Ford’s dividend quality, J&J’s split-off, cost basis discipline — what we think about all these
Send your questions directly to Jim Cramer and his team of analysts at [email protected] . Reminder, we can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. Question 1: What are your thoughts on the stability of FORD’s dividend? Thank you, Denise The quickest way to determine the sustainability of a company’s dividend is to consider it in relation to earnings and/or cash flow. The dividend payout divided by the earnings number is referred to as the “payout ratio” — below 100% is generally considered sustainable (so long as it’s positive). A negative number would imply negative earnings, which is obviously bad. A payout ratio above 100% would also be something to be concerned about because it means the company is paying out more than it makes and therefore eating into the cash on its balance sheet, an obviously unsustainable dynamic. That method is not the end all be all. We say this for two reasons. First, earnings fluctuate and therefore so does the payout ratio (assuming a non-variable dividend payment). Second, in addition to earnings fluctuations, we must always consider the financial health of the company. If we have reason to believe the earnings profile will change in the future (be it improvement or degradation) then we need to incorporate this into our view on the payout ratio. For this reason, it can be helpful to consider past performance as well as future expectations. Looking at Club name Ford (F), we see the following data from FactSet. On the basis of adjusted earnings per share (as indicated in the line below per-share dividend in the above table), Ford is generating enough income from normal operations (which is what adjusted earnings attempt to highlight, by excluding amongst other things, one-time charges) to cover its dividend to shareholders like us. That’s because all the numbers are positive in the “adjusted EPS payout ratio” line (2021 and 2022 actual results and 2023 and 2024 estimated results) and each of them is below 100%. The one caveat is that we must remember that adjusted earnings do not equate to cash flow and a dividend can’t be paid in IOUs. It’s for that reason we always say to compare the cash flow to the earnings number to get a sense of the earnings quality. The more actual cash supporting those earnings, the higher the quality. Fortunately in Ford’s case, what we see is that in addition to generating enough earnings, they are also pulling in enough cold hard cash to cover payouts, as indicated by the bottom line in the table “cash flow per share payout ratio,” which are positive and under 100%. That said, were we to see a period here or there where the payout isn’t covered by cash and/or cash flows, it’s not necessarily a reason to bail. But, it is something to investigate. Remember, the question is about long-term sustainability, not about one or two quarters over a number of years. So, using a little cash now and then in a difficult operating environment is, for the most part, acceptable, so long as you believe that things will normalize and the payout ratio will fall back under 100% before it becomes problematic. Of course, anything can happen, like a global pandemic that forces a dividend cut — but under normal operating conditions, the above data provides us confidence in Ford’s ability to continue paying out its quarterly dividend. When investing in a stock that pays dividends, it’s always a good idea to include a check-up on these ratios as part of the homework , along with a review of any upcoming cash payments, such as debt maturity date. These events can certainly take an axe to earnings and compete for cash flows. However, analysts will generally be able to factor this information into their forecasts. Question 2: Hello, what is the status on JNJ’s spin-off (KVUE)? Will existing owners of JNJ get any shares of KVUE? — WT We actually 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 J & J shares. As noted in our analysis of J & J’s latest release, we like this decision because it offers 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) acquiring “a large number of outstanding shares of Johnson & Johnson common stock at one-time in a tax-free manner.” It’s almost like a buyback, except with no cash being used, allowing the team to maintain the company’s future financial flexibility. Question 3: I know it is not that simple and I understand that discipline surrounding the cost basis should be maintained as much as possible to create future gains. However, I have had a number of instances where I was lucky enough to buy at or near the low of a stock. However, I did not buy enough in my first couple of incremental purchases to fill the original quantity I had hoped to buy. The stock just raced questionably higher and left me behind. … I was hoping that you could expand a little bit on a situation like this. Thank you, Jeff and your team for all you do. You are doing a great job. —Larry Not an easy question to answer. As you stated, our discipline is to not violate our cost basis and we stick to that as much as possible. That said, we have on occasion, gone against this discipline, a move we don’t take lightly. We can’t offer a specific rule on when this may be acceptable. Investing is, after all, as much an art as it is a science. But, we can provide some food for thought. We tend to view these scenarios — when a person makes money but not as much as they think they should have because they never got the full position on — as a “high-quality problem.” Sometimes the best course of action is to take the small win or let the name ride until a clear buying opportunity (like a market-wide correction or total dislocation between the stock and the fundamentals) presents itself. Remember that price is what you pay and value is what you get. It’s entirely possible that shares have increased in price but not gotten more expensive on a valuation basis if the appreciation was the result of earnings growth. In this case, one might find a violation of their basis acceptable as they would be violating their cost basis as far as the price is concerned but not necessarily getting a worse deal than they did before if the multiple is unchanged. They may even be getting a better deal if the multiple went down. That’s one way to think about whether it’s acceptable to violate basis. Think about Nvidia, on the one hand, one may think it crazy to have purchased the stock at $380 per share after it surged on earnings back in May. On the other, the stock didn’t go up nearly as much as the earnings estimates — and as a result, the price-to-earnings (P/E) multiple actually contracted (got cheaper in value). Now, here we are, with shares trading north of $450. NVDA YTD mountain Nvidia YTD performance Another approach to a scenario like the one described above is to treat your small position as if you have none at all. Remember, we care about where a stock is going, not where it came from. Thinking about the name as if you don’t have an existing position may help you think more objectively about the risk/reward at current levels. Would you be buying it had you missed the recent move altogether? In the end, the discipline is to abide by your cost basis. But, if you are considering violating it, then thinking about the name from the perspective of valuation (rather than price) and as if you weren’t already exposed, may help determine if that is indeed the correct course of action. (See here for a full list of the stocks INJim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s 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 ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Send your questions directly to Jim Cramer and his team of analysts at [email protected]. Reminder, we can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries.
Question 1: What are your thoughts on the stability of FORD’s dividend? Thank you, Denise
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