November 28, 2012 Comments

The Dow ended the day up 107 points or 0.8% but had been down about 100 points earlier in the day. Toronto ended the day up 0.2%.

Costco announced a special $7 dividend and rose 6% today. It is truly a great company. But it never seems to look cheap. Investors should perhaps consider why Costco is paying out the cash this way instead of buying back more of its own shares. And the reason could well be that the company considers the shares to be over-priced. With Charlie Munger on its Board I would think it would have bought more of the stock back if it thought it was any kind of bargain. So investors may be taking the the wrong message here. Another consideration for investors to ponder ist ath special dividend to reduce cash might indicate that growth will be slower. Then again the press release states that the share buy backs are ongoing… but this special dividend appears to be 10 times higher than the annual share buy backs.

Visa Inc. is updated and rated Buy at $147.29. This stock is up 45% this year. It was not on our list at the start of the year. The latest update in 2011 had been on May 6, 2011 (lower) Strong Buy at $79.41. It got added back to our list on March 28, 2012 at $119.35 and rated Buy at that time. It is up 23% since then.

With all these increases I was rather expecting that our analysis at this time would show it to be no better than a Hold. But as its earnings have risen we can justify a higher price. The trailing P./E is high at 24. But the P/E based on the next fiscal year earnings is more reasonable at 20. As we have perhaps seen in its earnings performance a company like this that has almost monopoly characteristics has what Buffett calls “wonderful economics”. Therefore it cab justify higher P/E than companies that face much stronger competition.

So it looks like this can be justified as a Buy. At the same time I would not load up on it. It may be a good stock to pick up on dips. The fact is that I sold this stock too early at much lower prices. Because of that I face certain emotional barriers to buying it at this higher price and so I have no plans to buy but i would reconsider on a significant dip. A reasonable strategy might be to take a small position and to hope for a dip to add to that.

Many times over the past couple of years I have remarked about the monopoly-like characteristics of this company joking when it rose that it’s hard to keep a good (largely unregulated as to price) monopoly down. It could face further price regulation in future which is another reason I would not go over board on it at this price.