Saturday, November 13, 2010

"An observation from Benjamin Graham on finding stock value when markets are up and margins of safety are thin"

Dow Jones Industrial Average 11,192.58  (Down) week ending 11-12-2010

 Benjamin Graham in his landmark investing book "The Intelligent Investor" notes that more money has been lost in the stock market by individuals buying secondary, lower quality company stocks at a value than from buying high quality stocks with a reasonable price premium attached to them when stock markets are at higher levels or have run up.  Such is the situation we find ourselves in today with many of the better quality stocks being sold and purchased with a substantial premium attached to their price.  So one should be cautious stockpicker at this time. One method to increase your odds of success in these times is to buy quality stocks that pay a dividend premium which attached together with their mild growth capital gain, will give you a good overall annual return.

 One such stock that I found this week and purchased with cash in my IRA account was BOARDWALK PIPELINE PARTNERS LP (Symbol BWP, $32.25).  Boardwalk is a partnership that owns 3 interstate gas pipeline systems plus integrated storage facilities. They currently pay a 6.39% dividend annually to the partners. The company operates at almost 25% Net profit margins with annual earnings per share from $1.39 in 2010 to $1.62 per share in 2011. My thinking here is to take the dividend and have the stock rise 10% which is a stock price of $35.50, a mild rise. This will give me a 16.39% annual return in an enviornment where the GDP is only running at 2% , so with only mild inflation risk.

My longtime friend , Michael Rodman, up in the Boston area had told me months ago about this high dividend yielding stock and I just sorta filed it away in my memory banks.  Frontier Communications Corp. (Symbol FTR, $9.00) is the company and it doles out an 8.3% dividend yield . The company is all topsy turvy`right now because of a gigantic aquisition from Verizon of telecom properties thereby tripling the company's size and doubling their debt. Frontier says they can run these propeties alot better and they are probably right. The stock only needs to see a price of $10.00 per share and you have a total return of 18.3% on an annual basis.

 My third pick is right in the middle of the Smartphone and wireless
craze and is very well managed. AT&T Inc. (Symbol T, $28.46) has a tidy dividend that pays 5.9% out of their never ending pile of cash. Amazingly the company has a 5 year sales growth of 24.45% according to the stats in SmartMoney. 17.80 % net profit margins and the company is projected to earn $2.49 per share. I can picture a total return here of 16 -18% with very little downside risk.

 So be careful out there as the captain of your financial ship.  When you are driving through icebergs, don't have the throttle on full speed ahead.
 We all know what happens when you do that!

 Have a good weekend and good luck with your fantasy football team.


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