Fresh food fixation becomes a business for Wash. U student

J.B. Forbes

Sarah Haselkorn, 20, sweeps the floor of her restaurant, Green Bean, in the Central West End on Oct. 23, 2012. The Washington University student opened the restaurant one year ago. Photo by J.B. Forbes jforbes@post-dispatch.com

November 02, 2012 12:18 am  •  By Georgina Gustin ggustin@post-dispatch.com314-340-8195

On a recent weekday afternoon, Sarah Haselkorn sat table-side at a restaurant in the Central West End, wearing shorts, a T-shirt and running shoes, with her hair pulled back in a ponytail and a backpack at her side.
She looked a lot like a typical college student — which she is. Sort of.
Haselkorn is, in fact, a senior at Washington University. But, between classes, exams and the demands of a her systems engineering major, she has also managed to co-launch and run Green Bean, a quick-service restaurant that serves fresh salads and wraps.
In the process, she’s tapped into a growing national trend — and an exploding market for fast, healthy food.
Haselkorn and her concept have, in fairly short order, caught the eye of a prestigious national entrepreneur organization, and a week from Monday she’ll give a presentation to its members on the floor of the New York Stock Exchange. She has another non-restaurant concept in development, and probably a lot more floating around in her head.
Oh, and she’s a triathlete. And she’s only 20.
Haselkorn moved to St. Louis from her hometown of Washington when she was 17, and soon determined the city’s food landscape was missing something.
“I noticed quickly there weren’t very many healthy restaurants in St. Louis where you could get something fast,” she remembers.
Healthy and fast are important attributes for a busy student who happens to run the odd triathlon. So rather than complain about the lack of quick-service, healthy restaurants, she opened one herself.
Haselkorn got in touch with a friend from her hometown, Nick Guzman, who had recently graduated from Amherst College, and the two started developing a business plan via email.
After a couple months trading ideas and doing research — Haselkorn spent hours watching customers come and go inside other area restaurants — the two had a formal pitch.
Based loosely on salad-centric restaurants they’d been to in New York and Washington, Green Bean would be fast and healthy.
It also would go a step beyond that: Green Bean, the concept went, would use recycled materials in all its packaging, reuse building materials, compost and recycle everything, and order food daily, tailoring it to the ebbs and flows of daily traffic to minimize waste.
“We wanted to have real, whole food and transparent nutrition,” Haselkorn says. “But we also wanted to focus on sustainability. We wanted to be better, different. We wanted it to be Green Bean.”
The two were confident in their concept, Haselkorn says, but were less so about their menu. So they approached James-Beard-award-winning chef, Peter Pastan — who is the father of one of Guzman’s friends — and asked him to develop a menu.
“I was 18 when I went to him,” Haselkorn remembers. “He said: Are you sure you want to do this?”
A few months later, they had found a space in the 200 block of North Euclid Avenue, and a few months after that they were tearing the place apart. Acting as their own general contractors, Haselkorn and Guzman oversaw the renovation and did much of the work themselves, using materials recovered during demolition.
Today Green Bean employs eight people, with Haselkorn and Guzman doing much of the work themselves, from maintenance to ordering.
When asked whether there’s anything she’s not involved in, Haselkorn says: “No. Not really. Well, maybe. We have a tax accountant.”
The restaurant does a steady business, mostly from health-conscious customers in the neighborhood and medical students from Wash U. It has been in business for about a year, and Haselkorn is already thinking about expansion possibilities.
“I think there’s room in the market in St. Louis, but the other option is to franchise,” she says. “We want to make sure it’s perfect first. You don’t want to replicate any imperfections.”
Analysts see more potential, too.
A “fast casual” restaurant — the category that Green Bean finds itself in — serves food that’s a notch or two higher in quality than typical fast food, but is not a full-service restaurant. Food usually is ordered at a counter, with a server sometimes delivering it to a table.
The category has boomed in the past decade as people seek out healthier, convenient food.
“Fast casual continues to outperform the rest of the industry,” said industry analyst Darren Tristano of Chicago-based Technomic. “ The drivers are from customers moving up from fast food, and diners moving down from full-service.”
Technomic estimates that the fast-casual category represented about $27 billion of the $370 billion restaurant market in 2011.
“It’s still very small,” Tristano said. “But there’s growth at double digits for the past 10 years, and it’s growing. We’re going to see more ethnic food concepts, and more healthy concepts.”
On Nov. 12, Haselkorn will present the Green Bean concept to a group of judges with the Entrepreneurs’ Organization’s Global Student Entrepreneur Awards. She’s one of 30 finalists from 42 countries.
Haselkorn — to her surprise — was selected to compete in a regional competition earlier this year, taking first place and earning the spot in New York.
That she won comes as no real surprise to her Wash U professor, Clifford Holekamp. He teaches a highly popular class for entrepreneurs called The Hatchery, which has launched dozens of successful businesses.
“Part of the award is based not just on the business, but on the entrepreneur,” Holekamp explained. “She’s a very talented young lady. She’s balancing an engineering curriculum, minoring in entrepreneurship and running a successful business, and that is just extraordinary.”
Indeed, sitting in Green Bean, Haselkorn has to remind herself that she should start preparing for the competition, which will dole out $250,000 in cash and in-kind business services.
But she also takes the prospect of not winning the title like a wise old pro.
“Just going to New York City is enough,” she says. “Even the opportunity to be there will affect my entire future.”
Then she left her restaurant and headed to class.

Movies are Corporations (Hollywood Accounting)

By Chad Upton | Editor
One of the most interesting classes I took in College was taught by a film producer. He only taught that one class, for two hours, once a week. He shared learnings from the entire film making process, from writing a script and getting funding to shooting and distribution.
From this class, I learned is that each film is incorporated as its own corporation and there are a number of reasons why they do this.
For one, it offers limited liability. If someone sues the production, the people who financed and produced the film have some legal separation between the film and their personal assets and other businesses.
It also offers financial abstraction from the people and companies who financed the film. Here’s a little math test to help explain this concept: if it costs $300 million to make a product and then you sold $1 billion worth of it, how much was your profit? $700 million right? Yes. Unless, your product was a film or TV show.

This is almost exactly what happened with Harry Potter and the Order of the Phoenix (2007). The studio invested just over $300 million to make the film and it grossed almost $1 billion from the box office and other distribution deals. But, instead of making $700 million, it actually lost $167 million (on paper). So, what happened to all of that money?
Hollywood has their own system of accounting, often referred to as “Hollywood Accounting” or “Hollywood Bookkeeping” where only about 5% of films actually show a profit. How?
Because the film itself is a corporation, that company is loaned money by the studio to make the film. The film pays the studio interest on that loan, which is one way to channel money back to studio.
Also, the studio generally owns other verticals where the film corporation can pay for things like advertising. For example, Harry Potter was made by Warner Bros, a subsidiary of Time Warner. Time Warner owns multiple TV networks and publications where the film company could buy advertising, thus channeling more money back to the parent company.
There are also distribution costs. The parent company may also have business interests in these channels where they can pay themselves again.
All of these things are done to essentially bankrupt the corporation that was formed to make that single film. Why?
If there are no profits, they don’t have to pay partners who agreed to a share of net profits. This is why you’ll often see some heavy hitters get a share of the box office or gross income instead of net profit. Depending on how they setup the initial investment in the film entity, there may also be a payroll tax advantage to financing the film this way.

There have been plenty of lawsuits over this type of accounting and the film company often loses. Jurors have awarded favorable settlements to actors and other partners who have been shorted money due to hollywood accounting. Although one judge called it, “unconscionable” — it’s not illegal.

4 Tricks Restaurants Use to Make More Money

4 Tricks Restaurants Use to Make More Money
Written by Miranda Marquit

This is a guest post from my online buddy Robb Engen. He writes over at Boomer & Echo, as well as contributes to Moneyville.ca. I love his look at some of the ways restaurants try and squeeze a little more out of you. Personally, even knowing this, I still like to eat out — I enjoy the experience.

We all love going out to eat to enjoy good food and wine with our friends and family. But when you go to a large chain restaurant, keep in mind that it’s a business and their aim is to boost the bottom line at the same time they’re creating an enjoyable evening out for you.

When I worked in the hospitality industry, I learned a few different techniques to get customers to spend more on their dining experience. Here are a few tricks restaurants use to get more money out of your wallet:

Menu engineering

The menu is the place where people choose their meal so a lot of time is spent trying to items more profitable. The uses of shaded boxes and borders around items on the menu are designed to catch your eye and can increase sales by 25 per cent. The word, ‘special’ or ‘new’ can increase orders by up to 20 per cent.

Often these highlighted items are dishes with the lowest food cost which means they may not the best value for you.

Each menu item is priced according to its cost. Most restaurants want to keep their food cost below 30 per cent. However, you won’t see oddball pricing of $19.31 simply because it fits a formula. Customers don’t perceive a difference between $19.31 and $19.99, so the restaurant raises the price and the extra 68 cents goes to the bottom line

Up-selling

In the hospitality industry, more emphasis is placed on training employees to become better sales people. The waiter, hostess, and bartender become extensions of their sales and marketing team.

Now up-selling has become the industry standard, as side dishes, appetizers, desserts and drinks all help build a higher average cheque per customer.

Your server is trained to ask if you want to add mushrooms or prawns to your steak dinner, or to try a specialty coffee with your dessert. Some restaurants expect their servers to suggest bottled water or Perrier when you ask for water, and offer a bottle of wine instead of the two glasses you asked for. The best servers take every opportunity to up-sell you on an item.

I had to say, “no thanks”, at least a half dozen times during our last restaurant experience.

Buffets

Buffets aren’t a big money maker for most restaurants, which means they likely offer the best value for you. Still, a good restaurant can find ways to make money on their buffets.

Restaurants use smaller plates on their buffet line, which reduces the amount of food you can take at one time. The buffet line starts with an assortment of low-cost breads and salads to fill you (and your plate) up faster.

Drinks

Some restaurants can even find savings with the smallest of items. Take drinking straws, for example. Your non-stop pop might come with the thinnest straw possible to help slow down your consumption. On the other hand, alcoholic beverages usually come with a big fat straw so you’re able to drink much faster.

Is Kohl's Marking Up Prices Before It Puts Items On Sale?

When you see a sale advertising "40% off" an item, what exactly does that mean? Is it 40% off the price it was selling for last week? 40% off the MSRP? There's a gray area in retail pricing that has some shoppers accusing Kohl's of inflating prices so that an "on sale" item looks to be a better deal than it actually is.

CBS Sacramento's Kurtis Ming -- one of the best named consumer reporters in the country -- looks at a few instances, including one where a Kohl's shopper thought she'd got a great deal when she bought a $210 sheet for for 50% off, only to later find a price tag showing the product had recently been selling for $170, and that the price had been marked up three times since until reaching $210.

"You always expect to see the price tag stuck on top of another one is the cheaper price," she says. "Actually, it was more expensive."

So CBS sent in hidden camera crews to several Kohl's outlets to see if this was standard operating procedure:

A CBS producer found clothes, luggage, kitchen, bath and bedding products -- 15 items in all -- marked up, some as much as $100, and price tags on top of price tags.

Other items have different price tags on different areas of the product.

One twin sheet set was listed at 50 percent off the original price of $89.99. But inside the plastic zipper, the earlier price tag shows $49.99, indicating the current sale is only $5 savings from the original tag.

A 10″ skillet was listed on sale for $34.99, with a regular price of $39.99, but underneath that sticker, the earlier price tag was marked $29.99 -- meaning Kohl's current price on sale is $5 more than the originally marked price.

One producer tried pointing out that a $150 sheet set marked at 30% off also had a price sticker showing a price of $90, about $15 less than what they would pay with the discount.

The producer asked the cashier if they could get 30% off the $90. A manager decided this was okay and told the undercover producer, "Sometimes when we do scratch-off coupons, we mark stuff up."

A consumer attorney tells CBS that Kohl's may be violating California state law if it is deliberately marking up prices just to make sales appear better than they should.

But Kohl's denies any such behavior, saying that prices of in-stock items went up because the cost of certain new inventory went up:

As is common in the retail industry, from time-to-time, product prices are increased due to production and raw material costs. When these types of price increases are implemented, our stores are instructed to re-ticket all items currently in our inventory to match the price tags for all in-coming merchandise...

Price increases at Kohl's are not common. However, the unprecedented increases in the cost of certain commodities such as cotton over the past 24 months have caused us to take these actions.

The retailer confirms that the price of the sheet set mentioned at the top of the story did indeed go up dramatically because they had to match the price Kohl's was going to charge for sheets made with cotton that was now costing everyone more money.

Using Buffett's Favorite Ratio To Analyze Apple And Its Industry

Many years ago while reading the Berkshire Hathaway (BRK.A) 1986 Letter to Shareholders, I discovered Warren Buffett’s ratio, which he calls "Owner Earnings". And to my amazement, in a little footnote Mr. Buffett actually explains how to use it and basically states that it is one of the key ratios that he and Charlie Munger use in analyzing stocks.

Due to the popularity of my “Buffett’s Favorite Ratio” articles, I have gotten many emails asking me to analyze Apple in that context. The following is my analysis of Apple (AAPL) and its industry using Mr. Buffett's ratio. For those new to this type of analysis please look here.

I would like to start this analysis by first showing everyone how Apple has done from a historical owner earnings perspective, going back to 1995: (Click to enlarge)
As you can see from the data above, buying Apple when its price to owner earnings broke below 15 in 2009 would have been the best time to buy its stock. Buying a company's stock when it breaks below that specific number on a price to owner earnings basis is key in doing this type of analysis. I proved that point in my back test of the DJIA 30 Index for the 60 year period of 1950-2009.

From a CapFlow perspective, Apple has consistently stayed below 50% since 2004 and the chart below will show you what that has meant for the company’s stock price
CapFlow is a key indicator of how management is conducting its cost controls. Had you been using this system at the time, you would have seen Apple's CapFlow drop from 84.62% in 2003 to 40.74% in 2004. Management cut costs by 51.85% in that year and proceeded to drop CapFlow in 2005 to 18.02%. This miraculously amounted to another drop of 55.78%. Management was clearly in charge of their destiny at the time because in just two years they were able to drop Apple's CapFlow by some 78.07%. This was a key breaking point for the company and because management has continued to keep the company's CapFlow low, it has been able to generate some serious Owner Earnings growth rates.

Before continuing with our analysis of Apple let us first look at their competitors and see how they are doing from an owner earnings perspective. The following is a table of the major companies that are in Apple’s Industry
As you can see from the table above, with my system you can zero in (within minutes) and know exactly which companies are the super stocks and which ones are the dogs with fleas. Western Digital (WDC) and Brocade (BRCD) are definitely dogs with fleas, as Western Digital comes in with two negative results and has a CapFlow of 122.64%. So one could say “look out below!”

IBM (IBM) and Dell (DELL) are definitely super stocks as they are clearly putting up strong owner earnings numbers. Unlike Apple, Dell is concentrating on consumers who are looking for a low price point. In comparing the two, one finds that Dell's computers sell for about half of what Apple's do, but even so, Apple is winning in the owner earnings game because it gives its consumers "white glove" customer service and quality. In this world you get what you pay for.

IBM's long-time CEO recently retired and I am not sure how good its new CEO will be. So I will give her some time to show me what she can do before joining Mr. Buffett in buying it.

If you are looking for value plays, then Dell, Logitech (LOGI) and Seagate Technology (STX) have insanely low price to owner earning numbers. Had you done this analysis on Seagate back in September you would have had an amazing buying opportunity as the stock was only selling in the low teens. Here is a chart of Seagate that will clearly show you what can happen to you as an investor when you get the owner earnings numbers right
Finally one stock being pumped up by analysts is Hewlett Packard (HPQ) as Meg Whitman is now the CEO. But we need to give Meg some time to get things organized as the stock is still a value trap, in my opinion. I can say this because its FROIC is still too low for a tech stock and though its CapFlow is under 50%, it is not much below that. If Whitman can shed some assets that are underperforming and bring HP's FROIC up to 20%+, you may have a great turnaround story here.

Recently Apple's stock has been in a trading range even though its Owner Earnings numbers have been fantastic. I don't know if this is a result of its CEO Steve Jobs' passing, but I believe that I may have the answer as to why this may be happening. It can be attributed to the company having way too much cash on its balance sheet. This excess cash reduces the company's Main Street performance numbers because it effects its FROIC. Remember that FROIC measures owner earnings return on total capital. Total capital is basically long term debt + shareholder’s equity. Cash which returns 1% at best makes up the lion's share of Apple's total capital. In my opinion, Apple needs to either start making acquisitions of companies that have a FROIC of 20%+ or it needs to start paying a dividend. Until the company does that, I have decided to sit on the sidelines. As you can see, FROIC is actually expected to drop from 30.64% in 2011 to 27.96% for 2012, even though Apple's owner earnings are expected to grow at 27.02%.

You can’t really be expected to move much in the stock market if the return on half of your capital is growing rapidly and the other half is dead- growing at just 1%. It is an anchor on the stock, which can be remedied very quickly by paying a one-time $20 a share dividend to shareholders. Warren Buffett has this similar problem as Berkshire Hathaway (BRK.A) generates way too much cash. He solves this problem by being proactive about it and invests the cash in companies like IBM (IBM), Intel (INTC) or MasterCard (MA) which are all monster FROIC producers in their own right. If Apple's management decides not to pay out a dividend or buy out other companies, they should at least start buying stock in other companies which have tremendous FROIC. Until they do something about all that cash, the stock should remain in a trading range as much of its total capital is only earning 1% at best.

Moneyball: It's About Investing, Not Baseball

Moneyball: It's About Investing, Not Baseball

By Joseph Hogue

The movie adaptation of Michael Lewis’ book, “Moneyball” comes out today to what will surely be big box office bucks (if advertising is any indication). The book is based on the front office career of Oakland A’s scout Billy Beane. Around 2002, Beane adopted Bill James’ Sabermetric approach to recruitment in order to help the team compete against teams with upwards of three times their salary power. Not able to recruit the big name athletes, the A’s had to find undervalued players. They did this by using statistical analysis of uncommon metrics, but ones with higher correlations to career success in athletes, than the more traditional metrics like stolen bases and RBIs.

The movie is sure to be a feel good romp about an underdog story and determination. What most will never know is that the book, “Moneyball: The Art of Winning an Unfair Game,” was written by one of the great financial journalists and has significant importance for investors. Those of us without the money power of institutional investors would do well to learn something from Mr. Beane and the Oakland A’s.

Metrics

Sabermetrics places emphasis on in-game statistics rather than the industry norm of career averages. Key metrics include: "late-inning pressure situations" (LIPS) and my favorite "narration, exposition, reflection, description" (NERD). What is important to investing is the idea that many measurements, i.e. price-to-earnings, debt-to-equity, and earnings per share are so popularized as to be commoditized and of relatively little value. To compete with the institutional players, investors must look deeper into stock metrics to find measures more highly correlated with success and less often used. To this end I will present two methods of measurement not universally used and with proven success.

The first method will be the Piotroski Score, named after the University of Chicago Professor, Joseph Piotroski. Piotroski argued that because value stocks are often distressed companies, investors should implement a way to distinguish between companies with good future potential and those more likely to be value traps. The scoring is built on a series of nine criteria for evaluating a firm’s financial strength. Over a 20-year test period, those stocks scoring highest also outperformed a portfolio of all value stocks by about 7.5%. Additionally, those stocks scoring lowest were up to five times more likely to file bankruptcy or de-list their shares. Piotroski immediately came to mind when I first saw the commercials for "Moneyball." Both the movie and the method involve finding undervalued picks with a good future. Both Sabermetrics and the Piotroski Score look at ‘in-game’ (financial statement) statistics instead of getting caught up in the more popular relative valuation methods.

The scoring is fairly simple and straightforward with one point given for each of the following criteria:

Positive prior year net income.
Positive prior year operating cash flow: This is a better gauge of income and less susceptible to management manipulation.
Current year return-on-assets is greater than prior year: A good measure of profitability.
Prior year operating cash flow exceeds net income: A warning sign of income statement manipulation by management is net income that significantly exceeds operating cash flow. Managers can manipulate accounts to show higher net income, but it is much harder to manipulate actual cash flows.
Ratio of long-term debt to assets is lower than prior year: Lower liabilities relative to assets is a sign of improving financial stability.
Increasing current ratio (current assets divided by current liabilities): This is a signal of improving access to working capital and solvency.
Number of shares outstanding is equal or lower than prior year: An increasing number of shares outstanding means that prior investments are being diluted.
Current year gross margin exceeds prior year: Margins measure the company’s competitive position.
Percentage increase in sales exceeds percentage increase in total assets: An improving asset turnover means the company is improving productivity.

DR Horton (DHI) and Dell Inc. (DELL) both did well in a Piotroski screen with top scores of nine. DR Horton is a $3.1 billion homebuilder operating in 26 states. Its stock price has been pressured along with the rest of the homebuilders, losing 11.4% over the last twelve months. Eighty-seven percent of the shares are held by institutions and 12.5% are held by insiders making the float relatively limited. Another 26 million shares are sold short, about 11.2% of float, meaning there could be some support as short-sellers return to buy back their positions.

Dell is the $27 billion computer-maker and retailer that was once the darling of wall street and the kind of stock that made you rich. In the ten years to 2000, the stock price increased by 846 times, but has not been able to catch a break since. The stock is up 14.7% over the past year but still off 15.1% from its July highs. The company’s CEO, Michael Dell, recently told Bloomberg that they would continue to look for 8-10 acquisitions per year of companies with proven technologies. The stock price is relatively cheap at only 8.0 times trailing earnings though return on assets is fairly low at only 7.5%.

Big Lots (BIG) and Eastman Kodak (EK) did not do as well on the screen with scores of 0 for Big Lots and 3 for Eastman Kodak. Big Lots operates a chain of cost-leader retail stores across the 48 contiguous states and 88 stores in Canada. Though the stock has been supported over the last few years as a low-cost retailer, lowered expectations on economic growth and a generally tired consumer are holding the company back. The stock, at $33.62, is up 1.4% over the year but well off its highs of $43.68 per share.

Eastman Kodak, that once great camera company is now only a $700 million shell of its former glory. The company operates in three segments: consumer digital imaging; graphic communications; and film, photofinishing, & entertainment. Looking over the financial statements is depressing with negative profit margins, return-on-assets, and cash flow. The stock is down 38.7% over the last year and has a negative book value when goodwill is backed out.

The Altman Z-Score is similar to the Piotroski Score in that it is a predictor of financial distress and used primarily in value investing. The method, published in 1968, was named after Professor Edward Altman of New York University. It uses five ratios, multiplied by a coefficient for weighting of importance, to predict the likelihood of bankruptcy within two years. The model was found to successfully predict 72% of corporate bankruptcies two years prior to filing chapter 7 and only falsely predicted bankruptcy in 6% of cases. Subsequent studies have found the method to accurately predict distress 80-90% of the time with 15-20% false predictions (pdf).

The five ratios and their coefficients are:

Working Capital/Total Assets (1.2): Measures liquidity of assets and the financial flexibility of the firm.
Retained Earnings/Total Assets (1.4): A measure of profitability relative to the company’s size.
Earnings Before Interest and Taxes/Total Assets (3.3): A measure of operating efficiency outside of tax and debt considerations.
Market Value of Equity/Book Value of Total Liabilities (.6): It is a possible warning signal when the market value of the firm is substantially below the book value.
Sales/Total Assets (1.0): A measure for total asset turnover and efficient use of firm assets.

The scores for each ratio are then summed and interpreted as follows:

Score>3.0 - The company is safe based on financial figures.
2.7><2.99 - The company is on alert and investors should be cautious.
1.8><2.7 - There is a good chance the company will file bankruptcy within two years.
Score<1.8 - The probability of the company filing for bankruptcy within two years is high.

One notable Altman Z laggard is media conglomerate Time Warner Inc. (TWX) with a score of negative .50 and a high probability of financial distress. The company trades for a persuasive price-to-earnings growth (PEG) ratio of just .78 and an even price-to-book value. The stock is only off 3.6% over the last year but has traded flat since 2002 and is off its 2007 highs by more than half. Media companies have had a tough go of it lately as more content goes to the internet and traditional media loses advertising revenues. Though the company’s margins and revenue growth are in-line with industry averages, a deeper look into the financial statements presents a possible unstable future.

There is some redundancy between the two measurements and not much research as to which is the better predictor. They are relatively easy to calculate and an Excel spreadsheet template makes the process even faster, so I use both for my value investments. Stocks scoring well on both metrics usually make the cut for value picks, while those scoring well in one but not the other would need further scrutiny. A note of caution, I’ve found several screens on the internet that give different scores for the same stock so you will want to take the time to dig into the financial statements and do the actual scoring yourself.

Adapt or Lose Money

Another key take-away from the book is the idea of adaptation to market efficiency. The success of the A’s Sabermetrics approach brought imitators and competitors in the field. Today, most big league teams have a staff of statisticians analyzing a slew of data. To continue their run, the A’s had to continuously search for neglected metrics that would correlate with success.

This is just as true in investing. The first guy to discover the January Effect probably made some good money. The millions of investors that have tried the approach since then haven’t fared as well. As soon as a metric or strategy is popularized, the market starts pricing for it and the easy money is gone. Investors must continuously adapt their strategy to stay one step ahead of the market.

Investing, like professional baseball, is an extremely competitive field. Those that do not spend the time to find novel and superior analytical tools will be fodder to the big dogs, i.e. the Detroit Tigers. Further, without an analytical staff to back our stock picks, regular investors like you and me need to analyze and adapt our strategies continuously to gain those coveted few percentage points above the index. The two measurement tools above will help to assess financial stability and solvency, but you’ll need a few other predictors to build out your toolbox.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Payout Ratio: Important Dividend Metric, Too Often Overlooked

Payout Ratio: Important Dividend Metric, Too Often Overlooked
1 comment | September 12, 2011 | includes: DUK, ETE, FTR, MO, NOK, T, VGR

I was recently talking to one of my friends last week. He had about $600,000 invested in high yield stocks. These were companies paying well above what they were earning. I told him to be careful as these companies could cut their dividends in the future. This seems like a common problem for investors who overlook one simple metric, which is the payout ratio. The payout ratio is simply the percentage of earnings that are being paid out in dividends. Here are four companies that are actually paying out more than they take in.

Frontier Communications Corporation (FTR), a communications company, provides regulated and unregulated voice, data, and video services to residential, business, and wholesale customers in the United States. It offers local and long distance voice services, including basic telephone wireline services to residential and business customers.

Frontier pays nearly 11% in dividends. It sounds nice, except for the fact the payout ratio is around 450%. The company pays 75 cents a year and isn't even expected to earn half that next year. Another issue with Frontier is that it is in a dying area of business. It primarily deals with landlines. Landlines are quickly going away as people start switching to wireless telecom carriers.

Nokia Corporation (NOK) manufactures and sells mobile devices, and provides Internet and digital mapping and navigation services worldwide. Its devices & services segment develops and manages a portfolio of mobile devices, such as mobile phones, smartphones, and mobile computers; services; applications; and content.

Nokia pays a 7.6% dividend. The payout ratio is about 110%. This is set to increase as the company's earnings are set to decrease. Apple (AAPL) and Google (GOOG) have been taking a bite out of Nokia's market share. Nokia is already said to be stumbling as it tries to find new ways to innovate.

Energy Transfer Equity, L.P., (ETE) through its direct and indirect investments in the limited partner and general partner interests in Energy Transfer Partners, L.P., engages in midstream, intrastate, and interstate transportation of natural gas, as well as in storage of natural gas in the United States.

Energy Transfer Equity pays a 6.5%. The payout ratio is more than 200%. ETE has a good business model and I do like the MLP space, but the fact that it pays out so much is a huge red flag.

Vector Group Ltd., (VGR) through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States.

The company pays an 8.5% dividend. The payout ratio is over 200%. Vector's brand of cigarettes have a very small market share. With the company paying out all its earnings and taking on debt, it is not putting any capital into potential growth opportunities.

The payout ratio can tell us what future distributions will look like. A few things to note is that you also need to look at future earnings growth. If a company cannot match distributions with earnings, it may be time to sell. Here are three companies that have a nice yield and low payout ratios.

AT&T Inc., (T) together with its subsidiaries, provides telecommunication services to consumers, businesses, and other service providers worldwide. Its Wireless segment offers wireless voice communication services, including local wireless communications service, long-distance service, and roaming services.

AT&T pays a 6.2% dividend. The payout ratio is 50%. The company has a strong base of customers. There is plenty of growth in the dividend as well. The company is a strong blue chip as well as being a Dow component. AT&T is a favorite amongst many dividend investors.

Altria Group, Inc., (MO) through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally.

Altria pays a 6.1% dividend. Its payout ratio is 93%. However, its earnings are suppose to increase substantially over the coming years, meaning the payout ratio will decrease. The company has some of the strongest brands around. Although, the dividend may not be as high as Vector's, the company is much safer.

Duke Energy Corporation (DUK) operates as an energy company in the Americas. It operates through three segments: U.S. franchised electric and gas, commercial power, and international energy.

Duke currently pays a 5.3% dividend. The payout ratio is 64%. Duke is one of the largest utility companies in the U.S. Americans will always need energy and consumption is set to increase. Duke is an extremely stable company and with its recent purchase of Progress Energy (PGN), the company is set to increase its earnings power.

These three companies are great example of strong dividend payers with a low payout ratio. Always be careful when investing. Sometimes companies have high yields for a reason simply because there exists more risk. The best advice I can give in this case is "Slow and steady wins the race."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.