Dammit, Jim! I’m an Analyst, Not an Idiot!
Jim Cramer is at it again.
Three weeks ago, he rang the “lightning round” bell and sounded off about a lot of stocks in a little time. Last week he did it again.
Now, don’t get me wrong — I’m a fan of Mr. Cramer. I think he’s pretty entertaining to watch. But when you’re trying to cover that many companies in that small amount of time, you’re bound to gloss over some really important details as you make your conclusions.
And that’s exactly what he did three weeks ago when he questioned Communication Sales & Leasing’s (NASDAQ: CSAL) dividend yield. He said it was too high and that it’s a red flag. And if this were any other company in any other industry, he might be right.
Last week, he called CSAL “an interesting idea.” Which one is it, Jim?!
If you ask me, it’s more than just an interesting idea. It’s a great investment.
Dividend Trap or Income Haven?
He couldn’t be more wrong about CSAL. And here’s why:
CSAL is a real estate investment trust, or REIT. That means its management has to pay out at least 90% of taxable income (not net income) to shareholders in order to enjoy its sweet federal income tax-exempt status. So there’s one reason for hiking the payout — they’re making more money, so they’re paying out more money — because they have to.
In fact, CSAL’s already got $10 billion in leases under contract over the next 15 years. Break that number down into revenue per year, and we’re already talking about a 40% increase over the already substantial sales it had in the first year as a public company.
And that $10 billion doesn’t count the revenue it added yesterday by completing the purchase of Tower Cloud. That one gets it more exposure to all of the national wireless carriers (90% of Tower’s revenues come from them). It should also cut operational costs by around $6 million and add to the pre-tax income that’ll be distributed to shareholders. Looks like that dividend is going to get even bigger!
Another fact Jim ignored about REITs is that they are somewhat sensitive to interest rates.
Being that the markets are forward-looking, investors are pricing in the possibility of an interest rate hike by the Fed. That means companies that pay high dividends are looking a little less attractive. If you can get a higher rate than before from a fixed-income investment with pretty much no chance of default (i.e., U.S. Treasuries), you’re going to pull money from equities and put it into government-backed bonds. And if you’re a smart investor, you’re going to do it before the market prices of those instruments go up.
So we’re seeing a little downward pressure on the prices of REITs across the board. That makes the yield look higher than it might otherwise be…
And Cramer didn’t say the payment was high, just the yield (the percentage of the price of the stock made up by the actual cash payment).
That’s why CSAL’s ~10% yield looked like it was super-high. And neither of those are negatives in my eyes.
The company is making more money, so it’s paying shareholders more in dividends. The market is afraid of the Fed, so it’s lowered the price of a solid company (heck, an entire industry), giving smart investors an even better deal. I’d say those are two pretty great things.
When High Yields are a Fool’s Folly
I understand where Jim’s coming from, though.
Sometimes, a high dividend yield is a sure sign that a company is in serious trouble. Like I said, the market is forward-looking. So if a company isn’t being run properly or is about to face some serious headwinds, the stock price will drop in anticipation of that. When the stock price drops, the yield goes up, and the high dividend can become a trap for investors who are simply chasing yield.
The same problems that crater the stock price eventually cause management to cut the dividend. Then the stock gets hit with another sell-off, and the price plummets again. It becomes a vicious cycle until finally there’s no dividend left, and the folks who chased that high yield are left with big losses.
Sometimes, management can borrow money (sell bonds) in order to keep paying the dividend. They’ll do this in the hopes that they can fix whatever internal problems are crushing the stock before the debt crushes the company. But if they can’t, look out! Because the next likely event is default and a bankrupt company. Trust me — that never works out well for the holders of common stock.
And that’s why you have to do your homework before jumping into any company with a big dividend yield. CSAL is a company that, even with only one customer, was raking in billions of dollars in revenues within its first year of operations. And the management team has already completed its first acquisition, adding more customers and more revenue to the mix.
The Difference Between Analysis and Entertainment
So while Jim Cramer is right to be wary of high dividend yields, either he or the analysts who write his script didn’t do their homework on CSAL. If they had, then they’d see that the high yield is a temporary thing due to the forward-looking market pricing in an interest rate hike. They’d also see that the dividend payment is completely reasonable when compared to the future earnings of the company.
As I mentioned earlier, CSAL already has $10 BILLION in revenues under contract booked out over the next 15 years. If management keeps adding customers (which they are certain to do), those revenues will just keep climbing. And the dividend payment will, too. It’s a REIT. If earnings go up, payments must follow suit.
And that’s where Cramer and I differ drastically in our investment approach. He’s reactive. When something happens, he reacts to it as quickly as possible. I’m proactive. When my diligent research tells me something’s going to happen in the future, I act before it happens so I can protect my profits and increase my gains. It’s that simple.
That’s why I recommended CSAL to my subscribers at The Wealth Advisory back in January of this year — when the yield was way too high for old Jimbo.
We’ve been collecting a yield-on-cost of 12.6% for five months. Include the price appreciation, and that recommendation is already up over 65%.
Not bad for such a terrible stock, huh, Jim? That 10% yield doesn’t seem like such a bad thing once you do a little more research — or just a little research at all.
Another difference between Jim and me is that Cramer is in the market of increasing viewer numbers — yes, he’s part analyst, but he’s more an entertainer. Fast talking, loud noises, and flashing lights are great ways to do just that. So is calling into question the viability of a super-solid company.
Here at Wealth Daily (and at The Wealth Advisory), we’re in the business of helping our readers find the best investments for their wealth-building portfolios. Trashing solid investments isn’t in our repertoire. Neither are all the gimmicks.
That’s why I don’t try to fit analysis of 9–10 companies into 60 seconds. I’d prefer to do my homework and really nail one than gloss over the facts and maybe brush on a good idea. But hey, people like watching him. Maybe I should try smashing some watermelons and swinging a baseball bat at stuff in my next recommendation, too.
I’m interested to hear what Cramer has to say the next time CSAL comes up, though. He did say last week, “Let me come back on that one.” Well, Jim, come on back. We’re all waiting.
To investing with integrity (and patience),
Jason Williams
Follow me on Twitter @AllBeingsEqual
