Jan

7

Not long ago with 10 years just a shade over 3% and 30 years a shade under 4%, I calculated that with taxes and inflation factored, you are pretty much guaranteed to lose money. My father the Colonel conceded “some of us prefer to lose our money safely.”

I liken it to the bathtub game my young daughter likes to play. Rocking her body she sends walls of water sloshing back and forth, seeking it’s own level. Most investors seem to prefer buying in the deep end of the tub, chasing the water instead of dipping into the shallow end. Treasuries are like that, and gold.

One thing that has always served my allocation is yield, and I currently find a good bit of it in Canroys. Terribly out of favor these days, many of these are yielding better than 10%. With a universe of more than 30 to choose from, there are several gems which are not over levered, have a low operating cost, and pump enormous amounts of black gold year in and year out.

People fled because the Canadian government in their infinite wisdom decided penalizing this major industry with punitive taxes starting in 2011 would be a good idea. Then, oil fell. And credit dried up. And many cut their dividends in favor of reducing leverage. But throughout the oil and cash continued to flow, and the good news side of the story is that exploration and lifting costs are falling with suppliers stacking drilling rigs and crews right and left.

Even with oil half where it was a year and a half ago, many are doing quite well, and there is something to be said for the comfort of that monthly dividend check (and still for at least the time being a qualified dividend).

My other big yield play the last 18 months was cemeteries. As morbid as it sounds, the business is recession proof, and at the peak of the crisis I doubled down positions in two smaller cemetery companies (not the big one you are thinking of) when their dividend yield both exceeded 30%. I will clip that coupon the rest of my life, and that coupon will go up in the next 30 years as it has for both of these companies for the last 30 years. The coupon on that 30 year treasury will always be the same.

It may come as a surprise to some of the big brain quants and hedgies out there that something as quaint at the Gordon Growth Model can be useful. In case you don’t remember it, published in 1959, the model determines the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. Stock value (P) = D/k-G Where:
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)

Not wanting to date myself too much I will admit that, yes, I studied this in school and remember vividly calculating this for all 30 of the Dow by hand in the days before excel. It has been in my valuation arsenal ever since as a supplement to other measures and proves that there is nothing new under the sun, King Solomon himself probably used this formula.

Nick Pribus, a US citizen, has been actively involved investing in the Former Soviet Union since 1992 when he first traveled to Moscow supporting Honeywell's newly formed affiliate operation. In the following years Mr. Pribus was Controller of Eastern Europe for Honeywell responsible for accounting and development activities in Honeywell's newly formed affiliate operations in Warsaw, Prague, Budapest, Sophia, Kiev, St. Petersburg, and Moscow. Starting in 1998, Mr. Pribus was Investment Officer and Chief Financial Officer of the $100 million OPIC supported fund Agribusiness Partners International. That fund had control investments in eight leading companies in the FSU including the number one or two positions in poultry, glass container production, flexographic and offset printing, juice, water bottling, cheese, sparkling wine, ice cream, and dairy. Following the successful sale of fund portfolio companies in 2007, Mr. Pribus joined a private Kazakhstan company developing real estate, exploring in minerals, and continuing in agricultural activities. He continues to consult international investor groups interested in the Central Asia region using his extensive experience and deep contacts in the region, and is currently developing a $300 million private equity fund to focus on Kazakhstan and Central Asia. Mr. Pribus graduated with High Distinction from the Carlson School of Management at the University of Minnesota.


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