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ikkyu2 (99.52)

Update: out of CLCT today

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February 22, 2012 – Comments (5) | RELATED TICKERS: CLCT

Something someone said to me in comments prompted me to take another look at CLCT's financials.  This is a stock I've owned for a little over a year and a half.  Their core business is coin grading, including gold coins, which was what initially attracted me to them; they grade the coins, then seal the coin into a tamper resistant plastic package and collect a fee.

Latest fundamentals:  PE 22, 8.5% dividend yield, share price $15.67, long-term debt 0.

I took a look at the income statement, cash flow, and balance sheets, both annual and quarterly for the last 5 quarters, because someone had stated that the payout ratio was 185% and I didn't believe that could be correct.

Turns out it is correct; 185% is the ratio of dividends paid to operating earnings earned in 2011.

The income statement is frustratingly lumpy, even quarter to quarter and I didn't feel like I had a good sense of trends; income appeared to be flat in 2010 and 2011 after a few years of losses in 2008-2009.  The dividend payments listed on the income statement were odd because one would expect them to be the same quarter over quarter but they varied by as much as 400%.  Looking at cash flow statements gave a clearer picture: every quarter the company generates $9m in free cash flow that is immediately paid out as a dividend.

I also noticed that the company has been diluting itself, issuing about 1% in stock compensation every year for the past 5.   And they have deferred $3.5 million in taxes.

I have an 18% gain in the stock for the past 18 months, just a bit more than what the dividend contributed.  I still think their business model is a good one, but looking at their financials made me suspicious about how they're running the books, and for whose benefit. 

I can't say exactly what it was, but looking at the income statement something looked hinky, and not just that they paid out $1.80 for every dollar they earned (though that's a red flag as well.)  Hard to say that a company that pays an 8.5% dividend isn't shareholder friendly, though.  If they can put in a few quarters where the numbers start looking normal, I might get back in.  But for now I am out and happy to be.

 

5 Comments – Post Your Own

#1) On February 22, 2012 at 4:26 PM, ikkyu2 (99.52) wrote:

I guess one of the issues is that stock based compensation in a stock with such a high dividend really troubles me, because the compensation (and hence dilution) doesn't all show up on the balance sheet; rather, it also consists in a future income stream that is quite substantial.

For instance, the $1.1 million in stock base compensation they paid out in 2011 is going to earn someone $90K in 2012, and all the years beyond that.  It's kind of a sneaky way of taking on future debt at the expense of current shareholders; and also a way of semi-dodging taxes for the corporate founders.

The way it's different from debt is that the debt in this case is owed to the stock-compensated employees, diverging their interests from other shareholders; and it doesn't show up on the balance sheet as interest expense; and it never expires or is paid off (unless there is a stock buyback, which insiders might know more about than outsiders would.)

Hinky. 

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#2) On February 22, 2012 at 7:41 PM, HarryCarysGhost (99.78) wrote:

http://caps.fool.com/Blogs/do-you-like-to-collect-stuff/707498

You posed this question to me as -

CLCT vs KO

I looked at CLCT until I got to payout ratio. At that point KO is the hands down winner. (especially with a 20yr time-frame)

Payout ratio is not the end all be all, cash flow must be considered, but yeah it looks funky.

Maybe some freindly Fools more adept at accounting practices would be willing to explain this one. The buisiness model seems solid. While the accounting does not.

Cheers.

 

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#3) On February 22, 2012 at 9:12 PM, rd80 (99.10) wrote:

Good explanation of your sell.

Regardless of where the stock goes from here, selling when something doesn't look right is a smart move.

 

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#4) On February 22, 2012 at 9:14 PM, rd80 (99.10) wrote:

Oh, and a props to HCG for pointing out the high payout ratio.

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#5) On February 28, 2012 at 3:30 PM, ikkyu2 (99.52) wrote:

Yes, I'm also grateful to HCG for pointing that out to me.  Thanks, bud.

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