Financials

I want to give a quick analysis of where we are with earnings season.  At a high level, earnings have been quite good for most companies and especially the ones I own.  The tax plan enacted at the end of the year has given another growth catalyst to companies already making record profits.

As part of managing my holdings I have been reviewing the reports that have come in.  Perhaps the biggest thing I am looking for is the 2018 guidance provided by management.

I started by putting all of my tickets into Finviz and sorting by the earnings date to see what has been reported thus far.  Here is a link specific to my portfolio.

Big list so far!  The first that reported (Nike reported in December before the tax plan was even passed).

The Banks

J.P. Morgan and Wells Fargo were among the first to report with J.P delivered a beat and Wells a miss.  That aside, neither bank seemed to provide any guidance for 2018.  While guidance should not be taken as fact, sometimes management will provide their reasoning behind the assumptions behind earnings expectations.  I think the newness of the tax plan is not fully captured by the market as every company has to figure out exactly how the new rules will impact their specific circumstances.  That withstanding, I did read a good article covering why banks should be great investments over the long haul.

I have a hard time considering selling a bank due to some of the tailwinds focused in the article.  If you don’t want to read the details here’s the high level summary points:

  • Tax reform
  • Rising rates coupled with the Fed unwinding it’s balance sheet
  • Regulatory reform
  • Technology advances driving efficiencies (think blockchain)

Travelers

Travelers delivered a beat, earnings fluctuated due to catastrophic losses but revenue still grew 6% year over year and the company just loves returning money to shareholders.

I love the insurance company model.  They take your money, invest it while they hold it and later pay back most of it to you.

The shareholder yield is the net sum of all money returned to shareholders; buybacks + dividends + (net change in debt).  Travelers prefers to deliver more money back through net buybacks than dividends.  Buybacks technically are more tax efficient than dividends.

Here’s a quick brief; first income is taxed at the corporate level.  Dividends then paid to you will be taxed at your tax rate.  Having these stocks in a tax advantaged plan such as a 401K will exclude you from this tax.  Another perk is that a buyback program can be scaled up or down depending on business results than being boxed in with a dividend that is too high.

From this chart, the blue line is total dividends paid over time and while it has generally increased it has been quite slow.  This is due to the impact that reducing shares has.  Sharecount has reduced nearly 30% in the past 5 years which allows the company to give a nice yearly dividend raise without increasing the total dividend payments (look at the steps in the orange line).

Summing all of this up, it’s easy to see why Travelers has delivered alpha (market beating returns) over time.

For 2018 the company has not provided guidance but currently analysts consensus is about $10.74 in adjusted EPS.

That may put the stock currently at only at about 14x expected 2018 earnings.  Coupled with some of the tailwinds expected for financials and this stock is not expensive.  Earnings will fluctuate due to catastrophic events but with a low dividend payout they can scale their buyback program up or down to continue returning money to shareholders.

Conclusion

J.P. Morgan, Wells Fargo and Travelers delivered decent results with Wells being the laggard.  While no company gave specific 2018 guidance these stocks all seem to have runway for earnings growth.

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