Connecting the Dots

The Great Income Shortage… and How to Survive It

June 28, 2016

At the Strategic Investment Conference in May, I was part of the Mauldin Economics Editors’ Panel, and a lot of people were very bullish on bonds. Moderator Mark Yusko asked me why I suggest substituting high-dividend-paying stocks for bonds.

Let me paraphrase for you what I said. One problem with bonds is, they have a coupon that never goes up. Sure, with stocks you’ll have a little more volatility, but you also pay much less tax on dividends than on interest income.

Look, it’s not so much about a risk-reward strategy—it’s simply a matter of where to get the income you need to survive. Because the greatest shortage going forward will be income… in terms of wages as well as investments. And so those things that produce steady income and good upside will become very dear.

Below, I’m giving you one of my recent stock recommendations from my premium service for high-yield investments, Yield Shark. This is a truly crisis-proof company that should make you money for years to come, and right now you can get the stock at a very attractive entry price.

The same goes for Yield Shark itself, by the way. For a very limited time, we are offering the service at a special price to Connecting the Dots readers.

Through July 5, you can get one whole year—12 monthly issues—of Yield Shark for only $99. That’s half off the regular price.

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Now, let’s get right into today’s issue. The following is an excerpt from one of my Yield Shark letters…

The Investment Golden Egg

Longtime readers know that I was raised on a vegetable farm near Tacoma, Washington. Our only neighbors were fellow vegetable farmers—George Takahara and Minoru Uchida—and egg farmer Henry Bissinger.

Even though each of them had their own business to run, all four of them looked out for each other like brothers. They selflessly helped each other without being asked and always did so without payment or expectations. Those three neighbors were hard-working, honest, dependable, generous individuals—and friends as good as anyone could ever ask for.

This was never more evident than when our family home burned to the ground. I was six years old. Not only were we homeless, the fire happened during the middle of the busy harvest season, so there was no time for my parents to feel sorry for themselves.

Our three neighboring angels fought over who would put us up, put a roof over our head and food in our stomach, helped my father harvest his fields, and even helped build temporary living quarters in a corner of our barn.

The reason I tell you this story is not so much to explain how wonderful our neighbors were, but to point out one big difference—other than skin color—of those four farmers. Mr. Uchida, Mr. Takahara, and my father all grew vegetables, while Mr. Bissinger was in the egg business.

They all worked 90 to 100 hours a week (yes, I’m serious). Mr. Bissinger had the biggest house and drove the nicest car.

“Lots of money in eggs, Tony,” my father said.

Which brings me to the stock I want to recommend to you this month.

Cal-Maine Foods and the Golden Egg

Mississippi-headquartered Cal-Maine Foods is the largest producer of eggs in the United States with a staggering 40 million egg-laying hens. That’s a lot of chickens, and each one lays an average of 250-300 eggs per year!

All of its production is in the United States, primarily in the South, and Cal-Maine sells the majority of its shell eggs in approximately 29 states across the US southwestern, southeastern, mid-western and mid-Atlantic regions.

Cal-Maine sells those eggs in three primary forms:

  • Shell Eggs: the kind that you and I buy at grocery stores (73% of sales)
     
  • Specialty Shell Eggs: organic, free range, cage free, and nutritionally enhanced eggs (24% of sales)
     
  • Egg Products: liquid, frozen, and dehydrated eggs typically used by large institutions (3% of sales)

Cal-Maine sells those eggs and egg products under four major consumer brands: 4 Grain, Farmhouse, Egg-Land’s Best, and Land O’ Lakes.

That’s pretty impressive for a business that a fresh-out-of-the-Army soldier started on a shoestring in 1957.

After serving in the US Army, Fred Adams attended the University of Southern Mississippi and upon graduation took a job as an animal feed salesman for Ralston Purina, where he worked for three years making contacts and learning the poultry business.

In 1957, Adams launched his own egg operation in Mississippi, but he had big dreams and merged with two egg companies in Maine and California. Adams continued to expand by buying farms in Arkansas, Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas, and Utah.

Four Reasons to Buy Cal-Maine Shares Today

Reason #1: Profits, Profits, Profits

My father was right—there is big money in eggs, and Cal-Maine sells millions of them. In 2015, the company had a 23% market share of the egg business.

Over the last five years, Cal-Maine has grown revenues at an impressive 11.6% CAGR (compounded annual growth rate).

However, Wall Street has given up on Cal-Maine because egg prices have dropped, falling from over $2 per dozen eggs to the lower end of the $1 range.

Reason #2: Eggs Are Good for You!

Remember when eggs were considered to be a major cause of high cholesterol? That changed in 2000 when the American Heart Association concluded after 25 years of study that saturated fat—not cholesterol—was the culprit of heart disease and gave the green light to eat eggs.

Dietary trends in the United States have begun focusing on high protein (remember the Atkins diet?), and eggs are one of the best sources of protein you can find. One egg has only 75 calories but 7 grams of high-quality protein, which is why US egg consumption has been growing.

While per-capita consumption of eggs has been reliably steady, the number of Americans is growing. In 2000, the US had a population of 282 million, but that number has grown to 321 million today, so we’re talking about 12 billion additional eggs being eaten.

Plus, if you’re worried about the stock market, you should love Cal-Maine because demand for eggs is extremely stable, and that makes it a very defensive stock during tough times.

Reason #3: Buy Your Straw Hats in January

I can’t help it, I’ll forever be a cheapskate—so I get excited when I see a great stock go on sale. Cal-Maine was trading as high as $63.25 in October, but has lost a third of its value since then.

Cal-Maine also has $8.67 per share in cold, hard cash, a big cushion for both business and stock market safety.

Reason #4: Tasty but Scrambled Dividend

Cal-Maine has an unusual dividend policy:

  1. No profits… no dividend!
     
  2. Dividends are limited to 33% of its net income.

That type of undependable and fluctuating dividend would normally be a red flag to me, but founder Fred Adams and his family own 31.3% of the outstanding Cal-Maine shares, which is one of the highest insider ownership stakes that you’ll find.

Talking about aligning the interests of management with those of the investors!

If you were a member of the Adams family (and I’m not talking about Gomez, Morticia, and Lurch), how important would dividends be to you?

Extremely important—and you can bet that Fred Adams will do whatever it takes to keep those profits and dividend checks coming.

In the last quarter, Cal-Maine paid out a dividend of $0.751 per share. If this dividend were held constant, that would work out to $3.00, or 5.8% dividend yield.

However, I don’t want you to expect 5.9%. The Wall Street consensus 2016 profit estimate is for $4.99 per share, so we’re talking about $1.65 in dividends, or 3%.

That 3% dividend, with upside to a dividend increase as well as capital appreciation, is pretty darn attractive, in my book.

Dividends aren’t the only thing Cal-Maine does with its cash. From 2014 to 2015, the company paid off 20% of its long-term debt, down from $50 million to $40 million.

Right now, Cal-Maine’s share price looks pretty attractive, so I recommend buying at the market. (Disclaimer: If you’re not a Yield Shark subscriber and decide to buy CALM, please know that you’re doing so at your own risk. To get ongoing guidance on this stock, including how long to hold and when to sell or take profits, please consider giving Yield Shark a try.)

One More Thing Before I Go…

In recent editions of Yield Shark, I recommended to my subscribers: a real estate investment trust that focuses on student housing and pays a handsome 3.5% dividend… a tech giant with a 52-cent-per-share dividend that, one of the richest investors thinks, is currently undervalued… a company firmly entrenched in one of the biggest US growth sectors in the United States, with a 4% yield and growing… and many more.

If you’re looking for stable, income-producing investments with high yield and great upside, I suggest you try my newsletter risk-free for 90 days and join happy subscribers like Michael F.:

“My results have been overwhelmingly positive. [Yield Shark] is a different perspective from the mainstream investment advisors.”

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Tony Sagami
Tony Sagami

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