Question:
We already own American Campus Communities for the dividend yield. We are also considering Equity Residential. How do you feel about these REITs? Do you prefer one over the other?
Answer:
REITs—real estate investment trusts—sell like stocks on the major exchanges and invests in real estate directly, either through properties or mortgages. By design, REITs have to pay out 90% of their earnings. Luckily, earnings are not how REITs are measured. Investors need to be careful when looking at the details of REITs. Instead of earnings, you should be measuring funds from operations, which is a cash flow number, adding amortization and deprecation back to earnings. Investors shouldn’t look at price to earnings (P/E) either. American Campus Communities, Inc. (NYSE: ACC) has a P/E of 36.23. When you look closer at a price to funds from operations, the ratio is 16.68, which is more in line with normal stocks. ACC also has grown its dividend by 5%.
Equity Residential, (NYSE: EQR) has a P/E of 8.82 and a price to funds from operations of 20.47, making it more expensive than American Campus Communities; however, EQR’s dividend is 4.85%. Both companies have their dividend well covered. If interest rates were to rise, both REITs could decline in price. Neither stock meets our criteria for financial strength or safety. You should be OK holding American Campus Communities for income because the dividend is well covered; however, if you are looking for growth, we recommend you invest elsewhere.
Question:
I own Ternium S.A., a steel producer in Latin America. I was told this was a way to play the commodity market. While the general markets have seen a pullback in commodities in emerging markets, this basic material holding has done OK. I’m still in the green. Is it time to sell this one?
Answer:
We recommend you take your profits and run for the hills. The problem with the global steel industry is there’s just too much steel production. It’s a classic case of when supply outstrips demand, which has the effect of pushing prices lower. We’ve seen estimates that steel mills have annual production capacity of 1.8 billion tons, but demand is only 1.5 billion tons a year. That leaves the question of what happens to the extra 300 million tons?
It doesn’t help matters that the industry is highly fragmented at a time when more consolidation is needed. Governments around the world are throwing their hat in the ring by backing companies that are building or planning to build about 100 new mills by 2016, which is going to create even more supply. Steel makers realize there is a capacity issue, but not many seem willing to cut production.
Aside from the steel industry’s issues, Ternium S.A. (NYSE: TX) does not meet our financial strength and safety criteria. We recommend selling this holding.
Question:
Can I take a loan from my IRA to finance the purchase of a home?
Answer:
Loans are not permitted in IRAs. If you are under age 59 ½ and a first-time homebuyer, you can take a distribution and not have to pay the 10% additional tax on up to $10,000 of distributions.
To qualify for treatment as a first-time homebuyer distribution, the distribution must be used to buy, build or rebuild a first home for yourself; your spouse; your or your spouse’s child; your or your spouse’s grandchild; or your or your spouse’s parent or other ancestor—so the definition is relatively flexible. However, it is important to note that this is a distribution and not a loan.
If you have a Roth IRA, you can withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 ½. You may be able to take a loan from a 401(k) or a 403(b) if you have one.
Question:
I think you’ve mentioned that you’re not sure about holding medical device makers right now. I hold shares of Atrion Corp. Where does that fall in your recommendations of buy, hold or sell?
Answer:
Atrion Corp. (NASDAQ: ATRI) is a small company with a market cap of $5.58 million. Not many analysts follow the company, so information is a little harder to come by.
The reason we are concerned for medical device makers is because we do not know how the additional taxes as a result of the Affordable Care Act might affect their revenue. Atrion’s long-term growth is up in the air, but they have a history of 12% growth over the last five years.
While the company doesn’t look expensive compared to other health care companies, we prefer Aetna, Inc. (NYSE: AET), a diversified healthcare benefits company and Universal Health Services, Inc. (NYSE: UHS), which owns and operates hospitals. We expect both to do well under the Affordable Care Act. As for medical device makers, we own Becton, Dickinson and Co. (NYSE:BDX), a $21.3 billion company. BDX offers stable earnings growth at 8%. They also make staples, such as syringes and catheters, which lends to more stability in earnings. We recommend avoiding Atrion Corp.
Question:
I’ve owned Church & Dwight since 2005. I always thought of it as a good long-term holding. Lately I’ve been intrigued with FMC Corporation. Should I make the switch or stick with the tried and true?
Answer:
Both Church & Dwight, Co. Inc. (NYSE: CHD) and FMC Corporation (NYSE: FMC) are financially stable companies that satisfy our criteria for investment.
We’ve been big fans of Church & Dwight for a long time, and it has clearly been a standout among Consumer Staples companies. The company owns the Arm & Hammer brand that’s not only used as baking soda, but also laundry detergent, cat litter, toothpaste and deodorant. Church & Dwight also markets Brillo pads, Trojan condoms and First Response pregnancy kits. Demand for the company’s products has remained robust, particularly since many consumers have traded down to its value-oriented offerings, which, in turn, has driven the company’s growth. Shareholders, have certainly been rewarded from such growth.
As for FMC Corp., for those who have never heard of it, the company produces a variety of chemicals generally used by the food and agriculture industry. The company is the world’s largest producer of natural soda ash, which is used in manufacturing glass and a number of other Industrial applications. FMC has had some mixed results lately. Its Agricultural unit has gained momentum, mainly through Latin American sales, on the back of increased cotton and soybean production. However, its Minerals unit have been under pressure from weak soda ash export pricing and increased costs.
As a materials company, we’d like to see stronger commodity prices and economic growth to increase demand. That said, with inflation and price increases muted, we’ve really only seen half that equation, i.e. stronger economic growth. All-in-all, we think you’d be better off sticking with Church & Dwight.
At Henssler Financial we believe you should Live Ready, and that includes understanding the fundamentals of your investments. If you have questions regarding your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email 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.
