As many of you might be aware, the investment themes that worked best this year were high dividend paying stocks and treasuries.  Many market prognosticators expect the same trends to continue.  It is very important to look at what the dividend payout ratio is which can be calculated by dividing the dividend payout by net income.  Some companies like Centurylink (CTL) or Frontier Communications (FTR), pay out nearly 100% of net income or greater, meaning there is very little cushion to invest in growing the business.  At TTCM we are taking advantage of the time arbitrage between low stock prices due to short term uncertainty, versus long term dividends and capital appreciation.
A perfect example of this is Citigroup.  Currently the market cap is about $76 Billion with the stock trading at $26.14.  Over the last twelve months they have earned $11.4 Billion meaning the stock has a current earnings yield of 15%.  Next year we expect them to earn about $5-6 a share pushing the forward earnings yield over 20%.  Assuming they earn $5 a share and pay out 50% of their earnings as a dividend, you’d be getting $2.50 a share as a dividend.  At the current price this would equate to roughly a 10% yield while even at $50 a share the yield would still be quite high at 5%, meanwhile they are still investing 50% of earnings into the business, allowing book value and earnings power to grow.
You can substitute Citigroup with several of the financial that we have been investing in because the common theme is that while the short term is murky, the valuation gives us a large margin of safety, and attractive potential future returns.  The primary things standing between us meeting our investment goals is time and volatility.  As Warren Buffett once said “The Market Timer’s Hall of Fame is an empty room” we acknowledge that the timing of this arbitrage between price and value can be tough to get right.  In our opinion it has been elongated by the political quagmire in both Europe and the USA, but eventually things will stabilize and the key is not to miss the opportunity.  Below is an excerpt from Barrons outlining the elements which will allow Citigroup to return capital.  Thank you very much!