Send your questions directly to Jim Cramer and his team of analysts at [email protected]. Reminder, we cannot provide personal investment advice. We will only consider more general questions about the portfolio or the investment process or stocks in related industries. Question 1: What are your thoughts on FORD’s dividend sustainability? Thank you, The quickest way to determine the sustainability of Dennis Co.’s dividend is to consider it in relation to earnings and/or cash flow. The dividend payout divided by the earnings number is called the “payout ratio”—below 100% is generally considered sustainable (as long as it’s positive). A negative number would mean negative income, which is obviously bad. A payout ratio above 100% would also be a cause for concern as it means the company is paying out more than it is earning and therefore eating into cash on its balance sheet, which is clearly an unsustainable dynamic. This method is not the end all. We say this for two reasons. First, earnings fluctuate and so does the payout ratio (assuming a constant dividend payout). Second, in addition to revenue fluctuations, we should always consider the financial health of the company. If we have reason to believe that the earnings profile will change in the future (whether it improves or declines) then we need to factor this into our view of the payout ratio. For this reason, it can be helpful to consider past performance as well as future expectations. Looking at the club name Ford (F), we see the following data from FactSet. On an adjusted earnings per share basis (as indicated in the line below dividends per share in the table above), Ford is generating enough income from normal operations (which adjusted earnings attempt to reflect, among other things, one-time charges) to cover its dividend to shareholders like us. This is because the numbers in the “Adjusted EPS Payout Ratio” line are all positive (actual results for 2021 and 2022 and estimated results for 2023 and 2024) and are each less than 100%. One caveat is that we must remember that adjusted earnings do not equal cash flow and that dividends cannot be paid in IOUs. That’s why we always say compare the cash flow to the earnings number to get a sense of the quality of earnings. The more real cash these earnings contain, the higher the quality. Fortunately in Ford’s case, what we see is that in addition to generating enough revenue, they’re also taking in enough cold hard cash to cover payouts, as shown by the bottom line in the table “Cash Flow Per Share Payout Ratio,” which is positive and less than 100%. That said, should we see a period here or there where payments are not made in cash and/or cash flow, that’s not necessarily a reason to bail. But, this is something to research. Remember, the question is about long-term sustainability, not one or two quarters over many years. Therefore, using a small amount in a difficult operating environment is, for the most part, acceptable, as long as you are confident that things will normalize and the payout ratio will fall below 100% before it becomes difficult. Of course, anything could happen, such as a global pandemic that forces a dividend cut — but under normal operating conditions, the above data gives us confidence in Ford’s ability to continue paying quarterly dividends. When investing in dividend-paying stocks, it’s always a good idea to include a checkup on these ratios as part of your homework, along with reviewing the maturity date of any upcoming cash payments, such as debt. These events can certainly take a toll on earnings and compete for cash flow. However, analysts will usually be able to incorporate this information into their forecasts. Question 2: Hello, what is the status of JNJ’s spin-off (KVUE)? Will the current owners of JNJ get any share of KVUE? — WT We just got an update on this with Johnson & Johnson’s ( JNJ ) second-quarter earnings release. The company is seeking to do what is known as a “split-off” with its remaining majority stake, meaning management will make a tender offer and JNJ shareholders will have the option to exchange those shares for Kenvue ( KVUE ) shares. We own shares of J&J. As noted in our analysis of J&J’s latest release, we like the decision because it gives the company the ability to divest its Kenvue stake (currently at 89.6% ownership) while potentially (depending on how many investors choose to accept the offer) “at the same time to acquire a large number of Johnson & Johnson’s outstanding shares in common tax-free stock.” It’s almost like a buyback, except no cash is used, allowing the team to retain the company’s future financial flexibility. Question 3: I know it is not that simple and I think discipline around cost base should be maintained as much as possible to ensure future profitability. However, I have had many instances where I was lucky enough to buy a stock at or near a low price. However, I didn’t buy enough in my first two extra purchases to fill the original amount I had hoped to buy. The stock just got questionably high and left me behind. … I was hoping you could expand a bit on a situation like this. Thank you, Jeff and your team for all you do. You are doing a great job. -Larry It’s not an easy question to answer. As you said, our discipline is not to violate our cost base and we stick to that as much as possible. That said, we have, on occasion, gone against that discipline, a move we don’t take lightly. We cannot offer any specific rules as to when this may be acceptable. Investing, after all, is as much an art as it is a science. But, we can provide some food for thought. We see these scenarios—when a person makes money but not as much as they think they should because they never found the perfect position—as a “high quality problem.” Sometimes the best course of action is to take small wins or let the name move until a clear buying opportunity (such as a broad market correction or a complete divergence between the stock and fundamentals) presents itself. Remember that price is what you pay and value is what you get. It is entirely possible that the share price may have increased but not become more expensive on a value basis if the appreciation is the result of increased earnings. In this case, one might find it acceptable to violate their basis because they would be violating their cost basis as far as price is concerned but not necessarily getting a worse deal than if multiples had not changed. They may even get a better deal if more than one goes down. This is one way of thinking about whether it is acceptable to violate a premise. Think of Nvidia, on the one hand, one might think bought the stock at $380 per share after its earnings increase in May. On the other hand, the stock didn’t rise nearly as much as earnings estimates – and as a result, the price-to-earnings (P/E) multiple actually contracted (the price got cheaper). Now, here we are, with shares trading north of $450. NVDA YTD Mountain Nvidia YTD Performance Another approach to the scenario described above is to treat your short position as if you had none. Remember, we care about where the stock is going, not where it came from. Thinking about the name as if you have no current position can help you think more objectively about the risk/reward at current levels. Would you be buying it if you missed the recent move altogether? Finally, the discipline is to stick to your cost base. But, if you’re considering breaking it, thinking about the name from a price point of view (rather than price) and as if you’re not already exposed, can help determine if it’s really the right course of action. (See here for a complete list of stocks from INJim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling stocks in his charitable trust portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. The Investing Club information above is subject to our terms and conditions and privacy policy, along with our disclaimer. No formal obligation or duty exists, or is created, by reason of your receipt of any information provided in connection with Investing Club. No specific results or profits are guaranteed.
Send your questions directly to Jim Cramer and his team of analysts at [email protected]. Reminder, we cannot provide personal investment advice. We will only consider more general questions about the portfolio or the investment process or stocks in related industries.
Question 1: What are your thoughts on FORD’s dividend sustainability? Thank you, Dennis
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