Fidelity Worldwide (FWWFX) can invest anywhere in the world, but it consistently has had the majorit...
A Global Edge for Income Investors
08/18/2014 10:00 am EST
Richard Stavros of Investing Daily, has just launched a new advisory service—Global Income Edge. Here, he tells us about the newsletter and highlights two initial buy recommendations from its conservative and aggressive model portfolios.
Steven Halpern: Our guest today is Richard Stavros of Investing Daily. How are you doing, Richard?
Richard Stavros: Good, good; thank you for having me on the show. I’m looking forward to talking to you about finance and stocks.
Steven Halpern: First off, congratulations are definitely in order. You’ve just launched a brand new investment advisory service called Global Income Edge. Could you tell our listeners a little about the new service and its investment strategy?
Richard Stavros: I’d be happy to. We’re extremely pleased to have launched Global Income Edge. It basically fills—what we believe is—a very strong need for better income opportunities in the world today, given Federal Reserve stimulus, the economy being as weak as it is still, even with the good quarter last quarter.
There really aren’t a whole lot of options, particularly as the Federal Reserve has said that it would maintain its accommodative policy for some time.
Global Income Edge basically has gone out and looked at a real top-to-bottom analysis to look at what are the real income opportunities out there, and we found that there are some very, very good investment opportunities that really aren’t being highlighted in the market.
Steven Halpern: Let’s look at this from a risk perspective. You do note that in the lower interest rate environment income investors are taking on too much risk because of low Treasuries in their search for yields, and you believe that well-positioned global companies offer an alternative. Could you explain on that outlook?
Richard Stavros: Sure, I’d be happy to. This is the trend that’s really been developing in just the last few years. People are familiar with global companies— Apple (AAPL), AT&T (T)—I guess, recently, because they have new investments overseas, but local companies in the US are becoming much more global. In many cases, more than 50% to 60% of their earnings come from global investments.
We’ve been finding that, whereas in days before, these companies maybe looked at international investments as sort of just something to maybe improve a little bit the profitability, now they are depending on this type of income because of the way the world is.
The developing economies basically missed the global crises. They have a lot more disposable income and they are growing at a faster rate than developed economies and, mainly, that’s because developed economies have an overhang from the downturn and the deleveraging that’s going on.
Companies in the last few years have become much more efficient at finding new customers, merging because of competitive pressures, and you are really looking at the rise of the global company. With those increased earnings, you are also seeing improved dividend income.
Steven Halpern: Define fundamentally strong companies. You’ve developed a model that assesses dividends and the financial strength of the companies behind them. Could you describe some of the factors that you consider in this assessment?
Richard Stavros: Sure, I’d be happy to. One thing that we haven’t liked about, sort of, the global market is that it’s very, highly volatile and we’ve also seen that right now because of stimulus at central banks around the world, a lot of the valuation from the market appears really high and when you have these—what you’d call “bubbly” markets—it’s very difficult to find intrinsic value.|pagebreak|
So, we completely decided to go to a dividend discount model that’s based on the Gordon Growth Model that basically looks at what the projections are of the future dividend growth of that particular company to evaluate what the value of the company is.
Because we feel that right now the markets are so frothy, even when you do a comparables approach, you’re really looking at two very expensively priced companies and not really getting an insight into where the value is.
We looked at free cash flow to equities as well to see how much money would go to shareholders after paying different expenses. We also wanted to make sure that the companies had a history of paying a dividend.
In our aggressive portfolio, the companies—on average—have five years of paying a dividend, where a conservative portfolio has up to ten years plus and have been paying a steadily growing dividend.
We also—in terms of looking at companies—we decided we only wanted to look at companies that could be traded on the New York Stock Exchange, because we felt that the disclosure requirement on US exchanges are so much better and we want to make sure that—when we’re evaluating companies that have global investments—that all of their financial information is as transparent as possible and there’s nothing more transparent than the New York Stock Exchange, so that was also part of our evaluation.
Looking at their dividends, their free cash flows, seeing the business model, as well as making sure that the company had growth opportunities. It was also not enough to just pay a good dividend. There are companies out there that pay almost unbelievable dividends, but if you start looking at their balance sheet they’re really not great investments.
What you need to do is apply the growth and the dividend, look at the balance sheet, look at the cash, understand what the business is, and then you start to see what a realistic level of dividend can be paid by a solid global company. When you look at those things together, you start to find that there are some global titans out there are paying very, very good dividends, much better than say, what you could get in one particular country.
In the United States, typically, the dividend is—a very strong, high dividend is considered 4% or 5%, but if you look at some of these global companies, they can pay up to 8% to 10% sometimes.
Steven Halpern: Let’s walk through a couple of your initial stock recommendations so that our listeners can get a better understanding of how you operate at Global Income Edge. For conservative investors your first buy recommendation was Vodafone (VOD), so could you briefly tell us of the attraction there?
Richard Stavros: Sure. Vodafone is an established European telecom company. It had a really large stake in Verizon Wireless for a while and just recently sold it. It’s been repositioning itself over the last few years and it’s starting to move into a position of growth.
Vodafone has various stakes in different emerging markets—India, the Middle East, parts of other emerging markets—and those emerging markets have been growing and producing earnings at a level that is significant to the company.
I guess the best way to maybe convey to your listeners the value, or convey the size of Vodafone. Vodafone has 436 million customers around the world and Vodafone has always been, kind of, on the cutting edge on integrating new technologies.
Some may see telecom as an industry that’s on its way out, but I see telecom as integral to delivering the kind of services, high-speed networks that everybody wants around the world.|pagebreak|
In emerging markets, people want their smartphones, they want to be able to see on-demand TV, all these things that maybe we take for granted in the United States are things that other parts of the world are only beginning to adopt.
There’s incredible growth for Vodafone in terms of its emerging markets, and Europe is starting to slowly but surely improve and we also see good earnings potential there in terms of Vodafone.
Steven Halpern: For the aggressive portion of your service you highlighted a company called KKR & Co. (KKR). Could you tell us how this firm fits in with your investment outlook?
Richard Stavros: Sure. KKR & Co. is in our aggressive portfolio, where Vodafone is in our conservative portfolio.
One thing I would add is that I’ve read about how investors are buying high-yield Kenyan bonds that yield 6%, yet can be in a very risky frontier market like Kenya, given some of the terrorism issues that have happened around their country.
Then you compare that to Vodafone. Vodafone pays a 6% dividend and it’s a conservative telecom that has infrastructure around the world.
Here we go to KKR & Co., which also illustrates our thesis that many people think the big income opportunities, or growth income opportunities are just overseas, but they’re not. They can be here at home.
KKR, as some may know, made the leverage buyout famous with the takeover of RJR Nabisco 20 or 30 years ago, but since then—beyond being the preeminent private equity firm since the new financial rules that have been put together—has been taking business away from a lot of the other financial services firms that have had to scale down their businesses to comply with new financial regulations.
What I like about KKR & Co. particularly is that it’s still a partnership. A lot of the investment banks in Wall Street are only C corps and many people think that if these investment banks—as they had been traditionally—if they would have stayed as partnership, a lot of the issues that happened during the crisis wouldn’t have happened.
Even though you can buy an investment in KKR, it is still a partnership and managed by the main partners. I think this introduces a level of conservatism in the type of investments that they make. Second of all, they’re in growth mode.
They are getting into a lot of other businesses that traditionally they haven’t been, like syndication, loans, advisory. Many people think that KKR could be the next Goldman Sachs. I do think that they have the right qualities to get there, and particularly the fact that their structure makes them more conservative. They are moving into these new areas and, at the same time, they are a good private equity firm.
They have more than 90 companies—investments in 90 companies—generating $200 billion in annual revenue. Then they have another $50 billion of assets devoted to loans, major equity to borrow, and so clearly, this fits our growth model.
They are a very good solid established financial services firm and they are also going out internationally and buying different investments and expanding. It’s my belief that this could be a substantial global financial powerhouse in the future and they offer an attractive 8% yield, which is fantastic.
Steven Halpern: Congratulations again on the launch of the new advisory service and thank you so much for spending the time with us today.
Richard Stavros: Thanks for having me. Good talking to you.
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