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This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

7. Dividends

I typically do not like dividends. There are truly bad companies on the market that use dividends to keep their stock holders satisfied rather than using that money to grow the company and create long-term growth. Also, I buy a stock when its price is growing and sell it when the market is moving against the stock; therefore, I may miss a dividend payout in order to preserve my capital during a market correction. When you become addicted to dividends, you lose the perspective that the company may not be performing adequately or you may be tempted to stay with a stock during a price correction that ultimately erodes your investment cash.

I personally prefer that the company keep its dividend to a minimum and use its cash to grow the company faster. This will cause the stock price to appreciate in the long term. Your investment strategy may be different though.

Even though I don’t make my decisions based on dividends, it is important to understand what the company is doing regarding dividends. The annual report is the communication vehicle for the management of the company to tell you, the owner, how much you will be receiving for your dividend check.

You need to be comfortable with this payout. Is it adequate? Is it hurting the other investments the company could be making? Is it increasing enough to fit your goals?

Here are the links to all 9 posts of the series:

  1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
  2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
  3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
  4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
  5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
  6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
  7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
  8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
  9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)

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Company name Old National Bancorp
Stock ticker ONB
Live stock price [stckqut]ONB[/stckqut]
P/E compared to competitors Fair
MANAGEMENT EXECUTION
Employee productivity Poor
Sales growth Fair
EPS growth Poor
P/E growth Good
EBIT growth Poor
ANALYSIS
Confident Investor Rating Poor
Target stock price (TWCA growth scenario) $13.29
Target stock price (averages with growth) $13.36
Target stock price (averages with no growth) $9.9
Target stock price (manual assumptions) $11.09

“Old National Bancorp (Old National) is a financial holding company. Old
National, through its wholly owned banking subsidiary, Old National Bank,
provides a range of services, including commercial and consumer loan and
depository services, investment and brokerage services, lease financing and
other traditional banking services. Through its non-bank affiliates, it
provides services to supplement the banking business, including fiduciary
and wealth management services, insurance and other financial services. The
Company provides financial services primarily in Indiana, eastern and
southeastern Illinois, and central and western Kentucky. Old National
operates in two segments: community banking and treasury. ”

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

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Company name IBERIABANK Corporation
Stock ticker IBKC
Live stock price [stckqut]IBKC[/stckqut]
P/E compared to competitors Good
MANAGEMENT EXECUTION
Employee productivity Fair
Sales growth Good
EPS growth Good
P/E growth Good
EBIT growth Good
ANALYSIS
Confident Investor Rating Good
Target stock price (TWCA growth scenario) $91
Target stock price (averages with growth) $118.3
Target stock price (averages with no growth) $95.77
Target stock price (manual assumptions) $73.4

“IBERIABANK Corporation (IBERIABANK) is a multi-bank financial holding
company with 209 combined offices, including 136 bank branch offices in
Louisiana, Arkansas, Florida, Alabama, Tennessee, and Texas, 26 title
insurance offices in Arkansas and Louisiana, and mortgage representatives in
47 locations in 12 states. The Company is the holding company for
IBERIABANK, a Louisiana banking corporation, Louisiana; IBERIABANK fsb, a
federal savings bank; Lenders Title Company, an Arkansas-chartered title
insurance and closing services agency and IBERIA Capital Partners LLC, a
corporate finance services firm in formation. The Company offers traditional
commercial bank products and services to its clients. These products and
services include a an array of commercial, consumer, mortgage, and private
banking products and services, cash management, deposit and annuity
products, and investment brokerage services. ”

Confident Investor comments: At this price and at this time, I think that a Confident Investor can confidently invest in this stock.

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This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

3. Inventories

Many companies have varying levels of inventory over the course of the year. Since the Annual Report is always at the same time, it is worthwhile to see how this metric changes from year to year.

Once again, we are not overly concerned with the growth or reduction of inventory. We are more concerned with why it changed or didn’t change. In general, the company needs inventory to level out pricing and supply chain issues but inventory tends to tie up cash. Also, in some industries the inventory may have less value over time if it is not turned adequately.

The easiest way to find information about inventory in the Annual Report is to do a search on the term “inventories” using your search capability in your reader or browser. Once you find the table that shows the increase or decrease, there will be a few paragraphs discussing the metrics. Does it make sense to you? Does it cause you any concerns?

As a very general rule of thumb, the inventory level shouldn’t change much from previous years. If it does change, in general it should be going down. If the inventory is going up relative to the growth of the company’s sales, you should make sure that the management team has an excellent reason for this increase. If the inventory decreases more than 5-10% from its historical values, you should make sure the management has a reason for that change as well.

If you don’t like the reason for the change (or lack of change) in the discussion, this may be a signal to you to get this company out of your portfolio. Inventory levels are often a ‘mine canary’ for problems in the operations of the company. You aren’t a large enough stockholder to call the Chairman and have the problem fixed, so your choice is to continue as a stockholder or sell your holdings. Don’t think about it any more than that simple test.

Here are the links to all 9 posts of the series:

  1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
  2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
  3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
  4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
  5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
  6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
  7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
  8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
  9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)

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Now that BHP [stckqut]BHP[/stckqut] has given up their efforts to acquire Potash [stckqut]POT[/stckqut], I am returning Potash to my Watch List. Potash never stopped being a Good Company but it was difficult to be confident in an investment in the company with BHP in the hunt.

From BHP’s website:

15 November 2010
BHP Billiton (ASX:BHP/LSE:BLT/NYSE:BHP and BBL/JSE:BIL) today announced that it has withdrawn its offer to acquire all of the issued and outstanding common shares of Potash Corporation of Saskatchewan Inc. (“PotashCorp”) (NYSE:POT/TSX:POT) (the “Offer”).

BHP Billiton has determined that the condition of its Offer relating to receipt of a net benefit determination by the Minister of Industry under the Investment Canada Act cannot be satisfied, and accordingly, the Offer has been withdrawn. A total PotashCorp-related transaction cost of approximately US$350 million, of which approximately US$250 million related to the US$45 billion acquisition financing facility, will be recognised as an exceptional item in the December 2010 interim accounts.

BHP Billiton continues to believe its Offer would have resulted in a significant net benefit to Canada, Saskatchewan and New Brunswick. As a package, the proposed undertakings offered by BHP Billiton in a signed, written submission to the Minister of Industry were unparalleled in substance, scope and duration, reflecting the importance of potash to Canada and Saskatchewan. The company had offered to commit to legally-binding undertakings that would have, among other things, increased employment, guaranteed investment and established the company’s global potash headquarters in Saskatoon, Saskatchewan.

The investment commitment included US$450 million on exploration and development over the next five years over and above commitments to spending on the Jansen project. An additional US$370 million would have been spent on infrastructure funds in Saskatchewan and New Brunswick. BHP Billiton would also have applied for a listing on the Toronto Stock Exchange.

In addition, BHP Billiton was prepared to make a unique commitment to forego tax benefits to which it was legally entitled and, as a condition of the Minister’s approval, BHP Billiton was prepared to remain a member of Canpotex for five years. Both of these undertakings were intended to allay any concerns the Province of Saskatchewan may have had regarding potential losses in revenues.

Further, to give the company an even stronger Canadian presence, BHP Billiton undertook to relocate to Saskatchewan and Vancouver over 200 additional jobs from outside Canada. BHP Billiton would have maintained operating employment at PotashCorp’s Canadian mines at current levels for five years and would have increased overall employment at the combined Canadian potash businesses by 15% over the same period. BHP Billiton also made a number of additional undertakings in relation to Saskatchewanian and Canadian participation in senior management roles within the combined potash business, within a new Potash Advisory Board and also on the Board of BHP Billiton.

Local suppliers would have been guaranteed a full and fair opportunity to provide goods and services and BHP Billiton undertook to spend at least US$8 million per annum on community programs, primarily in Saskatchewan and New Brunswick, while raising overall community spending from PotashCorp’s current levels to BHP Billiton’s levels. BHP Billiton also offered to invest in the University of Saskatchewan to create a Mining Centre of Excellence to enhance the province’s mining capabilities and to raise the international profile of both the University and the province.

BHP Billiton was prepared to accept an unprecedented monitoring and compliance regime that would have provided the Government with additional assurances that the undertakings would be complied with, including making available a US$250 million performance bond.

During the investment review process, BHP Billiton engaged extensively with officials from the Investment Review Division of Industry Canada. In view of the reasons underlying the Minister’s interim decision of November 3, the company believes that the Minister of Industry would have required additional undertakings beyond those BHP Billiton had already offered which would have conflicted with BHP Billiton’s business strategy and been counter to creating shareholder value. BHP Billiton Chief Executive Officer Marius Kloppers expressed disappointment at the outcome while emphasising the company’s commitment to Canada and disciplined approach to shareholder value.

“Unfortunately, despite having received all required anti-trust clearances for the Offer, we have not been able to obtain clearance under the Investment Canada Act and have accordingly decided to withdraw the Offer. We remain committed to Canada and we plan to develop a significant presence in the potash industry in Saskatchewan. As part of those plans we will continue to progress our Jansen Project and other development opportunities,” he said.

“Our core business strategy of diversifying our investments across geographies and commodities differentiates us and, more importantly, continues to deliver value to our shareholders and the communities and countries where we operate. We have an unparalleled portfolio of tier one assets, which we believe can sustain decades of increased production. We plan to invest US$15 billion in our global business this financial year and expect our ongoing capital commitment to continue to deliver robust production growth,” Mr Kloppers added.

BHP Billiton also announced its intention to continue the company’s strong track record of returning excess capital to shareholders by reactivating the remaining US$4.2 billion component of its previously suspended US$13.0 billion buy-back program.

BHP Billiton Chairman Jac Nasser said: “The decision to reactivate the buy-back program is entirely consistent with our commitment to maintain an appropriate capital structure while we continue to make substantial investments in our growth projects. BHP Billiton has a strong track record of returning capital to shareholders. From 2005, BHP Billiton has completed buy-backs totalling US$12.7 billion or 11% of issued capital, and has also paid out US$17.9 billion in dividends.”