Twitter to Score Ultimate World Cup Win

, I’m the CEO of CultureBanx, redefining business news for minorities. Opinions expressed by Forbes Contributors are their own.
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MOSCOW, RUSSIA – JUNE 19: Moussa Wague of Senegal is challenged by Kamil Grosicki of Poland during the 2018 FIFA World Cup Russia group H match between Poland and Senegal at Spartak Stadium on June 19, 2018 in Moscow, Russia. (Photo by Catherine Ivill/Getty Images)

Sports fans often use Twitter to follow and discuss live sporting events. A lot has changed on the platform since the last World Cup. Primarily the addition of video, along with a users ability to discover content that’s relevant to their interests. Will Twitter’s bottom line be the actual World Cup winner?

The Breakdown You Need to Know: The 2014 World Cup boosted Twitter’s second-quarter revenue by $24 million, according to MKM Partners. Some analysts predict this year’s event will be worth more and can affect results for the second and third quarters. Black U.S. adults could play a big role in this since they use Twitter more than any other ethnic group at 26%, according to Pew Research.

Since the last World Cup shares of Twitter are up 24% and currently trading near three-year highs. At this point the company has a more refined platform and strategy, which means the event could deliver an even larger boost this time around.

Twitter has exhibited its ability to shape global events and its head of content Kay Madati is helping make video profitable for the company. Madati recently announced 30 new video content partnerships. The 2018 World Cup is likely to spur even more user engagement which should translate into more ad revenue. Video ad spending at Twitter is set to total $18 billion in 2018, according to eMarketer.

CultureBanx research took a look back at past major live sporting events and their impact on Twitter’s engagement. There were 672 million tweets during the 2014 FIFA World Cup. Also, there were 45 million tweets during Super Bowl 2018 including 4.8 billion impressions. Lastly, the 2017-18 College Football season garnered 33 million tweets along with 4.9 billion impressions.

Through the social media giant’s deal with Fox Sports, the network will provide next to real-time highlights of every goal scored throughout the competition. Also, Fox Sports will produce both pre-game shows along with clips including player interviews. “Video is a major area of strength for Twitter, already driving more than half of the company’s total ad revenue,” wrote JP Morgan analyst Doug Anmuth.

The company now has 69 million monthly users in the U.S. and 267 million abroad. Of course the international nature of the event should help aid further penetration in some overseas markets. International now represents 48% of Twitter’s ad sales versus just 33% four years ago. It’s important to be aware that advertisers typically spend more to reach users in the U.S., compared with international markets particularly in developing areas.

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Fortnite's Stink Bombs Do Some Pretty Serious Damage

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, I write about video games and technology. Opinions expressed by Forbes Contributors are their own.

Credit: Epic Games

Fortnite: Battle Royale’s new stink bombs.

Fortnite got a new weapon today, and while that’s a sentence you can write just about every other week, this week’s feels like it might actually have the potential to change the way the game is played. The stink bomb went live today, and it’s basically a cute name for mustard gas: a brutal, yellowish cloud that forms sulfuric acid in your lungs and melts you from the inside. Despite the aesthetic similarities, Epic want sto be sure that you know the stink bomb is not that. Regardless, it’s just as brutal. Damage was a major question when the stink bomb first released, and I can assure you: the thing hurts.

Like most players, my first experience with the legendary-tier stink bomb was on the receiving end. I was playing squads without teammates because I was getting some challenges done and I find they’re easier in squads. So I was already at a steep disadvantage when I came across three opponents by the indoor soccer stadium. Regardless, I built my little 1X1 fort and took aim, like you do. I was immediately pelted by at least two stink bombs, rendering my fort completely unusable. I did the only thing that I could do and hopped out, where I was immediately shotgunned by the players that had been using the stink as a cover for an approach.

The stink here does 5 damage every half-second for 9 seconds for a total of 9 seconds, which is just under what it takes to kill an opponent at full health. Despite the two grenades, the damage I received did not appear to stack, meaning I still only received the five damage per half second. Regardless, that was enough to make my life very unpleasant. It means that if I were to have stayed put it would only have taken 10 health damage to put me down for good.

I’d expect this to change the game in interesting ways. Right now, explosives and wild firing are the only real area control methods, and neither does so as effectively as the stink bomb. It could really change the way the early moments of an encounter go if one player is able to scare the other out of their fort without losing access to theirs. I’m interested to see what this looks like at the higher levels.

Even After Multiple Cyberattacks, Many Businesses Fail to Bolster Security. Here's What You Need to Do

Small businesses suffered a barrage of computer invasions last year but most took no action to shore up their security afterward, according to a survey by insurer Hiscox.

It found that 47 percent of small businesses reported that they had one attack in 2017, and 44 percent said they had two to four attacks.

The invasions included ransomware, which makes a computer’s files unusable unless the device’s user or owner pays a ransom, and phishing, in which emails that look legitimate are used to steals information. The invasions also include what are called drive-by attacks, which infect websites and in turn the computers that visit them.

Despite the prevalence of the data invasions, only about half of small businesses said they had a clear cybersecurity strategy, the report found. And nearly two-thirds said they didn’t bolster their security after an attack.

Hiscox estimates that seven out of 10 businesses aren’t prepared to handle cyber attacks, although they can cost a company thousands of dollars or more and ransomware can shut down operations. Cybersecurity tends to get pushed to the back burner while owners are busy developing products and services and working with clients and employees. Or owners may see it as an expense they can’t afford right now.

Some basic cybersecurity advice:

–Back up all of a company’s data securely. This means paying for a service that keeps a duplicate of all files on an ongoing basis. The best backups keep creating versions of a company’s files that can be accessed in the event of ransomware — eliminating the need to pay data thieves. Some backups cost just a few hundred dollars a year.

–Install software that searches for and immobilizes viruses, malware and other harmful programs. Also install firewalls and data encryption programs.

–Make sure you have all the updates and patches for your operating systems for all your devices. They often include security programs.

–If you have a website, learn how to protect it from hackers, using software including firewalls. But you might be better off hiring a service that will monitor your site with sophisticated tools that detect and disable intruders.

–Tell your staffers, and keep reminding them, about the dangers of clicking on links or attachments in emails unless they’re completely sure the emails are from a legitimate source. Educate your employees about phishing attacks and the tricks they use. Phishers are becoming increasingly sophisticated and are creating emails that look like they really could have come from your bank or a company you do business with.

–Hire an information technology consultant who will regularly look at your systems to be sure you have the tools you need to keep your data safe.

–The Associated Press

The Surprising Economic Benefits of Clean Energy

It seems to be a common misconception that environmentalism and economic growth are opposed, but nothing could be further from the truth. The economic power of the green movement is most visibly on display in the clean energy industry, which is rapidly growing and innovating daily.

Clean energy impacts residential, commercial, and industrial properties, so how it is supported and implemented is key to how it impacts both the planet and the economy. Here’s a look at programs that support the development and expansion of clean energy, as well as how clean energy is being integrated with our infrastructure today.

How clean energy impacts businesses

Clean energy might not seem, on its surface, like a business issue for anyone outside of the renewables industry. However, on the contrary, it is a powerful cost-cutting measure that carries with it a huge branding opportunity. Not only can businesses save money by harnessing the power of sun, air, or sea, but they can also demonstrate to a consumer base eager for corporate social responsibility that they care about their environmental impact.

Those benefits are driving adoption by more companies. In 2017, companies acquired more than 4 gigawatts of clean energy, the most of any year on record. And already in 2018 companies have acquired nearly three quarters of last year’s total, putting them on pace to easily surpass 2017’s record-breaking acquisitions of clean energy.

Adoption rates also mean that the branding advantage presented by the opportunity to shift to clean energy will soon turn into an imperative. Changing now means companies are responsible kids on the block, but waiting until later means they run the risk of looking like a lackadaisical polluter. As clean energy becomes more ubiquitous, it will be expected, rather than applauded. Large adopters are clearing the way for smaller companies, and clean energy is moving toward something that feels more like mass adoption.

Regulatory support for clean energy

In 2015, the White House established new Property Assessed Clean Energy (PACE) guidelines through the Federal Housing Administration that should help scale up adoption of clean energy. PACE enables low-cost, long-term financing for a variety of energy efficiency, renewable energy, water conservation, storm protection, and seismic improvements. PACE financing is repaid as a special assessment or tax on the property’s regular tax bill and is processed the same way as other local public benefit assessments like sidewalks and sewers.

Depending on where you live, PACE financing can be used for improvements on commercial, residential, nonprofit, light industrial and agricultural properties. PACE is designed to lower utility bills for homeowners, create jobs and help local governments achieve important environmental goals (although it hasn’t been without its opponents).

Real world implementation of clean energy

Technological development and theory are great things, but they are nothing without real action. How we implement clean energy and the market conditions surrounding it are the most important aspects of transforming the way we obtain our energy.

A number of companies use earth-friendly practices and products to provide the homeowner with energy saving solutions, offering qualifiable PACE improvements and upgrades that can be made to a home or business. Many work with financing companies like Renew Financial, a clean-energy finance company led by CEO Cisco DeVries, the innovator of the PACE finance model, to provide solutions that aim to keep the immediate environment clean and reduce energy waste and costs.

Environmental resiliency is certainly an issue across the country. In Florida in particular, homeowners are concerned due to the risks of flooding, hurricanes, and extreme heat.

One company, Evergreen Homes, says it’s seeing an increase in requests for critical property upgrades such as roofing, wind-resistant windows and other energy-efficiency improvements. CEO Ido Stern says it provides customers with a number of options “to make much-needed weatherization and energy improvements that make their properties hurricane safe, and comparable with new construction, while at the same time saving them money and increasing their property values.”

Every dollar saved by the implementation of green solutions and clean, renewable energies is a dollar that can be used in the local economy, boosting growth and improving the business environment. In this way, economic growth and environmental progress go hand in hand. So, the next time someone says you have to degrade the environment to make money, remember that a large sector of the American economy is driven by finding business solutions to critical environmental problems.

SA Interview: Focusing On The Numbers, Not Just The Story, With Peter Kaye

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Peter Kaye is an analyst at an investment advisor with >$1B AUM. He has completed all three levels of the CFA program. He primarily focuses on value and GARP strategies. We emailed with Peter about how to take advantage of a deal break and mispricing when investors write off an entire country as well as how (and why) investors can “shadow” a hedge fund manager’s portfolio.

Seeking Alpha: Can you discuss how (and why) investors can incorporate actual numbers into their investing rather than solely qualitative arguments? Can you give an example?

Peter Kaye: Good question. I find a lot of people get very attached to a story rather than actually looking at the numbers. I like using Microsoft (NASDAQ:MSFT) or Cisco (NASDAQ:CSCO) during the tech bubble as examples. Microsoft, for instance, is one of the best businesses ever: dominant position in software, very high switching costs, very high margins and tons of free cash flow the company can use to either buy back shares or reinvest in the business. It made a great story as well: software was (and is) eating the world, and there was the potential for multiple decades of growth ahead of the company.

That’s all well and good, but look what happened if you’d bought shares in 1999: you wouldn’t have broken even for 16 years (this is why numbers matter)! The simple fact at the time is that the shares were pricing in a perfect future. One can actually perform a fun exercise with some of the companies in the tech bubble where you put yourself in 1999, and run a DCF on the company you’re looking at using the company’s actual free cash flow that they generated over the next 18 years. You can see how far the valuation of many companies strayed from their intrinsic value during that time, and it really makes you think about the high flyers today.

Investing is all about probabilities because the future is inherently uncertain. The reason that value investing works, over time, is that low expectations are just easier to beat. Cheap companies either have management work hard to stop being cheap, or another company comes in and does an acquisition, or the business improves on its own. There are multiple ways to win there, whereas for a company whose intrinsic value is completely reliant on future cash flows that need to grow a lot, there are a lot of ways for that company to disappoint.

As to how investors can incorporate numbers? Always ask for proof of a qualitative claim, and always remember that the price you pay (relative to value) is the greatest determinant of long-run returns. In order to figure out the value, you need to run some numbers.

SA: The phrase “this is priced into the stock” gets thrown around a lot – how do you determine what is (or is not) priced in? Are there specific factors or examples?

PK: My own personal way to check this is to run a simple DCF of the company. The idea is simply that, similar to a bond or any other financial asset, the value of a company is the present value of the free cash flow it generates over time. This is true simply because of math: if you buy a company for $1 and it generates $2 of FCF for a year, your return will mathematically be 100%. You’ll probably never find 100% free cash flow yields anywhere, but the principal is the same (higher free cash flow, now or in the future, means higher returns). This is why looking at free cash flow (and numbers!) matters.

Let’s say a company has sales growth of 5% and generates 10% free cash flow margins. Let’s assume that continues forever, and run a DCF using those assumptions. If that results in a stock price of $100 and the current price is $50, then we can say the market is pricing in significantly worse results, and we can then delve into why that is. The model may well be wrong, and the market might be right, but now at least you have some questions to ask and research to do.

The process works the other way as well: if the stock price is $100 and the DCF gets us to $50, then the market is pricing in either faster sales growth or much better margins, and we can then delve into why that might be and whether those assumptions are realistic.

I’ll walk through a simple example.

I know that analog semiconductor businesses should grow at 1.5x to 2x GDP due to increased technological content in pretty much everything around the world. GDP growth around the world is expected to be between 2 to 3% over the long run, so we know that at the low end, analog businesses should grow sales at 1.5 x 2% = 3%.

I know that analog semiconductor businesses have high barriers to entry and it’s a pretty consolidated industry, so margins tend to be quite high, with Texas Instruments having the highest margins due to scale (semiconductors are basically a manufacturing business so economies of scale are an important part of the business). A company like NXPI has averaged roughly 20% free cash flow margins, and that’s a little lower than some other larger names, and higher than smaller names, so that fits with the scale dynamics I discussed earlier.

So we can put the two together: grow sales at 3%, and slap a 20% free cash flow margin on it, and whatever value that gives us is sort of a floor valuation for a long-term investor. In NXPI’s case, this results in a valuation of about $98 per share using a 9% discount rate.

Now what can go right here? GDP growth could be faster. Analog businesses could grow at 2x GDP instead of 1.5x. Margins could increase as the business grows. So there are multiple sources of upside to this value that I can quantify if I choose to, but I can simply say they’re “free” upside if the stock price is trading below my conservative estimate of fair value.

After going through the above analysis, I can say that what is “priced in” to NXPI is a darker future than what I believe will happen over the long term (say 5 to 10 years).

SA: In your bullish thesis on Workiva (NYSE:WK) you said “A SaaS business is effectively a business where each customer is like a bond” – can you unpack that thought process? How can investors in SaaS companies determine if their “bond” will default or is AAA?

PK: As I said above, the value of any financial asset is the present value of the free cash flow it generates. The same is true of a customer! For most businesses, there is only one cash flow: a single sale. For a SaaS business, with recurring revenues, there is a cash flow stream, and we can value that stream. Each customer brings in revenue, and there are COGS to expense, and the net of the two is the cash flow per customer. If we see that the company has customer retention of say 80%, then we know that the average customer life is 1/(1-0.8) or 5 years.

We can then compare that to the cost to acquire that customer to see whether the business makes sense. In Workiva’s example, the company earns a lot from customers, and it doesn’t cost them too much relative to what they earn, to go acquire them. Thus, it makes sense for Workiva to spend as much as possible acquiring all these customer “bonds” and sitting on them. This dynamic is why it can make a lot of sense for growing SaaS businesses to actually post operating losses as they grow: they’re investing in getting highly profitable customers!

One can look at the customer retention rate to see the likelihood of “default”, but it’s a difficult thing to really measure. Lots of factors weigh on it like switching costs, customer service, competitors’ products etc. One has to just make a best guess as to how happy the customers are and how long they’ll stay with the company. If the company’s customer retention rate has been high historically (and there aren’t a bunch of customers on free or discounted software…) then that should give some confidence that customer life will be decently long.

SA: Can you discuss how an actual or expected deal break can be a potential long idea?

PK: Deals are usually bought by M&A arbitrage funds who attempt to profit from the spread that deals trade at. The problem is that when a deal fails, these funds have to sell the stock. For widely held deals, or illiquid stocks, this can create a huge wave of technically motivated selling that has nothing to do with the fundamentals of the company.

I start licking my lips when I see things like this happen: the best thing to be in the whole world to me is a buyer from a forced seller. When people have to sell, they make dumb emotional decisions, and that’s where an investor with a little patience can profit!

The other advantage of a broken deal is that you can see where, roughly, the private market values the company. If a strategic acquirer was perfectly willing to pay $100, but the deal failed because of regulatory reasons or financial reasons, then you can make a decent guess that the business is probably worth around $100 to a strategic acquirer.

That doesn’t, of course, mean you should rush out and buy the company. The deal might fail for a lot of different reasons, and the case might be that it’s just a bad company with a declining business. You always have to do your homework, and establish what you think the intrinsic value of the business is before you buy it.

I would say that companies like Monsanto (NYSE:MON) or NXP Semiconductors, if their deals fail, would be great examples of businesses that are fundamentally sound, have interesting growth drivers, and would likely trade off severely due to forced selling because there are a lot of arb funds in those names. I do hold NXP, and I bought Monsanto when it traded way off earlier this year to ~$115 which is what I estimate fair value is for the company as a standalone.

I would say as a closing comment that this same “forced seller” dynamic is why spinoffs tend to be fertile grounds to look: large investors might receive some shares in a small company that is too much of a hassle to worry about, so they sell immediately regardless of whether that is a financially prudent decision.

SA: One of your best calls was on Polaris Infrastructure (OTCPK:RAMPF) – can you discuss how opportunities are created when investors write off an entire country as being uninvestable or too complicated to analyze?

PK: Polaris was a company that went bankrupt, and actually had a lot of forced sellers in it. The bondholders got converted into equity, and then had to sell as holding equity was outside the mandate of their funds. This caused the price to decline from about $10 CAD after the restructuring to about $6.50 or so when I started covering it. It was clear that the asset was very good and that the problem had simply been a financing one.

One seemingly big risk of course was that the company’s only producing asset was located in Nicaragua, which is a bit of a scary place for western investors.

My dad was a corporate banker for 27 years without a single loan loss, which is pretty impressive in my view. He lent to some of British Columbia’s biggest corporations, including a number of our large mining companies, and he saw first hand that country risk is real. Investors like to discount politics, but it can play a huge role in everything from changing tax rates to a government effectively nationalizing a project.

Because of this, it’s pretty critical to spend some time evaluating the politics of a country and its history and culture to try and figure out what’s really going on. The nice thing about humans is that no matter where they’re from, they respond to incentives, so it’s really figuring out what their incentives are.

In the case of Nicaragua, the thing that stood out to me was that it was 100% in their national security interest to stop relying on oil, and start generating domestic renewable energy. They don’t have the engineering or the capital to do this, and so it seemed unlikely to me that at this relatively early stage in their development, Nicaragua would choose to shoot itself in the foot and start nationalizing projects (which would then scare off foreign capital).

That being said, Polaris will always (at least until it gets an asset somewhere else) trade at a discount to peers with safer assets. Investors should expect higher returns from a company with assets in Nicaragua vs. a company with assets in the US or Canada. For that reason, Polaris is not my largest position: there is a chance, however small, that they could see 100% of the value of the company wiped out if Nicaragua chooses to nationalize their asset.

Indeed, right now we are seeing the cost of being in Nicaragua for Polaris as the shares have sold off due to extreme levels of political unrest in the country. For the time being, I don’t see how this unrest will impact the company: people still need electricity, and their customer is a large state utility. Where this could get ugly is if the current dictator’s government falls, and the new government embarks on a radical bout of political changes.

I think this selloff in Polaris shares is overdone, but I can certainly empathize with it. I have no concrete answer as to what the country will look like in a year, and that certainly highlights the risks in investing in emerging markets. That being said, long term I expect the company to do just fine.

More broadly, I think that unless investors have some special on the ground knowledge, they should take a dim view of many geographies. 90% of the time, investments in places like Russia or Egypt or Iraq can work out, but 10% of the time, you lose everything or close to it. That risk of permanent capital loss means that a company in a risky geography should probably be weighted in such a way as to allow for the investor to stomach losing 100% of what they put in.

So in summary, I would say that countries don’t necessarily present opportunities; individual companies present the opportunity. It’s more that investors need to pay very close attention to the risks involved, and I would say that as a political science major, most people discount politics a little too much.

SA: How, when, and why can investors “shadow” a hedge fund manager’s portfolio rather than invest directly?

PK: Great question. I think other smart investors are the best source of investment ideas, period. I follow a lot of managers from Bill Ackman (despite his recent terrible performance) to Allan Mecham at Arlington Value. These guys (and I follow maybe 30 to 40 different managers) are my filter. I don’t shadow a single manager’s portfolio, I take what I think are the best ideas from all of them!

If you think about it mathematically, here’s why it saves a ton of time. Each manager has a number of analysts, and each manager might have a universe of 500 stocks they know well. There will be some overlap of course, but even with 50% overlap, that still means a universe of 250 x 40 = 10,000 stocks around the world that they’re looking at. They then do the work and pick the best ideas and stick those in their portfolios.

I then look at those portfolios, and let’s say there’re 30 stocks in each, that means 30 x 40 = 1200 stocks, but often there’s some overlap, so say it’s 600 stocks. 600 stocks are enough to keep me busy for a while, but these managers have gone the extra step and done the screening of the 10,000 names for me, which saves a ton of time. They’re all smart people, so I trust that the stocks in their portfolios are on average pretty good.

I then look at their position sizing and when they added them, and I try and focus on the largest one, or the ones they’re adding to, reason being that I want to look more closely at their higher conviction names or the ones they think are undervalued now. So let’s say that gets you to 100 names, that’s still a lot of due diligence to do to narrow that down to 20 or 30 to stick in your own portfolio.

The reason you don’t shadow blindly is that often managers are wrong. I knew that Bill Ackman going into Valeant was wrong, and I thought he was way too early in Chipotle (NYSE:CMG). Einhorn’s investment in AerCap (NYSE:AER) is not one I would have made, just because I don’t really like that sort of financial/capital intensive business generally. For each name I put in my own portfolio, I conduct my normal due diligence and do my own valuation so that I am fully comfortable with what I own and I can trade it myself rather than relying on other people to think for me.

So as you can see, I would only use other managers as a filter; you still have to do all the work yourself before you actually invest.

I would also point out that there is no shame to looking to others to find ideas. As a great example of this, in The Big Short, many of the investors who foresaw the crisis heard about the short housing trade from Greg Lippman at Deutsche Bank, and then did their own due diligence and entered the trade.

Many others who were not profiled in the book but made money on the theme, likely heard about it from friends or other fund managers in the industry. This is a great case of how one of the best trades of all time didn’t have to be your idea, you just had to be listening to other smart people.

Some of my top ideas right now including NXPI (Elliot Management), TripAdvisor (NASDAQ:TRIP) (GreenWood, Greenhaven Road, PenderFund Capital), Workiva (Pat Dorsey), Polaris (PenderFund Capital), EnviroStar (NYSEMKT:EVI) (Greenhaven Road), Rolls Royce (OTCPK:RYCEF) (ValueAct) and many of my other best ideas in the past were sourced from people I admired in the industry.

SA: What’s one of your highest conviction ideas right now?

PK: Aside from NXPI or Workiva, I have two high conviction ideas.


I have a fairly sizable investment in TripAdvisor, which jumped 20% after earnings (a great example of what happens when expectations are non-existent!). The basic thesis here is pretty simple actually. The company has two businesses, the core hotel review business and a non-hotel attractions business, and the market isn’t really getting what’s actually going on with them.

The hotel business has been declining for a few years, in no small part because people are switching to mobile and mobile monetized at like 20% the rate of desktop. This business is coming close to an inflection point, however, because 1) at some point mathematically mobile dollars start growing faster than desktop dollars shrink and; 2) monetization of mobile is now close to 50% of desktop. The two forces mean that soon, I expect, the hotel business will start posting decent growth numbers again.

There is another advantage to the hotel business’ move to mobile which is that it greatly lessens the power of Google over TRIP. TRIP’s users are very loyal and so if TRIP can keep them on the app it means lower marketing spending and better margins and also a greatly reduced competitive threat.

The non hotel business, which allows you to look up and book attractions and restaurants, is growing gangbusters at 30 to 40% a year, and is rapidly becoming a much larger part of TRIP’s business. We can look at the price that OpenTable was sold to Priceline (now for, and see that this business is quite valuable.

Finally, TRIP has hundreds of visitors and collects huge amounts of data which is valuable to somebody. The company is largely controlled by Liberty Media (LMCB). This creates a very nice floor on the stock’s valuation as if TRIP gets too cheap, it’s likely to be sold at a premium.

So the result is a business whose financials obscure what are actually decent trends within its business (and recall that TRIP is a very high margin business, so additional revenue drops almost entirely to the bottom line). Either the company is sold, or it resumes growth and we should see both improved financials and a good degree of multiple expansion in the stock.

Some of that multiple expansion has already taken place. TrirAdvisor was very heavily shorted and what we’ve seen in recent weeks has likely been driven, at least in part, by short sellers covering. I think over the long term we still have a lot of growth for TripAdvisor as their market is growing strongly and their margins should greatly expand as the business scales. While shares aren’t as cheap as they were at $30, I think for someone with a long term time horizon they still represent attractive value.

I’d note that a lot of people think TRIP and Trivago (NASDAQ:TRVG) are the same thing, and whenever Trivago misses earnings people sell off TRIP. Trivago is a mess (I’ve been short the stock as a hedge for TRIP actually) where they are simply buying customers using expensive TV ads. They don’t have the same market power, user base, customer loyalty, shareholder base, or even the economics of TRIP. Google and are likely to crush Trivago and I think it’s a terminal short.


My second high conviction idea is Enbridge (NYSE:ENB), which is the largest energy infrastructure company in North America. The company pays a 6.5%+ dividend (so you get paid for patience) and management has targeted 10% growth in the dividend for the next few years. The company has come under fire recently as interest rates have risen and they’ve faced some political headwinds (a FERC ruling and some opposition to their large Line 3 project), and shares have cratered. There’re also concerns about leverage.

What the market is missing I think is that ENB placed a lot of assets into service last year that haven’t really showed up in the financials yet, and they’re going to do the same this year (of their $22 billion backlog, more than half will be placed in service between last year and this year). The street is also bad at modelling the company as they acquired Spectra Energy and many banks didn’t cover both. What they miss is that Spectra’s Q1 is very strong and last year, ENB hadn’t closed the acquisition until the end of Q1, so you don’t see that strength in Enbridge’s financials.

I think that the market is going to see that the fundamentals of the company are very good, and that they’re going to be able to pay down debt quicker than the market believes (though still more slowly than what ENB was promising after Spectra closed). They are also going to sell some assets to fund their growth, which isn’t a net positive really but it does show that the company has a lot of levers to pull in order to deliver on that growth.

ENB also has a very complex corporate structure, and the plus of the recent FERC ruling is that ENB is more likely to simplify that structure, which should make investors more comfortable with the company.

I think today’s current valuation builds in room for rates to go up to about 4% on the US 10 year, so there’s some margin of safety in the valuation. I think that as debt gets paid down over the next 5 years, you’ll see some multiple expansion as the company de-risks the balance sheet. This sort of setup is a little private equity style: buy something cheap, pay down the debt, and earn good levered IRRs. Because ENB’s assets are regulated, and now with oil at $70, I think there’s very little operational or asset risk here, it’s almost entirely a debt paydown story.

I would caution, though, that pipelines rely on the capital markets to fund growth, and that can create some problems: lower growth means lower valuations, which means growth gets harder to execute because you have fewer financial options. Growth being harder means the potential for further valuation declines, and the cycle continues. Thus, while I have high conviction on ENB, I think investors should size it appropriately in case things continue to go downhill. Every time I’ve had a blow-up, it’s been due to leverage, so I’m very careful to size these sorts of positions carefully.


Thanks to Peter for the interview. If you’d like to check out or follow his work, you can find the profile here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Check with individual articles or authors mentioned for their positions. Peter Kaye is long NXPI, WK, RAMPF, TRIP, MON, ENB, EVI, RYCEF and short TRVG.

Daymond John: How I Learned to Be a Leader

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Gold Bullish On Fed Hike 3

Gold weathered the Federal Reserve’s 7th rate hike of this cycle this week. Gold-futures speculators and to a lesser extent gold investors have long feared Fed rate hikes, selling ahead of them. Higher rates are viewed as the nemesis of zero-yielding gold. But contrary to this popular belief, past Fed rate hikes have proven very bullish for gold. This latest hike once again leaves gold set up for a major rally in coming months.

The Fed’s Federal Open Market Committee meets 8 times per year to make monetary-policy decisions. These can really impact the financial markets, and thus are closely watched by gold-futures speculators. These elite traders wield wildly-outsized influence on short-term gold price action due to the truly extreme leverage inherent in gold-futures trading. What they do before and after FOMC decisions really impacts gold.

This week’s latest Fed rate hike was universally expected. Trading in the federal-funds-futures market effectively implies rate-hike odds. Way back in mid-April they shot up to 100% for this week’s meeting, then stayed there for 5 weeks. In the last several weeks they averaged 91%. So everyone knew another Fed rate hike was coming. That’s typical, as the FOMC doesn’t want to surprise the markets and ignite selloffs.

The big unknown going into the every-other FOMC meetings followed by press conferences from the Fed chairman is the future rate-hike outlooks. Top FOMC officials’ individual federal-funds-rate outlooks are summarized in a chart traders call the “dot plot”. That was hawkish this week, with 2018’s total expected rate hikes climbing from 3 to 4. More near-term rate hikes projected have really hammered gold in the past.

But on this week’s Fed Day gold didn’t plunge despite these hawkish dots and 7th rate hike of this cycle. Gold was around $1297 as the FOMC statement and dot plot were released that afternoon, and only fell modestly to $1293 after that. Then it started rallying back a half-hour later during Jerome Powell’s post-decision press conference. Gold closed that day at $1299, actually rallying 0.3% through a hawkish FOMC.

Gold-futures speculators usually sell leading into the every-other “live” FOMC meetings with dot plots and press conferences. Incidentally the first thing the new chairman Powell discussed this week is he is going to begin holding press conferences after all 8 FOMC meetings each year starting in January! So the gold-futures-driven gold volatility surrounding the Fed could very well become more frequent in 2019 and beyond.

All that gold-futures selling before FOMC meetings leaves speculators’ positions too bearish. And the Fed tries hard to never majorly surprise on the hawkish side anyway. So after FOMC decisions the very gold-futures speculators who sold aggressively leading into them often start buying back in. This trading dynamic forces gold lower leading into Fed Days, and then drives big rebound rallies coming out of them.

This week a single gold-futures contract controlling 100 troy ounces of gold worth about $130,000 had a maintenance-margin requirement of just $3100! So futures traders can run up to 41.9x leverage to gold, which is mind-boggling. The legal limit in the stock markets has been 2x for decades. At 40x each dollar deployed in gold futures has 40x the impact on the gold price as another dollar invested in gold outright.

So even if you don’t trade gold futures like the vast majority of gold investors, they are important to watch since they dominate short-term gold action. This first chart looks at gold and speculators’ total long and short positions in gold futures over this Fed-rate-hike cycle. Each of these 7 rate hikes is highlighted, showing how gold sells off into them before rallying out of them mostly driven by speculators’ gold-futures trading.

Back in late 2015, the FOMC hadn’t hiked its FFR for nearly a decade. At its late-October 2015 meeting, the FOMC statement warned the Fed was “determining whether it will be appropriate to raise the target range at its next meeting”. That hawkish signal shocked gold-futures traders and they started dumping long contracts while rapidly ramping short sales. Gold was crushed on that, falling 9.1% over the next 7 weeks.

On the eve of that fateful mid-December FOMC decision to start hiking rates again for the first time in 9.5 years, everyone was convinced that was bad news for gold. Gold yields nothing, so surely higher bond yields would divert investment away from gold. It sounds logical, but history has proven the opposite. So just days before that initial Fed rate hike, I wrote a bullish essay showing how gold thrived in past rate-hike cycles.

Gold surged 1.1% the day of that first hike, but plunged 2.1% to a 6.1-year secular low of $1051 the very next day. Foreign traders had fled overnight following that rate hike. But gold started powering higher right after that. By mid-February 2016 gold had roared back up 18.5% on all that post-FOMC-rebound spec long buying and short covering! Gold formally entered a new bull market at +20% a few weeks later.

The Fed’s second rate hike of this cycle came exactly a year after the first in mid-December 2016. Again the Fed telegraphed another hike, so again gold-futures speculators fled longs and ramped shorts. In the 5 weeks leading into that FOMC meeting, gold plunged 11.2%. That was really exacerbated by the extreme Trumphoria stock-market rally in the wake of Trump’s surprise election victory early in that same span.

While everyone saw that Fed hike coming, the dot-plot rate-hike outlook of top FOMC officials climbed from 2 additional rate hikes in 2017 to 3. So spec gold-futures selling exploded, battering gold 1.4% lower that day and another 1.2% to $1128 the next. That hawkish FOMC surprise of more rate hikes faster was the worst-case Fed-decision scenario for gold. The general gold bearishness was epically high.

But gold didn’t plunge from there like everyone expected. Instead it rebounded dramatically higher with an 11.4% rally over the next 10 weeks or so! When speculators’ gold-futures longs get too low and/or their shorts get too high heading into any FOMC decision, these excessive trades have to be reversed in its wake. Any pre-FOMC gold-futures selling directly translates into symmetrical post-FOMC buying.

Since the FOMC spaced out its initial couple hikes of this cycle by an entire year, there was rightfully a lot of skepticism about when the third would come. So up until just a couple weeks out from the mid-March-2017 FOMC meeting, the FF-futures-implied rate-hike odds were just 22%. But Fed officials jawboned them up to 95% by a couple days before that meeting. Gold was again hit on Fed-rate-hike fears, falling 4.7%.

But right after that third rate hike of this cycle, gold immediately caught a bid and surged 7.6% higher over the next 5 weeks or so. That dot plot kept the 2017 rate-hike outlook at 3 total, not upping it to 4 as the gold-futures speculators expected. So again they were forced to admit their pre-FOMC bearishness was way overdone and buy back in. Fed rate hikes aren’t bearish for gold despite traders’ irrational expectations.

After being wildly wrong for three Fed rate hikes in a row, some of the gold-futures speculators started to pay attention heading into this cycle’s 4th hike in mid-June 2017. But gold still fell 2.1% over several trading days leading into it. That hike too was universally expected like nearly all of them, and the dot plot was neutral staying at 3 total hikes in 2017. But the gold-futures selling broke precedent to continue that time.

In the first week or so after that 4th hike last summer, gold fell 1.9%. Those post-hike losses extended to 4.2% total by early July. That particular rate hike was unique to that point in that it came to pass early in gold’s summer doldrums. In June and early July, gold investment demand wanes so it usually just drifts sideways to lower. Thus this decades-old seasonal lull effectively delayed that post-FOMC gold reaction rally.

Once last year’s summer-doldrums low passed, gold again took off like a rocket as specs scrambled to normalize their excessively-bearish gold-futures bets. So gold surged 11.2% higher between early July and early September on heavy gold-futures buying. This gold reaction to last June’s 4th Fed rate hike may be the best template of what to expect after this June’s 7th one. Summer may again delay gold’s rebound.

But whether gold’s usual post-FOMC rally starts now or a few weeks from now is ultimately irrelevant in the grand scheme. The seasonally-weak summer doldrums don’t change the fact that speculators’ gold-futures bets get too extreme heading into telegraphed Fed rate hikes, so they have to be normalized in the FOMC’s wake. This gold-bullish pattern has held true to varying degrees after all 6 previous hikes of this cycle.

The Fed took a break from hiking in September 2017 to announce its wildly-unprecedented quantitative-tightening campaign to start to unwind long years and trillions of dollars of QE money printing. So the rate hikes resumed at that every-other-FOMC-meeting tempo in mid-December 2017. Again the goofy gold-futures traders started fearing another hawkish dot plot, so gold fell 4.0% in several weeks leading in to it.

But that 5th rate hike of this cycle was accompanied by a neutral dot plot forecasting 3 more rate hikes in 2018 instead of the 4 gold-futures traders expected. So again they had to admit their bearishness was way overdone and buy back in aggressively. So over the next 6 weeks after that FOMC meeting, gold shot 9.2% higher to $1358 nearing a major breakout! How can anyone believe rate hikes are bearish for gold?

The 6th hike of this cycle came right on schedule in late March this year, accompanied by a neutral dot plot still forecasting 3 total rate hikes in 2018. But again the gold-futures traders worried leading into that FOMC decision, pushing gold 3.2% lower over the prior month or so. They started buying back in that very Fed Day, so gold sharply rebounded 3.3% higher to $1353 within 4 trading days of that Fed rate hike.

This gold-futures-driven gold price action surrounding Fed rate hikes is crystal-clear. Gold falls leading into FOMC meetings with expected hikes on fears of hawkish rate-hike forecasts in the dot plots. All that pre-FOMC selling leaves speculators’ collective gold-futures bets way too bearish, with longs too low and/or shorts too high. Then once the Fed acts and specs realize gold isn’t collapsing, they quickly buy back in.

The Fed’s again-universally-expected 7th rate hike of this cycle came this Wednesday. And despite the gold-bullish examples of all the prior 6 hikes, gold-futures traders again sold leading into it. Starting back in mid-April, they embarked on a major long liquidation that pushed gold 4.0% lower by this week’s FOMC eve. In their defense that was mostly in response to a US dollar short squeeze, so maybe they are learning.

Gold-futures data is released weekly in the CFTC’s famous Commitments of Traders reports. These are published late Friday afternoons current to preceding Tuesday closes. So the latest data available when this essay was published is from the CoT week ending June 5th. Even then a week before this 7th Fed rate hike, total spec longs at 235.9k contracts were way down at a 2.3-year low! Speculators were all out.

The Fed indeed hiked as expected, and specs’ hawkish forecast seemed to be confirmed by this newest dot plot. Finally at this week’s FOMC meeting the collective rate-hike outlook rose from 3 total hikes in 2018 to 4. That was the perfect excuse for gold-futures traders irrationally terrified of higher rates to sell gold hard! Yet they couldn’t, with their longs among the lowest levels of this bull the selling was already exhausted.

So gold is once again set up with a very-bullish June-rate-hike scenario like last summer. Once again specs need to normalize their collective gold-futures bets after waxing too bearish leading into another Fed rate hike. That big gold-futures buying is inevitably coming, although it may once again be delayed for a few weeks by the summer doldrums. That would simply add to gold’s powerful seasonal autumn rally.

Gold’s resilience this week in the face of that hawkish dot plot was very impressive. Remember the last time the near-term FFR forecast added another hike in mid-December 2016, gold plunged 2.6% in only 2 trading days. The fact gold didn’t suffer another kneejerk plunge this week on adding another hike this year shows considerable strength! Speculators could’ve aggressively short sold gold futures, but refrained.

Thus gold’s post-rate-hike reaction after this 7th one is likely to mirror the strong rallies after the prior 6. They ranged from 3.3% to 18.5% in the weeks and months after hikes, averaging 10.2%. Given we’re in the heart of the summer doldrums, gold’s post-FOMC rally this summer could mirror last summer’s. It didn’t start until early July, but from there gold blasted 11.2% higher into early September. That’s a big deal.

Gold was trading at $1295 this Tuesday before this week’s FOMC decision. That’s a high base relative to gold’s bull-to-date peak of $1365 from early July 2016. A decisive 1% breakout above that happens at $1379. That would change everything for gold psychology, unleashing a major new wave of global gold investment demand. That critical breakout level for sentiment is only 6.4% above this week’s FOMC-eve close!

So there’s a good chance this coming 7th post-rate-hike rally of this gold bull will push gold’s price into major-breakout territory! As long as gold doesn’t slump too deep in the remaining summer doldrums of the next few weeks, that targets a potential breakout span in this year’s autumn rally. Those tend to peak by late September. With gold relatively high and spec gold-futures longs super-low, gold’s setup is very bullish.

For 7 Fed rate hikes in a row now, most traders have believed and argued that higher rates are bearish for gold. This rate-hike cycle is now 2.5 years old, plenty of time for that popular thesis to play out. Yet between the day before that first hike in mid-December 2015 and this week’s 7th hike, gold still rallied 22.4% higher! The US Dollar Index, which was supposed to soar on rate hikes, slipped 4.7% lower in that span.

Conventional wisdom on Fed rate hikes is obviously very wrong. That’s nothing new, as my extensive research has documented. Throughout all of modern history, gold has thrived during Fed-rate-hike cycles. Today’s cycle is the 12th since 1971. During the exact spans of all previous 11, gold averaged a solid 26.9% gain. During the 6 of these where gold rallied, its average rate-hike-cycle gain was a huge 61.0%!

The Fed’s last rate-hike cycle ran from June 2004 to June 2006, dwarfing today’s. The FOMC hiked in 17 consecutive meetings, totaling 425 basis points which more than quintupled the FFR to 5.25%. If rate hikes and higher rates are bad for gold, it should’ve plummeted at 5%+. But instead gold surged 49.6% higher over that exact span! Fed-rate-hike cycles are bullish for gold, regardless of what futures guys think.

Sadly their irrational and totally-wrong bearish psychology even infects gold investors. This next chart looks at gold and the physical gold bullion held in trust for GLD shareholders. That is the world’s largest and dominant gold ETF (GLD). Its holdings reflect gold investment trends, rising when capital is flowing into gold and falling when investors are leaving. That futures-driven gold action around rate hikes is affecting investment!

Unfortunately this essay would get far too long if I dive deeply into this chart. But I couldn’t exclude it from this discussion either. Because of that goofy gold-futures trading action surrounding Fed rate hikes in this cycle, investors have followed suit to varying degrees. They tend to sell gold leading into Fed rate hikes, and that downside momentum often continues in the weeks after hikes. That really weighs on gold.

But after a couple weeks of strong post-FOMC rallying driven by that gold-futures rebound buying, investors once again start warming to gold. They resume buying GLD shares faster than gold itself is being bought, and start amplifying gold’s post-rate-hike rallies after retarding them initially. It is disappointing that investors too are drinking the psychological tainted Kool-Aid poured by gold-futures speculators.

As a battle-hardened speculator myself and lifelong student of the markets, I don’t care which way they are going. We can trade them up or down and make money. But it’s very frustrating when the traders who dominate gold’s short-term price action continue to cling to a myth, distorting signals and misleading everyone else. History has proven over and over again that Fed-rate-hike cycles are very bullish for gold.

Gold has rallied strongly on average after 6 of the past 6 Fed rate hikes of this cycle! Last summer was the only quasi-exception, when gold’s weak seasonals delayed its post-hike rally for a few weeks. There is literally no reason not to expect gold to power higher again after this week’s 7th hike. And with gold at these levels, that next post-FOMC rally should see a major bull-market breakout that will bring investors back.

The last time investors flooded into gold in early 2016 after that initial December rate hike, gold powered 29.9% higher in 6.7 months. The beaten-down gold miners’ stocks greatly amplified those gains, with the leading HUI gold-stock index soaring 182.2% higher over roughly that same span! Gold stocks are again deeply undervalued relative to gold, a coiled spring ready to explode higher in this gold bull’s next major upleg.

The bottom line is Fed rate hikes are bullish for gold, and this week’s is no exception. Gold has not only powered higher on average in past Fed-rate-hike cycles, but has rallied nicely in this current one. Gold enjoyed big rebound surges after all 6 previous Fed rate hikes of this cycle. Gold-futures speculators who sold too aggressively leading into FOMC meetings had to buy back after to normalize their bearish positions.

And gold looks super-bullish in the coming months after this week’s 7th Fed rate hike of this cycle. Those gold-dominating futures traders sold their longs down to levels not seen since the initial months of this gold bull! So they’re going to have to do huge buying to reestablish normal positioning. While gold’s summer doldrums may delay that a few weeks, the coming gold-futures buying could drive a major upside breakout.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own extensive long positions in gold stocks and silver stocks which have been recommended to our newsletter subscribers.

Puerto Rico's Observatory Is Still Recovering From Hurricane Maria

As Hurricane Maria approached Puerto Rico in late September 2017, planetary scientist Ed Rivera-Valentin knew he needed to get out. His apartment was near the coast, in Manatí, and some projections had the storm passing directly over. “I knew I couldn’t stay there because something bad was going to happen,” he says.

Some people stayed with inland family, or in shelters. But Rivera-Valentin went to work, driving an hour or so into the island’s karst formations, the knobby, tree-covered hills left as water dissolves limestone. Between the peaks sits Arecibo Observatory, the 1,000-foot-wide radio telescope where scientists have, since 1963, studied things up above. Rivera-Valentin grew up in the city of Arecibo, and as an adult, the telescope became his professional home: He got his dream job using Arecibo’s radar to study asteroids. As the hurricane approached, he also thought perhaps the observatory could be his bunker.

The telescope, though, was soon to meet with unusually strong forces of nature. Like the island itself—which was hit with some $90 billion of damage, hundreds or thousands of deaths, and infrastructural failings—the observatory took a beating from Hurricane Maria. Eight months later, with recovery money from the federal government newly available, Arecibo is just beginning to bounce back. While the hurricane didn’t knock Arecibo out, it did leave the telescope a fraction as effective as it once was. And it did so at the same time that the telescope faces decreased funding from the National Science Foundation and a disruptive change in management.

Rivera-Valentin wasn’t the only employee who had decided to retreat to the telescope. At the observatory, most of the employee-evacuees hunkered down in the visiting scientists’ quarters, meant for out-of-town astronomers, and the cafeteria. But Rivera-Valentin stayed in his office. As water seeped through every gap it could find, he put himself on mopping duty. Inside the control room and engineering building, where the main corridor was flooding, another scientist—Phil Perillat—protected the electronics.

As the calm eye of the storm passed over, Perillat snapped a photo of the telescope’s “line feed”—a 96-foot-long radio receiver that looks like a lightning rod. It hangs 500 feet above the dish, pointed toward the ground. You might remember it from Golden Eye, when James Bond dangles from the rod in an adrenaline-filled chase scene. But in Perillat’s picture, the line feed itself is dangling. It had snapped in the wind, which reached 110 miles per hour at the observatory site.

At some point, Rivera-Valentin heard a boom: The dangling line feed, he would later learn, had completely detached, falling hundreds of feet onto the dish and smashing through its surface panels like a meteorite.

After the storm had passed, on September 21, people were stuck at the observatory for days. The two roads leading down from the site were blocked by trees, landslides, and even a newly-formed lake. But observatories, in general, are meant to keep up operations when the grid goes down. They have generators, water. Angel Vazquez, director of telescope operations, was able to contact the outside world with his HAM radio, and let them know everyone was OK.

The radio telescope, however, was not. When employees first attempted to assess the damage, they went to the visitors’ center, where an observation platform overlooks the dish. They couldn’t get as up close as they usually could, by walking underneath it: An eight-foot-deep lake—which lingered till December—now lapped against the telescope’s undergirdle. Eventually, they paddled beneath the massive structure in kayaks, and saw damaged panels hanging below the surface, looking like roof metal twisted in a tornado.

Meanwhile, the observatory itself had morphed into a relief center. When one of the the roads finally opened, about two days after the hurricane’s landfall, local residents arrived for support. “Anyone who walked up to the observatory, they were getting water,” says Rivera-Valentin. “Anyone who came up and said we need to do laundry, they could do laundry.” FEMA helicoptered in supplies to pass out to the community.

On September 29, staff brought the dish back online with generator power. The observing run wasn’t much, just “passive” work; they just held the telescope’s pointing mechanisms in place and simply let the sky drift over as it watched for signals from pulsars. In part, they wanted the scientific data. But they also wanted to run a diagnostic on the scope’s performance.

“The shape of the dish itself had changed,” says Rivera-Valentin. It couldn’t quite focus, like if someone had warped your camera lens. All the receivers still worked—save the one that, you know, crashed into the telescope. The telescope could still function, but its sensitivity was hobbled.

Despite the dish difficulties, which continue today, the observatory slowly began to do more science, in low-power mode. In November, it tracked a fast radio burst, and did a run in cooperation with a Russian radio telescope. And then in December, the region’s electricity flickered on. With that, the observatory could use the diesel generators to run its power-sucking radar. They sent powerful radio waves streaming into space, waited for them to hit an asteroid millions of miles away, and then waited for them to bounce back to their battered antenna.

It worked.

On December 15, they observed the asteroid Phaeton. Rivera-Valentin was glad to have the data (and make little videos from it). It was a piece of normal.

But Arecibo has a long way to go before it’s all the way back. “They have started repairs,” says the National Science Foundation’s Joe Pesce, who until recently oversaw the Arecibo program. “But the vast majority of them are still underway.” It could take a couple of years.

Abel Mendez, who runs the Planetary Habitability Laboratory, has seen the change in the telescope’s performance firsthand. Mendez works at the University of Puerto Rico at Arecibo, training the telescope toward red dwarf star systems that have planets, to understand more about their habitability. After Maria, the telescope’s effectiveness dropped by about 50 percent in the high frequencies he uses, because of alignment, pointing, and panel issues. “Fortunately, the telescope was so sensitive before that that 50 percent—for what we’re doing—is not a big concern,” he says. At lower frequencies, the telescope was about 20 percent less effective post-hurricane. Still, some scientists need every bit of gain they can get. Much of the universe, after all, is far away, and hard to see.

The bipartisan budget act, made law in February, allocated $14.3 million to get the observatory back to full working order. The observatory just got its first allotment of that money, through the National Science Foundation, at the beginning of this month. Getting that federal money has been slow, but now that it’s in hand, the real work can begin.

The initial allowance—$2 million—is for the basics, like removing debris, fixing the fraying roofs, and giving CPR to the generators, three of four of which are having problems. “Work on those is up and going,” says Pesce. “Longer-term, there are the bigger fixes, like repairing the line feed.”

But in February, the NSF announced that Arecibo would soon be under new ownership, which means a leadership transition is taking place at the same time that a scientific rehab is starting. The NSF has historically funded much of Arecibo’s operations. But it had been looking for “partners” for a while. These partners would not only manage the facility, as the previous management team had, but would also pay for some of its operations, taking part of the financial burden from the NSF.

And so a three-organization consortium took over on April 1. The University of Central Florida, under the leadership of Florida Space Institute director Ray Lugo, is at the helm. Lugo used to manage operations and maintenance at Cape Canaveral, and in that role, he contracted with Yang Enterprises, a Central Florida company that provides technical, operational, and logistical services. Yang soon became the second part of the Arecibo partnership. The third entity is Universidad Metropolitana in San Juan, Puerto Rico. Together, the three will run the facility, expand its science, and search for new sources of funding. That hunt for cash comes because NSF is ramping down its funding, which will drop from $7.5 million to $5 million between the first and second years of the new project, and then down to $2 million by the fifth.

The NSF said—on a PowerPoint slide in a town hall meeting at a recent astronomy conference in Denver—that there are “some transition difficulties to be worked out.” Some employees, for instance, have left, which surely presents difficulties for them and for the observatory: For many people who have worked at Arecibo, it’s not just a job. It’s an identity, a home, a community, a place where everyone can do laundry when they need to. And a telescope needs people who have expertise on it.

Yan Fernandez, one of the university scientists leading the collaboration, says UCF will look to scientists beyond their consortium to figure out what cosmic questions Arecibo should pursue. “We want the scientific community to give us info about how Arecibo can keep its place as a cutting-edge observatory in the future,” he says. “The scientific priorities have to come from the scientists who know best.”

With the recovery money, the telescope should be fully restored and able to pursue those priorities, but it won’t ever be the same. And neither will the people who were there for it all. By the time Arecibo was first able to use its radar system in December, Rivera-Valentin had already left the island. His partner had gotten a promotion that took him to Texas, and Rivera-Valentin transferred to the Lunar and Planetary Institute in Texas, which is run by the same organization that co-managed Arecibo until April.

For a while, Rivera-Valentin was able to keep his affiliation with Arecibo Observatory. But when management changed, he became a passive observer. He still plans to use the telescope, as a guest. And while he’ll miss the island where he grew up, and the giant dish nestled into it, there are some positives. “The moment someone says the word ‘hurricane,’ I can drive all the way up to Canada,” he says.

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It Is No Longer A Gamble Investing In Procter & Gamble: Part 5


Procter & Gamble (NYSE:PG) is a Dividend Aristocrat, Champion and blue-chip stalwart that has increased its dividend for 62 consecutive years. Therefore, it should be no surprise that this blue-chip stalwart has traditionally commanded a higher valuation than most stocks. Over the past couple of decades at least, it has been a very rare occurrence to be able to invest in this company at a valuation that would be considered reasonable or attractive. In fact, prior to current time, it took the Great Recession of 2008 and 2009 to bring Procter & Gamble down to reasonable valuation levels.

To put Procter & Gamble’s current valuation into perspective, this blue-chip can be purchased today with a 3.7% current dividend yield which is hovering around the highest it has been over the past two decades. Furthermore, Procter & Gamble appears attractively valued over virtually every rational valuation metric that prudent value investors might consider.

Procter & Gamble at a Glance

As the following screenshot clearly depicts, Procter & Gamble is a formidable company that has been in business for 180 years. The company sells products in more than 180 countries, and as previously stated, has increased their dividends for 62 consecutive years. Procter & Gamble is a diversified consumer staples company with businesses covering 10 product categories generating over $65 billion in annual sales.

The following screenshot provides a breakdown of Procter & Gamble’s net sales and earnings over each of their five reportable segments. Additionally, the company’s products are quality leaders in each of their categories and subcategories.

Morningstar offered their investment thesis on Procter & Gamble discussing the company’s effort to cull around 100 brands from its mix leaving it with 65 brands. However, the following excerpt from the report suggests Procter & Gamble’s clout with retailers remains formidable:

“In our view, despite slimming down, we still think P&G will carry clout with retailers, maintaining its scale edge. The 65 brands it maintains in its portfolio include 21 that generate $1 billion-$10 billion in annual sales and another 11 that account for $500 million-$1 billion in sales each year. We believe that by supplying products across multiple categories (such as fabric care, baby care, feminine care, and grooming among others), trusted manufacturers like P&G are critical to retailers looking to drive traffic, both into physical stores and on e-commerce platforms.”

FAST Graphs analyze out loud video: Valuing Procter & Gamble in Multiple Ways

There are numerous ways to examine and then ascertain the fair value of a business public or private. I am often asked what do I think is the best metric to use when trying to determine fair value? My answer to this question is simple and straightforward. I believe that investors should evaluate any stock they are examining over as many valuation metrics as they can. Therefore, my stock answer is to utilize all of the valuation resources at your disposal.

In addition to providing different perspectives on the relative valuation of a given stock, examining various metrics can also provide insights into the company’s operating strengths and/or challenges. Moreover, in addition to simply trying to ascertain valuation, I believe that examining various metrics also affords insights into important considerations such as dividend coverage. In other words, is the dividend safe and can it be expected to continue growing?

Consequently, the following analyze out loud video will look at Procter & Gamble’s valuation and the safety of its dividend utilizing numerous metrics. These will include adjusted and GAAP earnings, operating and free cash flow as well as EBITDA. I will also look at important underlying financial numbers associated with the company’s financial statements.

Most importantly, I will also provide insights into what I believe an investor stands to make by investing in Procter & Gamble today. To my way of thinking, this is a critical step that every investor should make prior to investing in a stock. Unfortunately, it is also a critical step that often is ignored. To be clear, what I’m suggesting is that I always calculate a precise range of reasonable return possibilities that I believe an investment in a given stock offers me. I never invest simply hoping that the price might go up. Instead, I invest with a specific expectation in mind, and then I closely monitor whether the business is meeting those expectations. Importantly, I am monitoring fundamental results as they unfold and not short-term stock price movements.

Summary and Conclusions

Procter & Gamble is a blue-chip dividend growth stock with a long history of increasing their dividend. However, since the beginning of fiscal year 2009, the company has produced anemic earnings growth and below average dividend growth relative to its historical norms. However, the company is taking actions to reinvigorate future growth. At this juncture, the consensus of leading analysts are giving them the benefit of the doubt.

Regardless of whether the company reinvigorates its historical normal growth rates or not, I contend the company is fairly-valued based on historical norms. Most importantly, I believe the dividend is safe and very attractive for such a high quality iconic blue-chip Dividend Aristocrat. Therefore, I would suggest that investors seeking a quality dividend growth stock with an above market current yield might give Procter & Gamble a closer look.

With my next article in this series, I will be covering PepsiCo (NYSE:PEP).

In case you missed them, here are links to Part 1 on General Mills (GIS), Part 2 on Kimberly-Clark (KMB), Part 3 on 3M (NYSE:MMM) and Part 4 on Campbell Soup (NYSE:CPB).

If you enjoyed this article, scroll up and click on the “Follow” button next to our name to see updates on our future articles in your feed.

Disclosure: I am/we are long PG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

7 Reasons You Should Buy This High-Yield Dividend Aristocrat Right Now

(Source: imgflip)

My retirement dividend growth portfolio has a simple goal; assemble a collection of quality income-producing assets to generate generous, safe, and exponentially growing income. A cornerstone of my strategy is to buy highly out of favor sectors.

(Source: FactSet Research)

Currently, telecom is the most hated sector, trading at just 10.4 times forward earnings. That’s significantly below both its 5- and 10-year average. These low valuations are due to a combination of interest rates rising off their all-time lows, as well as concerns over cord-cutting and stagnant growth.


T Total Return Price data by YCharts

And few telecoms have underperformed more than high-yield Dividend Aristocrat AT&T (NYSE:T). That’s because Ma Bell not just suffers from the same short-term growth challenges, but has been locked in a battle with federal regulators and the Department of Justice since October 22nd, 2016, to acquire media giant Time Warner (NYSE:TWX).

Well, now that battle is over, because on June 12th, Judge Richard Leon approved the merger without conditions, and even said that any appeals by the DOJ would not result in a stay on the merger closing. AT&T has said it plans to close the merger by June 20th.

Let’s take a look at the many reasons this merger is a huge win for shareholders of AT&T. In fact, it could be just the growth catalyst that finally allows the company to generate long-term market-beating total returns, especially from today’s incredibly attractive valuations.

1. The Merger Provides Just The Short-Term Boost AT&T Needs To Keep Growing

(Source: Simply Safe Dividends)

AT&T is America’s second-largest telecom provider with over 143 million wireless subscribers. However, due to the saturated nature of the US telecom market, the company has been struggling with flat top line organic growth for nearly a decade. In fact, only large-scale acquisitions, such as 2015’s $49 billion purchase of DirecTV, have helped keep AT&T’s revenues growing in the past few years.

The company has been plagued by two main issues. First, while its wireless business continues to gain customers at a steady pace, most of those are not the highly profitable postpaid (monthly subscribers), but prepaid and connected devices.

(Source: AT&T earnings presentation)

The company’s postpaid subscriber count growth has slowed to a crawl, thanks to T-Mobile (NASDAQ:TMUS) kicking off an industry-wide price war that included unlimited data plans. Sprint (NYSE:S) joined in that fight, and both Verizon (NYSE:VZ) and AT&T had to follow suit, offering lower-cost bundled plans that have driven down average revenue per user, or ARPU, by 6.9% in the past two years. This has caused mobility revenue (39% of 2017’s company total) to remain flat since 2016.

(Source: AT&T earnings supplement)

The other major business unit that’s struggling is the entertainment group, which includes broadband internet and pay TV.

(Source: AT&T earnings presentation)

Over the past year, cord-cutting at DirecTV cost the company 700,000 subscribers. Meanwhile, U-Verse (cable) saw its subscriber base decrease 10%. The good news is that DirecTV Now, the company’s new streaming platform, is growing like a weed, allowing AT&T to maintain flat video subscriber numbers over the past year.

The issue, however, is that DirecTV Now generates only about $31 per month in net revenue, which means that as it’s grown in popularity, Video ARPU has fallen significantly (9.3% in the last quarter, though some of that is due to the new corporate accounting rules).

(Source: AT&T earnings supplement)

AT&T did continue to see strong growth in its Mexican wireless business with 543,000 new total subscribers.

(Source: AT&T earnings presentation)

The issue, again, is that most of those were lower-margin prepaid users. In addition, the Mexican wireless business, while being the company’s fastest-growing unit, is also the least profitable.

(Source: AT&T earnings supplement)

The good news is that Mexican wireless EBITDA margins are improving steadily. The bad news is that the entire international segment represents a low-margin (though relatively fast-growing) drop in the bucket. For instance, in 2017, all of AT&T’s international operations, including its Latin American satellite TV business, made up just 5% of the company’s revenue.

All told, AT&T continues to suffer from declining top line growth. The good news is that tax reform and cost-cutting has helped to drive growth in adjusted earnings and free cash flow (what funds the dividend).


2017 Results

Q1 2018




Adjusted EPS Growth



FCF/Share Growth



Dividend Growth (YOY)



(Source: AT&T earnings release, earnings supplement)

Note that this quarter’s decline in free cash flow – what’s left over after running the business and investing for growth – is mostly due to the lumpy nature of the company’s capex.

(Source: AT&T earnings presentation)

FCF is cyclical from quarter to quarter, and what investors need to focus on is that management reiterated its early guidance for very strong growth in both adjusted earnings and free cash flow for 2018. In fact, FCF is expected to soar almost 20% to $21 billion this year. That, in turn, means that AT&T’s pre-merger dividend cost of $12 billion will result in a very safe FCF payout ratio of just 58%.


2018 Guidance

Adjusted EPS Growth


Free Cash Flow Growth


FCF Dividend Payout Ratio


(Source: Management guidance)

Of course, that large increase in the company’s bottom line is a one-shot deal created by a combination of tax reform and new accounting changes. Since these tailwinds won’t be repeating next year, investors are understandably worried about where AT&T’s future growth will come from.

This is the first reason I’m so thrilled to have the Time Warner merger be approved. That $85 billion deal is 50%/50% stock and cash. Note that AT&T is borrowing $40 billion to fund part of the cash portion of the buyout.



Forward Adjusted Net Income

Forward FCF


Adjusted EPS



$159.2 billion

$21.6 billion

$21.0 billion

6.183 billion



Time Warner

$31.5 billion

$6.0 billion

$4.3 billion

0.791 billion




$190.7 billion

$27.6 billion

$25.3 billion

7.32 billion



(Sources: Morningstar, AT&T earnings releases, F.A.S.T. Graphs, Management guidance)

Starting in Q3 of 2018, the new combined company will become a true juggernaut, the world’s largest telecom/entertainment company with almost $200 billion in annual sales.

More importantly for dividend lovers is the fact that, assuming analyst forecasts for Time Warner’s growth are correct, the merger will boost AT&T’s adjusted EPS from $3.50 this year to $3.77 in 2019. That’s about 8% adjusted EPS growth. Free cash flow per share is expected to increase about 2% but increase the company’s total free cash flow to $25.3 billion. That’s compared to a new dividend cost of $14.6 billion, meaning that AT&T could be generating post-dividend FCF of $10.7 billion in 2019.

Meanwhile, the good news is that the approval of this merger also means that the $26 billion T-Mobile/Sprint merger is more likely to be approved. Already, AT&T is seeing its ARPU declines decelerating as the price war started by its smaller rivals starts to dissipate.

(Source: AT&T earnings presentation)

Analysts expect that US wireless postpaid prices should stabilize in 2019 and then start climbing again as all the major telecoms focus on maximizing cash flow to invest in the coming switch to 5G. If T-Mobile and Sprint end up merging, then the odds are even greater that AT&T will be able to see its ARPU start climbing again in 2020 and beyond.

Or, to put it another way, AT&T’s recent struggles mean that the company needed a bridge to get it past its current growth slump. In 2018, tax reform provided that bottom line boost, and in 2019, the Time Warner merger will. That gets the company to 2020, at which point 5G and the company’s ongoing transition to streaming should restore its core business units to organic top and bottom line growth.

2. Vertical Integration Could Help Boost AT&T’s Top And Bottom Lines

The biggest reason AT&T gave for wanting to buy Time Warner was the latter’s wide-moat, industry-leading content. Combined with its own current assets, this will turn AT&T into the world’s largest media delivery company with operations in nearly every country.

(Source: AT&T investor profile)

The heart of Time Warner’s wide-moat assets are its three business units:

  • HBO & Cinemax: 134 million global subscribers in over 150 countries.
  • Turner Networks: It owns numerous cable channels, including Adult Swim, Bleacher Report, Boomerang, Cartoon Network, CNN, ELEAGUE, FilmStruck, Great Big Story, HLN, iStreamPlanet, Super Deluxe, TBS, Turner Classic Movies (TCM), TNT, truTV and Turner Sports.
  • Warner Brothers Entertainment: Produces over 70 TV shows a year and has a film library consisting of over 8,000 titles.

In the age of mobile phones and video-on-demand (streaming), content is king, and Time Warner has one of the world’s largest stockpiles of valuable content. It also has deep pockets to constantly make more, including $9 billion it spent last year across HBO, cable channels, and Warner Entertainment.

Time Warner’s major competitive advantage is that its cable networks have 90% market penetration in the US, and cable companies are loath to let in new channels (competitors). Which brings us to how AT&T plans to not just benefit from its marginal revenue, earnings, and cash flow, but use this content to stabilize its entertainment group.

DirecTV now is growing much faster than rival products like Dish Network (NASDAQ:DISH)’s Sling TV, Hulu Live, or Sony (NYSE:SNE)’s PlayStation Vue. In fact, within a few quarters, analysts expect DirecTV Now to surpass Sling’s current 2.3 million subscriber count, making it the third-largest US streaming service behind Netflix (NASDAQ:NFLX) and Hulu. But remember the problem with DirecTV Now, specifically its lower price.

According to analyst Michael Nathanson, while AT&T is charging $35 per month for the basic DirecTV Now service, thanks to bundling, the average net revenue is actually $31 per month. What’s more, content costs are running about $30 per month, and Nathanson estimates that AT&T is actually losing $.26 per month on each DirecTV Now subscriber.

Given that DirecTV Now as well as the company’s upcoming skinny TV streaming bundle (AT&T Watch, $15 per month, free to unlimited wireless subscribers) are going to dominate the future of the entertainment segment, the company needs to figure out a way to make them profitable.

(Source: Motley Fool)

One way AT&T plans to try is offering additional services, such as DVRs, as well as pay-per-view. However, the trouble is that many consumers are drawn to DirecTV Now for its simplicity and relatively low price (compared to cable). This means that the company needs a stronger approach to boosting margins on streaming.

That would be on the cost side, which is where Time Warner’s content comes in. By owning many of the channels that are part of its streaming packages, AT&T will be able to lower content costs and turn a profit on its streaming options. But that’s only part of the long-term plan to restore its wireless and video businesses to organic growth.

The other is bundling. According to CEO Randall Stephenson, “Bundling allows us to have profitability from that combined account…It also creates higher value, lifetime value, for each of those customers.”

Bundling basically means cross-selling its various products by offering discounted prices for customers who subscribe to multiple offerings.

(Source: AT&T earnings presentation)

AT&T has managed to steadily increase its bundled offerings, which now include 30% of postpaid wireless subscribers and 48% of video subscribers, respectively. AT&T Watch, being free to unlimited wireless subscribers, may be able to help boost the company’s postpaid ARPU. Combined with the stabilizing of wireless pricing that Morningstar analyst Allen Nichols expects in 2019 (with prices rising in 2020 and beyond), the company’s biggest and most profitable segment should once more return to growth.

This provides the company the bridge it needs to get to its big growth catalyst of the 2020s: 5G.

3. Merger Serves As A Growth Bridge Until 5G Takes Off

5G is the next generation of wireless and offers three distinct benefits:

  • Greater speed (up to 20 GB per second) and data capacity
  • Up to 200 times lower latency (time to send data packet to receiving device)
  • The ability to connect a lot more devices at once (such as sensors and smart devices)

Not only does 5G offer the promise of much faster data connections for smartphones, but it’s also going to be the backbone of the Internet of Things, or IOT. That’s where devices are connected to the internet to allow real-time data gathering and analysis in order to optimize performance, maintenance, and overall profitability. Intel (NASDAQ:INTC) projects that the number of IOT-connected devices will increase from 15 billion in 2020 to 200 million by 2020. And by 2025, some analysts expect the global IOT market to hit $6.2 trillion. Super-fast and efficient telecom networks will be what the mountains of data created by the IOT (which includes driverless cars) runs on. That, in turn, should greatly boost AT&T’s potential top and bottom line growth.

The other major growth opportunity in 5G is in gigabit wireless internet. The average home uses 190 GB of data via its internet connection each month. This makes offering home internet service via 4G LTE not practical, since it would overload the network. However, 5G is going to change the game by allowing internet that’s potentially up to 40 times faster wirelessly. In fact, AT&T has been experimenting with what it calls Project AirGig, which uses 5G transmitters attached to power lines. According to Andre Fuetsch, president of AT&T Labs and chief technology officer, AirGig could “bring this multi-gigabit, low-cost internet connectivity anywhere there are power lines – big urban market, small rural town, globally.”

That could help AT&T win major market share in the internet service provider, or ISP, market. Last year, there were 93 million US subscribers, who generated $118 billion in revenue in 2017. For context, the US wireless market saw revenue of $180 billion last year.

And in Mexico as well, where AT&T is investing $3 billion into expanding its wireless network, AirGig could help the company leverage its large investments in that country to break into the fast-growing but still far from saturated Mexican ISP market.

(Source: Statista)

Currently, AT&T is experimenting with 5G in numerous cities and plans to launch full service in 12 major markets by the end of 2018. However, global 5G standards won’t be decided until 2019, and the first wireless chips with 5G capabilities are also coming next year. Thus, it will likely be until 2020 or 2021 until the company really starts to see 5G start to contribute significantly to its top or bottom line. Fortunately, the acquisition of Time Warner helps bridge that gap in two important ways.

4. Time Warner Brings The Higher-Margin Business Model….

Being the nation’s second-largest wireless provider gives AT&T strong economies of scale. For example, according to Morningstar, AT&T Mobility has 900 subscribers per wireless employee, fully 50% more than T-Mobile’s 600. This helps to better amortize high fixed costs over more customers and results in stronger profitability. AT&T is also able to spend relatively less on wireless capex, 16% of revenue compared to T-Mobile’s 19%, because its existing network is more developed and requires less expansion (it already covers 99% of the US).


Gross Margin

Operating Margin

Net Margin

FCF Margin






Time Warner





Telecom Industry Average





(Sources: GuruFocus, Morningstar)

This is why the company boasts some of the industry’s best profitability, including net margins that are three times as high as most of its peers. More importantly, despite massive capital spending (over $140 billion in the past five years), AT&T is still able to generate relatively high free cash flow margin.

But as impressive as AT&T’s profitability is, it pales in comparison to Time Warner’s. That’s to be expected, given that Time Warner is in a far less capital-intensive business, where content creation is its biggest expense. Because Time Warner will represent 17% of the combined company, this means that the merger closing should instantly boost AT&T’s net margin by 1.4% to 13.7%.

Or, to put it another way, on June 20th, when the merger closes, AT&T will become an 11% more profitable company.

5. Merger Boosts AT&T’s Long-Term Growth Potential By 37%

One of the biggest frustrations AT&T investors have had is with the slow growth rate of the last decade. Well, not only is AT&T’s FCF/share growth rate expected to increase organically in the coming years (5G and recovery in wireless pricing), but by acquiring the faster-growing Time Warner, investors in this Dividend Aristocrat should see their long-term growth potential boosted by 37%.


Current FCF

10-Year Analyst FCF Growth Projection

Analyst Projected 2028 FCF


$21.0 billion


$32.0 billion

Time Warner

$4.2 billion


$12.5 billion


$25.2 billion


$44.5 billion

(Source: Management guidance, F.A.S.T. Graphs)

Note that long-term analyst projections are educated guesstimates, so must always be taken with a grain of salt. That being said, Time Warner is a major purchase, and unlike the Mexican business (2% of revenue), is going to represent a needle-moving (and profitable) deal when it closes.

6. Dividend Profile: High, Safe Yield, With Market-Beating Total Return Potential



2018 FCF Payout Ratio

10-Year Dividend Growth

10-Year Total Return

AT&T (without merger)



3.5% to 4.3%

9.7% to 10.5%

AT&T with merger



4.8% to 5.9%

11.0% to 12.1%

S&P 500





(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Yardeni Research,

The most important component of any income investment is the dividend profile, which consists of three parts: yield, dividend safety, and long-term growth potential.

AT&T’s yield has now risen to 6.2% (as I write this), thanks to the share price tanking 5% on news of the merger being approved. This means that it is now yielding over three times the paltry payout of the S&P 500. More importantly, at a projected 2018 FCF payout ratio of 58%, that dividend is very well-covered by the company’s river of free cash flow.

Of course, there’s more to dividend safety than just a low payout ratio. You also need a good balance sheet that allows a company financial flexibility to grow, while preserving the 34 consecutive years’ streak of rising dividends.





TTM Interest Cost

Interest Coverage Ratio


$163.0 billion

$46.9 billion


$6.8 billion


Time Warner

$22.3 billion

$16.9 billion


$1.2 billion



$225.3 billion

$63.8 billion


$9.0 billion


Industry Average



(Sources: Morningstar, GuruFocus)

This is where many worry about AT&T because of the massive amount of debt it will be taking on to close this merger. In fact, it will have the highest debt load in corporate America. And while it’s certainly true that the company’s leverage ratio and interest coverage ratio are worse than the industry average, the surprising fact is that once the merger closes, AT&T’s debt burden won’t be any harder to service. That’s because Time Warner is large and profitable enough that the far larger company’s debt/EBITDA ratio will remain the same and the interest coverage ratio will actually go up a bit.

Net debt for the combined company will be $174.7 billion. With AT&T generating $10.7 billion in annual post-dividend FCF, this means that within about 3.5 years the company will be able to bring its net debt down to about $137 billion and lower its net debt/EBITDA ratio below 2.0 (from its current 2.7).

However, this does mean that while AT&T has the potential for faster dividend growth, the company won’t be able to actually achieve that until after it has paid off tens of billions in its new loans. This is why analysts don’t expect the company to increase its dividend until 2022 or 2023. That’s when dividend growth is expected to increase to 2 cents per quarter per year instead of 1 cent. But the good news is that even with the current rate of dividend growth (2% annually), at its current rock-bottom valuation, AT&T should be able to generate 8.2% annual total returns. This is actually slightly higher than what the broader market is likely to do from its currently stretched valuations.

And if AT&T executes as expected, and returns to faster dividend growth, then this low-volatility blue chip will be likely to generate double-digit total returns that will put the S&P 500 to shame.

7. Valuation: AT&T Is Trading At A Fire Sale Price


T Total Return Price data by YCharts

It’s not been a good year for AT&T shareholders, as the combination of rising interest rates, growth concerns, and merger uncertainty have caused it to badly underperform even the weak telecom sector. However, this underperformance is precisely what has me so excited to recommend the stock right now, because market pessimism has gotten so large that Ma Bell now represents a potentially excellent deep value proposition.

There is no 100% objectively correct way to value a stock, which is why I like to use a three-step approach with my valuation models. This creates a more robust estimate that minimizes the chances of overpaying for a company.

Step 1 is determining whether a company has market-beating long-term total return potential under the Gordon Dividend Growth Model (TR = yield + long-term dividend growth). AT&T passes this screen, even if it maintains its current token dividend growth for far longer than I expect.

The second screen is looking at the most relevant valuation metric – which, in this case, is price/free cash flow (what pays the dividend) – and comparing that to its historical norm. This is because over long stretches of time, valuations tend to be mean-reverting and come back to a relatively fixed point that represents fair value.


Forward P/FCF

Implied 10-Year FCF Growth Rate

Historical P/FCF


Historical Yield

% Of Time In Last 22 Years Yield Has Been Higher








(Source: Management guidance, Morningstar, GuruFocus,, Benjamin Graham)

Currently, AT&T’s price-to-forward FCF is a stunningly low 8.0, which is less than half its 20-year average. Now it’s true that the company’s growth has slowed dramatically since 1998, which means it deserves a lower multiple. However, 8 times forward FCF means the market is pricing in -0.3% FCF/share growth for the next 10 years. Even with all the growth challenges it faces, I think AT&T’s numerous growth catalysts, most notably the Time Warner acquisition, mean that it should easily beat this super-low hurdle rate.

Finally, I like to compare the company’s yield to the historical yield, given that my primary focus is on dividends. And just like with price/FCF, yields are mean-reverting and tend to approximate intrinsic value well over time. Currently, AT&T’s 6.2% yield is 17% above its 13-year median yield, indicating the stock is likely 17% undervalued. That’s in line with Morningstar’s fair value estimate of $40 (19% undervalued), based on a dual stage, long-term discounted free cash flow model.

What’s more, AT&T’s yield has only been higher 8.8% of the time in the past 22 years. This likely means the stock is close to bottom, which creates an even larger margin of safety for investors buying today. This is why I’m strongly recommending AT&T for anyone seeking a source of low-volatility, high-yield income. That is assuming you’re comfortable with the company’s risk profile.

Risks To Consider

While AT&T is a low-risk blue chip, that doesn’t mean the company doesn’t face numerous challenges in the coming years. For one thing, the company’s wire-line business is expected to see negative long-term growth as its legacy land line business continues to deteriorate. Meanwhile, cable companies like Comcast (NASDAQ:CMCSA) have made good strides in recent years in winning market share from AT&T, which is why its broadband subscriber base has been growing at a snail’s pace. Now, ISPs are also going after enterprise customers, which has previously been an area of major strength for AT&T. This only puts more pressure on management to execute well on 5G in order to reverse these trends and win back market share in the company’s internet business.

Next, we can’t forget that the capital-intensive nature of the telecom business means that AT&T’s debt load might act as a competitive disadvantage in future. That’s because the company must continue investing heavily, not just into new 5G infrastructure but into maintaining its existing 4G LTE networks. This is because 5G and 4G are going to have to co-exist for at least a decade before all customers are switched over to the new and superior standard.

Speaking of debt, AT&T’s mountain of bonds, while not yet threatening the dividend, is still going to be the highest in corporate America. This means that it will need to make deleveraging a priority. This means dividend growth lovers are going to be waiting until at least 2022 or 2023 before they can see faster payout growth. And of course, there’s no guarantee that the company will actually increase its dividend faster once its balance sheet is stronger.

After all, CEO Randall Stephenson has shown himself a fan of empire building on an epic scale. That includes highly questionable capital allocation decisions, such as overpaying for DirecTV (a company already in decline at the time), as well as entering the monstrously competitive Mexican wireless market. While AT&T’s subscriber base has been growing quickly in Mexico, America Movil (NYSE:AMX) is the juggernaut in that country with seven times the number of subscribers. It also commands nearly 60% market share in ISP, meaning that AT&T’s ability to leverage its Mexican wireless investment via 5G may prove fruitless.

Another concern I have is that now that the merger approval will kick off a wave of media industry consolidation. Already, Comcast is preparing a hostile all-cash (and debt) bid for Twenty-First Century Fox (NASDAQ:FOXA). Disney (NYSE:DIS) – which is buying Fox – is apparently talking with bankers about borrowing to add a cash component to its all-stock deal to counter the coming Comcast bid. Meanwhile, CBS Corp. (NYSE:CBS) and Viacom (NYSE:VIA) are locked in a complex soap opera, and some analysts expect to eventually see the two companies re-merge (CBS was spun off in 2006).

Then, there’s all manner of smaller but still large media companies that the market is now buzzing are potential takeover candidates, including Lions Gate Entertainment (NYSE:LGF.A), which is shopping itself around to potential buyers. The point is that AT&T’s win in court is expected to set off a media merger mania. And so, in a few years, I wouldn’t be surprised if Stephenson decides he needs to return to the content well with yet another medium-to-large sized deal – one that could end up replacing the debt the company has paid off with fresh loans that make it impossible for AT&T to accelerate its dividend growth beyond the current token 2% annual rate.

Finally, we can’t forget that there is no guarantee that the company will be able to convert the promise of 5G into the kind of growth analysts currently expect. T-Mobile, whether or not it merges with Sprint, is going to remain a fierce competitor – one whose CEO has taken a Jeff Bezos-like approach to winning market share by focusing on the best possible customer experience (including lower costs). This means that T-Mobile, even if swallows Sprint (and thus becomes bigger than AT&T in wireless), might end up maintaining negative pricing pressure, causing AT&T’s ARPU to flatline or even continue drifting lower.

With the company’s wireline business expected to continue declining steadily (and video ARPU drifting lower by 1% per year due to increased streaming), AT&T has a lot of growth headwinds to overcome in order to live up to its full potential. Fortunately, the company’s rock-bottom valuation and sky-high yield means investors buying today are being adequately compensated for these risks.

Bottom Line: Time Warner Merger Means AT&T Has Vastly Improved Long-Term Growth Prospects And Is A Potentially Great Buy Today

Don’t get me wrong, AT&T’s growth challenges are not going to be cured by acquiring Time Warner. However, the successful completion of the merger will provide numerous benefits, both in the short and long term. These include a faster-growing, higher-margin business, important assets to stabilize its video and wireless units, and a growth bridge to the 5G ramp-up (in 2020 and beyond).

And while the dividend growth-boosting effects are likely still far in the future (2022 or 2023), in the meantime you still get paid very handsomely to wait for the company to execute on its long-term growth potential. And even if AT&T ends up executing rather poorly on its growth catalysts, at today’s price investors are unlikely to lose money over time. Rather, they will probably enjoy high, safe, and stable income from this Dividend Aristocrat for the foreseeable future.

Disclosure: I am/we are long T.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.