Financing Cash Flow: Changes in Debt & Equity
Posted on September 9, 2014 | Dividend Investing
In our series on the cash flow statement, we have examined operating cash flows, which measures cash flow through day-to-day operations, and investing cash flows, which measures the net cash from investment or disposition of long-term assets held by the firm. This month we examine financing cash flows, which pertains to changes in capital funding, namely debt and equity. Cash flows from financing looks at activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing or redeeming more stock.
One cannot automatically say with cash flows from financing that a negative number is bad and a positive one is good. Early-stage and high-growth companies are unlikely to generate enough cash from operations to fund investment, so they need to turn to capital providers to issue more company stock or notes and bonds. These firms will have positive cash flows from financing. A more mature company should be generating excess cash from operations that exceeds the investment needs of the company, allowing the firm to reduce its debt, repurchase shares and pay a dividend to shareholders. These firms will tend to have negative cash flows from financing. However, even a mature firm may have positive financing cash flows after issuing debt or equity to fund a large acquisition.
Each line item of the financing cash flows section should be evaluated to understand whether the company is raising capital or repaying capital and what changes are being made to the capital structure—i.e., the proportion of debt to equity. A financing activity only appears on the cash flow statement if there is an exchange of cash during the specified period.
September Monthly Report, and Surprise ECB Rate Cut
Posted on September 5, 2014 | Dividend Investing
The new September monthly report is now online. In it, we discuss why we look at both relative and absolute valuations when analyzing a stock. We also explain what cash from financing is and why you should care.
No changes were made to the DI portfolio, due to a lack of acceptable candidates. The DI tracking portfolio’s cash position, though still small relative to the overall size of the portfolio, is growing. Next month, we will consider reinvesting in one or more of our existing holdings if no new stocks appear on our radar screen.
The S&P 500 Is No Longer Far Away From 2,500
Posted on August 29, 2014 | Dividend Investing
The S&P 500 index hit a new milestone this week, crossing above 2,000 for the first time in its history. The new record high wasn’t actually any more special than any previous record high, other than for its number. Big, round numbers catch attention and 2,000 is a big, round number.
What’s always missing in the conversation are considerations of inflation, economic growth and math. If stock prices rise in reaction to inflation, then they should rise over time. Similarly, if stock prices are influenced by economic growth, then they rise as the economy expands. History shows that over the long term, stock prices reflect earnings growth, which in turn are impacted by both inflation and economic expansion. Therefore, the major stock indexes have set and risen above record levels and are expected to continue to do so in the future (with periodic interruptions along the way).
Inversions Can Lead to Capital Gains Taxes
Posted on August 22, 2014 | Dividend Investing
In an inversion transaction, the foreign corporation “buys” the American corporation. This allows for the domicile of the new corporation to move from the United States to the foreign country. (In the case of Medtronic, its headquarters will move from Minneapolis to Dublin.) Shareholders of record as of the date of the merger will see their existing shares swapped for stock in the new combined entity.
Have the Bears Been Sent Running?
Posted on August 15, 2014 | Dividend Investing
U.S. stocks continue to show resiliency. A week after nearly touching official pullback territory (a decline of at least 5%), large-cap stocks have rebounded nicely. The NASDAQ index enjoyed its strongest weekly performance since February, while the S&P 500 index had its best weekly performance since April.
The bond market is performing well too. Yields on the 10-year Treasury note fell to 2.34% today, the lowest closing yield of the year. To put this number in perspective, the benchmark note started 2014 with a yield of 3.03%.
Mr. Market is causing those who have made bearish forecasts to seem silly, as investors who have maintained their allocations to stocks and bonds have done well. But, while the bears may have been sent running this week, they have not been banished. That’s actually a good thing, because when sentiment runs too hot (which, at least for stocks, it currently is not) downside risks intensify.
Enjoy this week’s good returns, but remember that market conditions can change quickly.
Investing Cash Flow: The Purchase or Sale of Long-Term Assets
Posted on August 13, 2014 | Dividend Investing
In the previous article of this series, we examined operating cash flows, which measures day-to-day profitability. This month we move on to the next primary section of the cash flow statement: cash flows from investing activities. Investing activities pertain to the acquisition or disposal of non-current assets (investments) and are usually classified as either capital expenditures—money spent on items such as new property, plant or equipment—or monetary investments such as the purchase or sale of government bonds or stocks of other firms. It is important to remember that, as with all cash flows, an investing activity only appears on the cash flow statement if there is an exchange of cash during the specified period.
Cash flows from investing activities are separately reported because they tell whether the company is investing in assets that are expected to result in future profits or whether it is disposing of long-term assets already owned. It is important to note that investing activity does not take into account the issuance or redemption of company’s own stock or debt.
Mergers and Speculators, Plus the August Monthly Report
Posted on August 9, 2014 | Dividend Investing
We’re more concerned with fundamental factors such as dividends and cash flow than day-to-day price changes. In the August Monthly Report, which is now online, we give you some updated insight into how companies have been spending their cash. We also give you more insight into the cash flow statement.
What you won’t find are any portfolio changes. We simply could not find a quality company trading at an attractive enough valuation to warrant making a change.
Downside Volatility Reappears
Posted on August 1, 2014 | Dividend Investing
Downside volatility reappeared yesterday as the major indexes fell around 2%. It was the second-worst day of the year for the Dow Jones industrial average and the third-worst day of the year for the S&P 500 index. More importantly, it wasn’t unusual. Daily moves of 2% have occurred in a variety of bull and bear markets throughout market history. It just feels unusual because the markets have been so relatively calm this year.
Operating Cash Flow: Measuring Day-to-Day Profitability
Posted on July 31, 2014 | Dividend Investing
In the June DI Monthly, we introduced the statement of cash flows, which shows how much cash a company is generating through operations as well as through changes in company assets, liabilities and equity. This month, we examine the calculations behind cash flow from operating activities, which is a measure of the amount of cash generated by normal business operations through revenues from selling goods and providing services. It excludes activities classified as investing activities or financing activities.
Cash flow from operating activities (also known as operating cash flow or cash flow from operations) has a very simple objective-to show whether a firm’s day-to-day operations generated or depleted cash. If net cash flow from operations is negative, it means that the company is spending more cash than it is generating in producing and selling its goods and services. If it is positive, the company is generating more cash than it is spending on its day-to-day operations.
Lots of Results News to Share
Posted on July 25, 2014 | Dividend Investing
We have much earnings news to share with you this week, so we’re going to keep our opening comments brief. In general, earnings have been good, but not great. There were some positive surprises, but also some misses too. Mostly, the DI companies have been performing as we expected them to.
Wall Street is very focused on short-term results. As investors, we’re more focused on the trends. We want to know how a business is evolving and whether the change is in a positive or negative direction. Sometimes a quarterly report can be enough to give us reason to reconsider our position in a stock; more often, however, it is a trend built over several quarters that will alter our opinion.