Morgan Stanley & JP Morgan Expected To Boost Capital Return

One of the reasons we invested in JP Morgan Chase (JPM) and Morgan Stanley (MS) is our belief that they are over capitalized. Their excess capital will eventually be returned to shareholders through buybacks and dividend increases as they continue to pass the Federal Reserve’s Comprehensive Capital and Analysis and Review (CCAR).

Goldman Sachs via Barrons believes that over the next two years we will see the big banks grow their dividends faster than any other group.

These banks will grow their dividends faster than any other sector over the next two years, concludes a recent Goldman Sachs report—once they’re given the green light after the Federal Reserve’s annual Comprehensive Capital and Analysis and Review (CCAR), due shortly.

Richard Ramsden, who heads Goldman’s financials group in global investment research, says: “Banks can grow their dividends by roughly 20% to 25% per year over the next few years, given that both payout ratios and earnings will be growing for the banking system.”

From Barrons. Click image to enlarge.


Big Banks Expected to Boost Payouts

Avoid Companies with CEOs Who Golf Too Much

Malcom Gladwell is back with his second season of Revisionist History. The first episode is A Good Walk Spoiled

In the middle of Los Angeles — a city with some of the most expensive real estate in the world — there are a half a dozen exclusive golf courses, massive expanses dedicated to the pleasure of a privileged few. How do private country clubs afford the property tax on 300 acres of prime Beverly Hills real estate? RH brings in tax assessors, economists, and philosophers to probe the question of the weird obsession among the wealthy with the game of golf.

What does golf have to do with investing?

CEOs Who Golf Too Much

The gem in this podcast starts around 5:35 minutes and continues till 9:19. If you include – and I don’t know why you wouldn’t – the little dig at former Bear Stearns CEO Jimmy Cayne for leaving early on Fridays to play golf while his firm collapsed.

“The more golf a CEO plays, the worst his firm does.”

“The more golf a CEO plays, the more likely he is to be fired.”

Some further reading.

Fore! An Analysis of CEO Shirking

Ron Baron’s Tesla Predictions Versus the Base Rate

On Tuesday Ron Baron appeared on CNBC and made some bold Tesla (TSLA) predictions.

Ron Baron’s Tesla Predictions

To summarize, Ron Baron believes in 2.5 years Tesla will achieve the following.

  • By 2020, Tesla’s share price will be $1,000
  • By 2020, Tesla will have $70 billion in revenue
  • By 2020, Tesla will sell 1 million cars per year
  • By 2020, Tesla will have $10 billion in operating profit

Tesla (TSLA) is already a large holding for Ron Baron and his fund company Baron Asset Management. Tesla’s stock has done well for them since their purchase in 2014. Because of this, Ron is making his predictions from an Inside View.

Sales Growth from the Inside View

Ron is focusing too much on how unique he believes Tesla to be.

This is not to say Ron and his team did not create financial models, develop forecasts for Tesla’s potential total addressable market, and predict Tesla’s future market share.

They did.

But they made their models and assumptions from an Inside view. The Inside View is prone to overly optimistic assumptions and overconfidence in one’s own abilities.

Ron Baron believes Tesla will grow its trailing twelve-month sales from $8.55 billion to $70 billion in 2.5 years. A compound annual growth rate of 131%.

Maybe Tesla achieves this.

But did anyone at Baron Asset Management ask, “In the history of publicly traded companies, across all sizes and industries, how many companies were able to grow their sales at a compound annual growth rate of 131% over 2.5 years?

Sales Growth from the Outside View

Michael Mauboussin and his team at Credit Suisse created the Base Rate Book to help with the outside view. The Base Rate Book addresses our sales questions above.

Sales Base Rate
Table from The Base Rate Book

Only 2.5% of all companies since 1950 have achieved a compound annual growth rate over 45% during a 3-year time span.

I’m willing to bet this rate drops below 1% for a CAGR greater than 100% over 3 years.

An even better Outside View is to see how many companies with sales numbers similar to Tesla’s have achieved a compound annual growth rate greater than 45% for 3 years?

Outside View for $7-12 Billion in Sales

The Base Rate Book also has sales data broken down into smaller cohorts.

Tesla had $8.55 billion in trailing twelve months sales which places it in the $7-12 billion sales cohort.

Base Rate
Table from The Base Rate Book.

Only 0.7% of companies with $7-12 billion in existing sales were able to achieve a compound annual growth rate greater than 45% over 3 years.

Goal of the Fundamental Investor

From the introduction to the Base Rate Book

The objective of a fundamental investor is to find a gap between the financial performance implied by an asset price and the results that will ultimately be revealed. A useful analogy is pari-mutuel betting in horse racing. The odds provide the probability that a horse will win (implied performance) and the running of the race determines the outcome (actual performance). The goal is not to pick the winner of the race but rather the horse that has odds that are mispriced relative to its likelihood of winning.

As a result, investing requires a clear sense of what’s priced in today and possible future results. Today’s stock price, for example, combines a company’s past financial performance with expectations of how the company will perform in the future.[emphasis added]

The fundamental investor needs to compare their Inside View assumptions to the Outside View.

The fundamental investor needs to ask what has happened to other similar companies in this situation. Then determine if the current stock price and its implied assumptions represent a mispriced bet or an overpriced bet?

Is Tesla a Mispriced Bet or an Over Priced Bet?

Tesla’s share price is trading at an all-time high near $380 per share. Tesla’s current market capitalization is $62 billion. This is greater than Ford’s at $44 billion and General Motors’ at $52 billion.

GM Market Cap Chart

GM Market Cap data by YCharts

Ford and GM’s trailing twelve-month revenues are $153 billion and $170 billion respectively. Tesla had $8.5 billion.

GM Revenue (TTM) Chart

GM Revenue (TTM) data by YCharts

Ron Baron is predicting Tesla will grow its sales at a compound annual growth rate of 131% over the next 2.5 years.

Only 0.7% of companies with $7-12 billion in existing sales has ever achieved a CAGR above 45% over 3 years since 1950.

Given Tesla’s current share price, market capitalization, and implied assumptions about its future does Ron Baron’s bet look mispriced or over priced?

Dividend Stock to Avoid: Energizer Holdings (ENR) and the Secular Decline of Alkaline Batteries

Energizer Holdings (ENR) is a well-known consumer brand. The company recently underwent a corporate restructuring, a spin-off. Energizer Holdings current dividend yield is 2% with a payout ratio at 50%. Finally, Energizer recently increased its quarterly dividend by 10%.

Energizer is what we classify as a new dividend payer and given its recent history, it is a company we should be interested in buying. But we’re not.


It starts with this photo.

Old Consumer Electronics in iPhone
Source unknown.

Everything in the photo above and a whole lot more resides in this device.

Click image to enlarge.

All those old consumer electronic devices ran on alkaline batteries. And now your smartphone runs on a rechargeable lithium battery.

The old household battery drawer filled with AA, AAA, C, and D batteries has now been replaced by the drawer full of USB cables.

Alkaline Battery Secular Decline

Because of this, Alkaline batteries are in a secular decline.

Alkaline Battery Decline
Click image to enlarge. From Stephen Saroki’s 2017 Ira Sohn Presentation.

From Energizer Holding’s 2016 10-K we see total battery sales declining too.

Energizer Battery Sales
From 2016 10K.

For the foreseeable future, alkaline batteries will not completely disappear. The argument then is alkaline batteries sales will level out and/or shift into a much slower decline. Especially once the smartphone markets mature. Price increases should help offset future declines in volume.

Given the low capital needs to maintain the battery business Energizer Holdings will continue to produce strong cash flows. Much like tobacco companies and cigarette sales. And now soda companies.

The difference is tobacco companies’ customers are extremely addicted brand loyal to a specific cigarette. Soda drinkers are brand loyal too. Not to the extent of a smoker.

Both products provide a sensory experience for their customers. Batteries do not.

E-Commerce & Brand Value

Before the internet, the smartphone, and the ease to comparison shop traditional advertising made it easy for consumers to pay up for the branded product, “I know this brand. Therefore I trust this brand. I shall buy this brand.”

The ability to comparison shop on the internet and access to other customer reviews have changed this.

Amazon Basics Batteries
From Stephen Saroki’s Ira Sohn 2017 Presentation.

Which battery would you buy?

Both have the same star rating but you get double the batteries for about $2 cheaper with the Amazon Basics brand.

Before the internet and customer reviews, if you saw the same set-up in the store you might assume the Amazon Basics batteries were of lower quality. Now you don’t.

The brand of the battery is less important with consumers today.

Amazon’s Increasing Market Share

The Amazon Basics battery is the leading battery sold online.

Amazon Private Label
From Mary Meeker

Online battery sales account for 2-4% of total battery sales. E-commerce is still in its infancy and rapidly growing. Online battery sales will grow along with e-commerce further hurting the sale of premium branded batteries. Pricing and margins for premium batteries will continue to decline.

Amazon does not make its own batteries. It contracts that out to a battery manufacturer in Asia. Even if that contractor is Energizer Holdings it does not make Energizer a worthwhile investment for a dividend growth investor.

As a private label contractor Energizer is now a price taker instead of a price maker. Amazon will play the other battery manufacturers off each other to get the best deal for its customers. Energizer’s position would be tenuous at best and Energizer would have to keep sacrificing margin to keep the business.


This is all a long-winded way of saying we don’t see the long runway of growth we want in a dividend growth investment.  Energizer’s revenue is not recurring nor highly repeatable. The value of its brand is deteriorating.

Energizer may be able to keep growing its dividend for the next couple of years but we don’t see how Energizer will be able to grow its dividend at above average rates over a long period of time.