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TransAlta: Environmental Regulations And Cheap Crude Make For A Perfect Storm

Summary TransAlta’s share price has fallen sharply over the last six months in response to the return of cheap petroleum and the election of pro-environment governments in Alberta and Canada. Planned and unplanned downtime in Q2 prevented the company from taking full advantage of hot temperatures in Canada, resulting in a large earnings miss for the quarter. Looking ahead, the company is faced with the prospect of either converting its existing coal facilities to natural gas or writing off a large amount of relatively young assets. While a large forward yield could catch the eye of dividend investors, the company’s outlook is too negative to be an attractive long investment opportunity at this time. Author’s note: This article refers to a Canadian company and all dollar figures represent Canadian dollars unless otherwise stated. The share price of Canadian electricity generator TransAlta Corporation (NYSE: TAC ) has plummeted in 2015 to date as the prices of natural gas and petroleum have halved and regulatory concerns have mounted in its primary markets. This volatility has only increased over the last week in the wake of Canadian voters bringing the country’s pro-environment Liberal party to power in national elections and a rumored buyout attempt, although the company’s shares have rebounded by 27% over the last four weeks. This article evaluates TransAlta as a potential long investment opportunity in light of this uncertainty. TransAlta at a glance TransAlta owns and operates power plants in Canada, the United States, and Australia. Owning more than $9 million in assets, including more than 5,200 MW of generating capacity in the Canadian province of Alberta alone, the company utilizes a diverse mix of coal, natural gas, wind, and hydro to generate electricity that is then sold to nearby electric utilities via power purchase agreements. TransAlta is heavily reliant on coal despite this diversity, however, owning 4,931 MW of coal-fired capacity, 88% of which is contracted out for an average period of 5.5 years. This capacity has an average age of 17 years, making it relatively young given that coal-fired capacity can remain operational for up to 50 years. Another 1,447 MW of TransAlta’s capacity relies on natural gas, of which 95% is contracted out for an average period of 10.9 years. The company also utilizes 1,271 MW of wind power, 65% of which is contracted for an average of 10 years; and 914 MW of hydro, 96% of which is contracted for an average of 5.3 years. While electricity generation operations provide the majority of the company’s earnings, it also operates an energy trading division that has historically generated roughly $50 million in annual EBITDA. TransAlta has reported steady annual EBITDA growth since FY 2009, including 6% annually since FY 2012. This growth has been made possible primarily due to its heavy exposure to Alberta, which has been home to rapid economic and construction growth in recent years due to its large reserves of unconventional petroleum in the form of oil shale and tar sands. In addition to being substantially more energy intensive than conventional petroleum extraction, Alberta’s unconventional reserves became the subject of heavy demand in the early years of the current decade as rising energy prices made their extraction commercially attractive. This set off a resource boom in the province that in turn led to population growth, demand for new housing, and ultimately higher electricity demand. Unfortunately for TransAlta’s shareholders, electricity generators responded to this demand with a sharp increase in supply. Oversupply in Alberta was the ultimate result, leading to lower electricity prices. FY 2010 and FY 2011 proved to be the high points for the company’s annual revenue and EBITDA results, respectively, although both have also rebounded from their FY 2012 lows. It was on the verge of returning to its pre-glut earnings level in FY 2014 when petroleum prices swooned, making the extraction of Alberta’s unconventional petroleum reserves unattractive. The province’s economy has reversed course and the construction industry has faltered, further increasing its electricity glut and hurting electricity prices. TransAlta has responded to the poor situation in Alberta by diversifying its operations in terms of both geography and fuel mix. It has expanded its capacity in Australia, building 1,000 MW of new natural gas-fired generating capacity and acquiring 136 MW of existing renewable capacity. Recognizing its heavy exposure to the North American coal market, however, with North American coal generating capacity contributing 45% of its Q2 2015 consolidated EBITDA and Canadian coal contributing 39%, the company is also moving forward with an effort to expand its share of Alberta’s generation market from 11% currently to 30% by 2021. Perhaps the most important development, however, is TransAlta’s 2013 decision to form a subsidiary focused on renewable generation, the aptly-named TransAlta Renewables (OTC: TRSWF ). In May, TransAlta dropped down $1 billion in Australian assets to its subsidiary in exchange for $217 million in proceeds, which it used to reduce its debt load, and a post-transaction ownership interest of 76%. The subsidiary’s focus on renewable generation assets provides it with a number of advantages over TransAlta, including attractive financing rates and lengthy contracts as Canada’s government incentivizes the move away from fossil fuels to renewable energy. TransAlta, in turn, intends to use TransAlta Renewable’s distributions (it has a forward yield of 9.3% at the time of writing) to provide it with the cash flow necessary to finance its own debt and future capex. TransAlta Renewable will play an important role in TransAlta’s ability to meet its target of $50 million annual EBITDA growth and 8-10% annual shareholder return moving forward, the latter being something that it hasn’t achieved since FY 2011. Q2 earnings report TransAlta reported Q2 earnings that demonstrated the negative effects of its exposure to the North American coal markets and Alberta’s unconventional petroleum market. Revenue came in at $438 million (see figure), down by 10.8% YoY, as availability at its generating facilities declined from 85.4% to 80.9% over the same period (8,820 GWh generated versus 9,283 GWh YoY). The revenue decline came despite an increase in Alberta’s average electricity price from $42/MWh to $57/MWh due to abnormally hot weather during the quarter and was primarily due to one of its coal facilities experiencing damage-induced unplanned downtime that lasted most of the quarter and another facility undergoing planned downtime at the same time. TransAlta financials (non-adjusted) Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Revenue ($MM) 438.0 593.0 718.0 639.0 491.0 Gross income ($MM) 238.0 356.0 450.0 362.0 279.0 Net income ($MM) -131.0 7.0 148.0 -6.0 -50.0 Diluted EPS ($) -0.47 0.03 0.54 -0.03 -0.18 EBITDA ($MM) 133.0 231.0 359.0 238.0 158.0 Source: Morningstar (2015). Gross profit came in at $238 million, down from $279 million YoY. Surprisingly, given the earnings reports of other North American electricity generators, TransAlta’s cost of revenue fell only slightly over the same period from $212 million to $200 million despite the presence of much lower energy prices in the most recent quarter. As a result, net income fell to -$131 million from -$40 million in the previous year. Some of the decline was attributable to a non-cash adjustment to the fair value of the company’s energy hedges as well as the presence of a higher base tax rate in Alberta. Accounting for these factors resulted in an adjusted net income of -$44 milllion compared with -$12 million YoY. Adjusted EPS fell to -$0.16 from -$0.04, missing the analyst consensus by $0.14. EBITDA also fell, declining from $213 million to $183 million YoY. The company’s emphasis on coal-fired generation hurt, with its coal segment reporting the only YoY decline to EBITDA; the wind segment was flat and the natural gas and hydro segments reported gains, albeit insufficient to offset coal’s performance. Beyond its generation segments, however, TransAlta’s trading segment reported a $22 million YoY decrease due to volatility in the energy markets. Free cash flow increased slightly by $3 million to $23 million over the same period, although the company’s operating cash flow fell from $51 million to -$39 million. Outlook TransAlta took steps to reduce the uncertainty in its outlook during Q2, although several new headwinds have developed that will likely offset the positive impact of these steps. First, the company agreed to pay $56 million to settle market manipulation allegations in Alberta, bringing a multi-year saga to a close. Furthermore, the company’s aforementioned drop-down to TransAlta Renewables was the first stage of a process to reduce its debt load via further drop-downs. Moody’s recently announced that it is reviewing the company’s bond rating for a downgrade to junk status in light of its high debt load. In July, TransAlta agreed to purchase 71 MW of renewable capacity in the U.S., and this, too, could become part of a second drop-down to TransAlta Renewables that the company intends to use the proceeds from to further reduce its debt. The presence of very warm temperatures in Canada caused the company’s number of cooling degree-days to increase in Q3, allowing management to reaffirm its previous FY 2015 EBITDA guidance during the earnings call , albeit at the lower end of the given range, despite the Q2 earning miss. The current year’s guidance is likely to receive further support by the development of a historically strong El Nino event, which is expected to keep temperatures higher than normal through September, potentially boosting air conditioner use and supporting electricity prices. These positive impacts could become negative in FY 2016, however. Past El Nino events have been associated with below-average winter precipitation levels, especially in Canada’s western half. Many regions of Canada are already suffering from drought and, given the large number of hydroelectric facilities that TransAlta operates in many of those same regions, it is feasible that an especially strong El Nino could ultimately result in lower availability starting in Q2 2016. TransAlta’s outlook worsens still further beyond 2016. May saw the election of a left-of-center provincial government in the historically conservative Alberta. More recently the centrist Liberal party, which favors restrictions on greenhouse gas emissions, won Canada’s national election and will replace the outgoing pro-business Conservative party. The new governing party is expected to support clean energy initiatives, in part by placing national restrictions on coal-fired generation facilities. Given an average contract term of 5.5 years, TransAlta’s coal segment will need to establish new power purchase agreements relatively soon after any new environmental policies become entrenched. Two of its alternatives, the use of carbon capture and sequestration at its coal-fired facilities and conversion to natural gas from coal, offer ways around this hurdle while incurring additional costs. Carbon capture and sequestration, in particular, is unlikely given the high costs that it incurs despite years of industrial R&D. Conversion to natural gas is more important and while this will incur conversion costs, it is preferable to simply shutting down coal-fired assets that have up to 30 years of effective productivity remaining. A more pressing matter is the continued presence of low petroleum prices in North America. The health of Alberta’s economy has long been linked to petroleum prices, with the province experiencing lower growth and falling construction rates during previous petroleum bear markets in the early 1980s and again in 2009. Likewise, TransAlta’s share price lost most of its value in late 2008 and early 2009 as petroleum prices fell, although crude’s rapid rebound prevented this from being reflected by a steep drop to its annual earnings in either year. The duration of the current low price environment is very important to TransAlta’s outlook due to its current debt situation. The company has $1.1 billion (mostly denominated in U.S. dollars) of debt that matures in FY 2017 and FY 2018, with another $400 million maturing in FY 2019. Its ability to repay these loans while also financing its planned capex and potential acquisitions will be very dependent on the economic health of Alberta, especially given the company’s plans to increase its share of the province’s generation market. While I do not expect petroleum prices to remain at their current levels for such an extended period of time, potential investors should be aware of the potentially severe financial repercussions to the company that would result from such a situation. Valuation The consensus analyst estimates for TransAlta’s FY 2015 and FY 2016 earnings have been revised significantly lower over the last 90 days in response to its missed Q2 earnings report and mounting headwinds, management’s reaffirmed guidance notwithstanding. The FY 2015 diluted EPS estimate has fallen from $0.23 to $0.12 while the FY 2016 estimate has fallen from $$0.29 to $0.23. Both of these results would be well below the company’s 5-year highs. Based on a share price at the time of writing of $5.25, the company’s shares are trading at an adjusted trailing P/E ratio of 105x and forward ratios of 43.8x and 22.8x, respectively. Even the FY 2016 ratio is well above the company’s respective historical range, suggesting that the company’s shares remain very overvalued despite their poor performance in FY 2015 to date. While a recent anonymous report suggested that TransAlta had been very close to selling itself , buying at the current price level would require the presence of very optimistic assumptions regarding future operating conditions for the company. Conclusion Shares of Canadian electric generator TransAlta have lost nearly half of their value over the last six months and are currently trading at only a fraction of their historical high price. While such a negative market reaction often indicates the presence of a value investment opportunity, potential investors in the company should be wary of the numerous pitfalls that sit in its path over the next several years. Low petroleum prices are already causing Alberta’s economy and construction market to slow, hindering the company’s plans to further increase its share of its largest market. Likewise, the removal of the Conservatives from both Alberta’s government as well as Canada’s national government since May make it likely that the company’s heavy exposure to the coal-fired power segment will hamper its overall earnings in the coming years as existing restrictions on greenhouse gas emissions are strengthened and future ones are enacted. With a share valuation that is much larger than its foreseeable earnings potential, a large debt load, and free cash flow per share that has been less than half of the company’s dividend per share in recent quarters, TransAlta is a very risky prospect for investors. There is a chance that a buyout could occur on favorable terms, resulting in a modest gain for new investors. I consider the probability of this occurring to be quite small compared to the potential for further losses in light of how overvalued the company’s shares are at the time of writing, however. Yield-seeking investors are encouraged to look elsewhere.

It Is A Good Time To Invest In The YieldCo ETF

Summary The renewable energy market is growing and yieldcos are gaining traction. The Global X YieldCo ETF remains insulated from the Chinese stock market weakness. Better performance than peers. The Global X YieldCo Index ETF (NASDAQ: YLCO ) is an ETF investing in YieldCos. This ETF provides a good chance of increasing investor returns, since it invests in the high yielding yieldcos as their underlying asset. In addition to investing in yieldcos which are considered a less risky way of earning stable dividends, this ETF also provides the benefit of diversification. The renewable energy market is set to grow at a rapid pace and will account for the lion’s share of electricity capacity going forward. YLCO has been battered recently due to a sharp fall in the overall energy sector. This has led to a jump in their yields as prices have declined. After drawing strong investor interest, the situation has reversed with investors shunning these securities. SunEdison (NYSE: SUNE ) which runs 2 yieldcos has said that it will not drop further projects into its yieldcos, given the sharp price erosion. Other companies such as Trina Solar (NYSE: TSL ) have also halted their plans of listing a yieldco. However, my view is that this is a temporary hiccup due to a combination of high exuberance for yieldcos and an overall selloff in energy prices. YLCO is currently trading down 27% since its listing in May 2015. Given the current slump in yieldco prices, I think it should be a good time to build some position in this safe bet. Why you should invest in this YieldCo ETF Underlying assets are yieldcos, which are growing – YieldCos are considered a safe bet given their low risk profile and ability to generate stable and predictable cash flows. They are also less volatile than renewable energy stocks. Even when the entire energy market is going through a severe downturn, I believe yieldcos are a good bet as they should continue paying their dividends since their cash flows are relatively immune from recessions. The growth story is also strong as the renewable energy industry is set to continue over the long term. No exposure to the Chinese market – The Chinese market turmoil has strongly affected the global commodity industry, with many commodity producers trading at multi year lows. There is a fear that the Chinese economy may face a hard landing leading to global slowdown. The global YieldCo ETF does not have any exposure in the Chinese market. The ETF has its maximum exposure in the U.S. market followed by the U.K. These two economies are performing well relative to other regions, such as Japan and Europe. A better shield to downside risks than individual holdings – YLCO has lost 27% since inception. Given below is the YTD performance of some of its top holdings, suggesting the ETF’s performance was better than most of its constituents. % of Holding YieldCos YTD performance 12.45 Brookfield Renewable Energy Partners (NYSE: BEP ) -10% 8.32 Terraform Power (NASDAQ: TERP ) -38% 7.68 NRG Yield Inc (NYSE: NYLD ) -45% 7.36 Nextera Energy Partners (NYSE: NEP ) -27% 6.53 Abengoa Yield (NASDAQ: ABY ) -27% Data as on 13th October’15 closing The renewable Energy Market is booming – There is an increased awareness about the renewable energy usage and its benefits in reducing the effects of global warming. Countries like India have large power deficits and rely on coal for their energy needs. Now these countries are at the forefront of an energy revolution, shifting largely towards solar, wind and other renewable forms of energy for their power needs. The U.S. has also made its stand clear by passing its recent ‘Climate Action Plan’. All of this speaks of a booming renewable energy demand. It is estimated that renewable energy could account for almost 80% of the world’s energy supply within four decades. The market for yieldcos is growing – YieldCos have proven to be a success amongst the shareholders, primarily due to their stable dividend growth and relatively lower risk profile. With the growing renewable energy market, more yieldcos are coming into existence. After the success of SunEdison’s ( SUNE ) Terraform Power, the company has also listed another yieldco specializing in developing economies – Terraform Global (NASDAQ: GLBL ). There was also a joint yieldco by SunPower (NASDAQ: SPWR ) and First Solar (NASDAQ: FSLR ) called 8point3 Energy Partners (NASDAQ: CAFD ). Likewise, Canadian Solar (NASDAQ: CSIQ ) is also thinking of forming a yieldco before year end. Stock performance & Valuation YLCO gave better returns than some of its top holdings, as shown in the table above. The YTD performance was also better than solar ETFs like the Guggenheim Solar ETF (NYSEARCA: TAN ) and the Market Vectors Solar Energy ETF (NYSEARCA: KWT ). The stock is currently trading at ~$11 which is 26% low than its all-time high price. The ETF was listed in May 2015 with an expense ratio of 0.65%. (click to enlarge) Source: Google Finance What could go wrong The energy stocks have taken quite a beating in recent days and yieldcos have not been immune to this fall. The slowdown of the Chinese economy has not only hurt the Chinese energy demand growth, but also the growth in other countries due to secondary indirect effect as their exports to the Chinese economy has declined. As we can see from the graph above, the stock price decline has happened in line and is following the trend in the broader energy market. If conditions get worse, the ETF could also lose more value. The project business is a highly capital intensive business, where developers resort to large amount of debt. Any problems in the sponsor company to honor their debt might lead to a slowdown in the yieldco business. Some of the yieldcos are now adopting a more prudent growth strategy to take into account the market turmoil. Some of the solar companies have also put their plans to do yieldco in cold storage. This might help YLCO as the competition for renewable energy assets will reduce, thereby making existing yieldcos more attractive. Conclusion The current weakness in the energy sector has caused major downturn in the energy sector. I believe this will cause the weaker players to close shop and only good quality stocks would survive. The major advantage of YLCO is that it does not have any exposure in the Chinese market, which is experiencing a major slowdown. Though it will not be totally isolated from the Chinese slowdown effects, it will still not be very drastic. Also the investment case for renewable energy market continues to be strong and YLCO insulates its investors from the volatility of directly investing in this sector. I think this is a good time to build a position in this yieldco ETF. Share this article with a colleague

I Sold McDonald’s And Then Made These Moves

Summary I sold McDonald’s as I felt the future returns would be diminished. I bought Johnson & Johnson. I made a quick trade in Wells Fargo. I then added to my WEC Energy Group. Last week I published this article which detailed my reasons for selling McDonald’s (NYSE: MCD ). As I stated in the article, it was not easy selling MCD as I had held the stock for 8-years. However, I felt future growth was limited and the high dividend payout would limit future dividend growth. I decided that if I could find a stock with better long-term prospects, I would sell MCD. The stock had to pay a dividend in the vicinity of 3% or more, have good prospects for long term dividend growth, have a solid balance sheet, and have a business set for long-term growth. I keep a list of stocks that I believe are solid businesses and keep an eye on the price action so I am aware when they might become reasonably priced. One of those stocks is Johnson and Johnson (NYSE: JNJ ) and fortunately for me, it recently became reasonably priced. For most investors, JNJ needs no introduction, it is the largest health care company in the world, operating in three segments, consumer, pharmaceutical and medical devices. In the second quarter , consumer sales were $3.5 billion, pharmaceutical sales were $7.9 billion and medical devices had sales of $6.4 billion. Let’s take a look at all three of these segments. Consumer – The consumer segment primarily sells personal care products like nonprescription drugs, skin and hair care products, baby care products, oral care products and first aid products. JNJ products, like Tylenol and Listerine, are well known, but consumer is the smallest segment of JNJ. A few years back, JNJ was embarrassed by a rash of consumer product recalls due to poor safety protocols in the manufacturing plants. The recalls became so bad, that JNJ pulled many of its products from store shelves. After rebuilding their production facilities, JNJ products have slowly returned to the shelf and consumer sales have risen. In the second quarter worldwide consumer sales of $3.5 billion increased 2.3%, with U.S. sales up 2.7%, while outside the U.S. sales grew 2.1%. Look for JNJ to try and build their consumer business globally. Many of their products are regional and JNJ would like to expand their distribution. Here is a comment from JNJ management at a recent conference. ” Coupled with the fact that this business can be globalized, many of the brands have been developed regionally, we now think they can be taken on a more global scale .” Medical Devices – The medical devices segment sells a wide-range of products, such as wound care, surgical sports medicine. women’s health care, products for circulatory disease, blood glucose monitoring, orthopedic joint reconstruction, spinal products and disposable contact lenses. The medical device division recently completed a divestiture of Ortho-Clinical Diagnostics which reduced sales for the second quarter. Worldwide medical devices segment sales of $6.4 billion decreased 4.7%. U.S. sales declined 5.8% while sales outside the U.S. declined 3.9%. Excluding the impact of acquisitions and divestitures, underlying operational growth was 1.4% worldwide with the U.S. up 1.6% and growth of 1.4% outside the U.S. JNJ wants to be number one or number two in all their medical device businesses. Going forward, they want to focus on the orthopedic business as that is where they see the growth. Between 2015 and 2016 they will have 20 new product filings in the medical device business. Pharmaceuticals – The pharmaceutical segment includes products in therapeutics, anti-infective, anti-psychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology. As you can see, that is a long list and I could list all the drugs they currently have on market and what is about to come to market, but rather than list a bunch of drugs I cannot pronounce, I feel it is more important to share this fact. JNJ believes it will file 10 new drug filings by 2019, each with the potential to achieve $1 billion in annual sales. Here is a quote from JNJ’s second quarter earnings call . ” Our focused R&D strategy and commitment to driving launch excellence to ensure broad access and reimbursement has really come together to make a difference for patients and have this well-positioned to continue to drive above industry compound annual growth rate over the next several years. Fueled by seven of our recently launched products that we expect will each exceed $1 billion in sales this year and the more than 10 new products we plan to file by 2019 that each have $1 billion plus potential of their own based on their transformational potential to treat significant unmet medical needs worldwide .” In the second quarter worldwide sales of $7.9 billion increased 1% with U.S. sales down 1.5% and sales outside the U.S. up 3.8%. New competitors in hepatitis C and a divestiture impacted sales results. Why I am Confident in JNJ Going Forward – All the information I gave you concerning the various segments of JNJ business is interesting, but that is not why I bought the stock. I bought the stock for the following reasons.. The entire world population is getting old and in need of increased medical care. I like to buy stocks that have an overriding theme that will increase their chance for success. In JNJ’s case, their unique broad spectrum of health care products makes them an excellent candidate to benefit from the aging world population. Here are just a few facts highlighting why JNJ is likely to benefit from demographic trends. The United Nations states population aging is unprecedented, without parallel in human history and the 21st century will see even more rapid aging than did the previous century. The global share of older people (aged 60 and over) increased from 9.2 percent in 1990 to 11.7 percent in 2013 and will continue to grow to 21.1% in 2050. In the U.S. the older population-persons 65 years or older-numbered 44.7 million in 2013 (the latest year for which data is available). They represented 14.1% of the U.S. population, about one in every seven Americans. By 2060, there will be about 98 million older persons, more than twice their number in 2013. People 65+ represented 14.1% of the population in the year 2013 but are expected to grow to be 21.7% of the population by 2040. The increased number of persons over 65 years will potentially lead to increased health-care costs. The health-care cost per capita for persons over 65 years in the United States and other developed countries is three to five times greater than the cost for persons under 65 years, and the rapid growth in the number of older persons, coupled with continued advances in medical technology, is expected to create upward pressure on health- and long-term–care spending. One million Americans a year are getting total joint replacement. That figure is expected to grow to four million over the next 20-years. Global annual spending on cancer drugs has hit $100bn for the first time By 2021, annual prescription drug spending will nearly double, to $483.2 billion Health spending growth in the United States is projected to average 5.8 percent for 2014-24, reflecting the Affordable Care Act’s coverage expansions, faster economic growth, and population aging. Those are just a few facts, I could add more, but to me, it is obvious that as the world ages, health care will be a fast growing sector. I am confident, that JNJ, with its over 250 operating companies across the globe, will share in that growth. Why JNJ over McDonald’s – When comparing the two companies it seemed obvious to me, that JNJ was the financially stronger company and the company more likely to grow its business and dividend in the future. Let’s compare the two companies. All numbers are from Yahoo finance. Category JNJ MCD Price to earnings 16.75 23.95 Price to earnings growth 3.10 3.25 Price to book 3.70 9.05 Total cash $33.95B $4B Cash per share $12.26 $4.25 Debt $19.31B $17.9B Debt to equity 27.14 169.51 Yield 3.17 3.36 Dividend payout ratio 50.2% 77.96% Operating cash flow 17.09B 6.55B I think any fair-minded observer would look at those numbers and say JNJ is the more financially sound company and the company more likely to reward shareholders going forward. At a recent Morgan Stanley conference, JNJ CFO Dominic Caruso said this about the large amount of cash that is on the balance sheet. ” So I think it’s safe to say, we have sufficient capital to put to use, we’re going to put it to use. It’s going to be in a value creating acquisition, or in share buybacks ” So we have two companies. MCD which may be cash challenged, or JNJ which is sitting on a pile of cash. We have JNJ selling at a P/E under 17 and MCD selling for over 23. We have JNJ which has raised it’s dividend 6% and 7% the last two years and we have MCD which has raised it’s dividend 5% the last two years. We have JNJ which saw earnings per share grow from $3.49 in 2011 to $5.70 in 2014 and we have MCD which saw earnings fall from $5.27 in 2011 to $4.82 in 2014. After considering all that information, on September 28th, I sold MCD for $97.57 and bought a full position in JNJ for $90.41. I expect to hold forever, or until the business deteriorates. I expect JNJ to grow slowly, benefiting from the demographic trends and JNJ’s diverse health care related products. I also expect the dividend to grow steadily. Next Move McDonald’s was the second biggest position in my portfolio, so selling it freed up a large sum of cash. Even though I bought a full position in JNJ, I still had cash left over from the sale, in addition to cash that had built up in my account from the recent quarterly dividends. As I sat on the cash contemplating what to do with it, I saw a short term situation develop which I took advantage of. On Friday, October 2nd, the Labor Department announced a very disappointing jobs number. When I saw the jobs number, I knew the number was very disappointing and I knew traders would determine any Federal Reserve rate increase, which many thought was coming soon, would be delayed. Based on that, I had a hunch the banks would take a pounding at the open, as investors would determine the banks interest rate spreads, which everyone thought would be improving with a rate increase, would now be further in the future. As I expected, the market opened down big and the banks were the worse performers. I thought this was very short-sighted and an overreaction. Banks were in no worse shape on October 2nd than they were on October 1st. So I took the cash funds in my account and bought Wells Fargo (NYSE: WFC ) for $49.60 shortly after the open. This was a short-term trade, not an investment. I have sworn off banks as an investment as it seems every five years or so, they have some sort of crisis. Fortunately for me, before the day was over, WFC was back above $51.00 and closed at $51.26. I sold WFC on October 7th for $52.56, a quick gain of approximately 6%. The 6% gain added a little more funds to my account, so on October 7th, after selling the Wells Fargo shares, I bought shares in WEC Energy Group (NYSE: WEC ), formerly Wisconsin Energy. I paid $51.88 per share. I began building a position in WEC in July, when I made two purchases, one for $45.10 and another for $46.34. Those two purchases amounted to a little bit more than a half position. With the latest purchase, I now have about an 85% position at a cost basis of $47.63. I imagine I will complete the position before the end of the year. The company, formerly known as Wisconsin Energy, recently purchased Intergys Energy another Midwest utility. The combined company is now known as WECEnergyGroup. WEC is deserving of its own article as there is a lot I would like to say, but briefly let me mention this. WEC provides electricity and natural gas service to 4.4 million customers across four states, Wisconsin, Illinois, Michigan and Minnesota. They are the eighth largest natural gas distribution company in the country and among the 15 largest investor owned utilities in the country. WEC currently yields 3.5% and investors can expect dividend growth of 6-8% a year, in-line with earnings growth. I think WEC is an excellent, financially sound, utility which has several unique characteristics that differentiates it from other utilities. I will expand on WEC in a future article, but suffice to say, I intend to hold WEC forever, or until the business deteriorates. The End Result When all was said and done, I had sold McDonald’s, a long time holding and purchased Johnson and Johnson, a dividend stalwart, that had become attractively priced. I then made a quick purchase and sell of Wells Fargo that resulted in a small profit. Subsequently, I purchased additional shares in WEC Energy Group. So I now own a stock, JNJ, that, in-my-opinion, is a better value and has better long term prospects than MCD, which I previously owned. I also was able to purchase additional shares in WEC Energy Group a stock I am currently building a position in. In addition, the dividends I get from the shares I bought in JNJ and WEC will be slightly more than the dividends I was getting from MCD. Investing is about maximizing your investable cash. I believe in long-term investing, however, at times, there may be a company that offers better value, better growth, and/or better dividend growth, than the stock you own. In that case, selling a stock that you have owned for a long time makes sense. That is the situation I recently saw and that is the action I took. Only time will tell how it works out.