I started investing in dividend paying stocks only 7 years after I started my investing journey. If I could start my investing story over, I would definitely start by picking dividend growth stocks on day one.

SA: What is one of your best dividend ideas, and what’s the story?

DAC: Enterprise Transfer Partners L.P. (NYSE:ETP) units currently represent an excellent buying opportunity for long-term high-yield income investors looking for capital gains as well as income. One of my favorite quotes from investing icon Sir John Templeton is:

“Invest at the point of maximum pessimism.”

Templeton is known as a contrarian investor. He referred to his investment philosophy as “bargain hunting.” His guiding principle was:

“Search for companies that offered low prices and an excellent long-term outlook.”

I feel this statement perfectly illustrates where ETP units lie at present. The reward far outweighs the risk at the time. There is still a wide gap between the bullish sentiment level regarding ETP and the natural gas and energy sectors. The stock may have already bounced off the point of maximum pessimism, yet that only increases the margin of safety for investors opening a new position. ETP’s newly combined assets have created a strong foothold in the most prolific producing basins for the MLP. This should augur well for organic growth for years to come. The over 12% yield, coupled with adequate coverage ratio of better than 1, establishes a solid margin of safety. The ETP is under-owned and oversold presently. I still see 30% upside in the stock. If we can break through resistance at the 200-day SMA, we could be off to the races. Discovered Dividends members are up 10% on the units in the past month alone with a 14% yield on cost locked in. The current yield is still a healthy 12.6%.

DS: I like United Parcel Service (NYSE:UPS). It fits the bill in all the criteria I mentioned before. The rise of e-commerce is really increasing package volume in the US and elsewhere, and that has resulted in consistent, high single-digit top line growth, and bottom line growth approaching the low double-digits. Shares have been beaten down by a holiday season where UPS underestimated package volume, but the long-term fundamentals are definitely there. You’ll get a 3.2% yield with high single-digit dividend growth ahead. Also, the dividend itself remains less than 60% of earnings per share. Tough to go wrong with this one.

DDS: StoneCastle Financial Corp., (NASDAQ:BANX), is a closed-end management investment company, which invests in US community banks, one of the most stable parts of our financial system. BANX invests via preferred equity, subordinated debt and common equity investments in local banks. BANX yields around 7%, and offers retail investors the most attractive yielding access to US community banks.

Hidden Dividend Stocks Plus subscribers are enjoying a 10%-plus total return on BANX so far in 2018, vs. a negative return for the market.

FR: Best dividend idea: General Cable (NYSE:BGC) – bought for $13.80 as of 10/14/16, paying a $0.72 annual dividend. Recently priced at $29.65 as of 4/20/18; still paying the $0.72 annually. (BGC’s yield fell from 5.217% to 2.43% in the past 18 months, but the price upside was 118%.)

GS: With the cloud that AT&T (NYSE:T) has been under with its merger plan with Time Warner (NYSE:TWX) and disappointment with it latest earnings report, we have T in our sites to take another bite shortly. Our subscribers picked up excellent yield on T several months ago when it fell to $32.60 and gave us a 6.13% yield. On Thursday, the disappointing earnings report kicked T’s price to the curb, lower than our last bite. It hit $32.55 then bounced once investor realized what a bargain it had become, once again. Its usual dividend yield is closer to the 5% range. Should the market misprice T further, down to the $30 range, we’ll be picking up more shares and enjoying nearly a 7% yield on this Dividend Aristocrat.

RL: One of my top investing ideas is ETRACS 2x Monthly Leveraged Alerian MLP Infrastructure Index ETN (NYSEARCA:MLPQ). Please note that this type of 2X leveraged midstream play is not for widows and orphans. However it does provide a very effective way to receive a high yield and potential capital gains while taking advantage of an anticipated rebound in the oversold midstream sector.

RM: Again, there are many opportunities today in the high yield space. We would like to name two of our best picks to buy and hold for the next 2 years at least. First we have been recommending the Washington Prime Group (NYSE:WPG) with a yield of 15.6%. WPG is a mall REIT with one of the best management in the industry. They have successfully re-positioned their portfolio and balance sheet and substantially reduced their risk profile. WPG is now less and less dependent on traditional retail stores. Tier One enclosed and Open Air properties represent 64% of their portfolio. WPG is a classic case of a high-yield stock that has gotten so beaten down that it represents a unique buying opportunity. The price of WPG could easily increase by 50% and the stock would still be trading at reasonable valuations.

Another stock we are bullish on is Energy Transfer Partners (ETP) with a yield of 12.4%. The Midstream MLP sector has witnessed weakness which can be attributed to a great deal of confusion about the impact of the recent tax law changes and a FERC ruling and their impact on MLPs. This has resulted in a pullback in the price of ETP which is one of the largest player with a highest quality assets. The stock is trading at just around 8 times Distributable Cash Flow and offers investors a tremendous upside potential in addition to the very generous dividend.

TDG: I’ve mentioned a few tech stocks already, but one of my favorite companies now is probably Starbucks (NASDAQ:SBUX). The stock has been dead money for the past two years and it’s definitely a good timing to invest. First, Starbucks’ incredible membership programs will push sales higher. Starbucks now counts 14.2 million members. SBUX membership program doesn’t only encourage repetitive spending from its members, but also provides management with A-class marketing information. This is how the company is able to modify its menu, its store size, and design according to what people want.

Starbucks also shows strong momentum in China. Chinese markets will grow nearly double-digit numbers for a while as SBUX is successfully implementing its coffee shops over there. During the last quarter, China comp sale increased by 6%. SBUX is opening over 600 stores per year in China. This territory will become the next “USA land” for the great coffee maker. Oh… did I mention the 25% dividend growth last year and the 500% dividend growth over the past 5 years?

TFT: Past: NEWT, GAIN. These are two unique BDCs that aren’t only making money out of (traditional) lending but also out of VC-like activities.

Future: ENB (midstream-MLP), D (utility). Two distressed stocks that are now paying about 7% and 5.15%. The latest move by both was massive increases to their payouts. While we don’t expect ENB to increase as much going forward, we see in both stocks an attractive combination of income and price appreciation potential from their current prices ($29.60 and $64.70 respectively).


Thanks again to our panel:

Canadian Dividend Growth Investor, author of DGI Across North America

David Alton Clark, author of Discovered Dividends

Dividend Stream, author of Streaming Income

Double Dividend Stocks, author of Hidden Dividend Stocks Plus

Fredrik Arnold, author of The Dividend Dog Catcher

George Schneider, author of Retire 1 Dividend At A Time

Richard Lejeune, author of Panick High Yield Report

Rida Morwa, author of High Dividend Opportunities

The Dividend Guy, author of Dividend Growth Rocks

The Fortune Teller, author of The Wheel of FORTUNE

If you like what you read, please click the orange “Follow” button.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: David Alton Clark is long BAC and ETP. George Schneider is long T, MO, PM and all the stocks in the Fill-The-Gap Portfolio. Richard Lejeune is long MLPQ. Rida Morwa is long WPG, ETP, USA, ADX Dividend Stream is long UPS. Double Dividend Stocks is long BANX personally and in client accounts. The Dividend Guy is long SBUX, MSFT, TXN, CSCO. The Fortune Teller is long NEWT, GAIN, ENB, D. Robyn Conti holds positions in T, ENB and BAC.

Here Are Apple’s Tips for Buying a Router Optimized for iPhone and Macs

Now that Apple has discontinued the AirPort, it’s offering some tips on finding a replacement.

After Apple announced plans on Thursday to discontinue its wireless routers, the company published a support page on its website that details how you should choose a router that would work well with any number of Apple devices—including the iPhone, iPad, and Apple TV—among others.

While Apple doesn’t share anything new that the average router buyer wouldn’t already know, the company clearly believes that buying a higher-end option is a good idea.

Here’s a list of the features Apple says you should be looking for when choosing a wireless router to work with its devices:

  • Support for the latest wireless standard, 802.11ac.
  • Dual-band routing, so your device will connect to either a 2.4GHz or 5GHz connection for the fastest possible connection.
  • Apple says you should be on the lookout for MIMO or MU-MIMO, which ensures all your devices take advantage of your connection, even when several devices are connected at the same time.
  • On the security front, Apple suggests you use WPA2 Personal encryption. It’s currently the strong Wi-Fi security option.

Apple’s tips come after the company revealed it’s discontinued its AirPort, AirPort Extreme, and Time Capsule. The move wasn’t much of a surprise, as Apple hasn’t offered a new router in several years. Meanwhile, its competitors, including Linksys, Netgear, and even Google, have been delivering new and faster router options.

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Apple said in a statement on Thursday that it only stays in markets that it can “make a meaningful contribution to.”

Apple didn’t offer any specific models in its support page that customers should buy. The company, however, sells the Linksys Velop Whole Home Mesh Wi-Fi System in its Apple stores.

The Final 10 Of 50 Faster Growing Dividend Growth Stocks: Part 5


This is the fifth of a five-part series presenting 50 dividend growth stocks that I have screened for current fair value. With this article, I will be covering 10 additional dividend growth research candidates with moderate to higher yields in addition to the initial 40 that I presented in part 1 found here , part 2 found here , part 3 found here and part 4 found here.

The first 4 parts of this 5-part series presented research candidates ranging from high to moderate yielding attractively valued dividend growth stocks. With this part 5, most of the candidates are more oriented to dividend growth investors seeking a higher total return. To be clear, most of the research candidates in this group might appeal to investors who are still a few or more years away from retirement. Although dividends are still important to this investor type, portfolio and dividend income growth are more pertinent than a high current yield.

This is the final article in this 5-part series on not just 50 attractively valued dividend growth stocks, but also a series of insights into the principles of valuation itself. Consequently, a primary focus of this series of articles is on attractive valuation. Regardless of whether you are investing for growth, current income or income growth, valuation is a universal principle that should be applied with discipline and prudence.

However, being disciplined to only invest at fair valuation is more about prudence and controlling risk than it is about generating the highest possible return. Nevertheless, I believe all successful investment strategies should start with the primary focus on identifying fair or intrinsic value. Accordingly, I will conclude this series by reposting many of my views on valuation I made in previous articles.

Furthermore, I suggest that valuation is a mathematical principle and not a vague concept. Therefore, when I speak of valuation, I am referring to the mathematical calculation of the returns (including both capital appreciation and dividend income) which you could prudently expect to earn from the company’s earnings and/or cash flows. Those returns should be large enough to compensate you more than you could earn from a theoretically riskless investment like a Treasury bond. If you are not being compensated for the extra risk you’re taking by investing in stocks, then I believe you are paying more than you should be.

“Price Is What You Pay. Value Is What You Get”

The venerable investor Warren Buffett has a real knack of putting complex concepts and ideas into simple and easily understood terms. In my opinion, his quote, “Price is what you pay. Value is what you get” is one of the more profound and important statements he has ever uttered. If truly understood, these simple words represent perhaps some of the most important bits of investment wisdom that an investor in common stocks could ever receive.

The concept of fair valuation represents the key to receiving the full benefit that these wise words provide. Knowing the “price” you pay is simple and straightforward. And, although many have an intuitive understanding of value, its deeper meaning is often only vaguely comprehended. Anyone who has truly made the effort to study Warren Buffett’s investment philosophy understands that receiving value on the money he invests is of high importance to him.

So how do you know, when buying a stock, if you’re getting value or not for your money? I contend that the answer lies in the amount of cash flow and/or earnings that the business you purchase can generate on your behalf. And regardless of how much cash flow and/or earnings the business can generate for you, its value to you will be greatly impacted by the valuation you pay to obtain it. If you pay too much you get very little value, but if you pay too little, then the value you receive is greatly increased.

Therefore, if value is what you’re looking for, then it’s important that your attention be placed on the potential cash flows and/or earnings that you’re expecting to receive. Unfortunately, few investors possess the presence of mind to focus on this critical element. Instead, investor attention is more commonly and intensely placed on stock price and its movement. A rising stock price is usually considered to be good, and a falling stock price is considered bad. However, prudent investors understand, recognize and acknowledge that the stock market often incorrectly prices the stock behind a business relative to its intrinsic value.

Another investing great offered his view on this important point: “Just because you buy a stock and it goes up does not mean you are right. Just because you buy a stock and it goes down does not mean you are wrong.” Peter Lynch “One Up On Wall Street.”

Just like the Warren Buffett quote, Peter Lynch’s quote is also based on the principle of sound valuation. The point is that a rising stock may be dangerously overvalued, while a falling stock price may indicate that the company is becoming a rare opportunity on sale. Importantly, this can only be determined by focusing on the company’s fundamentals and the intrinsic value they represent.

Knowing the difference between a so-called “value trap” versus an attractive opportunity will materially impact not only the long-term rate of return the investor receives, but perhaps more importantly, the risk they are taking to get it. As I will illustrate later, you can dramatically overpay for even the best company. Because, it is a truism that the stock market can, and often will, inaccurately appraise the value of a business from time to time – up or down.

From what has been said so far, it should be clear that to receive value, you must know how to calculate value. Then, and only then, can you be certain that you’re investing in a stock and receiving value for the price you pay. However, there is an important caveat that needs to be introduced.

Just because you buy a stock at value doesn’t necessarily mean that you will receive a high return. This is because value, although important, is only one component of future return. Another important component is the earnings and/or cash flow growth rate of the business.

To clarify, you can buy a slow-growing company at sound valuation, and even at the same valuation as a faster growing company, while still earning only a modest rate of return. In fact, it could be argued that only being willing to invest at sound valuation is more critical for a slow grower than it is for a faster grower. As an aside, and as it relates to common stocks, this is usually associated with higher yielding slower growers.

The rationale here is that there is very little margin for error when investing in a low growth security. Therefore, it’s even more imperative that you get valuation correct. This may be one of the most confusing aspects of fair valuation, or value, that I will elaborate on later.

The Foundational Principles of Value

What gives a business (stock) value? Ultimately, any business, public or private, has its value derived from the amount of cash flow and/or earnings it can generate for its stakeholders (stockholders). In the long run, not only will capital appreciation depend on the level of cash flow and/or earnings, dividends and the growth thereof are also a function of these important metrics.

It is because of this principle that the discounted cash flow (DCF) method of valuing a business is so widely accepted by scholars and professional investors. Consequently, this series of articles on valuation and on how to value a business is strongly based on utilizing fundamental valuations based on cash flows and/or earnings as the primary method for assessing fair value or True Worth™ as I like to think of it as.

However, I intend to spare the reader the tedious task of evaluating or calculating long and complex mathematical formulas to assess fair valuation. Instead, I will focus on presenting logical explanations and straightforward discussions of the principles behind these important valuation methods. Additionally, I will provide what I hope the reader finds as an easy-to-understand video analysis as evidence supporting my points. Anyone who is interested in a more scholarly approach can simply Google: How to value a company using the discounted cash flow method (DCF).

I believe investors can possess a practical and useful understanding of the basic principles of fair value. To receive value when you buy a stock, you must be careful that you are only paying a price that represents sound valuation. Fair valuation is only manifest when your investment in a business is supported by a strong foundation of fundamentals. These would include, but are not limited to, strong cash flow and earnings generation supported by a proven business model with prospects for continued growth.

Furthermore, the terms “value” and “valuation” though not synonymous, are very closely related. I am going to do my best to illustrate that the investor can only get value when buying a stock if they apply the discipline of sound valuation when they initially invest.

In other words, when the price you pay is at a level that equals sound valuation, then good long-term value is what you will receive. As previously suggested, if you overpay, your long-term value will be less, and if you’re fortunate enough to buy on the cheap, your long-term value will be enhanced.

Calculating Intrinsic Value With Zero Growth, Moderate Growth And Low Growth

Let’s start by looking at sound valuation from the perspective of minimum to maximum levels based on rates of growth. The reader should understand that much of what I will present next represents an overly-simplistic view of valuation. However, I believe that this is the best way to lay a sound foundation of understanding of this important investing principle.

There will be subtle calibrations that investors need to apply when making investments in real world situations. On the other hand, the core principle will aptly apply and hold true. Therefore, let’s initially look at how you would value a future stream of income that doesn’t grow (zero growth). A 10-year treasury bond would represent a good proxy to illustrate this principle. The interest rate is fixed and guaranteed, but it does not grow.

Common sense and logic would dictate that you would never be able to buy a Treasury bond at one times its interest. In other words, a stream of income has an intrinsic value that is some multiple of its annual income stream. To calculate current valuation, you simply divide the interest rate it pays into its price. With 10-year treasuries yielding approximately 2.95% today, you divide 2.95 (the rate) into 100 (the price) and discover that it is selling at approximately 34 times interest. Stated another way, it would take 34 years of receiving those interest payments to pay back your original investment if the bond did not mature first.

Historically, this is a very high price, which means that yields remain historically low. Therefore, people, possibly still traumatized by the Great Recession, are buying Treasury bonds today because they are willing to pay the high price for the safety they perceive they are receiving. Under more normal levels of interest rates, 10-year Treasury bonds have been more typically offered at yields of 6% to 8%. Do the division and this calculates to valuations of approximately 12 to 17 times interest.

This also offers a clue to why a P/E ratio of approximately 15 is a general proxy for fair value stock valuations. Nevertheless, any investment has a value that is greater than its annual income stream, but investors should understand there are rational limits to the multiple you pay for an income stream that should not be exceeded.

Common stocks are certainly not as safe as Treasury bonds; however, the principles behind sound valuation still apply. In other words, if a company generates an income stream, even if it doesn’t grow, it will have value that is greater than its annual income stream. Otherwise, this no growth investment would be generating cash on cash returns of 100%. Clearly, this would be illogical. Consequently, just like a Treasury bond trades at a multiple of interest, a common stock will trade at a multiple of its income stream. which is generally represented as earnings and/or cash flows. This is commonly expressed as either a P/E ratio or a price/cash flow ratio.

The reason I started with looking at a safe, but no growth fixed income vehicle was to establish the minimum foundation of valuation. Historically, the average price earnings ratio that has been applied to the average company (the S&P 500) for the past 200 years has been approximately within a range of 15-17. This calculates to an earnings yield of approximately 6 to 7%.

I do not believe it is a coincidence that this also represents the long-term average return that stocks have produced. To keep my promise of keeping it simple, I additionally point out that this valuation calculation also relates to normal fixed income yields of 6% to 8% as discussed above.

To summarize and clarify, when you invest in a stock, even a low growth stock, your future capital appreciation will be proportionately related to the growth rate the company achieves in the long run. However, this statement further assumes that you buy a low growth stock at value and measure your performance at a future date when it is also at value. Of course, if you measure it later at a higher valuation, your capital appreciation component of total return will be somewhat higher – and vice versa.

The following utility stock Southern Company (NYSE:SO) provides a real-world example of what I’ve written above. Note from the historical earnings and price correlated FAST Graph that Southern Company’s earnings growth rate was 3.6% over this time frame. Further note that the company was fairly valued at the beginning of the time frame being measured and fairly valued at the end (P/E ratios approximating 15).

As a result, when we examine Southern Company’s performance over this time frame we discover that capital appreciation (annualized ROR (w/o Div.) was also 3.6% – or precisely equal to Southern Company’s earnings growth rate. The reader should also note that even though Southern Company underperformed the S&P 500 on a capital appreciation basis, it significantly outperformed the S&P 500 on total cumulative dividends paid. Consequently, even though this is an income opportunity, it also marginally outperformed the S&P 500 on a total return basis over this specific time frame as well.

Next let’s look at a faster growing example the J.M. Smucker Company (NYSE:SJM). Here we see another example of fair value reflected as a 15 P/E ratio, however, this company offers a significantly faster earnings growth rate of 10.7% over this time frame. The same fair valuation, however, a dramatically higher rate of growth. Therefore, even though the same valuation multiple applies, the long-term total return will be dramatically different because of the different growth characteristics of this company’s earnings and dividends, etc.

Therefore, just as we saw with Southern Company above, the much faster growing J.M. Smucker Company produced capital appreciation (annualized ROR (w/o Div.) that was also in direct alignment with the rate of earnings growth the company achieved. However, because of the higher growth, the capital appreciation component was significantly more. Even more interesting, thanks to its fast growth, J.M. Smucker Company also produced a greater level of total cumulative dividends than the higher-yielding Southern Company did.

Calculating Fair Value on Fast-Growing Companies (15% Or Better)

Thus far I have attempted to lay the foundation of understanding how to value a common stock. So far I have presented low to moderate earnings growth examples. Next I will look at companies that grow earnings at 15% or greater as I investigate the nuances of evaluating this faster growth.

Extensive research over many years has led me to conclude that a P/E ratio equal to a company’s earnings growth rate (P/E=EPS growth) is more appropriate for companies that grow at faster rates. This calculation also reflects an ideal PEG ratio of 1. In Chapter 7 of his best-selling book One Up On Wall Street, the renowned investor Peter Lynch identified six general categories of common stocks: slow growers, stalwarts, fast growers, cyclicals, asset plays and turnarounds. This part of this article will focus on the fast grower category.

My definition of a fast grower is one that has consistently compounded earnings at 15% per annum or better over extended periods of time (five years or longer). Furthermore, the more consistent the growth has been, the better it fits my definition of a high growth stock. The rationale behind this relates to the magic that compounding brings when growth rates are 15% or greater.

This category of fast grower, Peter Lynch referred to as “superstocks” that he contended deserved the most attention from investors. The reason he believed they deserved the most attention, is because these are the stocks that will generate the highest total returns over the long run. Assuming of course you invest in them at fair value. Companies with these attributes are what Peter hunted for when he was seeking his “10 baggers” because he believed these were the most explosive stocks.

Centene Corporation (NYSE:CNC) represents an example of a fast-growing company (stock). Earnings growth has averaged 21.9%. Therefore, consistent with the P/E ratio equal to the company’s earnings growth rate formula, the orange line on the graph represents a fair value P/E ratio of 21.9 for this faster grower. Fair value for this high-growth company is significantly higher than what we saw with our previous examples because of the compounding power of its faster earnings growth.

Once again, utilizing this as a valuation reference, we see that stock price (the black line) follows earnings, and we also see periods of time where the stock is undervalued relative to the business results, as well as times when the stock is overvalued relative to the business results.

When reviewing the performance results of Centene Corporation we once again see a very high correlation between capital appreciation and the company’s earnings growth achievement. Moreover, a primary difference with this example compared to the others is that there are no dividends. This is a classic example of a growth stock in contrast to a dividend growth stock such as J.M. Smucker Company. When you invest in a true growth stock, your total rate of return comes solely from capital appreciation.

As an important aside, this relates to the reasons why many consider growth stocks riskier. For starters, it is very difficult to grow a business at rates above 15% like this company did. Additionally, there are no dividends being paid to soften the blow of short-term volatility that will inevitably occur from time to time.

How Do You Account For P/E Ratios Below 15?

Anytime you come across a company whose price earnings ratio is less than 15, which I have described as a foundational P/E ratio in this article, it’s usually associated with uncertainty. A current P/E ratio below 15 might possibly imply a concern that future earnings are expected to be less than current levels. In other words, this could mean that you are paying a higher P/E ratio for these expected lower future earnings.

For example, let’s assume you buy a dollar’s worth of earnings today and pay $15, or a PE ratio of 15. One year later, the dollar’s worth of earnings you paid $15 for today have fallen to only $.50 worth of earnings. Therefore, you have paid a P/E ratio of 30 for those lower future earnings. Consequently, we might assume that the market may have been acting as a discounting mechanism, or as suggested, just mispricing the company.

Other uncertainties that could cause chronic low P/E ratios below the standard P/E ratio of 15 could relate to quality considerations. There are also certain sectors, the energy sector comes to mind, where the market routinely applies a lower valuation. Of course, as previously stated, uncertainty is usually associated with those lower-than-justified valuations. Additionally, a P/E ratio below 15 may just be an example of the market undervaluing the company, as I pointed out earlier in this article.

FAST Graphs Portfolio Review: Next 10 (41 through 50) By Yield

The following portfolio review provides a summary of important metrics for the final 10 of 50 fairly-valued research candidates. The reader should note that the last 2 columns (light brown) provide annualized total return estimates based on the consensus 3 to 5 years trend line analyst estimates of either cash flows or earnings. The first light brown column provides total annual return estimates based on earnings, and the second light brown column provides total annual return estimates based on cash flows.

It’s also important that the reader understands that the primary attribute that each of these 10 research candidates have in common is fair valuation. Moreover, each individual candidate will not necessarily be an appropriate investment for every dividend growth investor. I believe it’s vitally important that each investor builds portfolios according to their own unique goals, objectives and risk tolerances.

Therefore, I suggest that readers might pick and/or choose to examine only those that meet their own personal needs. I will be elaborating more on this important aspect in the FAST Graphs analyze out loud video to follow.

Portfolio Review: Snap-On (NYSE:SNA), j2 Global (NASDAQ:JCOM), Kroger (NYSE:KR), Royal Caribbean (NYSE:RCL), Tractor Supply Company (NASDAQ:TSCO), Walt Disney Company (NYSE:DIS), Lear Corporation (NYSE:LEA), Open Text Corporation (NASDAQ:OTEX), Thor Industries (NYSE:THO), PulteGroup (NYSE:PHM)

FAST Graphs Analyze out Loud Video

In the following video, I will briefly illustrate why I believe each of these 10 research candidates are currently fairly-valued. Additionally, I will provide commentary on what type of portfolio or dividend growth investor they may be appropriate for. Furthermore, a word of caution relative to recent market volatility is also in order. With the stock market fluctuating as much as it recently has been, valuations and current dividend yields are presently very dynamic.

In Summary And Conclusion: Value Investing Requires A Long-Term Focus And Strategy

To understand what the intrinsic value or fair value of a common stock is, you must think like a long-term business owner and not like a stock trader. Additionally, you must think like a business owner that has no intention of selling their business. Put another way, your business generates your livelihood. Therefore, your primary focus and attention is on answering the question: how’s business?

When you own your own business, you care about sales, cash flows and ultimately net profits. These are the things that make your business valuable to you simply because these are the things that produce your income.

In contrast to requiring a long-term focus, value investing often has a dark side relative to the short term. In many cases, a stock comes into fair value because of it becoming temporarily out of favor with investors. Although this is not always true, it is often true during powerful bull markets like we’ve been in since the Great Recession ended. Nevertheless, value investors also need to be fully cognizant of the reality that they do not “ring a bell” at market tops or bottoms.

Consequently, an out-of-favor stock that has become fairly valued can continue to drop in the short run until the company comes back into favor. In Part 3 and Part 4, I presented examples in the aerospace and defense industry that reflect this short-term danger.

Finally, please remember that as a rule (and there are always exceptions to every rule), investors generally face a trade-off between growth and income. This same principle applies to risk. In theory, investors must be willing to take on greater risk to achieve higher rates of return. These principles speak directly to why investors need to invest according to their own goals, objectives, and risk tolerances. This concludes this five-part series on 50 fairly-valued dividend growth stocks, I hope you found it of value.

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Disclosure: I am/we are long SO, JCOM, KR, THO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

North Korea's elite quitting Facebook, concealing internet activity: researcher

WASHINGTON (Reuters) – North Korea’s ruling class has in recent months abandoned Western social media sites such as Facebook (FB.O), Instagram and Alphabet’s Google (GOOGL.O) and dramatically increased its use of tools that cloak internet activity, according to cyber security research published on Wednesday.

FILE PHOTO: Silhouettes of mobile users are seen next to a screen projection of Facebook logo in this picture illustration taken March 28, 2018. REUTERS/Dado Ruvic/Illustration/File Photo

The reclusive country’s small percentage of internet-connected leaders is preferring to use Chinese services such as Alibaba, Tencent and Baidu, U.S.-based cyber intelligence firm Recorded Future said in a report.

Between December 2017 and March 15 this year, North Korea’s elite increased by 1,200 percent its use of services such as virtual private networks and the Tor anonymity used to obfuscate internet activity, the firm said. Recorded Future said it analyzed internet protocol ranges associated with North Korea and other open-source information in its research.

Priscilla Moriuchi, director of strategic threat development at Record Future and author of the report, said that Pyongyang’s effort to mask internet activity showed it was not being fully transparent before a planned meeting between U.S. President Donald Trump and North Korean leader Kim Jong Un on denuclearization.

Trump on Tuesday called Kim “very honorable” and praised him for being “very open,” but he tempered expectations for any quick denuclearization deal by saying “it may be we’re all wasting a lot of time.”

Statements describing the country as being more open were “in contrast with what we have observed in North Korea’s online behavior,” said Moriuchi, a former senior U.S. intelligence official who studied Asia-based cyber threats. “It is a difference of data vs. diplomacy, or action against words.”

Internet access is strictly limited in North Korea. It is not known how many people there have direct access to the global internet, but estimates generally place the figure at a small fraction of one percent of the population of about 25 million.

Moriuchi said the change in online behavior may be because there is more foreign research and attention on how North Koreans use the internet. It may also be the result of stricter enforcement of an official ban against Western social media services and a desire to increase online security among North Korean’s senior leadership, Moriuchi said.

Reporting by Dustin Volz; editing by Grant McCool

Our Standards:The Thomson Reuters Trust Principles.

U.S. probing Huawei for possible Iran sanctions violations: WSJ

(Reuters) – The U.S. Department of Justice is investigating if Chinese tech company Huawei [HWT.UL] violated U.S. sanctions in relation to Iran, the Wall Street Journal reported on Wednesday.

FILE PHOTO: The Huawei logo is seen during the Mobile World Congress in Barcelona, Spain, February 26, 2018. REUTERS/Yves Herman/File Photo

It was uncertain as to how far the department’s criminal probe had advanced and what allegations the federal agents were exploring, the Journal said, citing unnamed people familiar with the matter.

The Department of Justice declined to comment. Huawei was not immediately available for comment.

U.S. authorities last week banned American companies from selling to Chinese smartphone maker ZTE Corp for seven years, saying the Chinese company had broken a settlement agreement related to Iran sanctions with repeated false statements – a move that threatens to cut off ZTE’s supply chain.

The ZTE ban was the result of ZTE’s failure to comply with an agreement with the U.S. Commerce Department reached last year after it pleaded guilty in federal court to conspiring to violate U.S. sanctions by illegally shipping U.S. goods and technology to Iran.

In 2016, the Commerce Department made documents public that showed ZTE’s misconduct and also revealed how a second company, identified only as F7, had successfully evaded U.S. export controls.

Ten lawmakers in a 2016 letter to the Commerce Department said they believed F7 to be Huawei, citing media reports.

In April 2017, lawmakers sent another letter to Commerce Secretary Wilbur Ross asking for F7 to be publicly identified and fully investigated.

Reporting by Arjun Panchadar in Bengaluru and Karen Freifeld in New York; Editing by Maju Samuel and Rosalba O’Brien