Better Living Though Chemistry

Steve McDonald
by Steve McDonald, Bond Strategist


Eastman Chemical was formed by George Eastman of Kodak fame in 1920. I’m sure he never expected it to not only outlive Eastman Kodak, but be one of the strongest performers in the industry.

Eastman is into everything from chemicals for the tire industry to cigarette filter fibers.

The CEO, Jim Rogers, stated in a Barron’s article that his company is an outstanding value, and they will keep shoving earnings down the market’s throat until the stock performs. I like this guy!

The company does have impressive numbers. It had a 127% rise in price between 2011 and this year. Earnings are expected to jump to $6.30 per share this year, a 17% increase, and to $8 per share by 2015. Yet it trades at a cheap 11 multiple compared to the industry’s 17.3. A one-point increase in the multiple would mean a 35% jump in the stock price. That’s just to 12!

The incoming CEO sees the $8 earnings target as very doable and stated that a multiple of just 12 gives them a $96 stock from its current $70.

Eastman has cash flow next year of $2 billion. That’s enough to cover its $525 million in capital spending and plenty left over for stock buybacks and dividend increases.

Wells Fargo’s Frank Mitsch said this is one that lets us sleep at night.

This company is doing everything right and has incredible numbers. There was some volatility in the first half of the year, but that has allowed the stock to get back to a more reasonable price level compared to its 200-day moving average. It is currently only about four points above its 200-day. In February it was 20 points above.

This one is in the buy range. Keep your eye on it.

Paying to Live to 100

Living to 100 and paying for it.

Since 1900 the average life expectancy in the United States has run up from 47 to 78, and it’s rising rapidly.

The population of the U.S. has doubled since 1950, but, in the same period, the number of people reaching the age of 100 has run up 2,200%. While a longer life is prized by most, it also means 30 to 40 years of unemployment and most people do not have enough retirement savings to even pay their bills, never mind retire rich.

The obvious answer is save more before retirement, but how much your money returns in retirement has become more important. Longer life spans have made returns in retirement the primary issue.

If we stay in or - at some time in the future - return to the extreme low yield income market we have now, meeting money needs in our golden years could be all but impossible.

Those extra 10 years won’t be so rosy if we’re broke, and the extra time also adds to inflation exposure.

When you add up the annual costs and the effects of inflation over an extended period like 30 or 40 years, delaying retirement is beginning to look like the only way many people will be able to retire, if at all.

There is, however, another solution to this massive underfunding problem most are facing, and it doesn’t involve a starvation diet. A portfolio with an annually increasing income revenue stream.

The best way to meet this challenge in the equity portion of your portfolio is to invest in companies with long histories of increasing dividends - not just paying dividends but increasing them. And the capital gains you will realize over time will act as a great kicker for inflation.

The days of simply locking in 7% from CDs or money markets are gone forever. Even if at some point in the future we can get those kinds of rates again, they are inflation traps. By the time your money comes out of long-term CDs or even long maturity bonds inflation has eaten a sizable portion of your principal.

Take look at the work Marc Lichtenfeld is doing with stocks that increase their dividends. It is the only way I see to make it through a very, very long retirement.

The “Slap in the Face” Award: Comfort = Punishment

This week, two quickies from Morgan Housle at Market Watch; he’s one of my favorites.

I like this one because the vast majority of investors are running for cover during the most recent pullback in stocks, and many are still hunkered down since the 2008 crash. It goes like this:

“The more comfortable an investment feels, the more likely you are to get slaughtered.”

Oh man, is that one right on the money.

And one more from Morgan:

“The more someone appears on TV the less likely their predictions will come true.”

This is a computer, it is not a TV!

Throw out the TV.

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