Tag Archives: yield

INTC’s new “3-D” tri-gate microprocessor technology

May 6, 2011 By in Current Market Thoughts, Industry Analysis, Stock ideas, Technology, Uncategorized Tags: , , , , , , , , , , Leave a comment

INTC’s May 4th announcement:  tri-gate

During its most recent quarterly earnings conference call, INTC alluded to a “revolutionary” announcement it would be making on May 4th about its next-generation microprocessor-making technology.  We already knew that the company was going to shrink the distance between elements of the patterns it creates on silicon from 32 nanometers (1 billion nanometers = 1 meter) to 22 nm this year.  But it hinted that there was more to come.

The “more” at a press conference on May 4th.  The company intends to manufacture its 22nm chips using a new technology that it has been developing for almost a decade–a 3-D process it calls tri-gate.

what it is

Up until now, INTC–like everyone else–has been placing chip circuits on a flat silicon substrate.  For 22nm, INTC intends to make the substrate three-dimensional by raising a series of fins up from the substrate, on and around which it will wrap the chip circuits.  If the conventional chip design looks like strands of spaghetti laid side by side, the new one looks more like Rice Chex.

what it does

The the new 3-D “tri-gate” chips cost only 2%-3% more to make than conventional ones.  Just by being 22nm (vs. competitors’ 32 mm offerings), they’re smaller, faster and use less power.  That speed and power advantage is about 15% (I’m eyeballing an INTC chart).  However, the new process allows the chips to be tuned, so that they do much, much more:

–they will use less than half the power of competitors’ chips in high speeds, or

–they will run 37% faster in low-power applications, like smartphones and tablets.

Assuming the adoption of the new process goes according to plan and works as INTC expects, tri-gate will put the company several years ahead of other chip makers.  And it will underscore dramatically the value of INTC having ownership of its own fabrication plants.

when it arrives

Volume production is slated for the second half of 2011.  INTC seems to be putting particular emphasis on shifting its Atom chip–targeted at markets ARMH presently dominates–to the new process.

the big question

The big question for tri-gate, as with any new technology, is whether it will work as expected.  INTC has close to ten years’ experience with the process–and does not seem to me to be the kind of company to announce a development without great confidence in it.  The rest of the semiconductor manufacturing industry is planning to adopt some version of the technology, just not right away.  Still, until we actually see INTC churning out large numbers of tri-gate chips, we won’t know for sure.  We also don’t know whether, even if the chips perform as advertised, that INTC will be able to displace ARMH in new smartphones or tablets.

investment implications

INTC shares are about flat since the announcement.  They’re trading at under 10x earnings and yielding over 3%.  To me, no good news, and a lot of bad, is already factored into the stock price.  On the other hand, merely applying a market multiple to the stock would imply a price of over $30 (see my analysis of INTC’s 1Q11 earnings).  So the risk-reward relationship seems very favorable to me. What I also find interesting is that besides the case made for a value investor, there’s one to be made to a growth investor as well.  It’s the prospect of much better earnings growth than the market expects, for longer than the market thinks.

About ARMH: it’s trading at 90+ times earnings, on the idea that it is the virtual monopoly provider for microprocessors to smartphone and tablet manufacturers.  INTC success doesn’t necessarily translate into ARMH failure; a lot depends on how fast the market is growing.  But while the company may do well, to my mind the ultra-high multiple represents a significant risk in the stock.

US corporates lobby for a new tax amnesty

October 20, 2010 By in Cash position, Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, Securities regulation Tags: , , , , , , , , , , 1 Comment

Yesterday’s Financial Times contains three (count ’em, three) articles, one on the front page and prominently above the fold, talking about recent efforts by US corporations in lobbying Washington to allow them to repatriate foreign cash holdings while paying little or no income tax.

This appears to be the start of a public relations campaign by the US Chamber of Commerce aimed at persuading Congress to pass a tax amnesty bill like the Homeland Investment Act (HIA) of 2004.

US tax law, unlike that of many other countries, makes multinationals incorporated in the US pay domestic income tax (less a credit for foreign income taxes paid) on any foreign earnings repatriated here.  This can be a big deal.  For a US company recognizing Asian profits in Hong Kong, for example, the corporate tax is zero.  This means a firm bringing money like this back home would typically have to pay 35% of it to the IRS.  The funds are probably going to be reinvested in growing Asian businesses.  But even if not, unless the funds are crucially needed in the US it would be financially foolish to repatriate it.

HIA allowed firms to pay a maximum of 5.25% tax on any money brought back to the US during a specified period of time.  Companies were required to use the repatriated funds only to hire new workers or to invest in plant and equipment.  The idea was that this would reduce unemployment and spur new investment.  None could be used for stock buybacks, dividend payments or executive compensation.

According to forthcoming research, the reality of the HIA was quite different.  Corporations repatriated around $300 billion from abroad.  Strictly speaking, all the money was used for the purposes intended.  But aggregate employment and capital investment didn’t increase.  The funds simply freed domestically generated profits to be used for dividends etc..  In fact, some firms actually used the repatriated funds to replace domestic profits that they shipped abroad.

Proponents of  HIA II, which the FT says include Cisco, GE and Microsoft, are not making strong claims this time around.  They label the cash, which is estimated at about $1 trillion, as being “trapped” abroad.  They argue that maybe $400 million would be repatriated under HIA II, giving the government $20 billion or so in tax money it wouldn’t otherwise have.  And the repatriated funds would likely slosh around doing something–presumably economically good–in the US.

So far the Obama administration is saying no, seeing that it’s in enough trouble without advocating a big tax break for cash-rich corporations.

investment implications (there actually are some)

1.  I wrote about this topic a bit last April, specifically regarding the large buildup of cash on the balance sheets of technology companies.

2.  To be able to pay it out in dividends, a US-incorporated company has to have the cash available in the US.  But most publicly-traded companies don’t disclose enough about where there cash balances are, or the cash generating/cash using characteristics of their US and foreign businesses for an analyst to see how well a given dividend is covered.  This didn’t make any difference when dividend yields were very low and investors were interested in capital gains.  But it does now.

3.  It takes a US$1.50 earned pretax in the US to give the same lift to the reported earnings of a US company as US$1 earned in Hong Kong.  So a corporation concerned with maximizing eps might well choose to recognize profits in Hong Kong rather than the US, assuming it had a choice.  Similarly, a decision to shift the profit stream to the US in order to may dividends–again, assuming this were possible–would mean a structurally lower level of eps.  I suspect that at some point, investors will ask for earnings estimates that are “normalized,” in the sense of adjusted to what they would be under a standard 35% tax rate, in order to get a more apples-to-apples comparison.

4.  Why lobby for HIA II?  The paper I linked to above argues that it makes very little difference to corporations in the aggregate.  But there may be firms–most likely in the tech area–who will be forced to borrow or to repatriate foreign cash balances (and pay tax on them), either to be able to maintain the current dividend or raise it.  The strongest advocates of a new HIA might well be in this position.

Start getting ready for 2011 now

October 15, 2010 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Strategy Tags: , , , , , , Leave a comment

it’s not too early

We’re now in the middle of October.

The second half of December is a completely lost time for professional equity investors. Volumes shrink considerably. Most professionals know their year has long since been either made or broken, so they’re on vacation. Many markets are shut down for part of the period. Accountants are starting to tot up the official score. Yes, there are sometimes very profitable anomalies to watch for (moe on this in another post). But, practically speaking, the party’s over and the lights have been turned out, so it’s much too late to be starting to reorient a portfolio.

In the first half of December, it starts to become much harder to talk to companies or to brokerage house analysts. They’re all involved in their internal pushes to close out the year, so they don;t have a such time as the would in other months. And they’re either out of the office or planning an imminent holiday departure, as well.

This means thinking about next year and acting on new strategic thoughts is starting to happen in world stock markets now, and will take place in the six or seven weeks left before December rolls around.

That’s our main investment job from this point on.

what to do

Two approaches:

1.  Develop/update your strategic plan. This is a high-sounding name for trying to figure out what the world will look like and how stocks (and maybe bonds and cash) will behave as investments after 2011 dawns. Stuff like: will it continue to be better in the US to bet on companies with a lot of foreign earnings or should one switch some money to thus-far underperforming domestic-oriented names? (I’ll be posting my thoughts for next year in a week or two

2.  Mechanical housekeeping. Three aspects to this:

—position sizes.    2010 has been a year of widely varying performance by different world stock markets and by individual stocks within them. If you’ve been very lucky or skillful, you’ll have positions that are up 50% relative to your overall portfolio. Some may violate your personal position guidelines. In my opinion, no one should have a stock, or mutual fund/ETF position (except index positions) that’s more than 10% of his total wealth. Your ideas may differ. But there can easily be positions that, when you sit down to look at them, are too risky because they’re too big. You should fix that.

—losers. Take a hard look at what’s gone wrong. We all play mental tricks with ourselves to rationalize away underperforming areas of the portfolio. But chances are, deep down inside, we know when something is a mistake. Sell and redeploy the money.

—asset allocation. This is the most important item under heading #2. I’ve saved this for last because I find it the most difficult decision to make. If you started with a 50/40/10 model allocation among stocks bonds and cash, you almost certainly are underweight cash and are likely underweight bonds. Neither of these asset categories look even remotely attractive to me. What to do? I’ve decided, as recent market action says many others seem to be doing as well, to substitute high dividend-yielding stocks for part of my stocks/cash allocation. In reality, you should be aware, if you also do so, that this is a change in asset allocation and an increase in the risk level of your holdings. At the very least, this means watching the consequences of the decision very carefully; it should probably also mean dialing down the risk level in your pre-existing equity holdings to compensate for the additional allocation to this category.

 

more on equity dividends, a badly misunderstood topic

August 22, 2010 By in Constructing a Portfolio, Current Market Thoughts, Dividends, Portfolio management Tags: , , , , , , , , Leave a comment

then…

For the last twenty-five years, dividends have played virtually no role in the thinking of most equity portfolio managers in the United States.

For one thing, the quarter century has been a time of great and rapid technological change–and has therefore presented unusually good investment opportunities.  So there was no need for dutiful managements to return   profits to shareholders for lack of lucrative reinvestment possibilities.

For another, increasing affluence and the rise of discount brokerage meant stocks were becoming accessible to most adults, not just coupon-clipping tycoons.  Baby Boomers were just coming of age and looked to stocks for capital gains.  Boomers simply weren’t interest in dividends then.

…and now

The Baby Boom is nearing retirement.  Age-appropriately, Boomers have begun to shade their investment choices away from pure capital gain toward vehicles that mix in an element of income as well.  At the same time, the domestic economy has matured.  Even before the financial crisis, economic growth had begun a secular slowdown.  In addition, the corporate field has become much more crowded with competition from Asia and Latin America.

As a result of both these developments, many American corporations are beginning to pay significant dividends again.

why misunderstood?

Three interconnected reasons:

1.  The last market cycles in the US where dividends made a real difference were during the accelerating inflation of the late Seventies (dividends were a bad thing) and the early disinflation years of the Eighties (dividends were very good).  Most of the portfolio managers who actually worked in these periods have either retired or are senior executives no longer managing money.

2.  Portfolio management is a craft skill.  You learn by practical experience as the apprentice of a skilled practitioner who is willing to teach, or at least willing to let you observe what he/she does.  Dividends just haven’t come up as a key topic in the training program for a very long time, so (I think) managers under fifty years of age have little clue about how to react to the change in investor preferences I think is going on currently.

3.  Academic finance, surprisingly, has (for a change) some useful information.  But it’s not very much. So you won’t learn about dividends there.   It’s unusual to see a faculty member with any practical knowledge of experience as a professional investor.  It’s rarer still to see a securities analyst of portfolio manager with tenure.  The best analogy I can come up with is that if you want to be a creative writer you don’t learn how by studying to be a literary critic.  But even that’s not quite right, since the literary critic and the writer share common assumptions about the value of the written word.  Finance academics deny that portfolio management is possible.

the Jeremy Siegel op ed article in the Wall Street Journal

I’ve written about this column in an earlier post.  In it. Mr. Siegel, a professor at UPenn, suggests that dividend-paying stocks can be a viable alternative to bonds.

I think the observation is correct and should be relatively uncontroversial.  Of course, I’ve been writing the same thing for months.  But the Siegel article has generated a mini-firestorm of protest  and it has spawned a number of pronouncements “correcting” what the authors consider Mr. Siegel’s misconceptions.

I’ve been fascinated–maybe stunned is a better word–by the counter-articles, which seem to me to reveal the authors’ ground level lack of understanding of what dividends are all about.  I’ve gone back and forth in my mind about whether to link to some examples and have decided, for good or ill, not to.  But careful readers of the Financial Times will have seen a particularly egregious example of what I’m talking about–a rare reversal of form between the FT and the WSJ.

So I decided I’d put down what I consider some of the fundamentals about dividends.

Here goes.

dividend basics

1.  From a credit analysis perspective, common equity dividends (I’m going to ignore preferreds in this post) are riskier than interest payments on the same company’s bonds.  If a firm gets into financial trouble, it can much more easily decrease of eliminate dividends to shareholders than it can interest payments to bondholders.

2.  Most bonds have a specified term, usually ten years or less.  Although the bonds may be far less liquid on a day-to-day basis than stocks, the bondholder will–absent financial problems with the bond issuer–receive his principal back at the end of the term.  Generally speaking, equities have no similar feature.  You may receive more than your original investment if/when you sell, depending on market conditions at the time.

3.  In theory, any company is continually looking for high return projects to reinvest the cash its business is currently generating.  If it can find such projects, it spends its cash on them.  If not, however, rather than  invest in projects where it thinks prospects are at best mediocre or let lots of idle cash build up on the balance sheet, the company should return funds to the shareholders (the legal owners of the company) for them to reinvest elsewhere.

As a practical matter, companies don’t always do this.  Sometimes, shareholders may make it clear to management that they don’t want the money back, that they’re rather have management reinvest even in cases where the returns may not be so high.  Most often, however, CEOs’ egos get in the way of doing the right thing by admitting that industry growth is slowing and that harvesting an investment is more appropriate than sinking new money in.

4.  Dividends are paid out of profits.  Typically, as income rises so too do dividends–unlike the case with bonds, whose coupon payments are typically fixed.

5.  Dividend levels are set by a firm’s board of directors. In well-managed companies, dividends are always backward-looking.  That is, they are set without consideration of possible future profit growth, but only at a level that historical experience says is appropriate.  Dividend increases are only made where there is strong evidence the business will be able to maintain the new payout even in weak economic times.

6.  Although dividend payout ratios are usually expressed as a percentage of profits, I’ve always found the correlation with cash flow to be stronger.

7.  Managements have different levels of skill in the dividend setting process, as well as different levels of commitment to maintaining the dividend during lean times.  As a general rule, firms that have cut the dividend in the past are more prone to do so in the future.

8.   The highest current yield isn’t always the best. It may simply be signalling the market’s belief that the dividend has no chance of growing–or, worse still, that the current payout is likely to be reduced.

9.  Dividend growth prospects count, too.  To my mind, the ideal combination is a stock

–with, say, a 2.5% yield but which is

–a leading firm in a maturing industry, and

–where management recognizes its obligation to shareholders not to continue to expand rapidly but rather to return an increasing amount of the cash it generates to shareholders.

Remember the rule of 72:  a 10% annual grower doubles cash generation every seven years.  A 15% grower does this in less than five.  In a firm like I’m describing, dividends have a chance to grow faster than that.  In the latter case–admittedly not an everyday find–dividend payments ten years from now would be 4x+ the current level, meaning a 10% dividend yield on an unchanged stock price.