PODCAST 130
SAFE DIVIDEND INVESTING
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 130, on August 24th of 2023.
My name is Ian Duncan MacDonald. In today’s podcast, I will be answering 5 interesting investment questions.
The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful self-directed investors.
QUESTION ONE
What are client appreciation events that financial advisors hold all about?
Client appreciation nights are a sales expense for the financial advisor that he can write off as a taxable expense. It is perceived by them to be a cost of doing business.
The clients do not recognize that it is their money paying for their wining and dining. The financial advisor is not a friend. There is no free lunch.
Some of the events can be very lavish. The more money you have invested with the investment advisor, the more lavish they can be. I have been invited to the advisor’s yacht club for dinner. Harbor cruises with dinner was another. The ultimate was a long weekend at the advisor’s private island resort in Georgian Bay of Lake Huron every summer.
The resort consisted of a main lodge and several cottages surrounding it. Here he showed off the fine wines that he had bought at auction. Some were incredible.
All the toys were available for the clients. It even included a small hovercraft.
However, when I lost $300,000 in three years, I realized the party was over. I took back what money was left and became a self-directed investor. Our supposedly close friendship evaporated, and I never heard from my advisor again. Our relationship had been bought with my money.
I learned a valuable lesson.
QUESTION TWO
In 2020 you expected to see bankruptcies in the cruise ship industry. What happened?
In depths of the Covid-19 Pandemic in 2020 I expected the cruise ship industry would soon see bankruptcies. The companies were burning through hundreds of millions of dollars in expenses without any offsetting revenues. Cruising vacations had come to a full stop. The ships were docked.
Just prior to Covid-19 one brave analyst at the Canadian Pension Fund had purchased several million shares of Royal Caribbean Cruises Ltd. Since then, its share value had dropped by a billion dollars in the fourth quarter of 2019.
Unlike many government pension funds, which play it safe by investing mainly in bonds and other assets generating fixed returns, the Canadian Pension Fund invests in corporations all over the world. It has had great success managing its half a trillion-dollar fund. Canadian citizens have no fears about their government paid pensions, which that have been paying into since they first started working.
I, in 2020, thought that it could be years before Royal Caribbean Cruises’ shares could exceed their pre-covid value. What crystal ball were analysts looking into when they continued to recommend the three major cruise lines as buys right up until today? What can we learn about investing by looking at the cruise industry over these last 3 years.
When the Canadian government pension fund was questioned on the wisdom of their purchase of Royal Caribbean shares in 2019 they responded, “Capital value is going to fluctuate over time”.
They are right. As long at the pension fund does not sell their depreciated shares, they will technically never take the billion-dollar loss. However, if your objective three years later in 2023 is to invest in financially strong companies, would you consider investing in the cruise industry?
Until COVID-19, investing in cruise lines looked like the safest of investments. Every year their boats were full of more and more baby boomers with the time and money to splurge on the non-essentials of life.
The then $46 billion-dollar cruise industry was dominated by Miami based Carnival Corporation (CCL), Royal Caribbean Cruises Ltd (RCL) and Norwegian Cruise Line Holdings (NCLH). In 2019, these three gave boat rides to 80% of the 26 million cruise passengers in the world. Between them they employed 272,000 in 200 ships.
Interestingly three years later, many stock analysts are still recommending them as a buy. Carnival had 8 analysts recommending it as a buy with another 3 recommending it as a strong buy. Norwegian had 2 analysts recommending it as buy and 2 more who recommended it as a strong buy. Royal Caribbean had no strong buys, but it did have 8 buy recommendations.
These buy recommendations are made without any of these cruise lines yet paying a dividend. Carnival and Royal Caribbean last paid dividends in early 2020.
Only one of them, Royal Caribbean had an operating margin on the positive side. It was 10.54%. Carnival’s operating margin was minus 8.57% and Norwegian was minus 2.69.
All three of their price-to-earnings ratios were on the minus side. With Royal Caribbean’s being the worst at minus 25.9. Norwegian was next at minus 8.3 and Carnival was at minus 5.6.
All three are a long way away from their previous highest prices. Royal Caribbean reached its summit on December 31 of 2019 with a price $133.51. It was at $98.57 on August 21 of 2023. This is not that far off its lowest share price of $96.61 on February 26 of 2020. Still, it has come a long way from where it was in 2009 at $5.69.
Norwegian’s current price of $16.73 is far below its January 2020 price of $57.95 which was below its highest price ever of $63.68 on October 27 of 2015. Its lowest price was $10.01 on April 6 of 2020.
Carnival’s current price of $15.59 is well below its highest price of $69.69 on February 22 of 2018 and below its price of $48.85 when it last paid a fifty-cent dividend in early 2020. Prior to that it had paid a reliable dividend payout as far back as my records went in 1989. Its lowest share price was reached on October 13 of 2022 when the stock was at $7.10.
One of the most important measurements I look at is a stock’s book value compared to its share price. The highest book value of the three stocks is Royal Caribbean with a book value of $11.24 compared to its current share price of $98.57. Carnival is next, with a book value of $5.61 compared to a share price of $15.59. Norwegian is last with a book value of 16 cents compared to a share price of $16.73.
Interestingly the shares of all three are being actively traded. Carnival traded almost 4 million shares on August 21st. Norwegian traded almost 2 million shares, while Royal Caribbean traded only 230,000 shares.
When I scored these 3 stocks using the IDM stock scoring software, Royal Caribbean scored 41, Carnival scored 38 and Norwegian Cruise lines scored 33. I personally avoid stocks scoring under 50. The highest score, out of thousands I have calculated was a 78. The lowest has been an 8. (If anyone wishes to see the eleven-item matrix display for each of these three cruise companies, send me an email and I will email them back to you)
In my last book “New York Stock Exchange’s 106 Best High Dividend Stocks” there were 87 stocks scoring higher than 50. Thirty-nine were scoring higher than 60. With so many strong, profitable, stocks to choose from, I am puzzled as to why, at this time, analysts would be recommending cruise lines as a buy? Is it to cater to the speculative investors who want to believe the cruise lines are diamonds in the rough that will soon generate sudden riches?
If this is as far as the cruise lines have recovered in 3 years, it would seem reasonable to believe that it will be several more years before they recover to their pre covid profitability. The recent media stories circulating that cruises were fully booked and making money is not born out in their financial figures.
Back in the late summer of 2020 I wrote, “Do you find it interesting that despite the pandemic, analysts are rating all these stocks as buys and strong buys? Based on this limited data, did the Canadian pension fund choose the best one to add to their portfolio? Interestingly Royal paid a dividend in April 2020, this appears to be the last dividend they will be paying for the foreseeable future. The other two have not paid dividends this year….
For every pessimistic seller, there must be an optimistic buyer. Those who bought at the recent lowest share prices have already made nice gains. Will the shares continue to climb? The optimists will say yes and buy. The pessimists will take their money and invest in companies that are not contingent on the desire of those able to spend on luxuries like cruise vacations. Uncertain times bring both great opportunities and great risk.”
It shall be interesting in 2026 to see if these three cruise companies have fully recovered. My worse expectation that one of more of them would cease operations has not come to pass. Perhaps, if one of them had ceased operations it would have strengthened the other two and would have sped up their return to profitability. Cruise lines received so much negative press about being “floating Petrie dishes” of infection that is hard to believe they the industry will ever achieve the revenues it had achieved before Covid-19.
QUESTION THREE
Is there such thing as a "best" stock to buy or hold, or is all buying and selling stocks just a matter of luck ?
It is possible to identify financially strong stocks by their operating margins, book value; and long histories of paying ever rising dividends. If you invest in 20 such companies who pay high dividends and keep investing the dividends back into the same 20 stocks you should expect to double your investment in less than 5 years. This isn’t luck. It is safe logical investing. For help in investing this way, go to www.informus.ca
QUESTION FOUR
How much experience should I have before I start investing into the stock market?
This is like asking, how long is a string. Why are you investing in the stock market versus many other possibilities. Perhaps you should read a book like “Income and Wealth from Self-Directed Investing” which will at least warn you what to look out for and give you the basis of identifying good stocks and bad stocks. It is very easy to lose money in the stock market. There are videos, podcasts, blogs and courses that can protect you from losses and those who prey upon the naive and innocent investors.
QUESTION FIVE
I told my financial advisor that I wanted to go from a 1% fee to a flat fee. Why did he not immediately agree to this?
Become a self-directed investor and pay no fee or a nominal fee. Think long and hard about how much the relationship is now costing you and what you are getting out of it. One expert in the financial industry suggests paying more than one quarter of one percent of the value of your portfolio is all anyone should pay.
Your financial advisor is a salesman whose efforts are mostly spent managing his customer base. His investment knowledge and expertise only needs to be a bit better than those he is soliciting.
With little effort to educate yourself, you can do a far better job managing your own portfolio than he is now doing. The time he has available to devote to your portfolio is probably no more than an hour or two in a year. Is the cost of your advisor really worth it?
Also, you most likely were paying more than the 1 percent in hidden charges that you are not aware of. The industry average is 1.83%. If you were investing in mutual funds, it could be significantly more. In a commission arrangement the commission is being split with the financial advisor, his investment company and with a fund manager.
A flat fee makes it harder for the investment advisor to hide how much is being nibbled on by everyone. Even the advisor may have only a vague idea of how much in total is being taken. It is no wonder your advisor needs to think and consult with the others involved about how to convince you to pay a flat fee that would be higher than what you thought you were paying.
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