Friday, January 16, 2009

Voters Deserve the Outcome: BAC, C and W/More on NADX/more adds to small cap monitor list

BMO Capital Markets downgraded Spectra Energy to market performQuotes for SE - Yahoo! Finance

I read an article in Barron's that 48 members of the S & P 500 cut or eliminated their dividends in 2008.  It is becoming increasingly difficult to find stocks that are unlikely to make a cut.  This makes the job for a conservative investor, who finds comfort in dividends, much harder.  Before 2008,  investors probably bought Citigroup and Bank of America believing their dividends were reasonably safe.  The author of the Barron's article suggests that Proctor & Gamble was unlikely to disappoint with a dividend cut. 

Before my time, which covers more than a few decades, investors did not trust management. They treated stocks just like current investors look at bonds.  Dividends, cash in hand, was the only sure return.  This was based in part on a belief that management would waste any excess money made by the company, or worse just steal it, or pay themselves exorbitant salaries and perks with the shareholders' cash.  Over time, those views transformed to allow managers to make tens of million, sometimes hundreds of millions per year, as hired help, to give them an incentive to do well.  Have they done well? I always thought that one incentive to work hard was to take pride in your accomplishments.  Another incentive was to avoid getting your ass fired.  

Risks would be taken to justify outlandish compensation packages, far removed from any actual benefit bestowed on the company for the risk taken, that could not be rationally justified to any prudent and sensible people.  Board of Directors became sycophants to these managers, rarely exercising any meaningful control over them.  Money was wasted on extravagant perks, corporate jets, and acquisitions doomed to dilute shareholder value in the name of some buzzword like synergy or cross-selling. And what was the result?  For shareholders in many such companies they are left with a stock certificate that has the same value of used toilet paper. For others, the value of their stocks has been decimated while the mangers grew rich off their mistakes.  Dividends have been reduced or eliminated.  Cash return to shareholders has been replaced by excessive stock options to those who are already paid too much, with dilution to existing shareholders reduced by using shareholder cash to buy back stock often at much higher prices than the current price.   Mutual funds rarely  do much of anything to protect the interests of their shareholders by forcing changes in corporations, and frequently mindlessly vote the corporate line no matter how bad the results have been-the walking, talking zombies of the financial world.  Other shareholders are too lazy to vote even though it only takes a few seconds to cast a vote online.   I always vote and will cast protest votes against most managers of American companies this year.   In a sense, shareholders, like voters in politics, ultimately get what they deserve.  For the U.S., we deserved George Bush.  For the shareholders of Citigroup, they deserve their current Board, Robert Rubin, and Chuck Prince.  There is always the power to change course provided that power is exercised.  Shareholders have that power and have only themselves to blame for failing to exercise it properly.  How many voted against the BAC acquisition of Merrill Lynch and why did you vote in favor of it?  Personally, I do not like being guillotined by the actions of my fellow shareholders, but I hardly have enough votes to swing the outcome of any vote one way or the other.  I can write about it however. 

At a minimum, I would hope that the young ones at some of these financial institutions will learn something from the current debacle engineered by them with the blessing of the self-proclaimed wise sages at the top. Possibly a new generation is needed to replace those who place their own self interest over the well being of their co-workers and the viability of their firm.

 The debt of National Dentex, which was a cause of concern, comes from using debt to finance two large acquisitions in 2005 and in 2006.  The total debt incurred to acquire the Keller Group of St. Louis  and the Green Dental Laboratories of Arkansas was 39.2 million (p. 14 of annual report:   e10vk)  Keller is operated as a separate subsidiary and has a different marketing approach, trying to market products on a national basis through advertising and direct mail.  This appeals to me.  Consequently NADX says the Keller subsidiary has had lower operating margins than the rest of NADX, but it is obtaining stronger sales growth and operating margins are improving. On page 13, NADX reveals stagnant same store sales growth during its fiscal 2007.   Compliance with Sarbanes-Oxley is a major expense for such a small company (see p. 13) and it would make a lot sense for it to just go private to save that money.  Until the company improves the profitablity of existing operations, I do not see much point in paying top dollar to expand into a new market by acquiring another small company.  The most recent excursion was the September 2008 acquisition of Dental Art Laboratories of Lansing for 10 million, net of cash acquired. (see p. 6 of recent 10-Q e10vq ) Really, the market value of the entire company now is just 20 million, so these acquisitions are not improving shareholder value even though they are increasing debt and revenues.  It is therefore hard to see that the current direction being pursued by management as improving the lot of its shareholders but subtracting from it.   I would like to see a 2 year moratorium on any purchase, unless it is being bought at book value or less in bankruptcy, and instead focus on improving the profitability of operations, expanding into existing markets, and possibly selling some underperforming assets to improve profit margins. 

Hertz announced 4000 more job cuts.  Yahoo! Finance  I follow this company only due to my small position in DKR. 

It would take a brave person, not entirely a foolish one, to venture into the regular preferred issues of Citigroup.  I noticed the volume today on CPRA, which is a non-cumulative preferred with a 8.125% coupon, Series AA, sinking 16% on close to 2 million shares, to less than $9.  C-PP: Summary for CITIGROUP PFD SER AA - Yahoo! Finance   This issue was sold to the public at $25 just a year or so ago.   It is sad to say that this issue can only be classified as highly speculative at this juncture. The Citigroup Trust Preferred issues are fairing a little better. CPRS Stock Quote - Citigroup Cap Ix Stock Quote - CPRS Quote - CPRS Stock Price  I would not touch a regular bank preferred issue now.  Possibly, on further weakness, I might do a nibble or two on selected Trust Preferred issues when a yield of over 20% would provide me with some compensation for their risk. 

GE Capital is going to cut up to 11,000 jobs.Yahoo! Finance

It would be reasonable to expect a 9% unemployment rate sometime before the end of the first quarter.

The difficulty in placing any value on assets held by the financial institutions is illustrated by the events surrounding the acquisition of Merrill.  It has to be assumed that the toxic waste is depreciating more in value by the week as the economy weakens.

I have added four more small caps to my list of those under active consideration for purchase with cash flow.  All were sold at higher prices at a profit:

I have not bought any of those but I am just trying to give myself a few more options.  At the pace I am moving, it may take the rest of the month to put $2,000 to work. 

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