To market, to market to buy a fat pig. Whilst the looming shutdown in Washington DC and the debt ceiling fight dominates the headlines, seemingly Mr. Market is expecting a resolution, sooner rather than later. Or even at the 11th hour, that is the track record of politicians at the moment. Poor showing really, Eddy Elfenbein in his weekly Crossing Wall Street newsletter suggested the same as I did yesterday, this is painful. In two months time this will have passed, the debt ceiling debate would have been resolved and the US will be then focused on more important issues. Perhaps about corporate tax rates and more importantly repatriation of money to the US. That is a lot more important in the long run than worrying about raising the debt ceiling and ruffling feathers.
Sigh. But we cannot escape this, it is going to dominate the screens in the coming weeks. And because there is going to be major grandstanding, it might, or might not impact on the markets. I have no way of knowing whether this time the market is going to call the politicians bluff. They might get a great kick out of knowing that their actions has a short term impact on markets. Because let us face it, you only go into politics because you have an ego of some sort, regardless of your will to help your fellow humans. Want to help, start a charity. I loved this great piece from a friend of the newsletter, both personal and the business:
The main reason there is a debt limit in the USA is to keep the politicians in check. They are everywhere incomparable in spending someone else's money, especially when it will enhance their chances of getting re-elected or to pass a favour through the congress to subsidise one of their large donors in the field in which his/her business enterprise operates ("pork barrel politics").
And you are right - assets exceed liabilities many times, probably because there is a debt ceiling. The problem is one of cash flow - so often a bankruptcy is caused by the liabilities being current and the assets fixed/unavailable. The fact that the debt is rising so rapidly is because the US economy is trading unprofitably. In 1980 when Ronald Reagan became President, the national debt after 204 years was $2 trillion; now 34 years later it is almost $17 trillion (compound growth per annum 6.5%).
So the big fear is that soon, especially if interest rates rise which seems eminently possible, the USA government will not be able to service the debt and pay for its day to day functions at the same time. And such a scenario will mean increased taxes which is just anathema to American corporations and the 1% in the USA that own 20% of the assets of the country.
The Reagan philosophy of "trickle down economics" - a bigger economy will lead to tax increases that will pay down the increased debt - proved to be a myth. His 8 year administration in the USA is still the only one that managed to triple the USA debt.
That last line is key, the republicans were the ones that tripled the debt of the US under his administration. I found that under his administration the debt ceiling increased an astonishing 18 times. Can I remember (I was too young) whether the stock market sold off or not? No. Does it matter in the long run? Stay long and be calm. At the same time.
I have never been to Beaverton in Oregon, a town of 90 thousand folks not far from Portland. The place is far from the bustling streets of New York (on the other side, the West coast), and most significantly for us in the global HQ of Nike Inc. Why Oregon? Well, that is where founder Phil Knight and Bill Bowerman (Knight's track coach) met, at the University of Oregon which is a fair distance away, but probably not unreachable if you are wearing a pair of Nike Zoom Wildhorse. According to Google maps the distance is 171.8 kilometers, perhaps 4 days of really hard trail running will get you there!!
Phil Knight was a talented middle distance runner and had a 4:10 mile time, that is really good! But more importantly for us, Phil Knight is the founder of Nike, his mate Jeff Johnson, according to Wiki suggested the name change (from Blue Ribbon sports, not a loaf(er) of bread) after the Greek goddess. Carolyn Davidson designed the famous swoosh logo in 1971 and was paid a whopping 35 Dollars for the designs. According to my trusty inflation calculator that translates to 195.71 Dollars in 2012. But don't feel sorry for Carolyn, after the company had listed, Phil Knight was so happy with her design that he gave her a diamond ring (with a swoosh) and a few hundred shares, back in 1983. Some estimates suggest around 500 shares, there have been five 2-1 splits since then. 16 thousand shares? At last evenings closing price that puts her net worth at 1,125,440 Dollars, a diamond ring and quarterly dividends of 3360 Dollars before tax. Well, she did say that they paid what she billed, so the rest as they say is history.
Why all this background about Nike? The company reported last evening after the market had closed and the results sparkled, trumping expectations by a long, long way. Revenues for their first quarter of their 2014 financial year increased 8 percent to 7 billion Dollars, 6.5 billion of that was their Nike brands, Converse (the shoes) makes up the balance of that. Nike have also owned Hurley for 11 years plus. Greater China was a drag on sales growth, North America and Europe delivering the goods! If ever you needed a sign that those geographies are back and that emerging markets are sucking a little wind, I guess sports apparel is a discretionary purchase. Sales are still skewed to footwear, which is 3,979 billion of total sales, apparel is a little over 2 billion with 434 million Dollars worth of equipment. EBIT topped 1 billion Dollars, increasing over 30 percent. Importantly as well gross margins increased 120 basis points to 44.9 percent.
But that is not what you really want to know, right? That is all very nice that the company is increasing margins, growing their top line at comfortably above inflation and continuing to attract newer customers as well as wowing their existing clients like me. I for one prefer their running shoes. They are nothing short of fabulous. But the business is more than fine products, I think that in the last annual report, the CEO Mark Parker summed it up well:
Sports and athletes. Innovation. Technology. Performance. Strategy. Sustainability. Speed. Culture. Investment. Passion. Community. These are the elements of our success and our potential. And none of them are static. How well we balance these elements - embrace, develop and leverage them - that is the art of growth. And we grow more skilled in that art every year.
Michael over the desk said something interesting, at least their product is not considered bad for your health, the converse in fact. Converse? Get it? Weak. Sorry. And the fact that their market continues to grow, fitness is for richer people. An association with a football team or brand is far bigger nowadays than it ever was. If I want to associate myself with a specific football team I can do so today, by buying their official merchandise at the Sportsmans Warehouse. You would be surprised that Nike sponsors only 6 English teams, including Manchester City and United, as well as Arsenal (sigh, poor fans cant appreciate a wonderful manager) and Everton. In Spain it is Barca and Atletico Madrid amongst the majors. They are however the official balls across the leagues.
Manchester United alone has 35.3 million likes (followers) on Facebook and over 1 million followers on Facebook, 332 thousand followers on Instagram. And all those people have or want a new football jersey. Manchester United reckon that 659 million people are "followers" globally. Their website has 62 million hits a month.
I think that what I am trying to point out is that the future is bright for Nike in official merchandise apparel (more middle income people wanting football jerseys and the like) as well as fitness levels continuing to pick up globally. Weight loss, child obesity, living longer and exercising into your golden years, as well as looking good whilst doing it. Innovation in exercise, Nike are at the forefront of that technology, leaders. Nike remains inside one of our core investment themes, aspirational consumerism, and we continue to add. The stock is expected to pop at the open and trade around the 75 Dollar level, on a forward multiple (2014) of 21 times earnings. Hardly cheap at these levels, but the earnings momentum should continue to see the company grow more aggressively here as sales in the developed world continue to pick up, and sales in the developing world stabilize and pick up.
Michael's musings! Ask what dividends can do for you!
To add to my piece from yesterday about not selling shares unless their future prospects turn for the worse or if you are using the proceeds to go on holiday. Sometimes the argument to sell is because one stock has gone up too much (nice problem) resulting in the portfolio being unbalanced.
A way to solve this is to use dividends from your holds to diversify your portfolio. By reinvesting dividends the costs of rotating are avoided and it means that a winning share is not being sold. Let us assume that we have a R1 000 000 portfolio, and a 2.5% dividend (after dividend tax) in the first year and then going forward, we use a dividend cover ratio of 3. A dividend cover ratio is the EPS/DPS, where a ratio greater than 2 is considered cautious, so a ratio of 3 is a very cautious ratio and would normally be linked to a growth stock were management prefer to reinvest cash, instead of paying it out. Assuming then that EPS grow at 15%, which works out to growth of less than 10% after inflation is taken off, making it not very aggressive growth. Taking all these assumptions into consideration, after 4 years the dividend only portfolio will be worth about R270 000.
The scenario shows that in a relatively short period of time, it is possible to diversify a portfolio by just using dividend flow. Another thing that the portfolio shows (more importantly in my opinion) is the impact of reinvesting dividends on the long term portfolio value. The safest and surest way to grow a small amount of money into a large amount of money is through compound interest, and in the case of the equity market it is through the reinvesting of dividends. So to summarise the last two pieces, don't sell a stock unless its' long term future has changed, and reinvest dividends.
Home again, home again, jiggety-jog. Markets are lower across Europe, we are being buoyed a little by the weaker Rand here. Worries in Italy about the ruling coalition. Yes, really. If you needed to be reminded, Italy has changed government over 60 times since World War II. Only one government in Italy has gone the full five years, according to my reading. So why get anxious about something that changes all the time anyhow?
Sasha Naryshkine and Michael Treherne
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