Thursday, March 17, 2016
Even though motorists are happy with lower gas prices, investors in oil and natural gas companies are feeling pinched away from the pump as $7.4 billion in dividends have dried up. For example, Anadarko Petroleum reduced its dividend by 81 percent and Kinder Morgan and Devon Energy both reduced dividends by 75 percent. Kinder Morgan was the largest dividend cut in terms of dollars ($3.44 billion), followed by ConocoPhillips ($2.42 billion). Chevron has chosen another alternative as it is reduced its capital spending and is considering increasing its debt to maintain the company's dividend. The steep decline in energy prices has also hit capital budgeting as oil and gas companies have resulted in the cancellation of more than $100 billion in new projects.
Tuesday, March 15, 2016
Historically, cat bonds have been issued by insurers or reinsurers to cover major losses. For example, a cat bond could have a trigger if the insurance company had to pay more than $2 billion in claims dues to a hurricane. However, many companies are finding that insurance companies are unwilling to cover major risks, or are charging a large premium to do so. As a result, corporations are seeking to insure losses directly with capital markets rather than through an insurance company. For example, Amtrak just issued $275 million in cat bonds that cover damage to its Northeast corridor infrastructure due to storm surges, wind damage, or earthquakes. And, last year, Kaiser Permanente issued $300 million in cat bonds to cover earthquake risk.
Activist investing has been on the rise in recent years. According to CFO, FactSet reported 355 activist campaigns in 2015, with 127 resulting in at least one board seat, while Ernst & Young reported 516 activist encounters. However, today's activist investors seem to be more collaborative than corporate raiders of the past. Importantly, the rise in activist investors appears to have lead to increased conversations between management and investors, which is a positive result. In fact, clear conversations between management and investors can head off confrontations as management may have information that shows an action desired by investors is a bad idea. While activist investing does not seem to be slowing any time soon, it does appear that in many cases, it has resulted in management becoming more focused on company performance and becoming more transparent.
Moody's Investor Services expects default rates on junk bonds to increase to 4 percent this year, up from the 3.5 percent default rate in 2015. The default rate for all bonds is expected to be 2.1 percent for 2015. Low commodity prices, widening yield spreads, and potential interest rate increases by the Federal Reserve are reasons given by Moody's. During 2015, there were 109 corporate defaults, totaling $97.9 billion.
Students often ask us how stocks are valued in the "real world." While analysts go into more depth than we do in this textbook, commonly used models are PE ratios, EV/EBITDA ratios, and free cash flow models, which we have discussed. However, in some cases, these valuation models go up in smoke. Take a look at Cannabis Sativa (CBDS), which is trading at just under $2 per share and has a market cap of about $31 million. The company has had negative earnings for the past three years, but more importantly, had revenues of $8,000 through the first 9 months of 2015 and $7,000 in 2014! Since the company has had no earnings, the PE ratio is not reported, but the PS ratio is almost 2,000. All-in-all, CBDS is priced at an extremely high growth rate.