What I Wish I Wrote ~ Mar. 4, 2016

We’re in a world of abundance. Is it leading to too many malinvestments? (The Reformed Broker)

A good breakdown of Berkshire-Hathway’s 2015 from Warren Buffett’s latest annual letter to shareholders. (The Aleph Blog)

Speaking of Berkshire-Hathaway, in 1999 Yahoo! was worth more and 19 other things that actually happened in 1999. (Dividend Reference)

The three paths to outperformance. (Morningstar)

“The most important financial services company you’ve never heard of”. (Intrinsic Investing)

Investing professionals should meditate. (Jason Voss on LinkedIn)

“It’s hard to believe that $65.7 billion of Warren Buffett’s $66 billion net worth came after his 50th birthday”. And other hard truths investors have a hard time wrapping their heads around. (Morgan Housel @ The Motley Fool)

Investing in you self. The 100 things list. (Budgets are Sexy)

How to be frugal and still enjoy life. (Dividend Mantra)

How safe is Chevron’s (CVX) dividend? (The Div-Net)

A bunch of links all focused on Warren Buffett and his recent comments on Berkshire-Hathaway and its portfolio of companies. (Value Investing World)

Lesson learned from Richard Thaler on behavioral economics. (25iq)

Radical investment advice. Do nothing. (Jason Zweig @ WSJ)

Software is the new oil. (AVC)

Book review on Quality Investing: Owning the Best Companies for the Long Term. (Value and Opportunity)

What makes life worth living in the face of death? Try and not to shed a tear after reading the 2nd to last paragraph. (Farnam Street)

AMM Dividend Letter ~ Portfolio Update Chevron (CVX)

We sold Chevron (CVX) in all dividend strategy* portfolios last week. Since we had already sent you two email updates earlier in the week, we held off on an immediate update at the time of the CVX sale to avoid inundating your inbox with another email.

U.S. shale oil and fracking has changed the dynamics of the world’s oil market. The old oil market can best be best explained by The Economist.

Big companies making big bets on big oilfields, while a cartel of oil-producing states fixed the price to keep itself rich and others, including the oil majors, profitable. That, in caricature, was how the oil industry once ran.

With the dramatic increase in shale oil production over the last several years, the U.S. has now become the large swing producer for oil. Shale producers can respond quickly to changes in oil prices by quickly ramping their drilling up or down. Their ability to increase supply when prices are high and decrease production during periods of low prices will likely keep a lid on oil prices for at least the next few years.

Out of the 3 U.S. super major oil companies, we estimate that Chevron has the highest break-even price per barrel of oil (i.e. price required to cover its capital expenditures and dividends) at approximately $80. Anything below this level would likely require the company to take on debt in order to maintain its current dividend. Unfortunately, if oil were to creep back towards $80 a barrel we would expect the shale producers to increase supply thus bringing the price per barrel of oil back below Chevron’s break-even price.

To be clear, we still view Chevron as a quality company. Their estimated production growth is higher than its super major peers, and its downstream operations (refining and marketing) help balance out its earnings during periods of low oil prices. However, as we have discussed in past letters and portfolio updates, we are most interested in building a portfolio of companies that can grow their dividends at above average rates over time.

We expect that the market dynamics of shale oil will prevent Chevron from organically growing their dividend at above average rates for the foreseeable future. While Chevron may be able to increase their dividend through the issuance of debt, we greatly prefer to invest in companies that are growing their dividends through operational cash flow not through increased balance sheet leverage.

As always if you would like to discuss this further, please contact us.

Sincerely,
Your Portfolio Management Team

* Clients with specific restrictions against eliminating CVX, and/or clients with significant taxable gains on their position in CVX may still hold the position.

The opinions expressed in “The AMM Dividend Letter” are those of Gabriel Wisdom, Michael Moore and Glenn Busch and do not necessarily reflect the opinions of American Money Management, LLC (AMM), an SEC registered investment advisor who serves as a portfolio manager to private accounts as well as to mutual funds. Clients of AMM, Mr. Wisdom, Mr. Moore, Mr. Busch, employees of AMM, and mutual funds AMM manages may buy or sell investments mentioned without prior notice. This newsletter should not be considered investment advice and is for educational purposes only. The opinions expressed do not constitute a recommendation to buy or sell securities. Investing involves risks, and you should consult your own investment advisor, attorney, or accountant before investing in anything. Current stock quotes are obtained at http://finance.yahoo.com. Prices are as of the close of the market on the date for which the price is referenced.