As this market has lost its collective mind and we are pushing through a 20x P/E on next 12 months consensus earnings on the S&P 500 (and 25x 2020's Covid-19 infected consensus EPS for the index), it is important to remember the past. Yes, the recent past. We saw this same type of action in mid-February, Then we had the inevitable Minsky Moment, as the market realized the extraordinary impact of the Covid-19 lockdown thereafter. The market has decided that the destruction of 20.5 million jobs, as described in this morning's non-farm payrolls report, was "not that bad" That's insane.
How does an active manager invest in a time of insanity? Well, focusing on cash flow is one way to do it. The motto of my firm is "cash flow never lies", ans it's actually a two-way mantra. As shares of companies that burned through cash in the first quarter like Tesla (TSLA) , which posted $920 million in negative free cash flow (operating cash flow minus capital expenditures) in Q12020, and Uber (UBER) , which posted $851 in negative free cash flow in Q120220 by the same measure, jump, the advantage to actually knowing how to read a cash flow statement seems to have been diminished. Dr Hyman Minsky knew that bubbles always burst, but he didn't manage money. Those who do know that cash flows into a fund are just as important as cash flows from a fund's holdings.
For my firm I utilize cash flow in three ways. Firstly, I identify companies that are sustainably producing free cash flow. Secondly, I read press releases to monitor those companies' managements to ensure that they are giving that cash flow back, mostly in the form of dividends -- buybacks don't really help us. Thirdly, I use that cash flow to produce more cash flow.
How? I use leverage to amplify our assets into dividend payers, and use the cash payments from the dividends to buy more of the same stocks. That means that the cash flow the firm is generating always increases. That does not mean, however, that my firm's net asset value increases every day. It's a bumpy ride, believe me. So, I need to manage leverage carefully and focus on stocks that are going to pay me back quickly.
As I have mentioned in recent columns, I believe the massive profits being generated by oil tanker companies are indeed sustainable, despite daily freight rate reports that display massive volatility. So, I am concentrating on buying those stocks opportunistically to harvest the cash flow from their immense (but justified by cash flow) dividend payouts. All of these companies' managements use payout ratios to calculate dividend amounts. Tankers are earning more per day, profits are up, dividends are up. No accounting hocus pocus. Just real cash flow.
Opportunistically, I try to align our portfolio to maximize the size of those dividend payments. This allows me to use more leverage. Thus, using an old-fashioned Wall Street trick known as dividend capture, I end up buying more near-term payers and, at the margin, selling more of those that have already paid. I wish I could keep them all, never sell a share and run a lazy portfolio. But, in case you haven't noticed, 2020 has not been a lazy year for the global economy. So, I am still working hard. Our firm will capture every one of the dividend payments listed in the following table, while hopefully managing the timing of ex-dividend dates and payment dates to maximize returns.
It's what I do.
| Symbol | Q12020 dividend | Record date | Payment date |
| DHT | $0.35 | 5/19 | 5/26 |
| NAT | $0.14 | 5/26 | 6/5 |
| NNA | $0.30 | 6/3 | 7/9 |
| EURN (2019 ann'l) | $0.29 | 5/29 | 6/9 |
| EURN (1Q2020) | $0.81 | 6/16 | 6/26 |
