5-Bullet Sunday #56

Earnings season has finally started! I’m very happy with this, because many European companies are going to announce their fiscal 2020 results. For most of them it includes their annual dividend announcement.

Many of these companies escaped dividend cuts last year, because Covid-19 became an issue around the end of February. We are year further now, but I must say that I have high expectations for the dividend hikes. Let’s see!

As always, enjoy today’s 5-Bullet Sunday!


Content created this week:


5-Bullet Sundayย is a weekly blog post with 5 topics that were on my mind this week related to Financial Independence and Dividend Growth Investing or something that just fed my curiosity. An overview of earlier posts can be foundย here


๐ŸŒŸ How to recognize a declining business

This week Engineer my Freedom and I spoke about how to recognize a declining business in our latest podcast. It was a topic we chose after receiving a question from Richard IFI, one of our frequent listeners.

Today I would also like to share with you my show notes. Treat it as a check-list for which the majority has to be checked to consider it as a declining business.

How to recognize a declining business, the eDGI way:

  • Active Inertia (a company knows it needs to change, but it does this using old practices)
  • Revenue is declining or at least growing far less than competition
  • Little product innovation which is driving meaningful growth in the portfolio. Existing products are rather being churned to the bone in an unsustainable manner.
  • Financial engineering kicks in. You will typically see an increasing gap between GAAP vs non-GAAP EPS numbers.
  • Sudden write-offs in the portfolio and large “restructuring costs” (i.e. assets and goodwill)
  • Several consecutive years where the CEO is promising that theyโ€™re on it while using very wise-sounding MBA language like “laser focused capital allocation decisions”. Unfortunately this mostly results in an excuse after bad results later on (denial).
  • Acquisitions are overpaid and they consume a lot of their cash and additional debt (do I hear AT&T here?). Goodwill is blowing up on the balance sheet.ย 
  • Corporate culture looks mainly for internal succession and it all smells like an old-boys network. The sitting board of directors would fear outsiders who would shake things up, because it could mean their end of their position.

In the show we used the example of IBM when we were reflecting on their FY 2020 numbers. The following table is an example of what I mean with widening GAAP vs non-GAAP numbers.

Earnings per Share20202019201820172016
GAAP6.1310.579.516.1412.39
NON-GAAP8.6712.8113.8113.8013.59
accounting GAP41.44%21.19%45.22%124.76%9.69%
IBM GAAP vs non-GAAP

This is one of the strongest reasons why I think IBM is definitely a business in decline.


To conclude, these bullets aren’t based on scientific facts, because it’s just based on my experience. Hence, I’m really eager to hear from you as well. Which bullets would you add to this list?

๐ŸŒŸ This week’s earnings

There were 3 earnings that stood out for the dividend growth investors this week. The first one was Intel Corp ($INTC) which reported disappointing earnings.

The main take away here is to not be misled in their annual report by the full year-over-year growth numbers. The company made quite a negative U-turn during the midst of 2020 and it has yet to recover. The main reason for this is increasing competition due to delays in 7nm chips.

My buddy Engineer My Freedom wrote a nice analysis about Intel not too long ago and I think it’s worth checking it out if you consider owning some stocks of Intel.

Another company reporting their earnings was IBM. Well, what can I say. I hope you’re not having too much money into this stock, because these are really shitty numbers.

The only good thing in this press release is the reduction of debt. Even the 19% Red Hat revenue increase and the 10% cloud increase is not good when comparing it to the growth numbers of Microsoft and Amazon.

I would also like to point out that they are purposely not reporting year-over-year EPS percentages in change anymore, because it really sucks (see table in my earlier bullets). This is how you know that their trying to mask their poor performance.

Last but not least, Castellum AB reported rock solid numbers. They increased their Funds from Operations (FFO) by 7% and just hiked their dividend by another 6%. I’ll share more about this company in an upcoming post.

๐ŸŒŸ Upcoming Earnings & Dividend Announcements

The following dividend stocks are announcing their quarterly earnings this week. For most of these it will also be the full-year 2020 earnings.

Earnings Calendar Dividend Stocks week of 26 January 2021
earnings calendar 25 January 2021

I expect the following stocks to announce a dividend hike: Philips, Kimberly-Clark, Novartis, SEB AB, LVMH, Kone Oyj, Elisa Oyj, SAP SE and Chevron. 3M typically announces their new dividend in the first week of February.

Fingers crossed ๐Ÿคž


PS: follow me on Facebook, Instagram or Twitter if you would like to see these one-sliders quicker or specific stock related one-sliders which I aim to share once a week.

๐ŸŒŸ Recommended Reads

I spoke earlier about Active Inertia in the context of how to recognize a declining business. I would argue that it’s very important for investors to have a grasp on this concept. Hence, I would recommend to read the following classic 1999 article from Harvard Business Review: why good companies go bad. It’s a timeless piece of knowledge which still applies today.

Nathanael wrote a really good article about portfolio diversification versus portfolio concentration. It is in French, but we Europeans know how to deal with that. Good content will never pass our eyes, because we’re the masters in using Google Translate ๐Ÿ’ช. Having said that, there were some good lessons in there, so worth having a look.

David Frank shared his goals for 2021 (in German (hint: gTranslate)). One of his goals is to make another big trip to a European country this year. David, invitation stands, come to Poland and hop over for a drink. Poland is a great country which has everything you can desire: white beaches, mountains, rivers, lakes and even an UNESCO Forrest. There are neither too many tourists, so you can be rest assured that you will have some great quality time.

๐ŸŒŸ Recommended Video

Few weeks ago I shared a video from Peter Lynch about how to invest when stock markets are at all time highs. So let’s throw in another legend this weekend: Jack Bogle ๐ŸŽš

Stock markets are at all-time highs, so these videos stay very timely for me.


Thatโ€™s it for the this week! I hope that you enjoyed this weekโ€™s 5-Bullet Sundayย ๐Ÿ™

As always, have a lovely week ahead!

Yours Truly,

European Dividend Growth Investor


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Disclaimer

Iโ€™m not a certified financial planner/advisor nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer. Iโ€™m not a finance professional through formal education. Iโ€™m a person who believes and takes pride in a sense of freedom, satisfaction, fulfillment and empowerment that I get from being financially competent and being conscious managing my personal money. The contents on this blog are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I canโ€™t promise that the information shared on my blog is appropriate for you or anyone else. By reading this blog, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information provided on this blog.

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European DGI

It's my desire to retire early via Dividend Growth Investing as a passive income stream. This is not easy and especially when living in Europe. That's why I started this blog and share my journey: to give you a European perspective.
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Andrea Kirkby
Andrea Kirkby
7 months ago

Another sign of a declining business is when there’s a real growth area, whether it’s cloud computing about ten years ago, or electric vehicles, or a new method of production, whatever, and the company isn’t just slow in taking advantage of it, the CEO continues to dismiss the new trend as a fad and unsustainable long after it’s become obvious which way things are moving.

But the GAAP vs non-GAAP is an interesting signal, and new to me. I’m going to check that one out on my own stocks.

Jung in Rente
7 months ago

Thank you so much for including my article in your weekly blog post! I really appreciate that! ๐Ÿ™‚

You don’t have to invite me twice to Poland – I love that country!

Especially, as my ancestors are from Silesia.

I already visited places like Warsaw, Krakow, Katowice, Wroclaw, Poznan and Zakopane.

But I would really love to see even more of that beautiful country!

So, where can I find you?! ๐Ÿ˜‰