Mr. Eley: The company has been in business almost 23 years, since September 1986, and we are "traditional" large cap value equity managers, meaning we select very large cap stocks that are in the S&P 500 Index or an occasional Dow 30 company that might not be in the S&P 500. We employ traditional measurements of value, such as p/e ratios, using trailing earnings; we use both shorter periods, such as a year, and longer periods such as the past 10 years. We look at current dividend yields and historical dividend payments; the higher the current yield and longer the dividend stream, on a consecutive basis per annum, the more we like the stock. We would prefer a dependable yield that has been paid for a very long time. Consequently, an ideal purchase candidate has a relatively low p/e ratio, substantial earnings and no serious questions about the ability to pay its dividend going forward. We also look at price to book ratios, in the belief that they tell us something about the current support for the stock price, should we run into an extraordinarily bad economic period. We had been telling our clients (including prospective clients) this even before entering this recent excruciating economic and market environment. We also will look at tangible book value and the price to tangible book ratio, due to our preference for companies that limit any activity that can cause their financial statements not to present good and accurate numbers. To give you an example, a company that is very aggressive in making acquisitions can often report a book value that is composed of nearly 50% goodwill, which often represents only hope that future earnings will be good. Finally, we look at the balance sheet. It's very important to us to invest in companies with low leverage. We look at the debt to equity ratio first; the lower the debt in comparison to equity, the better. We don't have a requirement that a company have no debt, because we certainly believe that debt can be used judiciously in order to enhance shareholder returns. However, we don't like seeing debt ratios that are over 50% of total capitalization or, equivalently, over 100% of common equity. We actually prefer companies with debt to equity ratios of 50%-60% and no more, unless we are dealing with a financial institution such as a commercial bank, where leverage is a part of its business and it has the help of the Federal Reserve. Even then we would like to see a substantial portion of the debt have a duration that matches the duration of any assets purchased with the debt. Some of the bigger banks got into trouble by buying mortgages that were really AAA at the time; however, the problems they are dealing with now come from using very short-term borrowings to hold very long-term and illiquid assets. They were not restricting their purchases and holdings of these long-term assets to some ratio to long-term CDs, bonds or notes that they were able to sell. I've gone through a bit of a detailed explanation to explain what we do, which is, in a nutshell, to buy the highest basket of minimally dependable earnings at the lowest price.
Tickers included in this excerpt: AA, BA, COP, CVX, DD, GE, OXY
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