Question:
On Sunday night I was watching a Clark Howard special, when he challenged a sixth grade class with how they would spend $100 dollars. One of the students said with some of his money he would buy Under Armour, because according to him “it just split and it’s a good buy right now.” What is your take on the stock? Is it a good buy, and how has the split helped?
Answer:
First, we’re excited to hear of a child with an interest in investing. Most 12-year-olds are more concerned with wearing Under Armour, rather than investing in it.
A stock split really doesn’t do anything for stockholders. It doesn’t add any value to a stockholder’s wealth. The most it will do is add liquidity to the shares and pay off the lawyers for filing the paperwork. Would you rather have a $20 bill or two $10 bills? Essentially, it doesn’t matter.
Although Under Armour (NYSE: UA) does not meet our investment criteria for financial strength and safety, it doesn’t mean you shouldn’t take a chance on this high-flyer. It has grown revenues and earnings about 30%, annually, over the past six-plus years, since going public—a period when much of the economy was mired in the Great Recession.
Then again, you will be paying a hefty price for that success, as shares trade about 60 times its annual earnings, and operating margins are only around 13-14%, with a profit margin of 7%.
Of the estimated $3 billion synthetic performance market, Under Armour is the leader, controlling about 60%. In just 15 years, Under Armour created a whole new market with its special wicking fabric and compression shirts.
Basically, this is a great company with great products. However, that doesn’t mean it is necessarily a good investment, because shares are trading at such an elevated valuation.
For a child, it may be a stock that may keep his interest. With such an early start, a 12-year-old has decades to let his money grow through the power of compound interest. For instance, a 12-year-old begins saving and investing just $100 a year and assuming his investment grows by 8% a year, he should have about $5,000 by the time he is 32.
In 50 years, or pretty much at retirement age, he could have more than $60,000 saved. By the time that 12-year-old is 65, he could have nearly $85,000 by saving just $100 a year, which would work out to about $5,400 total saving throughout that period.
Question:
If I swapped to muni bonds with similar dividends to my current stocks, couldn’t I end up with a better after tax yield, if tax rates go back to 2001 rates? What are your takes on muni bonds and is this true?
Answer:
What some have focused on lately are the yields as currently reflected. If you hold a stock with dividend yield of 3.5%, you should have an after-tax return of 3%, when you consider the current 15% dividend tax. However, a change in dividend tax could push many into the muni market, which should have the effect of raising prices and lowering yields on municipal bonds.
In 2008, we saw the municipal bond market proactively reduce prices on longer maturities in anticipation of a tax increase. This caused prices to fall and yields to increase to a level that would reflect the tax changes prior to the increase actually happening. When the tax increase did not come, the yields fell once again, reflecting tax-equivalent yield (TEY) in line with those of corporate bonds of similar quality and maturity. Any advantage will be short-lived, as markets will adjust to reflect the new changes. Dividends on stocks are not likely to be increased to reflect a change in taxation, as that could potentially cause a problem with capitalization. One thing we can count on is that when the dust settles, yield will generally reflect the amount of risk involved in the investment.
There is another problem with this issue too. In looking through high-quality municipal bonds, we did not find any yielding 3% maturing before 2025. We found a few 10-year zero coupon bonds yielding 3%, but they are California bonds. It’s been a tough market with interest rates so low. With yields so low, you have to be mindful of inflation overtaking your returns to give a negative real yield.
This should be a good time to consider where to hold certain assets. For instance, if taxes should increase on dividends, consider holding dividend-paying stocks in your tax-deferred accounts, such as, an IRA or 401(k). Hold municipal bonds in your taxable accounts. Our financial planners can help you with these decisions. 770-429-9166
Question:
Warren Buffet is buying IBM and Wells Fargo. Are Gene and Teddy doing the same?
Answer:
We still really like International Business Machines (NYSE: IBM). It is pretty much in the same boat as Accenture. It helps companies become more efficient and cut costs, and there is plenty of demand out there to increase the bottom line, i.e., profits.
IBM is even cheaper than Accenture on an earnings valuation basis. It is trading at 12.6 times earnings, but it is slightly more expensive on a price-to-sales basis, valued at 2.1 times sales. A dividend yield of just under 2% isn’t bad for a tech company either.
We have been light on bank stocks, as compared to a market weight. We do not currently own Wells Fargo, Corp. (NYSE: WFC), but have owned it in the past. The company’s price to earnings and price-to-book ratios are below their five-year average, while its price-to-sales is above its five-year average. The company’s long-term growth is 11.13%, which is higher than other banks. With a PEG ratio of 0.91, the stock is relatively attractive. It also pays a 2.59% dividend, which is relatively safe. It is a solid bank stock, but we remain in our decision to stay light in bank stocks. We do maintain a position in PNC Financial Services Inc. (NYSE: PNC).
Question
What is your outlook on Accenture?
Answer:
First, we own shares of Accenture (NYSE: ACN) in our Traditional Portfolio. We have owned it since prior to the financial collapse in the fall 2008. The stock has paid off handsomely for us. It has returned about 85%, compared with 21% for the S&P 500 and about 40% for the Information Technology sector.
Accenture has had momentum on its side as of late. As a leading management consulting, technology services and outsourcing organization, the company helps other companies become more efficient. Following the Great Recession, companies understand they need to be restructured in order to compete on a global scale by becoming leaner and reducing costs.
Accenture has expertise in a variety of industries, including, communications, financial services, and health and public service, to name a few.
All-in-all, we still like the company for a variety of fundamental reasons. ACN boasts a return on equity of 64%, as well as a profit margin that has consistently risen—more than doubling in the past ten years. The company has essentially zero outstanding debt. Additionally, earnings are expected to grow about 12.5%. The company’s dividend is growing, yielding nearly 2.5%. Finally, the stock isn’t all that expensive carrying a price-to-earnings ratio of 15.5, which is roughly in line with the market and a price-to-sales ratio of 1.4, which is less than half the average Information Technology sector’s 3.5 price-to-sales ratio.
At Henssler Financial, we believe you should Live Ready. If you have questions on your holdings, our experts are here to help. You can reach us at 770-429-9166 or at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
