Dividend Income Stocks: Portfolio Value Update - October 2021
Note that at a 90% debt to capital ratio, the PE ratio drops to 2.75 but the value per share increases to $11.41. For our part we’re trying to share our experiences so that others will follow in our foot steps and we’ll see other companies and experience develop. The first is that the rate at which you borrow will increase as you borrow more, reflecting the higher default risk in the company. In fact, if you are able to continue to borrow money at 4% at higher debt ratios, the PE ratio will continue to drop and the value per share continue to increase as the debt ratio increases. If I were to buy boutiquesin Apple today, I’d make note of my most recent line of resistance (Line G) pricing out at just over $130 a share and my most recent line of support (Line H), which was pricing at around $90 a share. If we get another stock market sell off, this could easily happen. The downside is that you may not find enough companies in a country, especially in a smaller market.
The second is that at a high enough debt level, with high interest rates, the interest expenses may start to exceed your operating income, eliminating the tax benefits of debt. If it is sounds too good to be true, it is, because there are two forces that will start to work against debt, especially as the debt ratio increases. In this post, I will start by looking at debt in isolation but then move to consider the cross effects of cash and debt on PE. The minus is that if stocks are collectively over priced, either at a country or sector level, a pricing comparison will just yield the least over priced stock in the country or sector. Shareholders are probably getting frustrated because the stock doesn't move higher. The benefit is that you have more comparable firms but the danger is that you are ignoring country risk. Compare stocks within a sector are priced globally, but control for country risk: In this last approach, you look at the pricing of companies across a sector but try to control for country risk by looking at differences between how the market is pricing companies in developed markets and emerging markets. You could then compare the PE ratio for the same company to the PE ratio for the Chinese market and decide that it is cheap, because it trades at a lower multiple of earnings than a typical Chinese company.
Compare how stocks within a sector are priced globally: A logical outgrowth of globalization is to compare companies within a sector, even if they are listed in different countries. Compare how stocks within a sector in a country are priced: Rather than compare across all stocks in a market, you could compare stocks within a sector in that market, on the assumption that both country and sector risk are already in the prices. Thus, you could compare the EV/Sales ratios of Brazilian retailers and argue that the retailers that trade at the lowest multiples of revenues are cheapest. Bank of America Corp (BAC) - Bank of America Corporation continues to trade with strength and feel a short term bottom has been made. Lest you feel qualms of sympathy for the losing group in either scenario, remember that most stockholders get a choice (to tender or hold on to the shares) and if they make the wrong choice, they have to live with the consequences. As I have argued in my posts on price versus value, the two approaches can yield divergent numbers and conclusions. The question then becomes one of what subsequent returns were and how much can we rely on ZBT to take action in our portfolios.
