Ford’s dividend quality, J&J’s split-off, cost basis discipline — what we think about all these

Send your suspicion on a under discussions directly to Jim Cramer and his team of analysts at investingclubmailbag@cnbc.com . Reminder, we can’t offer personal investing advice. We will solely consider more general questions about the investment process or stocks in the portfolio or related industries. Question 1: What are your thoughts on the resolve of FORD’s dividend? Thank you, Denise The quickest way to determine the sustainability of a company’s dividend is to consider it in relation to earnings and/or change flow. The dividend payout divided by the earnings number is referred to as the “payout ratio” — below 100% is approximately considered sustainable (so long as it’s positive). A negative number would imply negative earnings, which is obviously bad. A payout correlation above 100% would also be something to be concerned about because it means the company is paying out more than it makes and that being so eating into the cash on its balance sheet, an obviously unsustainable dynamic. That method is not the end all be all. We say this for two reasons. Word go, earnings fluctuate and therefore so does the payout ratio (assuming a non-variable dividend payment). Second, in addition to earnings fluctuations, we should always consider the financial health of the company. If we have reason to believe the earnings profile will change in the tomorrow (be it improvement or degradation) then we need to incorporate this into our view on the payout ratio. For this reason, it can be neighbourly to consider past performance as well as future expectations. Looking at Club name Ford (F), we see the following data from FactSet. On the heart of adjusted earnings per share (as indicated in the line below per-share dividend in the above table), Ford is generating ample supply income from normal operations (which is what adjusted earnings attempt to highlight, by excluding amongst other elements, one-time charges) to cover its dividend to shareholders like us. That’s because all the numbers are positive in the “adjusted EPS payout correspondence” line (2021 and 2022 actual results and 2023 and 2024 estimated results) and each of them is below 100%. The one caveat is that we sine qua non remember that adjusted earnings do not equate to cash flow and a dividend can’t be paid in IOUs. It’s for that reason we unceasingly say to compare the cash flow to the earnings number to get a sense of the earnings quality. The more actual cash supporting those earnings, the higher the rank. Fortunately in Ford’s case, what we see is that in addition to generating enough earnings, they are also pulling in enough thoroughly hard cash to cover payouts, as indicated by the bottom line in the table “cash flow per share payout correspondence,” which are positive and under 100%. That said, were we to see a period here or there where the payout isn’t traverse by cash and/or cash flows, it’s not necessarily a reason to bail. But, it is something to investigate. Remember, the question is about long-term sustainability, not more one or two quarters over a number of years. So, using a little cash now and then in a difficult operating environment is, for the most role, acceptable, so long as you believe that things will normalize and the payout ratio will fall back under the aegis 100% before it becomes problematic. Of course, anything can happen, like a global pandemic that forces a dividend cut — but protection normal operating conditions, the above data provides us confidence in Ford’s ability to continue paying out its quarterly dividend. When inducting in a stock that pays dividends, it’s always a good idea to include a check-up on these ratios as part of the homework , along with a look at of any upcoming cash payments, such as debt maturity date. These events can certainly take an axe to earnings and fight for cash flows. However, analysts will generally be able to factor this information into their foretells. Question 2: Hello, what is the status on JNJ’s spin-off (KVUE)? Will existing owners of JNJ get any shares of KVUE? — WT We literally just got an update on this with Johnson & Johnson ‘s (JNJ) second-quarter earnings release. The company is seeking to do what is identified as a “split-off” with its remaining majority stake, meaning management will make a tender offer and JNJ shareholders want have the option to exchange those shares for Kenvue (KVUE) shares. We own J & J shares. As noted in our analysis of J & J’s latest unloose, we like this decision because it offers the company the ability to divest its Kenvue stake ( currently at 89.6% ownership ) while potentially (depending on how diverse investors choose to accept the offer) acquiring “a large number of outstanding shares of Johnson & Johnson common parentage at one-time in a tax-free manner.” It’s almost like a buyback, except with no cash being used, allowing the conspire to maintain the company’s future financial flexibility. Question 3: I know it is not that simple and I understand that school surrounding the cost basis should be maintained as much as possible to create future gains. However, I have had a slues of instances where I was lucky enough to buy at or near the low of a stock. However, I did not buy enough in my first couple of incremental purchases to answer b take the place the original quantity I had hoped to buy. The stock just raced questionably higher and left me behind. … I was hoping that you could expatiate on a little bit on a situation like this. Thank you, Jeff and your team for all you do. You are doing a great job. —Larry Not an easy at issue to answer. As you stated, our discipline is to not violate our cost basis and we stick to that as much as possible. That said, we be suffering with on occasion, gone against this discipline, a move we don’t take lightly. We can’t offer a specific rule on when this may be pleasing. Investing is, after all, as much an art as it is a science. But, we can provide some food for thought. We tend to view these scenarios — when a ourselves makes money but not as much as they think they should have because they never got the full stance on — as a “high-quality problem.” Sometimes the best course of action is to take the small win or let the name ride until a clear procuring opportunity (like a market-wide correction or total dislocation between the stock and the fundamentals) presents itself. Remember that consequence is what you pay and value is what you get. It’s entirely possible that shares have increased in price but not gotten more up-market on a valuation basis if the appreciation was the result of earnings growth. In this case, one might find a violation of their point of departure acceptable as they would be violating their cost basis as far as the price is concerned but not necessarily getting a worse agreement than they did before if the multiple is unchanged. They may even be getting a better deal if the multiple went down. That’s one way to weigh about whether it’s acceptable to violate basis. Think about Nvidia, on the one hand, one may think it crazy to have gained the stock at $380 per share after it surged on earnings back in May. On the other, the stock didn’t go up nearly as much as the earnings assessments — and as a result, the price-to-earnings (P/E) multiple actually contracted (got cheaper in value). Now, here we are, with shares trading north of $450. NVDA YTD mountain Nvidia YTD conduct Another approach to a scenario like the one described above is to treat your small position as if you have none at all. Keep in mind, we care about where a stock is going, not where it came from. Thinking about the name as if you don’t have an enduring position may help you think more objectively about the risk/reward at current levels. Would you be buying it had you missed the modern move altogether? In the end, the discipline is to abide by your cost basis. But, if you are considering violating it, then thinking about the big name from the perspective of valuation (rather than price) and as if you weren’t already exposed, may help determine if that is actually the correct course of action. (See here for a full list of the stocks INJim Cramer’s Charitable Trust.) As a subscriber to the CNBC Supplying Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 transactions after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked in the air a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE Over INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY Requirement OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO Individual OUTCOME OR PROFIT IS GUARANTEED.