Frontline the Frontrunner

The first (and last) thing I ever learned about Frontline, Ltd is that it pays a huge dividend.

I had first seen the oil tanker company mentioned in an article concerning companies that have historically paid disproportionate dividends. The premise of the article was that high-performance companies with high dividend ratios can set you up with a nice retirement assuming you are investing a considerable amount. If the company’s generosity pays off and its share price rises, the investment essentially becomes a “high-yield” fixed income security with an ever increasing principal payment due at its ”maturity date”– which you get to decide! Not to mention the fact that qualified dividends  (though Frontline– being an international company– unfortunately wouldn’t qualify) are taxed at a lower rate than interest payments.

Above are our two current positions for FRO (these figures do not take dividends into account.)

Though our initial position represents a measly 4.68% of our invested funds, seven-month 30.2% unrealized gains are impossible to ignore. How’s that for inflation protection on a fixed income security!

To dump your money into every Tom, Dick, and Harry that offers a 10+% dividend yield would be foolish, but if it looks like the company can afford to pay the dividend for the foreseeable future it would be foolish not to jump on the train.

With the way that Frontline has been blowing the S&P out, unfortunately its dividend yields (only for potential new lots, of course) will diminish. For this reason, I am glad that even in my absence we decided to the opportunity to invest a full month’s share in FRO for August 2008 while we can still take advantage of above-average income yields. Needless to say, in the future we should keep our eyes peeled for similar opportunities in other sectors.

8/6/08 meeting minutes

Columbus Dividends meeting minutes for August 6, 2008

- 3 members absent

- Investments considered for High Risk: Transportation

o Union Pacific

o Tata Motors (to be revisited)

o Honda

o Frontline

- Final choice to invest for August: Frontline

- Annual meeting beginning of September

- Fiscal year ends September 1

- As of 8/6/08 the club was up .84%

Blind Buying: Hey… It works in the world of fragrance!

Sometimes, as Jim Cramer stated on his daily CNBC show, you have to close your eyes and buy.

 

If you are a religious “Mad Money” viewer, you may point out that Cramer offered this advice quite a while back in a bull market. He was implying that even though everything was overvalued, investors should still ‘get their bull on’. Stocks were moving higher, and to miss out on the potential gains for the sake of rational thinking would be…well, quite irrational.

 

This is essentially the strategy we have employed for the last eleven months (though due more to inexperience and club guidelines than to any type of allocation strategy). If the Dow drops 100 or comes up 70, we buy every month… like clockwork. No sales, no short sales, certainly no Iron Condor option spreads. I don’t know if Mike closes his eyes when he clicks buy on our TradeKing page, but for argument’s sake let’s imagine he does.

 

Cramer could rationally offer the same advice in this market, as he could in the market a year ago. Conventional wisdom tells us that: if you will live to see the profits from blind investment during a period of uncertainty, you won’t regret your decision (as long as you diversify). Looking at historic returns, if we keep working our current strategy, we won’t regret putting our money in for the long term. No two decade period has lost investors money (in net), not even periods that included ’29, the great depression and WWII.

 

Are there losses to be saved by holding off on our blind buy strategy during this downturn? Maybe. A good argument could be made for holding off… especially during our safe spot months. If your name is VTI and your job is to track the S&P, for the foreseeable future, providing the same mediocre returns as the market as a whole isn’t exactly outside of your job description. At least through the end of the year, a better safe spot could be found at our local mattress retailer.

When it comes to individual companies, however, I think we have some faith on our research. If market conditions prevent decent returns with our current strategy, we wouldn’t have sizable (though unrealized) gains through companies like V and FRO on our books.

 

Rather than attempting to time the moment when the market bottoms out, which it may already have, I think our focus should be on finding more winners. Wall Street analysts are suggesting that pharmaceuticals (as a whole sector) should perform well in the near future. Perhaps we should try that sector again, maybe in lieu of the next scheduled time when we flush our money down the S&P toilet.

 

Let me know what you think…

My justification of our biggest blunder to date:

So, the second time we were choosing an individual company it was supposed to be a higher risk area, so we went with pharmaceutical companies. In retrospect this was probably a pretty good sector to tackle early, not on a chemical level, but in terms of business model these are easy companies to understand. They raise capital, do research, and then if a product works they make a ton of money from it funding dividends, and additional research.

 

The big companies we considered like Pfizer, and Eli Lilly have numerous patents on drugs that are making them a ton of money, but that in cycles will expire and the performance of the stock will be based on how good a job they do of replacing those products with new ones. Smaller companies in this vain are working on a single product, and if it works who knows what they will do (like Mannkind).

 

In the end we decided to split our investment between MGI Pharma (which I will write about later), and Pfizer. Pfizer was meant as a hedge against the riskier investment, due to its age, size, and historic significance. As of now Pfizer is our worst investment, and the only thing I can really say in its favor is that it was a smaller one. It has paid a nice dividend, and seems set to continue to, but its shares have suffered.

 

A product lineup which included Lipitor, Diflucan, Zithromax, Viagra, and Celebrex were big influences on our decision, in addition to some quick interviews I did with some friends of mine in the medical profession (who prescribe these drugs more than other companies’ drugs). It may still work out for us though, any of their current projects of which they always have many could turn into the next Viagra, or Lipitor. If it does you’ll start to see that per share price rise in addition to the generous dividend, however if their research hits snags, or the drugs they produce don’t catch on, we could eventually see the dividend dropped, while the stock price continues to fall.