7 Stocks That Pay Dad Back
By Selena Maranjian June 13, 2008 Comments (0)
1 Recommendation
Forget the golf clubs! We have some great investment ideas Foolishly wrapped up in this special series for Father’s Day.
Dad, remember way back when you and mom paid me an allowance? I loved watching my money grow ... and occasionally spending it on a $3.99 LP at Korvette's or a magazine. Now I think it's time I returned the favor. I'm offering you several stocks that will pay you an allowance.
You'll get that money in the form of dividends, which both of us increasingly appreciate. Years ago, we were entranced by high-flying stocks that often landed with a thud. But with healthy dividend payers, we can not only enjoy a steady (and often increasing) stream of income, but also expect some stock-price appreciation, as well. It's a tantalizing combination.
Indeed, as my colleague Rich Greifner has pointed out in his article, "The Secret of Dividends," more than 40% of the S&P 500's total return over the past 80 years has come not from rising share prices, but from dividend payments.
Dividends for DadHere are a few companies you might want to consider as investments:
Company
Recent dividend yield
3-year dividend growth rate
Recent P/E ratio
5-year average P/E ratio
General Electric (NYSE: GE)
4.1%
11.9%
13.4
19.8
Wells Fargo (NYSE: WFC)
4.8%
8.3%
11.2
14.2
United Parcel Service (NYSE: UPS)
2.6%
14.5%
151.5
23.5
Johnson & Johnson (NYSE: JNJ)
2.6%
14.0%
16.4
19.8
Kimberly-Clark (NYSE: KMB)
3.6%
9.8%
15.0
18.5
Procter & Gamble (NYSE: PG)
2.2%
11.1%
19.6
23.8
Paychex (Nasdaq: PAYX)
3.7%
18.9%
21.9
36.9
Data from Morningstar.
Who wouldn't want to hold General Electric shares? Despite its massive size, the company's revenue still rose nearly 6% last year. According to Yahoo! Finance, its net profit margin tops 12%, and its return on equity (ROE) is 19%. It also offers quite a bit of diversification, since it's involved in everything from jet engines to financial services to alternative energy. (And water processing, and broadcast television, and medical equipment, and....)
How much safer can a company seem than Procter & Gamble? Its brands, including Tide, Crest, Gillette, and more, are well-known worldwide. And while many financial giants are struggling these days, Wells Fargo is going strong, with even Warren Buffett investing in it. Its annual revenue is up about 35% over the past two years.
UPS might be a harder sell right now, with our economy sputtering and fuel costs soaring. But the company is enjoying solid growth in revenue from international operations, and the U.S. economy will pick up one of these days, too.
Johnson & Johnson needs little introduction, sporting a net profit margin of more than 18%, and ROE topping 25%. Its own investor relations department has noted the company's "75 consecutive years of sales increases; 24 consecutive years of adjusted earnings increases; and 46 consecutive years of dividend increases." Over the last 10 years, Johnson & Johnson stock generated an annualized return of almost 8% for investors, compared to just 3.5% for the S&P 500.
Kimberly-Clark may be less well-known for many investors, but it shouldn't be. Its net profit margin is almost 10%, and its ROE tops 30%. Revenue rose 9% last year for its stable of familiar brands, including Kleenex, Kotex, and Huggies.
Finally, Paychex is unknown to many, but it processes payroll and performs many other critical tasks for thousands of companies (perhaps including your own employer). Its revenue has risen 30% over the past two years, while its net margin tops 25% and its ROE tops 35%.
Dad, you can learn more about successful investing and about dividend payers in these articles:
How to Shoot Dividend Ducks in a Barrel
How to Survive This Crazy Market
Stocks That Pay You Back
Friday, June 13, 2008
Wednesday, June 11, 2008
Lampert Puts Money On Housing Rebound
Lampert Puts Money On Housing Rebound
Stakes Being Taken In Battered Builders, Lenders and Retailer
By GARY MCWILLIAMSJune 12, 2008
Billionaire hedge-fund manager Edward S. Lampert is placing new bets on a U.S. housing recovery, buying stakes in beaten-up home builders, mortgage lenders and a home-improvement retailer.
Mr. Lampert's ESL Investments Inc., which owns half of department-store giant Sears Holdings Corp. and 40% of car retailer AutoNation Inc., has previously focused with mixed success on retail and bank stocks.
Recently, the Greenwich, Conn., hedge fund, which controls investments it valued at about $11.6 billion in its most recent government financial report, began picking up shares in hard-hit housing-related stocks. ESL acquired small stakes in U.S. home builders Centex Corp. and KB Home, according to its latest Securities and Exchange Commission filings. At recent prices, the stakes in the two home builders are valued at $10.4 million and $10.8 million, respectively.
ESL also is tip-toeing into mortgage origination and servicing, acquiring about four million shares of CIT Group Inc., a struggling subprime home and commercial lender, as well as 1.4 million shares of PHH Corp., a mortgage originator and mortgage-service company. The shares are valued currently at about $35.5 million and $25.2 million, respectively. ESL spokesman Steve Lipin declined to comment on the investments.
Mr. Lampert's purchases come as some analysts think the housing market's decline may be nearing an end. Investment adviser Sanford C. Bernstein & Co. this week estimated the housing correction will "begin to bottom within the next several months, which should lead to declining inventories and, eventually, stabilizing prices."
In another bet on a housing turnaround, Mr. Lampert this spring increased his stake in home-improvement retailer Home Depot Inc. ESL holds about 22.7 million shares valued at $590 million, up from 16.7 million shares last year.
Earlier this decade, Mr. Lampert acquired car-parts retailer AutoZone Inc. and discount chain Kmart Corp., turning the two around for big gains. He has been less successful with a big investment in Citigroup Inc. that came before the full force of the subprime-loan debacle. His purchases of Home Depot also have looked premature. He acquired his initial shares last this past fall when the stock was trading at between $32 and $37 a share; shares currently trade around $26. Meanwhile, the total value of his equity portfolio has tumbled to about $10.04 billion from about $11.6 billion reported at the end of the first quarter.
ESL acquired its shares in mortgage company PHH in September and only recently disclosed the investment. ESL is one of a handful of companies that have permission from the SEC to temporarily delay releasing details of some investments.
The housing investments are true to Mr. Lampert's interest in out-of-favor companies and industries and reflect his propensity to acquire shares in companies that have seen their shares tumble after buyouts collapsed.
Stakes Being Taken In Battered Builders, Lenders and Retailer
By GARY MCWILLIAMSJune 12, 2008
Billionaire hedge-fund manager Edward S. Lampert is placing new bets on a U.S. housing recovery, buying stakes in beaten-up home builders, mortgage lenders and a home-improvement retailer.
Mr. Lampert's ESL Investments Inc., which owns half of department-store giant Sears Holdings Corp. and 40% of car retailer AutoNation Inc., has previously focused with mixed success on retail and bank stocks.
Recently, the Greenwich, Conn., hedge fund, which controls investments it valued at about $11.6 billion in its most recent government financial report, began picking up shares in hard-hit housing-related stocks. ESL acquired small stakes in U.S. home builders Centex Corp. and KB Home, according to its latest Securities and Exchange Commission filings. At recent prices, the stakes in the two home builders are valued at $10.4 million and $10.8 million, respectively.
ESL also is tip-toeing into mortgage origination and servicing, acquiring about four million shares of CIT Group Inc., a struggling subprime home and commercial lender, as well as 1.4 million shares of PHH Corp., a mortgage originator and mortgage-service company. The shares are valued currently at about $35.5 million and $25.2 million, respectively. ESL spokesman Steve Lipin declined to comment on the investments.
Mr. Lampert's purchases come as some analysts think the housing market's decline may be nearing an end. Investment adviser Sanford C. Bernstein & Co. this week estimated the housing correction will "begin to bottom within the next several months, which should lead to declining inventories and, eventually, stabilizing prices."
In another bet on a housing turnaround, Mr. Lampert this spring increased his stake in home-improvement retailer Home Depot Inc. ESL holds about 22.7 million shares valued at $590 million, up from 16.7 million shares last year.
Earlier this decade, Mr. Lampert acquired car-parts retailer AutoZone Inc. and discount chain Kmart Corp., turning the two around for big gains. He has been less successful with a big investment in Citigroup Inc. that came before the full force of the subprime-loan debacle. His purchases of Home Depot also have looked premature. He acquired his initial shares last this past fall when the stock was trading at between $32 and $37 a share; shares currently trade around $26. Meanwhile, the total value of his equity portfolio has tumbled to about $10.04 billion from about $11.6 billion reported at the end of the first quarter.
ESL acquired its shares in mortgage company PHH in September and only recently disclosed the investment. ESL is one of a handful of companies that have permission from the SEC to temporarily delay releasing details of some investments.
The housing investments are true to Mr. Lampert's interest in out-of-favor companies and industries and reflect his propensity to acquire shares in companies that have seen their shares tumble after buyouts collapsed.
Sunday, May 18, 2008
股神的「雜貨店經營學」巴菲特用3000萬換13.5億的智慧
一個13歲的毛孩子，把爺爺當年經營雜貨店的精髓，一點一滴，運用在公司的經營上面，不但延續了家族企業的經營火種，更創造驚人績效，締造出舉世聞名的波克夏王國，這位有神奇魔力的小男孩，就是當今股神與全球首富——巴菲特。這是一位七十七歲的智慧老人，照著十三歲時腦中的圖像，一點一滴，完成爺爺當初未竟夢想的故事。「……十三歲時，我在祖父的雜貨店中住了四個月，就睡在堆滿《讀者文摘》的小房間中……他當時計畫出一本《如何經營雜貨店》的小書，就要我這個廉價勞工，把他所有的想法，用舊的計帳本背後空白的部分，全部記下……」這是巴菲特（Warren Buffett）今年為他表弟比爾．巴菲特（Bill Buffett）的新書《食物饗宴》（Foods You Will Enjoy）中，寫的一段話，記錄當年在祖父奧尼斯（Ernest Buffett）雜貨鋪中學到的種種。雖然爺爺的出書計畫最後失敗，但這四個月的朝夕相處，埋下了華倫．巴菲特成為一代偉大投資家的種子；祖父經營雜貨鋪的哲學，更成為波克夏在四十年間，能從即將倒閉的紡織廠，壯大成為兆元帝國的基礎。winwin_20080515_1210819216_0.jpgleft -->
第一堂課現金流入大的商品就是寶
經營雜貨店的人都知道，本小、利多、周轉率高的產品，是生存的不二法寶。以後見之明來看，波克夏購併公司的標準及條件，竟和當年巴菲特家族經營雜貨鋪選擇上架貨品的條件，如出一轍，找的對象都是一些投資小，但現金流入大的公司。因此，當初躺在雜貨店貨架上的熱門商品，卡夫卡奶油、OREO餅乾、麥斯威爾咖啡、箭牌口香糖、Milky巧克力棒，甚至連當初製造雜貨店外送車隊的馬門（Marmon）集團，在過去一年中，陸續投入波克夏懷抱。巴菲特家族的雜貨店不是奧瑪哈最早成立的雜貨店，卻是當地活得最長的鋪子之一，在孫子華倫．巴菲特還未成為資本市場的一方之霸時，老巴菲特早就已經是奧瑪哈零售業講話擲地有聲的意見領袖。他常掛在嘴邊的話就是：「成功的雜貨店老闆得帶著腦子上工！」（The master merchant must use his head）。
第二堂課設定安全邊際就能存活
他說，雜貨店經營要能存活，最重要的是如何應付生意清淡的日子。周六生意一定好，周日及周五就算差一點，也不至於差太遠，最重要的是如何應付清淡的星期一、星期三及星期四，「每一個工作天都有不同的計畫，如此，開了張，錢才會跑進來」。錢進來之後，更重要的是如何運用它，「如何把錢安全地投資在對的地方，比賺錢進來難太多了！」這樣「沒想成功、先想敗」的經營邏輯，與巴菲特及其恩師葛拉漢的投資理論核心「安全邊際」（Margin of Safety），幾乎沒有二致。有了安全邊際的概念，巴菲特在集團擴張時，信心就多了三分，即使價錢稍貴一些，只要時機掌握得對、企業價值看得準，其他都不是問題。不論是收購卡夫食品八．六％股權，或是與Ｍ&Ｍ巧克力集團，共同買下箭牌口香糖集團（Wrigley's），價錢都比市場估計得高，特別是箭牌集團的買進溢價高達三○％以上，連巴菲特在今年股東會上都承認：「價錢其實不是這麼便宜，但我確定它們絕對不在高檔，價錢雖不低??但我就是愛這種牌子老、經營穩的大食品廠，它們的地位非常難被扳倒??我情願用高一點的價格，買下一家績優公司，也不願用低價買一家爛公司！」
第三堂課品牌優，小本也能滾大利
老先覺當然有他自己的邏輯，在今年巴菲特給股東的信中，巴菲特特別以喜思巧克力（See's）為例，談到了這個品牌食品廠，如何小兵立大功，帶來日後十三．五億美元的現金流入，一點一滴幫助他打造波克夏江山。股神的算盤是這樣撥的。波克夏在一九七二年以二五○○萬美元，買下喜思巧克力，當時營收約三千萬美元、獲利只有五百萬美元，每年所需營運資本約為八百萬美元；三十五年間，喜思靠著品牌及小本經營，營收及獲利連年成長，至去年為止，獲利已經超過八一○○萬美元，若把這三十五年間淨利加總起來，金額更高達十三．五億美元，比當年的五百萬美元，整整膨脹了二七○倍。這樣的巨幅成長，營運資本只較當年小小增加了四倍，至四千萬美元。換句話說，喜思只要保留不到四千萬美元的資金，就可以把賺到的十三多億美元資金，全部「繳庫」給母公司，再由波克夏做進一步的投資運用，巴菲特喜歡的就是這種品牌食品公司「本小利大」的媚力。把這個邏輯釐清之後，巴菲特投資這兩個品牌大廠的道理就越來越清楚了。以卡夫食品來說，旗下擁有的品牌包括：OREO巧克力夾心、麥斯威爾咖啡、RITZ餅乾、Milky巧克力，都是卡夫食品旗下的重要品牌...
第一堂課現金流入大的商品就是寶
經營雜貨店的人都知道，本小、利多、周轉率高的產品，是生存的不二法寶。以後見之明來看，波克夏購併公司的標準及條件，竟和當年巴菲特家族經營雜貨鋪選擇上架貨品的條件，如出一轍，找的對象都是一些投資小，但現金流入大的公司。因此，當初躺在雜貨店貨架上的熱門商品，卡夫卡奶油、OREO餅乾、麥斯威爾咖啡、箭牌口香糖、Milky巧克力棒，甚至連當初製造雜貨店外送車隊的馬門（Marmon）集團，在過去一年中，陸續投入波克夏懷抱。巴菲特家族的雜貨店不是奧瑪哈最早成立的雜貨店，卻是當地活得最長的鋪子之一，在孫子華倫．巴菲特還未成為資本市場的一方之霸時，老巴菲特早就已經是奧瑪哈零售業講話擲地有聲的意見領袖。他常掛在嘴邊的話就是：「成功的雜貨店老闆得帶著腦子上工！」（The master merchant must use his head）。
第二堂課設定安全邊際就能存活
他說，雜貨店經營要能存活，最重要的是如何應付生意清淡的日子。周六生意一定好，周日及周五就算差一點，也不至於差太遠，最重要的是如何應付清淡的星期一、星期三及星期四，「每一個工作天都有不同的計畫，如此，開了張，錢才會跑進來」。錢進來之後，更重要的是如何運用它，「如何把錢安全地投資在對的地方，比賺錢進來難太多了！」這樣「沒想成功、先想敗」的經營邏輯，與巴菲特及其恩師葛拉漢的投資理論核心「安全邊際」（Margin of Safety），幾乎沒有二致。有了安全邊際的概念，巴菲特在集團擴張時，信心就多了三分，即使價錢稍貴一些，只要時機掌握得對、企業價值看得準，其他都不是問題。不論是收購卡夫食品八．六％股權，或是與Ｍ&Ｍ巧克力集團，共同買下箭牌口香糖集團（Wrigley's），價錢都比市場估計得高，特別是箭牌集團的買進溢價高達三○％以上，連巴菲特在今年股東會上都承認：「價錢其實不是這麼便宜，但我確定它們絕對不在高檔，價錢雖不低??但我就是愛這種牌子老、經營穩的大食品廠，它們的地位非常難被扳倒??我情願用高一點的價格，買下一家績優公司，也不願用低價買一家爛公司！」
第三堂課品牌優，小本也能滾大利
老先覺當然有他自己的邏輯，在今年巴菲特給股東的信中，巴菲特特別以喜思巧克力（See's）為例，談到了這個品牌食品廠，如何小兵立大功，帶來日後十三．五億美元的現金流入，一點一滴幫助他打造波克夏江山。股神的算盤是這樣撥的。波克夏在一九七二年以二五○○萬美元，買下喜思巧克力，當時營收約三千萬美元、獲利只有五百萬美元，每年所需營運資本約為八百萬美元；三十五年間，喜思靠著品牌及小本經營，營收及獲利連年成長，至去年為止，獲利已經超過八一○○萬美元，若把這三十五年間淨利加總起來，金額更高達十三．五億美元，比當年的五百萬美元，整整膨脹了二七○倍。這樣的巨幅成長，營運資本只較當年小小增加了四倍，至四千萬美元。換句話說，喜思只要保留不到四千萬美元的資金，就可以把賺到的十三多億美元資金，全部「繳庫」給母公司，再由波克夏做進一步的投資運用，巴菲特喜歡的就是這種品牌食品公司「本小利大」的媚力。把這個邏輯釐清之後，巴菲特投資這兩個品牌大廠的道理就越來越清楚了。以卡夫食品來說，旗下擁有的品牌包括：OREO巧克力夾心、麥斯威爾咖啡、RITZ餅乾、Milky巧克力，都是卡夫食品旗下的重要品牌...
Wednesday, May 14, 2008
China Earthquake Exposes A Widening Wealth Gap
China Earthquake Exposes A Widening Wealth Gap
By LORETTA CHAO and JASON LEOW in Pengzhou, China, JAMES T. AREDDY in Shanghai and GORDON FAIRCLOUGH in ShifangMay 14, 2008; Page A1
With the death toll from China's earthquake mounting, the disaster is throwing a harsh spotlight on the widening gap between the nation's rich and poor.
Soldiers and paramilitary police rushed to dig victims out from collapsed schools, homes and hospitals. As the grim work continues, it is increasingly clear that the quake inflicted its greatest destruction on rural areas and on the smaller towns and cities that have mushroomed from farm fields in recent years as part of China's rapid urbanization.
Loretta Chao/WSJ
Standing at the side of a highway between Mianzhu and Chengdu, the capital of Sichuan province, among the rubble that used to be a line of stores, a woman pointed to the place where her concrete house once stood. Click to see more photos from the Journal reporters' drive through Sichuan.
Such areas have far less stringent building-safety practices than China's relatively wealthy big cities, construction experts say. As a result, some citizens were more vulnerable than others when disaster struck.
Rescue and relief workers struggled Tuesday to reach victims in remote areas most damaged by the magnitude-7.9 quake in the southwestern province of Sichuan. Deaths in Sichuan alone had exceeded 12,000 as of Tuesday evening, with more than 26,000 injured and at least 9,400 buried in debris, the state-run Xinhua news agency said, quoting a senior provincial official.
On Wednesday morning, a local official who had just returned from Beichuan County -- one of the worst hit areas of Sichuan -- described a scene of widespread devastation. A town of 20,000 was crushed when mountains surrounding it collapsed. More than half of the town's residents are still missing. He said there is not even a place to land a helicopter for supplies or rescue missions.
Rescuers have pulled out 2,000 bodies so far, but they are still finding some survivors, he said. He saw one man pulled out with an injured arm and leg. "They revived him, and then he just started to cry," the official said. They have opened up the road to about six miles away from the town, and rescuers are having to hike the rest of the way.
Tens of thousands are still missing as the rescue effort continues in China following the country's worst earthquake in three decades. Officials warn that more aftershocks and mudslides could add to the toll. Video courtesy of Reuters.
On the outskirts of the small city of Shifang, east of the epicenter, Fang Haiying, a 40-year-old rice farmer, said more than 10 members of her village remained buried in the rubble of their houses. She and her extended family were wearing surgical masks to protect themselves from a chemical leak at a damaged ammonia plant a few miles away. "We've been waiting but no one from the government has come. We have nothing to eat," she said.
Nearly every house in Yinhua village on Shifang's western edge was destroyed. Boulders loosed by Monday's quake, some as big as vans, littered the main road in the area, along with the vehicles they knocked over or crushed.
Survivors of the chaos walked down the narrow mountain roads to Yinhua in search of transportation out of the quake-stricken area. Two 15-year-old boys said they had hiked three hours from their village in the mountains to get to Yinhua. The pair, Chen Shi and Zheng Jia, said their middle school, like so many others, had collapsed within seconds. About 100 of their schoolmates died, they said.
Roughly 55 miles away, the disparity of damage was striking. The glitzy new office towers and hotels of Chengdu, Sichuan's bustling capital of nearly 10 million people, were still standing and largely intact. The city suffered relatively little in Monday's quake, despite its proximity to the epicenter.
In Beichuan, about 100 miles from the epicenter, nearly 1,000 paramilitary police were searching frantically Tuesday for survivors in a school that collapsed, burying at least 1,000 students and teachers. The Beichuan Middle School's main building, formerly seven stories tall, had been reduced to a pile of rubble about 7 feet high, the official Xinhua news agency said. One teenage victim was pulled out with no legs, Xinhua said. Authorities have estimated the death toll at 5,000.
See details on the earthquake's impact nationwide, and see how the aftershocks took place.
Natural disasters often wreak their worst havoc on the disadvantaged, people who tend to live in subpar housing. This was the case with Hurricane Katrina in the U.S.
Widening Wealth Gap
Now, the issue is especially thorny for China's government: President Hu Jintao and Premier Wen Jiabao have based much of the public legitimacy of their administration on trying to address a widening wealth gap resulting from decades of capitalist reforms. Part of their overall plan, for example, has called for improving rural health care and education.
China's booming economy has lifted the financial fortunes of most of its citizens, but some have gained far more than others. Economists say the country, still nominally socialist, is now among the most unequal major economies in the world. Much of this imbalance is seen in the contrast between residents of the big, wealthy cities, and those of small, poorer towns and rural areas. The disparity is a growing concern to leaders worried about social instability.
Associated Press
Eight-month-pregnant Zhang Xiaoyan, 34, was pulled alive from a partially collapsed apartment Wednesday in Dujiangyan.
Incomes in rural areas, for example, averaged 4,140 yuan a person last year, or about $590 at current exchange rates. That represents an increase of 91% from a decade earlier, not adjusted for inflation. Urban disposable incomes, by comparison, rose by 150% during the same period, to an average of 13,786 yuan last year.
China's leaders have become increasingly concerned about the widening income gap, particularly in rural areas because rural residents still comprise more than 60% of China's 1.3 billion residents.
Mr. Wen, who flew to the disaster zone within hours of the quake, spent Tuesday touring affected areas and reassuring the public that Beijing would help those most affected. "We will try our best to send milk powder to parents and ensure that children do not go hungry," Mr. Wen told victims after learning of shortages of food, drinking water and tents, the Xinhua agency reported.
On the ground, authorities scrambled to rescue survivors. China's defense ministry said that as of Tuesday afternoon, nearly 20,000 soldiers and paramilitary police had arrived in quake-hit areas, with an additional 30,000 en route in planes, trains and trucks, or on foot. Repeated aftershocks complicated efforts and prompted thousands to seek refuge outside in makeshift tents scattered across the region.
The epicenter of the quake, Wenchuan County, has remained largely cut off from help. Because of bad weather, officials scrapped plans to fly relief supplies in by helicopter, then canceled a second plan to send in rescuers by parachute. Finally, about 1,300 military doctors and soldiers reached Wenchuan by foot -- nearly 24 hours after the quake struck.
China's building code has long required that new structures be able to withstand earthquakes, according to Huang Shimin, an earthquake engineering expert at the China Academy of Building Research in Beijing. But standards from region to region remain inconsistent. Throughout Sichuan, the specification is grade seven on a scale of up to 10. The same level applies in Shanghai. But in Beijing, the standard requirement is a grade of eight -- reflecting the capital's close proximity to the epicenter of a 1976 earthquake that killed at least 240,000.
Uncertain Issues
"Based on China's codes for earthquake-resistance in building designs, if there is no problem in specific design and construction, China's capability to resist the earthquake should be strong," said Mr. Huang. "But there are many uncertain issues related to the earthquake, so it's still a complicated issue."
ColorChina Photo / NewsCom
RESCUE OPERATIONS: A woman cries before a group of soldiers preparing to search for victims at a collapsed school in Dujiangyan on Tuesday.
Architects said the quake's discrimination could be partly attributable to the variation of tremors from one area to the next. But they also cited widespread differences in construction materials and technical skills between wealthy Chengdu and the poorer towns around it, as well as often patchy enforcement of building codes.
"There are a lot of holes," said a Shanghai-based architect who often works in Sichuan province.
Adding to the pressure is that thousands of little-known cities are literally sprouting up from pastureland in China. China's urbanization push is bringing up to 15 million people into cities annually. All of them need shelter, often as cheaply and quickly as possible.
The trend has helped make the world's most populous country the world's largest construction zone. China built about 1.80 billion square meters, or more than 19 billion square feet, of property in 2006. At the time, an additional 4.10 billion square meters was also under construction, according to government statistics.
Such rapid urbanization is transforming Sichuan, one of China's biggest provinces with a population of about 82 million -- roughly equal to that of Germany. The mountainous province ranked fifth out of China's provinces for the amount of floor space it laid down in 2006, almost twice as much property as completed in Beijing.
Rubble crushes a car in Dujiangyan.
In hastily built towns around Pengzhou, about 40 miles southeast of the epicenter area, local people acknowledged the construction of their now-destroyed homes was shoddy, with little consideration given to safety. Often property is built by individuals, but is legally subject to inspections, which often don't happen. The government's oversight of building regulations has tended to be scant.
Liao Xiaoling said her brother-in-law was thrown from an upstairs window and her 86-year-old father crushed under a wall when the brick structure that was both their home and business toppled. "Our home is gone," she said.
Besides its collapsed schools, two hospitals also suffered damage in Sichuan. Some analysts say public funds often accumulate more slowly than new residents in fast-developing areas, and are often diverted to other uses, such as building lavish local government offices.
Government officials warned against drawing the conclusion that particular kinds of buildings were more vulnerable than others. Li Bingren, the spokesman at China's Ministry of Construction, said buildings in the disaster area were built to code, but the quake and its aftershocks were "stronger and higher than the designed resistance level." Schools, he said, tend to have larger rooms and be bigger than ordinary buildings, exacerbating the toll when they fail.
At least nine schools fell across the quake zone, trapping thousands of children in gruesome scenes that were repeated time and again. There was rising anger at authorities over the loss of so many young people, expressed both on the ground and on the Internet.
At the People's Hospital in Pengzhou, nurses estimated they had treated at least a thousand injured people. A lack of electricity prompted hospital officials to evacuate patients outside into blue tents in the hospital's parking lot and backyard.
'It's All Gone'
The hospital was starting to run out of water Tuesday afternoon. Many patients were frantic because they had been separated from their families and were unable to reach them because of downed phone networks. Some were told to go home, but said they had no homes to return to.
Zhou Yan, a 26-year-old farmer, was in a tent recovering from a head injury she sustained after bricks from the second floor of her home fell on her. Doctors said she was free to go but there was no way for her to get home. "I have no home to go back to. It's all gone," she said.
Ms. Zhou's husband is a migrant worker who makes furniture in Shenyang, far away in China's northeast. He managed to get in touch with her, but no buses were available for him to take home. She said she believes the parents of her niece, who was staying with her when the quake hit, are dead.
Ms. Zhou said her house, built over 10 years ago, was brick, which is common in this area. The couple never thought to build it to withstand earthquakes, especially of this magnitude. She estimated it will cost at least 100,000 yuan to rebuild it, money she said will be "impossible" to save. "There's just no way. I don't know what to do next, or who to ask."
By LORETTA CHAO and JASON LEOW in Pengzhou, China, JAMES T. AREDDY in Shanghai and GORDON FAIRCLOUGH in ShifangMay 14, 2008; Page A1
With the death toll from China's earthquake mounting, the disaster is throwing a harsh spotlight on the widening gap between the nation's rich and poor.
Soldiers and paramilitary police rushed to dig victims out from collapsed schools, homes and hospitals. As the grim work continues, it is increasingly clear that the quake inflicted its greatest destruction on rural areas and on the smaller towns and cities that have mushroomed from farm fields in recent years as part of China's rapid urbanization.
Loretta Chao/WSJ
Standing at the side of a highway between Mianzhu and Chengdu, the capital of Sichuan province, among the rubble that used to be a line of stores, a woman pointed to the place where her concrete house once stood. Click to see more photos from the Journal reporters' drive through Sichuan.
Such areas have far less stringent building-safety practices than China's relatively wealthy big cities, construction experts say. As a result, some citizens were more vulnerable than others when disaster struck.
Rescue and relief workers struggled Tuesday to reach victims in remote areas most damaged by the magnitude-7.9 quake in the southwestern province of Sichuan. Deaths in Sichuan alone had exceeded 12,000 as of Tuesday evening, with more than 26,000 injured and at least 9,400 buried in debris, the state-run Xinhua news agency said, quoting a senior provincial official.
On Wednesday morning, a local official who had just returned from Beichuan County -- one of the worst hit areas of Sichuan -- described a scene of widespread devastation. A town of 20,000 was crushed when mountains surrounding it collapsed. More than half of the town's residents are still missing. He said there is not even a place to land a helicopter for supplies or rescue missions.
Rescuers have pulled out 2,000 bodies so far, but they are still finding some survivors, he said. He saw one man pulled out with an injured arm and leg. "They revived him, and then he just started to cry," the official said. They have opened up the road to about six miles away from the town, and rescuers are having to hike the rest of the way.
Tens of thousands are still missing as the rescue effort continues in China following the country's worst earthquake in three decades. Officials warn that more aftershocks and mudslides could add to the toll. Video courtesy of Reuters.
On the outskirts of the small city of Shifang, east of the epicenter, Fang Haiying, a 40-year-old rice farmer, said more than 10 members of her village remained buried in the rubble of their houses. She and her extended family were wearing surgical masks to protect themselves from a chemical leak at a damaged ammonia plant a few miles away. "We've been waiting but no one from the government has come. We have nothing to eat," she said.
Nearly every house in Yinhua village on Shifang's western edge was destroyed. Boulders loosed by Monday's quake, some as big as vans, littered the main road in the area, along with the vehicles they knocked over or crushed.
Survivors of the chaos walked down the narrow mountain roads to Yinhua in search of transportation out of the quake-stricken area. Two 15-year-old boys said they had hiked three hours from their village in the mountains to get to Yinhua. The pair, Chen Shi and Zheng Jia, said their middle school, like so many others, had collapsed within seconds. About 100 of their schoolmates died, they said.
Roughly 55 miles away, the disparity of damage was striking. The glitzy new office towers and hotels of Chengdu, Sichuan's bustling capital of nearly 10 million people, were still standing and largely intact. The city suffered relatively little in Monday's quake, despite its proximity to the epicenter.
In Beichuan, about 100 miles from the epicenter, nearly 1,000 paramilitary police were searching frantically Tuesday for survivors in a school that collapsed, burying at least 1,000 students and teachers. The Beichuan Middle School's main building, formerly seven stories tall, had been reduced to a pile of rubble about 7 feet high, the official Xinhua news agency said. One teenage victim was pulled out with no legs, Xinhua said. Authorities have estimated the death toll at 5,000.
See details on the earthquake's impact nationwide, and see how the aftershocks took place.
Natural disasters often wreak their worst havoc on the disadvantaged, people who tend to live in subpar housing. This was the case with Hurricane Katrina in the U.S.
Widening Wealth Gap
Now, the issue is especially thorny for China's government: President Hu Jintao and Premier Wen Jiabao have based much of the public legitimacy of their administration on trying to address a widening wealth gap resulting from decades of capitalist reforms. Part of their overall plan, for example, has called for improving rural health care and education.
China's booming economy has lifted the financial fortunes of most of its citizens, but some have gained far more than others. Economists say the country, still nominally socialist, is now among the most unequal major economies in the world. Much of this imbalance is seen in the contrast between residents of the big, wealthy cities, and those of small, poorer towns and rural areas. The disparity is a growing concern to leaders worried about social instability.
Associated Press
Eight-month-pregnant Zhang Xiaoyan, 34, was pulled alive from a partially collapsed apartment Wednesday in Dujiangyan.
Incomes in rural areas, for example, averaged 4,140 yuan a person last year, or about $590 at current exchange rates. That represents an increase of 91% from a decade earlier, not adjusted for inflation. Urban disposable incomes, by comparison, rose by 150% during the same period, to an average of 13,786 yuan last year.
China's leaders have become increasingly concerned about the widening income gap, particularly in rural areas because rural residents still comprise more than 60% of China's 1.3 billion residents.
Mr. Wen, who flew to the disaster zone within hours of the quake, spent Tuesday touring affected areas and reassuring the public that Beijing would help those most affected. "We will try our best to send milk powder to parents and ensure that children do not go hungry," Mr. Wen told victims after learning of shortages of food, drinking water and tents, the Xinhua agency reported.
On the ground, authorities scrambled to rescue survivors. China's defense ministry said that as of Tuesday afternoon, nearly 20,000 soldiers and paramilitary police had arrived in quake-hit areas, with an additional 30,000 en route in planes, trains and trucks, or on foot. Repeated aftershocks complicated efforts and prompted thousands to seek refuge outside in makeshift tents scattered across the region.
The epicenter of the quake, Wenchuan County, has remained largely cut off from help. Because of bad weather, officials scrapped plans to fly relief supplies in by helicopter, then canceled a second plan to send in rescuers by parachute. Finally, about 1,300 military doctors and soldiers reached Wenchuan by foot -- nearly 24 hours after the quake struck.
China's building code has long required that new structures be able to withstand earthquakes, according to Huang Shimin, an earthquake engineering expert at the China Academy of Building Research in Beijing. But standards from region to region remain inconsistent. Throughout Sichuan, the specification is grade seven on a scale of up to 10. The same level applies in Shanghai. But in Beijing, the standard requirement is a grade of eight -- reflecting the capital's close proximity to the epicenter of a 1976 earthquake that killed at least 240,000.
Uncertain Issues
"Based on China's codes for earthquake-resistance in building designs, if there is no problem in specific design and construction, China's capability to resist the earthquake should be strong," said Mr. Huang. "But there are many uncertain issues related to the earthquake, so it's still a complicated issue."
ColorChina Photo / NewsCom
RESCUE OPERATIONS: A woman cries before a group of soldiers preparing to search for victims at a collapsed school in Dujiangyan on Tuesday.
Architects said the quake's discrimination could be partly attributable to the variation of tremors from one area to the next. But they also cited widespread differences in construction materials and technical skills between wealthy Chengdu and the poorer towns around it, as well as often patchy enforcement of building codes.
"There are a lot of holes," said a Shanghai-based architect who often works in Sichuan province.
Adding to the pressure is that thousands of little-known cities are literally sprouting up from pastureland in China. China's urbanization push is bringing up to 15 million people into cities annually. All of them need shelter, often as cheaply and quickly as possible.
The trend has helped make the world's most populous country the world's largest construction zone. China built about 1.80 billion square meters, or more than 19 billion square feet, of property in 2006. At the time, an additional 4.10 billion square meters was also under construction, according to government statistics.
Such rapid urbanization is transforming Sichuan, one of China's biggest provinces with a population of about 82 million -- roughly equal to that of Germany. The mountainous province ranked fifth out of China's provinces for the amount of floor space it laid down in 2006, almost twice as much property as completed in Beijing.
Rubble crushes a car in Dujiangyan.
In hastily built towns around Pengzhou, about 40 miles southeast of the epicenter area, local people acknowledged the construction of their now-destroyed homes was shoddy, with little consideration given to safety. Often property is built by individuals, but is legally subject to inspections, which often don't happen. The government's oversight of building regulations has tended to be scant.
Liao Xiaoling said her brother-in-law was thrown from an upstairs window and her 86-year-old father crushed under a wall when the brick structure that was both their home and business toppled. "Our home is gone," she said.
Besides its collapsed schools, two hospitals also suffered damage in Sichuan. Some analysts say public funds often accumulate more slowly than new residents in fast-developing areas, and are often diverted to other uses, such as building lavish local government offices.
Government officials warned against drawing the conclusion that particular kinds of buildings were more vulnerable than others. Li Bingren, the spokesman at China's Ministry of Construction, said buildings in the disaster area were built to code, but the quake and its aftershocks were "stronger and higher than the designed resistance level." Schools, he said, tend to have larger rooms and be bigger than ordinary buildings, exacerbating the toll when they fail.
At least nine schools fell across the quake zone, trapping thousands of children in gruesome scenes that were repeated time and again. There was rising anger at authorities over the loss of so many young people, expressed both on the ground and on the Internet.
At the People's Hospital in Pengzhou, nurses estimated they had treated at least a thousand injured people. A lack of electricity prompted hospital officials to evacuate patients outside into blue tents in the hospital's parking lot and backyard.
'It's All Gone'
The hospital was starting to run out of water Tuesday afternoon. Many patients were frantic because they had been separated from their families and were unable to reach them because of downed phone networks. Some were told to go home, but said they had no homes to return to.
Zhou Yan, a 26-year-old farmer, was in a tent recovering from a head injury she sustained after bricks from the second floor of her home fell on her. Doctors said she was free to go but there was no way for her to get home. "I have no home to go back to. It's all gone," she said.
Ms. Zhou's husband is a migrant worker who makes furniture in Shenyang, far away in China's northeast. He managed to get in touch with her, but no buses were available for him to take home. She said she believes the parents of her niece, who was staying with her when the quake hit, are dead.
Ms. Zhou said her house, built over 10 years ago, was brick, which is common in this area. The couple never thought to build it to withstand earthquakes, especially of this magnitude. She estimated it will cost at least 100,000 yuan to rebuild it, money she said will be "impossible" to save. "There's just no way. I don't know what to do next, or who to ask."
Monday, May 12, 2008
JPMorgan Chase CEO: Recession is just beginning
JPMorgan Chase CEO: Recession is just beginningMonday May 12, 4:41 pm ET
JPMorgan CEO James Dimon says recession is just starting, even if market crisis is mostly over
NEW YORK (AP) -- JPMorgan Chase & Co.'s chief executive said Monday that while the crisis in the credit markets appears to be three-quarters over, he believes a U.S. recession is just beginning.
"Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession," said CEO James Dimon, whose bank saw its first-quarter profit fall by half due to the recent collapse of the U.S. mortgage market. "The recession just started."
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"We don't know if it's going to be mild or severe," he continued, speaking at a conference in New York hosted by Swiss bank UBS AG. "We're thinking there's a third of a chance that it's going to be pretty bad ... closer to the 1982 recession than the very mild recessions we had in 2001 and 1990."
Also incomplete is JPMorgan's acquisition of Bear Stearns Cos., the toppling investment bank that JPMorgan offered to buy in March.
"I want to make it perfectly clear: Mission not accomplished," Dimon said. He warned investors that while he still believes the deal was a good decision, "we are bearing an awful lot of risk" by taking on Bear Stearns' assets.
Bear Stearns is expected to post 2009 earnings of $800 million to $1.13 billion, Dimon said.
JPMorgan has so far found positions for 40 percent of the 14,000 Bear Stearns employees and job opportunities outside the company for an additional 1,500 people, Dimon said.
Bear Stearns shareholders are scheduled to vote on the proposed acquisition on May 29.
JPMorgan shares rose 67 cents to $47.24. Bear Stearns shares rose 15 cents to $10.38.
JPMorgan CEO James Dimon says recession is just starting, even if market crisis is mostly over
NEW YORK (AP) -- JPMorgan Chase & Co.'s chief executive said Monday that while the crisis in the credit markets appears to be three-quarters over, he believes a U.S. recession is just beginning.
"Even if the capital markets crisis resolves, it does not mean that this country will not go into a bad recession," said CEO James Dimon, whose bank saw its first-quarter profit fall by half due to the recent collapse of the U.S. mortgage market. "The recession just started."
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window.yzq_d['rdltJdG_fzs-']='&U=13f6ttftu%2fN%3drdltJdG_fzs-%2fC%3d626899.12331415.12723508.1383221%2fD%3dLREC%2fB%3d5133107%2fV%3d1';
"We don't know if it's going to be mild or severe," he continued, speaking at a conference in New York hosted by Swiss bank UBS AG. "We're thinking there's a third of a chance that it's going to be pretty bad ... closer to the 1982 recession than the very mild recessions we had in 2001 and 1990."
Also incomplete is JPMorgan's acquisition of Bear Stearns Cos., the toppling investment bank that JPMorgan offered to buy in March.
"I want to make it perfectly clear: Mission not accomplished," Dimon said. He warned investors that while he still believes the deal was a good decision, "we are bearing an awful lot of risk" by taking on Bear Stearns' assets.
Bear Stearns is expected to post 2009 earnings of $800 million to $1.13 billion, Dimon said.
JPMorgan has so far found positions for 40 percent of the 14,000 Bear Stearns employees and job opportunities outside the company for an additional 1,500 people, Dimon said.
Bear Stearns shareholders are scheduled to vote on the proposed acquisition on May 29.
JPMorgan shares rose 67 cents to $47.24. Bear Stearns shares rose 15 cents to $10.38.
Sunday, May 11, 2008
Behind AIG's Nasty Surprise
Behind AIG's Nasty Surprise
The insurance giant's far larger-than-expected first-quarter loss rouses investor ire and renews fears the credit crisis may still have a way to go
by David Bogoslaw
American International Group's (AIG) financial results took a sharp turn for the worse in the first quarter and sent a shock wave through the equity markets, renewing concerns that there's likely to be more fallout from the credit crisis.
After the market close on May 8, the world's largest insurance company reported a net loss of $7.81 billion, or $3.09 per share, in the first quarter, vs. a profit of $4.13 billion, or $1.58 per share, in the year-earlier period. Excluding mark-to-market writedowns and other asset impairment charges, the company had an operating loss of $3.56 billion, or $1.41 per share, in the latest quarter, compared with adjusted net income of $4.39 billion, or $1.68 per share, a year ago.
The bulk of those writedowns was related to credit default swaps, the complex credit derivatives used either by debt owners to hedge against credit events or by speculators to bet on changes in credit spreads. New York-based AIG said the loss included the impact of successful hedging activities that didn't qualify for hedge accounting treatment or for which hedge accounting wasn't used, including related foreign exchange gains and losses.
Seeking Fresh Capital
AIG also said it plans to raise about $12.5 billion in capital to shore up its balance sheet and provide greater financial flexibility to be able to respond to future events in the turbulent financial markets. First, it will raise roughly $7.5 billion through a common stock offering and an equity-linked offering, to be followed later by an offering of hybrid securities made up of debt and equity.
The loss far surpassed the per-share loss of 76¢ that analysts had expected, prompting AIG shares to tumble 8.8% to close at 40.28 on May 9.
Hank Greenberg, AIG's former chief executive, who has been very vocal in his public criticism of AIG's current management in recent months, told BusinessWeek that he was "stunned as a shareholder, and very disappointed and very upset" at the extent of the losses in the latest quarter.
He says he was surprised by the size of the impairment charges not only in AIG's Financial Products business but also in its partnership and equity investments, as well as how funds were allocated to various asset classes, which he wouldn't elaborate on. The increase in the expense ratio from about 19% a few years ago to the current 26% is also distressing to him.
Downbeat Assessment from Analysts
An AIG spokesperson wouldn't respond to Greenberg's remarks except to say that the motivation behind them should be considered given the multiple lawsuits Greenberg is facing. Among those, AIG is seeking to recover losses that resulted from writedowns and settlements due to accounting irregularities under Greenberg, and the insurer has also sued Greenberg and six other former AIG executives, claiming that after they left AIG in 2005 they illegally seized control of Starr International, an affiliated company that owns $20 billion in AIG shares.
Analyst Cathy Seifert at Standard & Poor's Equity Research said she expected to see weakness in AIG's "outsized" mortgage-related exposures but was "troubled by what we view as a pretty significant deterioration in a number of core insurance underwriting lines." She reaffirmed her hold rating on the stock and stuck to her 2008 earnings estimate of $2.50 per share, but said this forecast assumes underwriting results improve. She also said she believes the company is long overdue for a major restructuring. (Like BusinessWeek, S&P is a division of the The McGraw-Hill Companies (MHP).)
Tom Kersting, an analyst at Edward Jones in St. Louis, went as far as to say there needs to be a change in leadership at AIG, not limited to Martin Sullivan, the chief executive, but the entire management team. "They have come out time and time again on earnings calls and at analyst day [presentations] saying losses will only be this much, and they continue to go up and up," says Kersting. "At this point they have lost most of their credibility."
He lowered his rating on the stock to hold from buy on May 9 after assessing the latest results. "I'm not sure they had or have a complete handle on what's going on with some of their riskier investments," he says.
Dividend Hike Disappointment
The latest results were hurt by a pretax charge of about $9.11 billion for a net unrealized market valuation loss related to super senior credit default swaps held by AIG Financial Products Corp. Another weight on earnings stemmed from $6.09 billion in pretax net realized capital losses, mostly for other than temporary impairment charges in AIG's investment portfolio, which dwarfed $70 million in similar losses recorded in the first quarter of 2007.
Some analysts expressed dismay at the company's plan to raise its quarterly dividend by 10% to 22¢ per share at the same time that it's saying it needs to raise fresh capital. On the May 9 conference call with analysts and investors, Sullivan said the dividend hike reflects "the board and management's long-term view on the strength of AIG's business, earnings, and capital-generating power." The dividend increase will amount to about $200 million in annual expenses, small compared to the amount of capital AIG is trying to raise, the company said.
In a research note that Goldman Sachs (GS) put out on May 8, analyst Thomas Cholnoky said he expected the market to react negatively to the nearly 16% decline in book value and the need to raise capital, which is sure to dilute future earnings per share.
Reacting to Credit Ratings?
"The focus will be on the implications of the capital raise, especially given the company's belief that it has $2.5 billion to $7.5 billion of 'excess economic capital,'" Cholnoky wrote. (That's sharply lower than the $15 billion-$20 billion range prior to the onset of the credit crunch.)
He concluded that the capital-raising effort is primarily a defensive move prompted by Fitch Ratings' downgrade of AIG's claims-paying ability, S&P Ratings Service's downgrade of AIG's debt, and the possibility that AIG may now have to post collateral on its AIG Financial Products exposures. (Goldman Sachs has received compensation for investment banking services from AIG in the past 12 months.)
On the call, Steven Bensinger, AIG's chief financial officer, denied that the plan was directed by rating agencies and said management "felt this was the absolute right thing to do," and should be viewed as a proactive move to be prepared to respond to potential further turbulence in the financial market.
He conceded that the equity offerings would initially lower earnings per share, but said that over the longer term "it is something we hope we can offset by the use of net capital in very productive ways as opportunities manifest themselves over the course of the next few quarters."
The insurance giant's far larger-than-expected first-quarter loss rouses investor ire and renews fears the credit crisis may still have a way to go
by David Bogoslaw
American International Group's (AIG) financial results took a sharp turn for the worse in the first quarter and sent a shock wave through the equity markets, renewing concerns that there's likely to be more fallout from the credit crisis.
After the market close on May 8, the world's largest insurance company reported a net loss of $7.81 billion, or $3.09 per share, in the first quarter, vs. a profit of $4.13 billion, or $1.58 per share, in the year-earlier period. Excluding mark-to-market writedowns and other asset impairment charges, the company had an operating loss of $3.56 billion, or $1.41 per share, in the latest quarter, compared with adjusted net income of $4.39 billion, or $1.68 per share, a year ago.
The bulk of those writedowns was related to credit default swaps, the complex credit derivatives used either by debt owners to hedge against credit events or by speculators to bet on changes in credit spreads. New York-based AIG said the loss included the impact of successful hedging activities that didn't qualify for hedge accounting treatment or for which hedge accounting wasn't used, including related foreign exchange gains and losses.
Seeking Fresh Capital
AIG also said it plans to raise about $12.5 billion in capital to shore up its balance sheet and provide greater financial flexibility to be able to respond to future events in the turbulent financial markets. First, it will raise roughly $7.5 billion through a common stock offering and an equity-linked offering, to be followed later by an offering of hybrid securities made up of debt and equity.
The loss far surpassed the per-share loss of 76¢ that analysts had expected, prompting AIG shares to tumble 8.8% to close at 40.28 on May 9.
Hank Greenberg, AIG's former chief executive, who has been very vocal in his public criticism of AIG's current management in recent months, told BusinessWeek that he was "stunned as a shareholder, and very disappointed and very upset" at the extent of the losses in the latest quarter.
He says he was surprised by the size of the impairment charges not only in AIG's Financial Products business but also in its partnership and equity investments, as well as how funds were allocated to various asset classes, which he wouldn't elaborate on. The increase in the expense ratio from about 19% a few years ago to the current 26% is also distressing to him.
Downbeat Assessment from Analysts
An AIG spokesperson wouldn't respond to Greenberg's remarks except to say that the motivation behind them should be considered given the multiple lawsuits Greenberg is facing. Among those, AIG is seeking to recover losses that resulted from writedowns and settlements due to accounting irregularities under Greenberg, and the insurer has also sued Greenberg and six other former AIG executives, claiming that after they left AIG in 2005 they illegally seized control of Starr International, an affiliated company that owns $20 billion in AIG shares.
Analyst Cathy Seifert at Standard & Poor's Equity Research said she expected to see weakness in AIG's "outsized" mortgage-related exposures but was "troubled by what we view as a pretty significant deterioration in a number of core insurance underwriting lines." She reaffirmed her hold rating on the stock and stuck to her 2008 earnings estimate of $2.50 per share, but said this forecast assumes underwriting results improve. She also said she believes the company is long overdue for a major restructuring. (Like BusinessWeek, S&P is a division of the The McGraw-Hill Companies (MHP).)
Tom Kersting, an analyst at Edward Jones in St. Louis, went as far as to say there needs to be a change in leadership at AIG, not limited to Martin Sullivan, the chief executive, but the entire management team. "They have come out time and time again on earnings calls and at analyst day [presentations] saying losses will only be this much, and they continue to go up and up," says Kersting. "At this point they have lost most of their credibility."
He lowered his rating on the stock to hold from buy on May 9 after assessing the latest results. "I'm not sure they had or have a complete handle on what's going on with some of their riskier investments," he says.
Dividend Hike Disappointment
The latest results were hurt by a pretax charge of about $9.11 billion for a net unrealized market valuation loss related to super senior credit default swaps held by AIG Financial Products Corp. Another weight on earnings stemmed from $6.09 billion in pretax net realized capital losses, mostly for other than temporary impairment charges in AIG's investment portfolio, which dwarfed $70 million in similar losses recorded in the first quarter of 2007.
Some analysts expressed dismay at the company's plan to raise its quarterly dividend by 10% to 22¢ per share at the same time that it's saying it needs to raise fresh capital. On the May 9 conference call with analysts and investors, Sullivan said the dividend hike reflects "the board and management's long-term view on the strength of AIG's business, earnings, and capital-generating power." The dividend increase will amount to about $200 million in annual expenses, small compared to the amount of capital AIG is trying to raise, the company said.
In a research note that Goldman Sachs (GS) put out on May 8, analyst Thomas Cholnoky said he expected the market to react negatively to the nearly 16% decline in book value and the need to raise capital, which is sure to dilute future earnings per share.
Reacting to Credit Ratings?
"The focus will be on the implications of the capital raise, especially given the company's belief that it has $2.5 billion to $7.5 billion of 'excess economic capital,'" Cholnoky wrote. (That's sharply lower than the $15 billion-$20 billion range prior to the onset of the credit crunch.)
He concluded that the capital-raising effort is primarily a defensive move prompted by Fitch Ratings' downgrade of AIG's claims-paying ability, S&P Ratings Service's downgrade of AIG's debt, and the possibility that AIG may now have to post collateral on its AIG Financial Products exposures. (Goldman Sachs has received compensation for investment banking services from AIG in the past 12 months.)
On the call, Steven Bensinger, AIG's chief financial officer, denied that the plan was directed by rating agencies and said management "felt this was the absolute right thing to do," and should be viewed as a proactive move to be prepared to respond to potential further turbulence in the financial market.
He conceded that the equity offerings would initially lower earnings per share, but said that over the longer term "it is something we hope we can offset by the use of net capital in very productive ways as opportunities manifest themselves over the course of the next few quarters."
AIG's Tough Road Back
AIG's Tough Road Back
By Andrew Bary
Word Count: 552 Companies Featured in This Article: American International Group
WALL STREET IS LOSING PATIENCE with insurance giant American International Group and its CEO, Martin Sullivan.
AIG's surprisingly large first-quarter loss, reported Thursday, jolted its stock (ticker: AIG), which fell $3.87, to $40.28 a share, in heavy trading Friday, renewing speculation Sullivan may be booted. In 2005, the mild-mannered Englishman replaced the brilliant, imperious Hank Greenberg, who'd been forced out by an accounting scandal.
AIG, which is near a 10-year low of $38 set in March, might not slip much more because its earnings power in 2009 probably is at least $5.00 a share. But Citigroup analyst Joshua Shanker, who ...
By Andrew Bary
Word Count: 552 Companies Featured in This Article: American International Group
WALL STREET IS LOSING PATIENCE with insurance giant American International Group and its CEO, Martin Sullivan.
AIG's surprisingly large first-quarter loss, reported Thursday, jolted its stock (ticker: AIG), which fell $3.87, to $40.28 a share, in heavy trading Friday, renewing speculation Sullivan may be booted. In 2005, the mild-mannered Englishman replaced the brilliant, imperious Hank Greenberg, who'd been forced out by an accounting scandal.
AIG, which is near a 10-year low of $38 set in March, might not slip much more because its earnings power in 2009 probably is at least $5.00 a share. But Citigroup analyst Joshua Shanker, who ...
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