Geraldine Weiss (review)
su...@trwrb.dsd.trw.com
Investor's Club of the Air (an LA Area bunch) on Saturday, June 15. She
read some prepared remarks which explained her philosophy and approach.
Her newsletter, Investment Quality Trends, has been in operation for
over 25 years. She gave a very polished performance, and is a very
pleasant person. Buz Schwartz, the radio guru of the Investor's
Club of the Air, has endeavored to present approaches to investing
as an educational (and possibly promotional) exercise, as opposed
to focussing on guessing what is going to be the next "hot" stock.
And Geraldine provides a conservative approach. If you follow her
methods, you won't be buying stocks that will double in the next
two or 3 months :-)
Geraldine's work has shown that Dow to top out when the dividend
yield falls to the 3% range, and that support levels exist at the
4%, 5%, and 6% range. With the recent shake up of the Dow stocks,
the dividend is about $93. This provides the following prices for
the various yields:
3% 3100
4% 2326
5% 1860
6% 1550
Will the Dow drop to 2326? No one knows for sure :-) It appears that
the market is at dangerous highs, though. On a contrary note, it can
be argued that Geraldine's studies were made when the Dow stocks paid
higher dividends (on an average basis) and the validity of the ranges
now that the Dow stocks tend to pay a lower dividend is suspect. Who
knows? What is true that the Dow dividend yield dropped to something like
2.7% when the market peaked in Aug 87. Geraldine mentioned that during
the 87 market crash, her Undervalued stock category (which I presume was
small at the time :-) dropped only two percent!
The newsletter follows 350 stocks. They are divided into 4 categories:
Undervalued, Rising, Overvalued, and Declining. Currently, there are
about 13% stocks in the Undervalued, which represents historic lows
(and has nothing to do with variations on the makeup of the Dow).
She was of the strong opinion that the market is overvalued and this is
an extremely dangerous time for purchases. The majority (if not all)
of the undervalued stocks are in the utility group.
For those who are interested, I have appended my review of her book
which was posted on the net some time ago.
Maurice Suhre
su...@trwrb.dsd.trw.com
==========
"Dividends Don't Lie", by Geraldine Weiss and Janet Lowe
Longman Financial Services Publishing
This book explains the methods espoused and used in the newsletter
Investment Quality Trends, Geraldine Weiss, ed. The basic tenet
offered is that dividends are a more reliable indicator of value
than earnings.
Price does not determine value. The assumption is that prices will
tend to adjust to reflect a true value (whether that means price
decline or advance). Based on that, a conservative investor should
be trying to purchase when the situations are undervalued and
selling in overvalued situations. Hoping to be able to pick the
exact top (or bottom) is an exercise in futility. One should be
content with getting the major portion of an up move.
Earnings are subject to manipulation and/or exaggeration, even
within the Generally Accepted Principles of Accounting. However,
dividends paid represent cash in fist to the recipient, and are
monies paid from the corporate coffers. Nothing phoney about
the dividends! A history of consistent payment of dividends
along with a relatively consistent rise in the dividend is one
of the hallmarks of a blue chip company.
Weiss offers the following tests for a blue chip company:
1. The dividend has been raised at least five times
in the past 12 years.
2. At least 5 million shares are outstanding.
3. At least 80 institutions hold the stock.
4. Earnings have improved in at least seven of the last
12 years.
5. There have been at least 25 years of uninterrupted
dividends.
6. The stock carries a Standard & Poor's ranking of "A"
or higher.
Her historical records and research have established an undervalued
and an overvalued dividend yield for each of the 350 stocks that she
has in her dividend universe. When a stock gets in the undervalued
range, it is a possible buy. Similarly, overvalue suggests that it is
time to take profits.
The dividend yield theory has provided good signals for the DJIA. When
the Dow Industrials' dividend yield has dropped to 3%, this has marked
a topping area. Yields of 4% have often been bottoms, but 5% and 6%
levels have been reached. 6% is rare and marks a good bottom. Is it
OK to use the Dow as a proxy for the market as a whole? (probably
not. mes) Wrong question. The dividend yield theory uses the Dow
as a proxy for the blue chip companies. This makes more sense since
the Dow stocks will generally represent the industry groups and some
percentage of the Dow stocks will pass the blue chip test.
Anecdotal evidence is just that, but the book points out that the DJI
yield had fallen to 2.6% prior to the October 87 decline/crash. If
I remember right, the 3% line had been crossed back in May of 87.
[I have been looking for a way to switch from diversified fund to
fixed rate investment by using a broad signal which would switch
infrequently. This has application to the 401K plan here at TRW.
The DJI dividend-yield approach appears to have applications. mes]
The book is divided into 3 sections. Specifically,
I. The Dividend-Yield Strategy
II. Bargains Come in Cycles
III. Planning a Profitable Portfolio
The last section is particularly interesting since it talks somewhat
about investor psychology, attitudes, and requirements. Items such
as risk tolerance, patience, income, and capital preservation are
mentioned.
In short, the book recommends attempting to purchase blue-chip companies
at points of undervalue, thereby minimizing risk of capital loss.
Similarly, it recommends taking profits at points of overvalue, thereby
preserving profits as well as getting away from the much higher risk
of decline.
I'll leave you with one quote (p 120):
"Perhaps one should be thankful for the gamblers and speculators
though. Even if they frequently get stung, they are responsible for
driving the market and stocks higher than they reasonably should be.
In doing this, they set the stage so that the conservative investor,
the one tracking dividend yields, can take profits."
Obviously, I like this book and recommend it. I have tried to describe
the book accurately as best I can. And, as usual, all the above is IMHO.
--
Maurice Suhre
su...@trwrb.dsd.trw.com
Ross Casley
su...@trwrb.dsd.trw.com () writes that the dividend yield on the DJIA
is now very low, and that this may well presage a market fall. Then:
>On a contrary note, it can be argued that Geraldine's studies were made
>when the Dow stocks paid higher dividends (on an average basis) and the
>validity of the ranges now that the Dow stocks tend to pay a lower
>dividend is suspect. Who knows?
This remark doesn't make sense to me. Would you clarify it? If yields
are at a historical low, then by definition the Dow must have paid higher
dividends at most times in the past. You seem to be saying "Don't jump to
conclusions based on these low dividend rates because dividends are low
right now."
-Ross
Maurice E. Suhre
OK, clarification coming even though I thought it was obvious :-)
Consider an idealized situation to illustrate the principle.
Assume that you have a set of stocks, a divisor, and that every stock
in the set fluctuates between a 2% and a 4% dividend yield. Also
assume that the stock movements are perfectly correlated. That is,
they all peak or bottom at the same time. For this case, it should
be clear that the dividend yield of the index also fluctuates
between 2 and 4%.
Now, one dark night, I replace these stocks with a different set,
and a corresponding divisor, and that the replacement stocks all
have dividend yields between 1 and 2%. Now, the dividend yield of
the index will be fluctuating between 1 and 2%. The value of the
index is still the same (because of the appropriately chosen divisor).
Prior observations that 2% represents a "topping" area are no longer
valid. For the high-powered mathematicians out there, this is an
example of a non-stationary time series (I hope that's right :-).
Obviously, this situation does not reflect the DJIA exactly. Not all
stocks in the Dow are replaced at any given time (usually only one or
two), they don't all go up and down and the same time, and their dividend
yield swings will not all be the same. The point is this: if the
DJI stocks have been gradually replaced with stocks whose nominal
dividend yield is lower, then the yield of the DJIA will tend to be lower.
Since I don't have any numbers, I can't draw any very good conclusions.
What I do try to do is to point both sides of an issue, even if it is
just a somewhat speculative arm waving argument. In defense of the
Weiss approach, the 3% number presaged the 87 crash, and the Dow makeup
surely is not a great deal different now than it was then. Whether the
"circuit breakers" will prevent another crash remains to be seen.
The debate flares up from time to time about the efficacy of "market
timing". Without igniting the debate (I hope), it certainly seems
reasonable that there are times when the market is more dangerous
to enter than at other times. The 3% dividend yield appears to be
an indicator.
Hope this helps :-)
--
Maurice Suhre
su...@trwrb.dsd.trw.com
Bill Bill Tuthill
market commentary. Use of fundamental indicators (average P/E
ratio, dividend yield, and price/book value) was one of the few
ways you could have predicted the crash of '87.
However, there is a potential problem with the dividend yield
indicator. The business climate has changed lately; conditions
aren't as soft as they once were. Japanese companies often pay
minimal dividends, perhaps because the cost of capital in Japan
is so low. To compete, US companies need to reinvest profits,
rather than paying them out as dividends. Averaging dividends
over a 100 year period may be misleading, because US companies
were protected by tariffs until after WWII, and then found easy
profits in an industrial world ravaged by war.
US Steel and GM are textbook examples of how paying high dividends
prevents companies from making necessary investments.
Moreover, dividends are taxed twice: once on corporate profits,
and again on schedule B. This wasn't the case before tax "reform"
of 1986, before which there was a healthy $400 dividend exclusion.
This gives me less incentive to buy high-dividend stocks, and it
gives companies less incentive to pay dividends.
To support my assertion, here are some facts. The price/dividend
ratio peaked at 38.2 in August 1987, its highest point in history.
Even in 1929 it didn't get above 35. At the same time however, the
P/E ratio was only 21 in August 1987, much lower than the 25 level
reached in 1929. Moreover, the price/book value ratio was only
2.67 in August 1987, contrasted to an extreme of 3.95 in 1929.
[Numbers courtesy of Ned Davis Research, on the S&P 500.]
Dividends just aren't what they used to be. I'd pay more attention
to the average P/E ratio (overvalued at 18) and the price/book value
ratio (overvalued somewhere around 2).
Robert Burgin
>I have great respect for Geraldine Weiss, and enjoy reading her
>
>However, there is a potential problem with the dividend yield
>
>Moreover, dividends are taxed twice: once on corporate profits,
>
>Dividends just aren't what they used to be. I'd pay more attention
>to the average P/E ratio (overvalued at 18) and the price/book value
>ratio (overvalued somewhere around 2).
All good points, Bill.
Stein, in _Value Investing_, suggests comparing the dividend yield
with the 90-day Treasury Bill rate. His model is SELL when the
dividend yield is half or less the T-Bill rate, and BUY otherwise.
Based on this model, with the latest 90-day T-Bill rate below 5.8 %,
the market wouldn't be overvalued until the dividend yield goes
below 2.9 %. There's still some room to go, in other words.
By the way, some years back (1988 or 1989), I followed a large
number of stock recommendations based on various models and found
a curious thing with Weiss's recommendations. Her stocks to buy
finished first in my 'contest,' and her stocks to sell finished
second! Geraldine looks only at stocks of quality regardless -
the dividend must have been raised at least 5 times in the past
12 years; at least 5,000,000 shares outstanding; at least 80
institutional ownerships; earnings improved in at least 7 of the
last 12 years; at least 25 years of uninterrupted dividends; and
an S&P ranking of "A" or higher. My guess is that such stocks
will tend to do better than average regardless of whether they
are over or undervalued.
--rb