The Value of an Income Stream

June 20, 2016

The Value of an Income Stream

As I sit in our office there remains 2 days 5 hrs and 30 minutes until the British exit (BREXIT) vote from the European Union (EU). This vote will decide if Britain will remain as part of the EU or if they will strike out on their own without the financial support of the remaining member countries. 

Leaving the EU will have a negative impact on the UK’s credit rating as seen from this chart.The Value of an income stream

However, the BREXIT movement appears to be focused less on credit risk and more on gaining independence from a group that some feel is expensive to be apart of, and not real helpful.

Regardless, we have no way to know which way the vote will go.  Polls suggest the risk of Britain leaving is subsiding which is helping reduce uncertainty, this is why stocks are up today.  Most of the impact of this vote will be felt in Europe, but there will undoubtedly be ripple effects felt here in our country as currency valuations and bank stability are now global concerns. Continue reading “The Value of an Income Stream”

Xerox SERP

Will Xerox Executives be U-SERP-ED?

After addressing the challenges the Xerox salaried employee pension will have after the Carl Ichan endorsed split (article found here), I was asked to research another Xerox pension, the Supplemental Executive Retirement Plan (or Xerox SERP). I found there’s precious little information available on these plans, but what I did discover raised serious concerns.

Xerox SERP logoOne case study that was relevant was the Daimler/Chrysler SERP as one potential outcome for Xerox executives. In the late 90’s Daimler’s business was struggling and through a merger and subsequent bankruptcy ended up discontinuing their SERP plan. Executives fought back to retain some of their benefits, but they ultimately walked away with nothing. More details of this situation are available here from a legal firm that wrote about this in 2013.

While Xerox is not on the brink of bankruptcy, they are losing money every year and taking drastic measures to stop the bleeding. The upcoming split is being pitched as a cost-cutting measure ($2.4 Billion over three years), but some believe it is positioning the company for a sale of one of the remaining pieces. If bought, would the new buyer honor the existing Xerox SERP? The buyer of Daimler put in writing that they would.

Areas of concern:

No protection

Unlike the salaried employee pension plan that’s protected by the Employee Retirement Income Security Act (ERISA), the SERP is only offered to executives who are assumed to be able to understand the terms. This means it’s up to the execs to fend for themselves if the company goes sideways and is unable to pay.

The salaried employee pension is also protected by the Pension Benefit Guarantee Corporation (PBGC) which continues payments to pensioners (with limits) that are no longer able to be supported by the offering corporation. The SERP has no guarantee like this.

The right to change

The Xerox SERP has a caveat that allows them to change the terms at any time. Does this caveat allow them to change for any reason, or do they need to be in or approaching bankruptcy to make this change?

Document or Services?

In a statement made by Xerox and reported by Moody’s, the objective of Xerox moving forward is to maintain an investment-grade credit rating. The SERP is a financial obligation and when corporations have too many of these, they lose their investment-grade rating. How far would the company be willing go to reduce these financial obligations if they continue to lose money?

Another question is on which side of the business will the SERP reside? The stronger Services side or the legacy Document side?

Is there a solution?

Knowing these concerns, one reasonable strategy seems to be to try to negotiate a lump sum settlement.

For example, SERP benefits paying $93,000 per year for life ( with nothing continuing to a beneficiary) for a 70 year old male would be worth a lump sum of approximately $920,000 according to multiple insurance companies.

If Xerox wanted to reduce liabilities they might consider offering a lump sum of less than that to reduce obligations for the future. A concerned executive might consider negotiating a portion of their benefits rather than nothing at all if Xerox’s business continues to suffer.

If this is something you’d like to pursue, we’d be happy to discuss your specific situation with you or put you in touch with the executives we know of that are also interested in this same option. Please visit our contact page to get in touch with us.

-Tim Porter, CFP®

Growth vs Income

May 23, 2016

As we approach the summer the stock market is calm and news is light. Some developments we’re watching that could affect the markets in the near future are Britain’s proposed vote on exiting from the European Union June 23rd, the second interest rate increase in almost a decade speculated to be coming in a Fed announcement June 14th or 15th, and of course, the presidential election we read about every day.Growth 

While we wait to see what challenges these events will bring, we’ve made adjustments to the accounts and most recently finished updating our growth portfolio. In doing so we thought it would be a good time to share with our (mostly income) clients some differences between the growth and income strategies we use from Morningstar.

The goal of the growth portfolio is to outperform the S&P 500 Index over a full market cycle. Companies in this portfolio tend to be faster-growing, with both higher risk and higher return potential than the income portfolio.

The goal of the income portfolio is to earn 8-10% per year over the course of a market cycle, of which 3-5% will come from dividends with 4-6% annual dividend growth.Income

The downsides of the growth portfolio are inconsistency and volatility. With insufficient dividends to rely on every year and volatility 33% higher than the income portfolio, growth is good for a younger person with a longer time horizon, or as a smaller part of a whole portfolio. The income portfolio is better for investors in or near retirement looking to start making distributions from their accounts.

The total returns as reported from Morningstar of the growth and income portfolios over the last ten years are almost identical – approximately 9.4% per year. We attribute this parity mostly to the great recession we saw in 2008-9. When the economy struggles the more conservative income portfolio will have the upper hand. We would expect the growth portfolio to outperform in any decade with less of a dramatic pull back.

If this more aggressive portfolio is of interest to you or someone you know, please don’t hesitate to call so we can give you more details.

A Quiet Month

Other than the normal shenanigans of tax season, the financial world has been relatively quiet this last month. Our accounts on average registered a small gain to add to the favorable year-to-date returns, and after the dramatic start we had to this year we welcome the opportunity to catch our breath. The areas helping to steady investments are: stabilizing oil prices, persistently low interest rates, glimmers of hope in a China recovery, and no financial crisis to dwell on.

All seems well as most energy companies return to normal valuations and our growing dividend strategy appears to be outperforming the stock market. However, higher stock prices are not always good news. The stocks within the portfolios are on average fully (or 100%) valued, meaning, there are not many great deals (stocks selling at a discount) out there for us to pick up.

With that in mind, we’re looking to rebalance and sell overvalued and overallocated companies while we wait for the current earnings season, interest rates, or the next crisis to knock down stock prices so we can invest cash at more favorable levels. In the meantime, the dividends and interest, the main objective of most our portfolios, continue to roll in helping current and future retirees cover distributions they use to live on.

IMG_0346This quiet month was also great timing for me (Tim) to fulfill my two-week commitment to the Coast Guard for my Active Duty Training at Station Yaquina Bay in Newport, OR. During my two weeks we had a ceremony to honor the accomplishments of the crew. I was one of those privileged to be honored

by the Commanding Officer (CO) for becoming a Coxswain (boat driver) a month earlier. It was a proud moment for me and represented 3.5 years of work.

Being there for two weeks straight always gives me a better appreciation for the dedication of the active duty men and women. They are VERY good at what they do and I’m thankful for the time and effort they put in training a part-timer like myself.

As always, please call us with any questions you have. We’re making our way through our list of calls and if we haven’t reached out to you yet, you should be hearing from us shortly.

Thank you for taking the time to read,

-Bruce Porter & Tim Porter, CFP®

Calm AFTER the Storm

Calm Pic

In mid February we wrote about the “storm” we were in as we watched the stock market plummet 10% in short order. We mentioned having the courage to endure markets like this because it’s not easy to watch emotional swings affect our savings so dramatically. Usually it takes a fair amount of time to bounce back from situations like these, however, this storm passed relatively quickly and Josh Peters, CFA from Morningstar has made recommendations that held up well.

In the first 32 days of the year (Feb. 11) the S&P was down 10% while the growing-dividend equities in Peters portfolio were down less than half that. In the subsequent 42 days of the year, the stock market has climbed back 10% and Peters’ equities have risen close to the same amount (9% according to his newsletter). This leaves anyone invested in these stocks up nicely since the beginning of the year while the S&P struggles to stay positive. (Returns will vary depending on risk and individual portfolios.)

Even though we’re thankful for the great year-to-date performance of the conservative growing-dividend philosophy, we still remain concerned about the next storm and in an effort to prepare, we’re currently rebalancing all of our accounts. This is generating trades, which will show up as notices in our client’s mailbox. These are not major changes, but are more like tweaks to ensure portfolios are within guidelines after some investments have underperformed and some have outperformed since the beginning of the year.

A few of the stocks that have outperformed are Fastenal FAST, an industrial construction supplier, and Genuine Parts GPC, an automotive parts supplier. These stocks have taken off since late January, returning 33% and 23% respectively, not including dividends. These stocks are not huge dividend payers, with yields of 2.63% and 2.41%, but we’re happy to have low yields in addition to nice growth. Once again, we credit Peters for having the foresight to recommend these stocks for us and look forward to his next recommendation.

As we work through these rebalances we’ll be calling our clients to give updates on their specific situation. We look forward to catching up on what’s going on in their lives and discussing the good news that we survived the storm!

Happy tax season,

Tim Porter, CFP®

Our Core Values

Us
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2Bridges
Fiduciary Standard – As fiduciaries our legal (and moral) responsibility is to choose investments in the client’s best interest over the benefit to the advisor.

Independent – As a fee-based firm our investment decisions are independent of industry perks resulting in conflict-free advice.

Fee Transparency – In our first consultation we explain how we are compensated through fees, not commissions, how that contrasts with other industry compensation models and how those models affect clients.

Relational – We value lasting relationships with clients and retain them by staying in touch, returning phone calls and explaining investments at a level that matches client interest.

Suitability Standard – This standard is a step below the Fiduciary standard and only requires that investments recommended are suitable for the client but are not necessarily in their best interest.

Dependent – Compensation may determine behavior. When advisors’ compensation is dependent on commission-generation, advice may be subject to a conflict of interest

Hidden Fees – Some investments have multiple layers of fees buried in lengthy documents that can create complications in determining the overall fee.

Sales Mindset – Building trust is impossible if the sole reason for client contact is making additional sales.

Will the split affect Xerox’s pension?

While we’re big fans of Xerox and the phenomenal Phaser 8560DN, a wax-based xerox portlandink printer we’ve used for years in our office, this may be the least of their accomplishments. The contributions this 110 year old company has made to technology is quite impressive, including the computer mouse and ethernet. Now with the activist shareholder Carl Icahn in the mix the split of the company appears inevitable. Icahn will control three seats on the board of the services company, and we’re left to help our retiring Xerox clients answer the question, “Will the split affect my pension?”
Continue reading “Will the split affect Xerox’s pension?”

Surving the Storm – 3 lessons from USCG

Surviving the storm

 

3 lessons learned from the USCG to help get through the next market drop…

Some months in the stock market feel like the unexpected Nor’easter that pounded the New England coastline the night of February 18, 1952. January of this year began as the worst start to any year for the stock market of all time, down -10% in less than two weeks. With little news to validate this irrational instability, the stock market headed back up to end the month, but is now Continue reading “Surving the Storm – 3 lessons from USCG”

PCC / Berkshire Hathaway Merger – Part 2

February 2, 2016

How could I afford Berkshire Hathaway stock?!

The cash merger is now done! PCC is officially a Berkshire Hathaway subsidiary and $235 per share was the price paid for the company. That cash is now sitting in your account (Fidelity if you’re part of the employee stock option purchase plan ESPP) and ready for direction. A question I just got this morning was… “How could I afford to purchase Berkshire stock that’s trading at approx. $194,000 per share?!”

Other than Continue reading “PCC / Berkshire Hathaway Merger – Part 2”