Send your questions directly to Jim Cramer and his team of analysts at investingclubmailbag@cnbc.com. Reminder, we can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries.
Question 1: What are your thoughts on the stability of FORD’s dividend? Thank you, Denise
To determine the sustainability of a company’s dividend, it’s important to consider the dividend payout in relation to the earnings and/or cash flow. The payout ratio, which is the dividend payout divided by the earnings, is a useful metric. A payout ratio below 100% is generally considered sustainable, while a negative ratio implies negative earnings, which is not good. A payout ratio above 100% means the company is paying out more than it earns, which is unsustainable.
However, the payout ratio is not the only factor to consider. Earnings can fluctuate, so it’s important to also assess the financial health of the company. If there is reason to believe that the earnings profile will change in the future, it’s necessary to take that into account when evaluating the payout ratio. Looking at Ford’s data, it shows positive earnings in relation to the dividend payout, indicating sustainability. It’s important to note that adjusted earnings do not necessarily equate to cash flow, so it’s advisable to compare the cash flow to the earnings for a better understanding of the earnings quality. Fortunately, Ford’s cash flow is also positive and covers the dividend payout.
While occasional periods where the payout isn’t fully covered by cash and/or cash flows may occur, it’s not necessarily a cause for concern as long as it’s not a recurring issue. It’s essential to assess long-term sustainability rather than focus on short-term fluctuations. Taking into account the data provided, Ford appears to have the ability to continue paying its quarterly dividend.
When investing in dividend-paying stocks, it’s always a good idea to consider these ratios and also review any upcoming cash payments, such as debt maturity dates, as these events can impact earnings and cash flows.
Question 2: Hello, what is the status on JNJ’s spin-off (KVUE)? Will existing owners of JNJ get any shares of KVUE? — WT
According to Johnson & Johnson’s second-quarter earnings release, the company is planning a “split-off” with its majority stake in Kenvue (KVUE). This means that JNJ shareholders will have the option to exchange their shares for KVUE shares. As shareholders of JNJ, we view this decision positively because it allows the company to divest its Kenvue stake while potentially acquiring a large number of JNJ shares in a tax-free manner. This decision helps maintain the company’s future financial flexibility.
Question 3: I know it is not that simple and I understand that discipline surrounding the cost basis should be maintained as much as possible to create future gains. However, I have had a number 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 fill the original quantity I had hoped to buy. The stock just raced questionably higher and left me behind. … I was hoping that you could expand 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
It’s not easy to answer this question. While our discipline is to maintain the cost basis as much as possible, there are times when we may deviate from this approach. Investing is both an art and a science, so there are no specific rules on when it is acceptable to violate the cost basis. However, we can provide some insights.
In situations where an investor made a profit but not as much as they expected because they didn’t purchase the full position, it can be seen as a “high-quality problem.” Sometimes, it may be best to accept the small win or wait for a clear buying opportunity, such as a market-wide correction or a significant discrepancy between the stock’s price and its fundamentals.
It’s important to differentiate between price and value. A stock’s price may have increased, but it doesn’t necessarily mean it has become more expensive in terms of valuation if the appreciation was due to earnings growth. In such cases, violating the cost basis may be acceptable as long as the valuation multiple remains unchanged or even becomes more favorable.
Alternatively, treating the small position as nonexistent can help evaluate the risk/reward objectively. If you missed the recent move entirely, would you still consider buying the stock at its current price?
Ultimately, the discipline is to adhere to the cost basis. However, if you are considering deviating from it, considering the valuation perspective and evaluating the investment as if you weren’t already exposed may help determine the correct course of action.