Send your questions on to Jim Cramer and his team of analysts at investingclubmailbag@cnbc.com . Reminder, we will not offer personal investing advice. We’ll only consider more general questions on the investment process or stocks within the portfolio or related industries. Query 1: What are your thoughts on the soundness of FORD’s dividend? Thanks, Denise The quickest strategy to determine the sustainability of an organization’s dividend is to think about it in relation to earnings and/or money flow. The dividend payout divided by the earnings number is known as the “payout ratio” — below 100% is mostly considered sustainable (as long as it’s positive). A negative number would imply negative earnings, which is clearly bad. A payout ratio above 100% would even be something to be concerned about since it means the corporate is paying out greater than it makes and due to this fact eating into the money on its balance sheet, an obviously unsustainable dynamic. That method is just not the top all be all. We are saying this for 2 reasons. First, earnings fluctuate and due to this fact so does the payout ratio (assuming a non-variable dividend payment). Second, along with earnings fluctuations, we should consider the financial health of the corporate. If we’ve got reason to imagine the earnings profile will change in the long run (be it improvement or degradation) then we want to include this into our view on the payout ratio. Because of this, it will probably be helpful to think about past performance in addition to future expectations. Club name Ford (F), we see the next data from FactSet. On the idea of adjusted earnings per share (as indicated in the road below per-share dividend within the above table), Ford is generating enough income from normal operations (which is what adjusted earnings attempt to spotlight, by excluding amongst other things, one-time charges) to cover its dividend to shareholders like us. That is because all of the numbers are positive within the “adjusted EPS payout ratio” line (2021 and 2022 actual results and 2023 and 2024 estimated results) and every of them is below 100%. The one caveat is that we must keep in mind that adjusted earnings don’t equate to money flow and a dividend cannot be paid in IOUs. It’s for that reason we all the time say to check the money flow to the earnings number to get a way of the earnings quality. The more actual money supporting those earnings, the upper the standard. Fortunately in Ford’s case, what we see is that along with generating enough earnings, also they are pulling in enough cold hard money to cover payouts, as indicated by the underside line within the table “money flow per share payout ratio,” that are positive and under 100%. That said, were we to see a period here or there where the payout is not covered by money and/or money flows, it isn’t necessarily a reason to bail. But, it’s something to analyze. Remember, the query is about long-term sustainability, not about one or two quarters over a lot of years. So, using just a little money at times in a difficult operating environment is, for essentially the most part, acceptable, as long as you think that things will normalize and the payout ratio will fall back under 100% before it becomes problematic. After all, anything can occur, like a world pandemic that forces a dividend cut — but under normal operating conditions, the above data provides us confidence in Ford’s ability to proceed paying out its quarterly dividend. When investing in a stock that pays dividends, it is often a great idea to incorporate a check-up on these ratios as a part of the homework , together with a review of any upcoming money payments, similar to debt maturity date. These events can definitely take an axe to earnings and compete for money flows. Nevertheless, analysts will generally give you the option to factor this information into their forecasts. Query 2: Hello, what’s the status on JNJ’s spin-off (KVUE)? Will existing owners of JNJ get any shares of KVUE? — WT We actually just got an update on this with Johnson & Johnson ‘s (JNJ) second-quarter earnings release. The corporate is in search of to do what’s referred to as a “split-off” with its remaining majority stake, meaning management will make a young offer and JNJ shareholders could have the choice to exchange those shares for Kenvue (KVUE) shares. We own J & J shares. As noted in our evaluation of J & J’s latest release, we like this decision since it offers the corporate the flexibility to divest its Kenvue stake ( currently at 89.6% ownership ) while potentially (depending on what number of investors select to simply accept the offer) acquiring “numerous outstanding shares of Johnson & Johnson common stock at one-time in a tax-free manner.” It’s almost like a buyback, except with no money getting used, allowing the team to take care of the corporate’s future financial flexibility. Query 3: I realize it is just not that easy and I understand that discipline surrounding the associated fee basis ought to be maintained as much as possible to create future gains. Nevertheless, I actually have had a lot of instances where I used to be lucky enough to purchase at or near the low of a stock. Nevertheless, I didn’t buy enough in my first couple of incremental purchases to fill the unique quantity I had hoped to purchase. The stock just raced questionably higher and left me behind. … I used to be hoping that you may expand just a little bit on a situation like this. Thanks, Jeff and your team for all you do. You might be doing an incredible job. —Larry Not a simple query to reply. As you stated, our discipline is to not violate our cost basis and we keep on with that as much as possible. That said, we’ve got every so often, gone against this discipline, a move we do not take frivolously. We will not offer a particular rule on when this will be acceptable. Investing is, in spite of everything, as much an art because it is a science. But, we are able to provide some food for thought. We are inclined to view these scenarios — when an individual makes money but not as much as they think they need to have because they never got the complete position on — as a “high-quality problem.” Sometimes the most effective plan of action is to take the small win or let the name ride until a transparent buying opportunity (like a market-wide correction or total dislocation between the stock and the basics) presents itself. Keep in mind that price is what you pay and value is what you get. It’s entirely possible that shares have increased in price but not gotten dearer on a valuation basis if the appreciation was the results of earnings growth. On this case, one might discover a violation of their basis acceptable as they might be violating their cost basis so far as the worth is worried but not necessarily getting a worse deal than they did before if the multiple is unchanged. They could even be getting a greater deal if the multiple went down. That is one strategy to take into consideration whether it’s acceptable to violate basis. Take into consideration Nvidia, on the one hand, one might imagine it crazy to have purchased the stock at $380 per share after it surged on earnings back in May. On the opposite, the stock didn’t go up nearly as much because the earnings estimates — and in consequence, the price-to-earnings (P/E) multiple actually contracted (got cheaper in value). Now, here we’re, with shares trading north of $450. NVDA YTD mountain Nvidia YTD performance One other approach to a scenario just like the one described above is to treat your small position as if you might have none in any respect. Remember, we care about where a stock goes, not where it got here from. Interested by the name as in the event you do not have an existing position may show you how to think more objectively in regards to the risk/reward at current levels. Would you be buying it had you missed the recent move altogether? Ultimately, the discipline is to abide by your cost basis. But, in the event you are considering violating it, then fascinated about the name from the angle of valuation (reasonably than price) and as in the event you weren’t already exposed, may help determine if that’s indeed the proper plan of action. (See here for a full list of the stocks INJim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked a couple of stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Send your questions on to Jim Cramer and his team of analysts at investingclubmailbag@cnbc.com. Reminder, we will not offer personal investing advice. We’ll only consider more general questions on the investment process or stocks within the portfolio or related industries.
Query 1: What are your thoughts on the soundness of FORD’s dividend? Thanks, Denise
