Archives for March 2018

Don't Put All Your Eggs In One Basket

With it being Easter weekend, I thought it was the perfect time to write about one of my favorite sayings that holds true especially when investing. And investing in REITs even more so.

“Don’t put all your eggs in one basket.”

I often tell this to my kids before we kick off our annual Easter egg hunt in our backyard. They’re eager to fill a container with as many plastic eggs as they can find scattered across the yard. In some of the eggs, I’ve hidden a couple dollars. Others might have pieces of candy inside. Anyway, I’ll warn them: “Don’t put all your eggs in one basket.”

It never fails that, as they sprint around our backyard, their baskets get so full that eggs go flying everywhere. By piling the containers so high, my kids risk losing what might be some of the most prized eggs inside. A more strategic approach could be to carry the eggs in different ways – stuff them in pockets or in a separate pouch. But I digress.

So, how does the same concept hold true for investing in REITs?

Well, if you’re just now beginning to familiarize yourself with the sector, you’ll find a multitude of options. And I cover many of the sub industries. You’ll see industrial REITs, healthcare, retail, office, lodging, residential, self-storage, data center and infrastructure, to name some of the most well-covered classes.

Every year, as a REIT analyst and an investor myself, I’ll see certain sectors outperform others, but it’s always changing. Retail might not be so hot, but industrial could be on fire. The next year, health-care REITs could dominate with their growth. A lot of the fluctuations hinge upon what we read about in the papers every day: public policy changes, new tax reform, demographic evolutions.

That said, one can easily see why it’s smart to – over the long term – pick a number of these sectors, and some of the top-performing players within each. Alas, the biggest lesson of all, and a widely utilized risk management technique, is called DIVERSIFICATION.

Simply put, diversification strives to smooth out risk in a portfolio so the positive performance of some investments neutralizes the negative performance of others. Therefore, the benefits of diversification hold only if the securities in the portfolio are not perfectly correlated.

It’s true that many non-institutional investors have a limited investment budget and may find it difficult to create an adequately diversified portfolio. This fact alone is why many mutual funds and ETFs have been increasingly popular. In case you missed it, check out my article on Vanguard Real Estate ETF (NYSEARCA:VNQ).

Of course, many of you following me here on Seeking Alpha (I’m closing in on 50,000 followers – thank you!) read my articles because they want to outperform. After all, the name of the website you are reading is Seeking Alpha.

So, as a special Easter weekend treat I am going to provide you with 3 of my favorite “SWANs”, and while you should always attempt to accomplish diversification, remember that no matter how diversified your portfolio is, risk can never be completely eliminated.

You can reduce risk associated with individual stocks, but general market risks affect nearly every stock, and so it is important to diversify among different asset classes. The key is to find a happy medium between risk and return; this ensures that you can achieve your financial goals and SLEEP WELL AT NIGHT!

A pile of hay Description generated with very high confidence

Source

On Monday, I plan to publish the April edition of the Forbes Real Estate Investor (newsletter) and included is an article on the “Sweet 16 REITs”. I hand-picked 3 of my favorite REITs for this article, and you will have to read the newsletter on Monday to find out which REIT is laying the golden eggs.

W.P. Carey (WPC) is an easy pick for the basket. The company has never cut its dividend, and in fact, it has paid and increased its dividend for over 20 years in a row. The company recently increased the dividend (Q4-17) by over 7.4% (over the previous quarter).

These results demonstrate WPC’s commitment to maximizing long-term shareholder value as the company increased earnings while improving both the quality of the portfolio and the composition of the revenue stream. WPC also maintains a conservative payout ratio of 76%.

With close to 70% of ABR coming from leases linked to CPI, WPC has a built-in hedge against inflation, a differentiating factor among net lease REITs that is underappreciated by investors (approximately 95% of leases have either fixed or CPI-based contractual rent increases, with virtually no exposure to operating expenses).

WPC’s properties are located primarily in the U.S. and Europe. The company has subscribed to the view that U.S. retail real estate is overbuilt; it has had little such exposure for years. Instead, the company has been investing internationally for 19 years, primarily in western and northern Europe.

WPC has returned -8.6% YTD and shares are now priced at $61.99. The company’s P/FFO multiple is 11.7x (below the 2-year average of 12.1x). As noted above, the dividend is well-covered and the dividend yield is 6.5%.

A screenshot of a social media post Description generated with very high confidence

Tanger Factory Outlets (SKT) is the only “pure play” outlet center REIT, with a portfolio of 44 outlet centers in the U.S. (22 states) and Canada.

Comparing Tanger to Simon Property (SPG) or CBL & Associates Properties (CBL) is not an apples to apples comparison. On a relative basis, high-quality mall REITs currently have easier sales comps than Tanger, since their prior period sales were down due to the negative impact of reduced international tourism due to the strong dollar.

Tanger continues to have the lowest cost of occupancy among all public Mall REITs and most of the company’s tenants report that outlet stores remain one of their most profitable and important retail distribution channels.

To maintain the strong and flexible leverage profile, Tanger prefers to use internally generated cash to fund any further purchases under the share repurchase program. The redemption make-whole premium and the completion of the two projects that will open later this year will consume the remaining cash flow for the balance of the year.

I am maintaining Tanger as a STRONG BUY as shares have returned -15.7% YTD. SKT now trades at $22.00 with a P/FFO multiple of 10.0x (3-year average P/FFO is 15.3x). The dividend yield is 6.2%.

A screenshot of a computer Description generated with very high confidence

STAG Industrial (STAG) is one of my favorite industrial REITs. To mitigate secondary market risks, the company has built an impressive portfolio that provides well-balanced tenant diversification. The company owns 356 buildings in 37 states, with approximately 70.2 million rentable square feet, its largest tenant represents just 2.6% of ABR, and the top 10 tenants represent just 14.1% overall.

STAG has found that primary and secondary markets have similar occupancy and rent growth experiences, and secondary industrial property markets generally provide less rent volatility and equivalent occupancy compared to primary industrial property markets.

Because of STAG’s Class B (secondary markets) industrial investment rationale, the company enjoys low capital expenditures and lower tenant improvement costs (relative to other property types). Also, its Class B tenants tend to stay longer, since moving costs and business interruption costs are expensive relative to relocating a “critical function” facility.

STAG shares have returned -11.8% YTD and shares are now trading at $23.92 (with a P/FFO multiple of 13.9x). STAG’s dividend yield is 5.9% and I maintain a BUY.

A screenshot of a cell phone Description generated with very high confidence

In closing, John Templeton once said, “Diversify. In stocks and bonds, as in much else, there is safety in numbers.”

REITs now have their own GICS category (“Real Estate”) that offers access to the real estate market typically with low correlation with other stocks and bonds. Investors who diversify their portfolios have historically had a better chance of ending up with higher returns because diversification reduces portfolio volatility and mitigates losses from any one security or asset class.

REITs help to diversify a portfolio because, as real estate, they are a distinct asset class that has demonstrated low to moderate correlation with other sectors of the stock market, as well as bonds and other assets.

In other words, REIT returns have tended to zig while returns of other assets have zagged, smoothing a diversified portfolio’s overall volatility. This diversification may help an investor increase long-term portfolio returns without taking on additional risk, and that helps intelligent investors SLEEP WELL AT NIGHT.

Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Source: F.A.S.T. Graphs

Disclosure: I am/we are long ACC, AHP, AVB, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DDR, DEA, DLR, DOC, EPR, EXR, FRT, GEO, GMRE, GPT, HASI, HTA, INN, IRET, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, QTS, REG, RHP, ROIC, SBRA, SKT, SPG, STAG, STOR, TCO, TXRT UBA, UMH, UNIT, VER, VNQ, VTR, WPC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Facebook Employees Are Reportedly Deleting Controversial Internal Messages

Facebook employees are deleting potentially controversial comments and messages from the company’s internal communications systems, after the leak of a 2016 memo in which Vice President Andrew Bosworth appeared to place growth priorities ahead of public safety concerns.

According to Facebook employees who spoke with the New York Times, staffers are also urging the company to hunt down the leakers who released the Bosworth memo.

If the report is accurate, the deletion of internal communications could have legal implications, including in an ongoing Federal Trade Commission investigation into the company’s data-handling practices. Destruction of internal documents was a partial focus of the FTC’s recent investigation of Volkswagen.

Bosworth’s memo continued catastrophic PR fallout following findings that the Facebook data of as many as 50 million users was wrongly harvested by the election consulting firm Cambridge Analytica. In the memo leaked Thursday, Bosworth wrote that “connecting people” should be the company’s driving goal, even if “it costs someone a life by exposing someone to bullies” or “someone dies in a terrorist attack coordinated on our tools.”

Get Data Sheet, Fortune’s technology newsletter.

Facebook executives have defended the memo as merely provocative, and not actually intended to deny Facebook’s responsibility to try to prevent bullying or terrorism. Bosworth issued a statement via Twitter Thursday night saying he “didn’t agree with [the post] even when I wrote it” and cares “deeply about how our product affects people.” He further wrote that “this was one of the most unpopular things I’ve ever written internally and the ensuing debate helped shape our tools for the better.”

While some parts of Bosworth’s message may be defensible as pot-stirring hyperbole, others are more difficult to rationalize. For instance, Bosworth wrote about “questionable contact importing practices.” That phrase shows high-level internal awareness about choices including the collection of detailed call logs from many Facebook users, which reached public attention last week. That news contributed to growing signs that users no longer trust the social network to protect their personal data.

No, Buffett Is Not Buying GE

Yesterday, rumors began swirling that General Electric (GE) might be of interest as a significant investment, or even as a takeover candidate, from none other than Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B). So enthusiastic were investors that GE might finally catch a break that shares went up as much as 6.5% – no small sum that represents over half a billion in market capitalization.

Unfortunately, dreamers that bought GE are likely to be disappointed. Here’s why.

Buffett’s past with GE

Ten years ago, the Oracle of Omaha famously invested $3 billion in GE preferred stock at the height (or perhaps in the depths?) of the Great Recession. The preferred shares, superior in dividend preference to common stock but inferior to debt, came at a high price for ‘The General’: 10% interest per year in perpetuity. If GE wanted out, it could repurchase Buffett’s preferred stock at a 10% premium (which it did for a total of $4.1 billion, including dividends, in late 2011). As icing on the cake, Buffett’s Berkshire received warrants to purchase nearly 135,000 shares of GE’s stock at $22.25 per share.

If this sounds like a sweet deal for Buffett, you’re right – it borders on usurious. It’s good to be The Oracle, after all.

A struggling giant

Now, a decade later, GE is faced with a different problem. Macroeconomic storms have given away to microeconomic travails:

General Electric Selected Financial Results

FY 2015

FY 2016

FY 2017

Total Revenue

$117.4 billion

$123.7 billion

$122.09 billion

Gross Profit

$32.09 billion

$33.4 billion

$17.99 billion

SGA Expenses

$21.9 billion

$19.36 billion

$20.44 billion

Operating Income ( Loss)

$11.65 billion

$14.05 billion

($3.9 billion)

Net Income

($6.12 billion)

$8.83 billion

(5.8 billion)

Free Cash Flow

$12.58 billion

(7.44 billion)

$3 billion

Data Sources: General Electric, Scout Finance.

The winding down of GE Capital, as well as other “one-time items” has distorted GE’s net income. But, as Buffett’s teacher Benjamin Graham pointed out in The Intelligent Investor, why ignore such costs in valuing a business? Graham knew that a company of any reasonable size (and especially enterprises of GE’s scale) will ALWAYS have expenses like this crop up.

The more reliable figure for a quick-and-dirty analysis, free cash flow, is flashing an alarm bell (Fun fact: GE’s free cash flow, according to our friends at Scout Finance, came in at a whopping $15.12 billion in 2013 and a staggering $20.6 billion in FY 2014.) What a difference a few years makes.

Buffett knows this, and he will inevitably look to each division’s results for signs that the ship can be righted. Unfortunately, the prognosis here is not good:

GE Segment Revenues

Source: General Electric FY 2017 10-K.

General Electric Segment Profit

Source: General Electric FY 2017 10-K.

By shedding GE Capital, ‘The General’ was getting back to its industrial roots. Unfortunately, its industrial roots aren’t exactly growth businesses these days (save for Renewable Energy, but even that represents a small portion of the whole). Any buyout of GE means you get the whole thing – and the whole is not thriving.

John Flannery now leads the company, acknowledged to be a smart company man and touted as the man who turned around GE Healthcare. Alas, Healthcare’s performance over the past three years, the approximate period Flannery was at the helm, was not anything to write home about (see above).

Flannery seems to have the situation in hand (which unfortunately forced him to cut GE’s dividend and plan large cost cuts). The problem is that the situation is an extremely tough one and almost certainly not something Buffett would want to dive into. That is unless GE is willing to part with one of its top performing divisions, of course.

Buffett’s Cash Won’t Fix GE

Arguably, Buffett made his first millions as a distressed investor and turnaround artist. Anyone who has read just one of the numerous biographies of the man has no doubt heard the tale of Dempster Mill Manufacturing, GEICO, and even a New England textile manufacturer named Berkshire Hathaway.

But those days are over. Buffett wants to buy great businesses at fair prices – low stress is the name of the game.

Not only that but Buffett’s other well-known “opportune” investments in national brands (made at a time of distress) all had one of two characteristics: (1) The source of trouble is immediately solved with capital. The simple need for cash was the case with Buffett’s 1970s investment in GEICO when the company needed cash to survive, but the fundamental business of providing low-cost insurance to government employees remained intact. Once the capital infusion occurred, the insurance regulators backed off. Or (2), the business itself is excellent, but the company has a dark cloud over it. This was the case with Buffett’s investment in American Express (AXP) in the 1960s.

General Electric is different.

A pile of money won’t solve its woes (although that wouldn’t hurt given the company’s debt load) and most of its businesses are barely growing – if that. So, no, Buffett won’t be buying a massive stake in GE nor will be gobbling up the whole thing.

What you need to know

Buffett will not be riding in to rescue GE on a white horse.

Could I be wrong? Absolutely. Buffett has unmatched insights and access to information (how often do you suppose he and Flannery have talked in the past few months?). Combining any one of GE’s businesses with Berkshire’s could lead to significant cost savings – a potential source of upside that few possess. Or perhaps he could call up his friends over at 3G Capital for some good old fashioned zero-based budgeting magic.

But I doubt it.

It SOUNDS like the cap to a fantastic investing career. But it wouldn’t be Buffett. If anything, he’s talking to Flannery at the time of this writing about acquiring one of GE’s better performing industrial businesses. I can only hope Mr. Flannery takes a pass. The worst thing one can do in a crisis is make a deal on onerous terms, a lesson I can only hope GE learned in its previous dealings with Mr. Buffett.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Apple: Can We See A Major Correction?

Apple (AAPL) has not lived up to the high expectations of Wall Street in the 10-year anniversary of iPhone. All reports point to rapidly slowing sales in iPhones, which as a segment contributes 70% of the total revenue of Apple. It is highly possible that Apple could end this fiscal year with under 200 million unit shipments of iPhones. Last fiscal year, it stood at 216 million. Even the ASP bump due to a weaker dollar will not be sufficient to sustain Apple’s stock price at the current level. Investors should be ready for a bearish momentum in the stock as Apple declares its Q2 earnings.

Few fundamental bright spots

Apple has not been able to show good results in the fundamental metrics of the company. Most of the bullish thesis for Apple from different analysts talks about tax reform, buybacks, the benefit to EPS, and other non-company related issues. We know that Wall Street rarely rewards a stock that has only non-fundamental issues in its favor. IBM is a perfect example why investors should be wary about EPS growth based on buybacks.

Apple’s poor results are not limited to the iPhone segment. HomePod’s bad reception will become an even bigger issue as the duopoly of Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) increase their grip on the voice assistant and home entertainment segment. Tim Cook has been repeating himself about Apple’s product pipeline for the past five years. Five years back, he said it is “chock full” of “incredible stuff”. This claim has been reiterated several times but the end result has not been successful. At the same time other competitors, including Chinese OEMs, have been closing their distance with Apple.

Apple still makes 70% of its total revenue from iPhones. This makes the company overwhelmingly dependent on the fluctuations in sales of a single product. Most of the bullish run of 2017 was in the expectation of a big ‘Supercycle’ in the iPhone segment. This has certainly not happened. It is also turning out to be quite a negative performance. The recent news report about lower sales from Apple suppliers shows that we could easily see a mid-single digit decline in unit shipments of iPhones in this fiscal year.

In fiscal 2017, Apple delivered 216 million unit shipments of iPhones and a cautious projection for this fiscal would put the forecast in the sub-200 million range.

But why is this so important?

Apple’s stock has closely followed the performance of its iPhone segment. We can see this by comparing Apple’s stock price along with average quarterly unit shipments of iPhones for the past ten years.

Fig: Apple’s stock price and average quarterly unit shipments. Source: Apple Filings. Chart by Author

Apple was able to recover from a major dip in 2012 because of good growth in iPhone shipments. It can be clearly seen from the chart that during that period Apple’s stock was heavily undervalued. However, after the recent bull rally along with poor performance in this iPhone iteration, the stock has become overvalued according to this metric. It should be noted that for the current fiscal year, I have taken an average quarterly unit shipment projection of 53 million or 212 million for fiscal 2018.

If iPhones shipments end up falling below the 200 million mark, the gap between Apple’s current stock level and the performance of its most important segment will further widen.

Don’t put all eggs in the Services basket

The usual comments I have seen in every article on Apple is that the Services segment will make up the difference of performance in the iPhone segment. The numbers behind this show that it would be very difficult for the Services segment to make up for any slack in the iPhone segment, at least for the next few years.

Fig: Apple quarterly revenue by segments. Source: Apple filings

In fiscal 2017, Apple made $141 billion from its iPhone segment, whereas the Services segment contributed $30 billion and Other Products contributed another $13 billion. Hence, cumulatively the Services and Other Products segments make up less than one-third the revenue base of iPhone. This means that even if we see a 7% decline in iPhone revenue, the Services and Other Products segments will need to grow by 23% just to make up for the revenue loss.

A fall in iPhone unit shipments also hurts the overall ecosystem, on which Services and Other Products are heavily dependent.

So when do we see a correction?

This is the million dollar question (Maybe more).

Fig: Trailing 12-month PE ratio of Apple

Just two years back, Apple was trading at under 10 times its ttm PE ratio. No one has a crystal ball but it is difficult to see Apple trading at the current all-time high considering the series of negative reports we have heard about Apple.

Apple’s average earnings estimate for the current year and next year are:

Average EPS estimate for fiscal 2019 is $13.2. Giving a valuation multiple of 11 would give Apple a price target of $145. This price level would give investors a decent margin of safety against future ‘iPhone shocks’ and also give a better dividend yield, which has fallen to its lowest level. A $145 price target also eliminates the valuation gap according to the first figure shown above.

Fig: Apple’s stock price and average quarterly unit shipments with price target of $145. Source: Apple Filings. Chart by Author

Investor Takeaway

The continuous negative reports on Apple will end up leading to a correction in the stock price, sooner instead of later. The current price level is at least 20% overvalued, as iPhone sales continue to slide for the remaining quarters of this fiscal year. It would be naive to put too much faith in the Services and Other Products segments lifting Apple’s revenue, as they are still relatively at a very low level.

A fall in iPhone shipments also puts a question mark on Services growth rate. A mid-single digit fall in unit shipments in iPhone will end up giving sub-200 million iPhone shipments in fiscal 2018. Apple’s stock should see a correction once the unit shipment numbers of Q2 quarter are declared. This should allow analysts to recalibrate their projections for the current fiscal year. If Apple does not see tariff reductions in the trade negotiations started by the current administration, we should see a major correction in the stock.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Now Is The Time To Buy The 2 Best Dividend-Paying Pharma Stocks

(Source: imgflip)

My dividend growth retirement portfolio has an ambitious goal of generating 12% total returns over time. The cornerstone of my strategy is a highly diversified portfolio of quality dividend companies bought at fair price or better.

That means I use a lot of watchlists and patiently wait to buy the right company at the right price. Well, the market correction, plus a disappointing drug trial result, mean that two of my favorite blue-chip drug makers, Johnson & Johnson (NYSE:JNJ) and AbbVie (NYSE:ABBV), have finally fallen to levels at which I can recommend them.

Let’s take a look at why these two industry leaders likely have what it takes to continue generating years, if not decades, of generous, safe, and steadily rising income. Traits that history indicates will lead to market-beating total returns, especially from their currently attractive valuations.

Johnson & Johnson: The Most Trusted Name In Pharma Continues Firing On All Cylinders

The pharmaceutical industry is both wide-moat and defensive (recession-resistant). That can make it a potentially attractive industry for low-risk income investors. And when it comes to big drug makers, none are lower-risk than Johnson & Johnson, which was founded in 1885 and is the world’s largest medical conglomerate. The company has over 250 subsidiaries operating in over 60 countries, making it the most diversified drug stock you can own.

(Source: JNJ Earnings Presentation)

All three of its business segments posted strong growth in 2017, resulting in company-wide operational revenue growth of 6.3%.

Metric

2017 Results

Revenue Growth

6.3%

Free Cash Flow Growth

14.4%

Shares Outstanding

-1.6%

Adjusted EPS Growth

8.5%

FCF/Share Growth

16.2%

Dividend Growth

5.4%

Dividend FCF Payout Ratio

51.3%

FCF Margin

23.3%

(Source: JNJ Earnings Release, Morningstar)

Excluding major acquisitions, such as the $4.3 billion purchase of Abbott Medical Optics and the $30 billion purchase of Actelion, operating revenue was up 2.4%. However, what ultimately matters to dividend growth investors is the company’s free cash flow, or FCF. That’s what’s left over after running the business and investing in future growth, and it grew by an impressive 16.2% last year. And despite the lower-margin medical products and consumer goods segment, JNJ still managed to convert 23.2% of its revenue into free cash flow in 2017.

FCF is what funds the dividend, and with an FCF payout ratio of 51.3% JNJ’s track record of 54 straight years of rising dividends is all but assured. In fact, the company will raise it again next quarter, with the analyst consensus being for about an 8% hike for 2018. That’s thanks to highly positive management guidance, including:

Metric

Mid-Range 2018 Growth

Operational sales

4%

Operational sales ex acquisition

3%

Total sales

6%

Operational EPS

8.20%

Adjusted EPS

11%

(Source: JNJ Earnings Presentation)

This is largely thanks to the strength of its pharmaceutical segment, particularly the oncology division, which saw worldwide sales growth of 25% and generated $7.3 billion in sales for the company. The strength of JNJ’s cancer drug business was largely fueled by such drugs as:

  • Darzalex (multiple myeloma): Worldwide sales up 117%
  • Imbruvica (lymphoma, Leukemia): Worldwide sales up 51%

These offset the small (9.3%) decline in global Remicade sales, which is the company’s blockbuster immunosuppressant that treats rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn’s disease, plaque psoriasis, and ulcerative colitis. This decline was caused by the loss of patent exclusivity.

The good news is that while Remicade is in decline, other immunology drugs like Stelara (psoriasis and arthritis) are quickly stepping up to fill the gap. For example, in 2017, Stelara’s worldwide sales grew 24% to $4 billion, nearly matching Remicade’s $6.3 billion revenue.

In addition, JNJ is partnering with Theravance Biopharma (NASDAQ:TBPH) in a $100 million deal to develop its potentially far superior immunology drug to replace falling Remicade sales. That drug, TD-1473, is highly effective in very small doses. Early trials indicate it shows no significant broadscale immunosuppression, which has been the main side effect of all previous drugs in this category.

If future trials go well, then JNJ will likely pick up the tab for the drug’s registration costs, and its giant sales force will be responsible for marketing the drug. That’s in return for 2/3rd of US profits, as well as all global profits minus a double-digit royalty to Theravance.

This is great example of smart capital allocation, which reduces development risk immensely. JNJ has done this kind of co-development/co-marketing deal before. In 2011, it paid Pharmacyclics (now owned by AbbVie) $150 million to help it develop Imbruvica. Today, that cancer drug is one of Johnson & Johnson’s top sellers with nearly $2 billion in sales.

Pharmaceutical market analysis firm EvaluatePharma expects that figure to hit $7.5 billion by 2022, which is projected to make it the 4th-best selling cancer drug in the world. JNJ and AbbVie each have about 50% rights to Imbruvica, though AbbVie also enjoys royalty rights that it acquired when it bought Pharmacyclics.

Edurant, an HIV drug, also saw strong sales growth of 24.6%. This shows the major strength of JNJ. Which is that while most of its profits come from volatile, patented pharmaceuticals, it remains highly diversified, with even its largest medication representing only 8.2% of companywide revenue in 2017.

Best of all, JNJ’s drug development pipeline is deep, with 19 drugs in late-stage clinical trials for 85 indications in the US and the EU. And those are just late-stage phase three trials. In total, the company’s pipeline has 34 drugs, including 10 potential blockbusters that it expects to receive approval for by 2021. These are drugs the company thinks could generate over $1 billion in sales each.

This includes prostate cancer drug Erleada, which EvaluatePharma thinks could generate $1.6 billion in annual sales by 2022. Meanwhile, JNJ has Imbruvica in trials for seven more indications, four of which are expected to boost annual sales by at least $500 million each. All told, EvaluatePharma expects JNJ’s new drug/indication expansions over the next five years to drive $14.9 billion in additional sales, or nearly $3 billion per year.

And while it’s the least sexy part of the company, I like the consumer goods segment for its strong record of innovation.

(Source: JNJ Investor Presentation)

Consumer products has numerous highly trusted brands that have given the company a strong, non-patent reliant source of global revenue, including 55% from outside the US. In 2017, this segment’s sales grew 2.2%.

(Source: JNJ Investor Presentation)

In the last three years, JNJ has managed to use its enormous economies of scale to cut $1.7 billion in annual operating costs, resulting in operating margins rising by 4.5%. Going forward, the company expects to be able to achieve 1-2% above industry average growth, while achieving 20.3% operating margins.

Meanwhile, medical devices give the company much-needed diversification. It also provides a long growth runway given that in the future, global demand for surgical, orthopedic, cardiovascular, vascular, and vision devices is set to grow strongly.

Medical devices is a wide-moat industry, with JNJ controlling dominant positions in both orthopedics and endo-surgical devices (minimally invasive surgical tools). Surgeons are generally loath to switch suppliers, since they train and gain expertise using particular medical devices. This creates a stickier ecosystem and stronger pricing power.

The segment generated 5.9% growth in 2017. This was led by 46% growth in vision care (Abbott Medical Optics acquisition) and cardiovascular’s 13.4% growth in global sales.

The bottom line is that JNJ is a world-class drug maker, but also so much more. It has a strong track record of innovation and medical product invention in drugs, consumer products, and medical devices. Combined, these create a relatively steady river of free cash flow that has resulted in the industry’s best dividend growth track record – one that is likely to continue for many years and even decades to come.

AbbVie: Despite Recent Trial Failure, The Best Name In Biotech Still Has Plenty Of Growth In The Tank

Chart

ABBV Price data by YCharts

It’s been a rough few days for AbbVie, with shares plunging on news of disappointing phase two results for its Rova-T lung cancer therapy. Lung cancer, due to the large number of smokers in the world, is the most profitable sub-segment of the already very lucrative oncology market.

AbbVie paid $9.8 billion for Stemcentrx in 2016, including $5.8 billion up-front ($2 billion cash and $3 billion stock). The deal also included potentially $4 billion in cash earnout payments if the drugs developed from Rova-T hit certain milestones.

The reason that investors are reacting so negatively is that the results showed only 16% of cancer patients responded to the treatment, instead of the expected 40% response rate. So, AbbVie is abandoning plans to file for an early approval with the FDA.

This poor trial means higher risks of failure for the drug’s other trials, including much more important first- and second-line treatment indications. It also calls into question the Rova-T/Opdivo combination trial that AbbVie is partnering with Bristol-Myers Squibb (NYSE:BMY) on, and for which results should be in by 2019.

The biggest reason this freaked out investors so much is because AbbVie was spun off from Abbott Labs (NYSE:ABT) in 2013 with all of that company’s pharmaceutical assets. By far the most valuable has been the immunology drug Humira, which is used to treat arthritis, psoriasis, ankylosing spondylitis, Crohn’s disease, and ulcerative colitis. For several years now, Humira has been the best-selling drug in the world.

(Source: Statista)

This is why AbbVie has continued to put up incredible growth. In fact, in 2017, it had the best sales growth in the industry and came in number two in terms of adjusted EPS growth.

Metric

2017 Results

Revenue Growth

10.1%

Free Cash Flow Growth

43.7%

Shares Outstanding

-1.7%

Adjusted EPS Growth

16.2%

FCF/Share Growth

46.2%

Dividend Growth

5.4%

Dividend FCF Payout Ratio

44.1%

FCF Margin

33.4%

(Source: ABBV Earnings Release, Morningstar)

More importantly for income investors, AbbVie’s free cash flow exploded, thanks to the incredible margins it’s earning on its patented drugs.

Better yet? Thanks to tax reform, the company raised its 2018 Adjusted EPS guidance from about 17% to 32%, which is why management decided to hike the dividend for this year by 35%. However, the FCF payout ratio should still remain about 50%, due to the company’s strong growth in sales and free cash flow.

But if AbbVie is booming, then why is the market freaking out so much over Rova-T? Because AbbVie’s success with Humira is a double-edged sword. The drug was responsible for 65% of the company’s sales in 2017. This means that its prodigious profits and cash flow have a lot of concentration risk.

Investors are worried that AbbVie might end up going the way of Gilead Sciences (NASDAQ:GILD), where a single (in GILD’s case, two) blockbuster drug ends up seeing sharp sales declines that drag on earnings growth for years. That’s because in 2017, Humira lost EU patent protection. In addition, every major drug maker has a biosimilar rival in development.

The biggest risk was Amgen’s (NASDAQ:AMGN) Amjevita, which won approval in 2016. AbbVie has been battling in the courts to keep that rival off the market. In 2017, AbbVie and Amgen agreed that Amjevita would remain off the US market until 2023. That’s because while the FDA approved the rival drug, it didn’t take into account the 61 patents that AbbVie still has in effect.

Rather than proceed with a costly trial scheduled to begin in 2019, Amgen has backed down. This is why AbbVie CFO Bill Chase says that management has “come to the conclusion that this product [Humira] is durable.” And that investors are “not going to see anything catastrophic,” such as Humira sales falling off a cliff anytime soon.

In fact, AbbVie expects that with no biosimilar competition until 2023, it has a clear runway to keep steadily growing the drug’s sales.

(Source: AbbVie Investor Presentation)

But the point is that even if AbbVie’s rosy forecasts of Humira sales do come true, the company still needs to diversify if it’s going to avoid a major future decline in profits and cash flow.

After all, by 2023, the drug is going to face an onslaught of biosimilar rivals that will likely steal a lot of market share, or at the very least force AbbVie to reduce its prices significantly. In fact, by 2025, three years into competition with biosimilars, AbbVie expects Humira sales to fall to just $12 billion a year.

Which is why Rova-T was so important. Management believed that if approved for all indications, it could be a $5 billion blockbuster by 2025.

(Source: AbbVie Investor Presentation)

That was about 14% of the $35 billion in risk-adjusted (expected sales adjusted for probability of drug approval), non-Humira sales the company was forecasting for 2025.

In other words, Rova-T was such a big deal that the company spent a lot of money in order to try to reduce its Humira revenue concentration from 65% in 2017 to just 26% in 2025. However, the fact is that even if you assume a total failure on Rova-T, AbbVie’s sales should still come in at $42 billion by 2025, with Humira representing about 29% of revenue.

AbbVie: Lots Of Potential Growth Catalysts Ahead

Right now, AbbVie is all about Humira, the world’s most popular immunology drug and top-selling pharmaceutical period. But while immunology is indeed a booming industry, it’s far from the only growth avenue for this company.

(Source: AbbVie Investor Presentation)

In total, AbbVie thinks there is about a $200 billion market for the four key segments it’s targeting.

And the company has one of the deepest and most potentially profitable drug pipelines in the industry. In fact, in 2017, EvaluatePharma estimated that AbbVie’s new drugs in development could generate $20.4 billion between 2018 and 2022. That meant it had the third-strongest development pipeline in the world. Even if you assume a total failure of Rova-T, the new drug sales projection drops to $15.4 billion, which means that AbbVie’s pipeline drops to number four, just above Johnson & Johnson’s $14.9 billion. That’s because it still includes drugs like:

  • Risankizumab (psoriasis, ulcerative colitis, Crohn’s disease): $5 billion in projected 2025 sales off at least four indications
  • Upadacitinib (rheumatoid arthritis, dermatitis, Crohn’s disease): $6.5 billion in projected 2025 sales off at least six indications

And that’s just immunology. We can’t forget that oncology is going to become a major growth market in a fast-aging world where cancer becomes more common.

The leukemia drug Venclexta won approval in 2016, and is expected to generate peak sales of up to $2 billion. And of course, there’s Imbruvica, co-marketed with JNJ, which continues to put up massive growth as its number of approved indications increases. That drug’s peak $7.5 billion in annual sales potential would mean about $4 billion per year for AbbVie’s top line. Meanwhile, the drug maker has 23 drugs in development for solid tumors, with over 10 more expected to enter trials within a year.

Other opportunities to profit from demographics include Elagolix, an endometriosis drug. This is expected to generate up to $1.2 billion in annual sales by 2022.

And keep in mind that Rova-T’s results, while disappointing, were not necessarily a disaster. That’s because the results showed that Rova-T increased one-year survival probability from 12% with current treatments to 17.5%. That is why Morningstar’s pharmaceutical analyst Damien Conover thinks it might still obtain approval for most of its first and second line indications. That could mean total peak sales come in at $1 billion, down from Morningstar’s $3 billion projection before the trial results came in.

The point is that even if you assume the worst-case scenario – i.e., zero revenue from Rova-T – AbbVie is still looking at potential sales growth of 5.2% CAGR through 2025. And if Rova-T manages to get approved, then that figure could rise to 5.3%. And with strong operating leverage from economies of scale (cost savings driving EPS growth faster than revenue growth), that means that AbbVie’s long-term EPS and FCF/share should still come in between 10% and 15%.

Which, in turn, means that AbbVie investors can likely expect some of the best dividend growth from any drug maker in the coming years. Combined with its mouthwatering yield, that makes it a very attractive income investment right now.

Dividend Profiles: Safe And Growing Dividends Likely To Result In Market-Beating Total Returns

Stock

Yield

2017 FCF Payout Ratio

Projected 10-Year Dividend Growth

Potential 10-Year Annual Total Return

Johnson & Johnson

2.60%

51.30%

7% to 8%

9.6% to 10.6%

AbbVie

4.00%

44.10%

10% to 14.2%

14% to 18.2%

S&P 500

1.80%

32%

6.20%

8.00%

(Sources: Company Earnings Releases, Morningstar, F.A.S.T. Graphs, Multpl.com, CSImarketing)

The most important part of any dividend investment is the payout profile, which consists of three parts: yield, dividend safety, and long-term growth potential. This determines how likely it is to generate strong total returns and whether or not I can recommend it or buy it for my own portfolio.

Both Johnson & Johnson and AbbVie offer far superior yields to the market’s paltry payout. More importantly, both dividends are very well-covered by free cash flow.

However, dividend safety isn’t just about a reasonable payout ratio. It also means checking to see whether a company’s balance sheet is strong enough to support continued investment in future growth as well as a rising dividend.

Company

Debt/EBITDA

Interest Coverage

Debt/Capital

S&P Credit Rating

Average Interest Cost

Johnson & Johnson

1.4

26.0

32%

AAA

2.7%

AbbVie

3.6

9.0

72%

A-

3.1%

Industry Average

1.8

12.5

41%

NA

NA

(Sources: Morningstar, GuruFocus, F.A.S.T. Graphs, CSImarketing)

Here is where JNJ takes a clear lead over AbbVie. Johnson & Johnson’s leverage ratio is below the industry average, and its sky-high interest coverage ratio indicates that the company has no trouble servicing its super cheap debt.

In fact, JNJ is just one of two companies (the other being Microsoft (NASDAQ:MSFT)) with a AAA credit rating, which is one notch higher than the US Treasury’s. That’s why it is able to borrow at such attractive rates.

AbbVie, thanks to a slew of acquisitions in recent years, has a much-higher-than-average leverage ratio. In addition, its interest coverage is below that of most of its peers. However, while this high debt load is something I plan to watch carefully going forward, it isn’t yet a danger to the dividend. After all, AbbVie still has an A- credit rating and is able to borrow at very cheap rates as well. But in a rising interest rate environment, that might change. So it’s good that management plans to hold off on more acquisitions for now, while it uses the company’s enormous and fast-growing river of FCF to pay down debt.

As for dividend growth potential, this is of key importance, because studies indicate that a good rule of thumb for future total returns is yield + dividend growth. This is because, assuming a stable payout ratio, the dividend growth rate must track earnings and cash flow growth. And since yields tend to be mean-reverting over time, this combines both income and capital gains into one formula.

JNJ’s dividend growth rate potential is smaller than AbbVie’s, due mainly to its larger size. This makes it harder to grow quickly. However, analysts still expect about 7-8% earnings growth from this Dividend King. That should allow for similar payout growth and result in market-beating total returns.

AbbVie’s dividend growth outlook is more uncertain, though larger, thanks to its strong development pipeline. Unlike JNJ, AbbVie has no diversification into non-drug businesses, and so, its growth is more unpredictable and volatile.

However, I conservatively estimate that AbbVie should be able to achieve 10% dividend growth, while analysts expect about 14%. When combined with today’s attractive yield, that should be good for about 14% total returns. That’s far above what the S&P 500 is likely to provide off its historically overvalued levels.

Valuation: JNJ Is Finally Fair Value, While AbbVie Is On Sale

Chart

JNJ Total Return Price data by YCharts

Up until a few months ago, both JNJ and AbbVie investors were enjoying a very solid year. JNJ was tracking the market during a freakishly low-volatility 20% run in 2017. AbbVie was booming thanks to strong growth in Humira and the news that its cash cow wouldn’t get any competition until 2023. However, in recent weeks, JNJ and ABBV have suffered major losses that make them both potentially attractive investments.

Company

Forward P/E

Historical P/E

Yield

Historical Yield

Percentage Of Time Yield Has Been Higher

Johnson & Johnson

15.5

22.4

2.60%

2.90%

40%/30%

AbbVie

13.0

21.5

4.00%

3.00%

11%

(Sources: GuruFocus, F.A.S.T. Graphs, YieldChart)

JNJ and AbbVie are now trading at lower forward P/E ratios than their historical norms. More importantly, AbbVie’s yield is much higher than it’s been since the company’s 2013 spin-off. JNJ’s yield is not, but keep in mind that the company’s about to announce its 55th straight annual dividend bump. This should raise the forward yield to about 2.8%.

And even at a 2.6% dividend yield, JNJ’s payout has only been higher 40% of the time. And going off the likely 2.8% forward yield in a few months, 30%. Meanwhile, AbbVie’s yield has only been higher 11% of the time, indicating that it’s likely highly undervalued.

(Source: Simply Safe Dividends)

A rule of thumb I like to use for determining fair value is that I want to buy a stock when the yield is at least at the 5-year average. Taking into account the upcoming JNJ dividend hike, I now estimate that it is fairly valued. And under the Buffett principle that “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price”, I have no issue recommending JNJ today. After all, it’s the ultimate pharma blue chip, with the best dividend growth record in the industry.

Meanwhile, AbbVie is about 17% undervalued, which is why I consider it a more attractive investment today. That’s why I added it to my own portfolio during the recent correction and during the Rova-T freakout.

Note that if I had the cash, I’d have bought JNJ as well, and I highly recommend owning both blue chips in your diversified income portfolio. That’s assuming, of course, that you are comfortable with the complex risk profile of any pharma/biotech company.

Risks To Consider

When it comes to complexity and uncertainty, few industries are as challenging as pharma/biotech. That’s because of numerous risk factors that make it very challenging for companies to consistently grow safe dividends.

For one thing, the same regulatory hurdles that provide a wide moat and windfall profits for a time also make new drug development incredibly tricky and time-consuming.

(Source: Douglas Goodman)

For example, fat profit margins are created by patent protection, which usually lasts for 20 years. However, drug makers need to file for a patent at the start of the development process, which usually takes 10-15 years to complete. That means drug companies only enjoy patent-protected margins for a relatively short time before patent cliffs kick in and generic competition can steal market share.

And we can’t forget that the process itself is highly unpredictable, monstrously expensive, and only getting more so over time.

(Source: Tufts Center For The Study Of Drug Development, Scientific American)

When factoring in all the preclinical, clinical, and follow-up studies, it can cost as much as $2.6 billion to develop a new drug. And as we just saw with Rova-T, a promising drug can fail at any time. That can potentially result in a total write-off and gut-wrenching short-term price volatility.

Worse yet, because only about 1 in 10,000 compounds/treatments ends up making it through the FDA regulatory gauntlet, drug makers often have to acquire rivals to obtain promising pipeline candidates in late-stage development. All major M&A activity is inherently packed with risk.

For example, if a company overpays, then even a successful blockbuster drug can end up not contributing much to EPS or FCF growth. Meanwhile, synergistic cost savings, which are often counted on to make deals profitable, might not be fully realized. And what if a key drug that was a major reason for a large acquisition fails in trials? Then large write-offs can result, as may happen with Stemcentrx and Rova-T. And don’t forget that a failed acquisition can lead to a costly break-up fee. For example, in 2014, AbbVie abandoned the $55 billion attempt to buy Shire (NASDAQ:SHPG), resulting in a $1.6 billion break-up cost to shareholders.

The good news is that according to AbbVie’s CFO, when it comes to additional short-term acquisitions, investors shouldn’t “expect anything major.” That’s because, he said, “Running out and buying something of size doesn’t make sense.” Holding off on more acquisitions for a few years means that the company will have time to deleverage its balance sheet while it brings its strong development pipeline to market.

In addition, AbbVie does have a pretty good track record on acquisitions, since the $21 billion purchase of Pharmacyclics in 2015 was reasonably priced. It gave the company the blockbuster Imbruvica, which is its second-largest but fastest-growing seller.

But even if everything goes right, a company makes a smart acquisition at the right price, and the potential blockbusters in the pipeline are approved, there’s the issue of massive competition to contend with. For instance, patents on drugs are highly specific. Competitors are free to create alternate versions, including of highly profitable biological drugs. That’s why every pharma/biotech and their mother is constantly racing to develop biosimilars to the hottest blockbusters on the market.

In this case, Remicade faces competition from over 20 potential rivals, including Pfizer’s (NYSE:PFE) Inflectra, which is selling at a 10% discount to Remicade. And without patent protection, analysts expect Remicade sales to continue to deteriorate at an accelerating pace. Meanwhile, JNJ prostate drug Zytiga is also expected to see generic competition this year, due to patent expirations.

In order to keep their pricing power, pharma companies are also fighting constant legal battles. That’s to protect patents and also to try to block generic and biosimilar competition for as long as possible. All legal challenges are themselves highly uncertain, and a negative outcome can have a large impact on both the share price and future cash flow growth.

And we can’t forget about the other kind of legal uncertainty: class action lawsuits in case an approved drug ends up being harmful to consumers. For example, Merck (NYSE:MRK) had to pull popular pain drug Vioxx from the market in 2004 when post-clinical studies showed it significantly increased the risk of heart attack and stroke. The company has spent over 12 years in and out of courts, as a plethora of class action suits have continually pushed up the final settlement costs. In 2007, Merck settled most of the cases for $4.9 billion. But individual holdouts have continued suing the company, and the total cost is now at $6 billion, with several cases left to be settled.

And that is just one extreme case of what can go wrong. Often, legal liability is a death from a thousand cuts. For example, AbbVie recently lost a case in Chicago where a man successfully sued over AndroGel, a testosterone replacement cream. The plaintiff claims that AbbVie’s cream caused him to have a heart attack. While the jury did not find the company strictly liable, it still awarded him $3 million. The company faces about 4,000 more such cases over AndroGel. Each case is likely to have a different outcome, and some of them might be thrown out or be reduced on appeal. But the point is that even non-blockbuster products can end up as a major financial liability.

Meanwhile, in the past, JNJ has faced its own legal hassles, including numerous consumer product recalls, defective knee, hip implants, surgical mess, and a $2.2 billion settlement over antipsychotic drug Risperdal.

Finally, we can’t forget the other major legal risk: government regulations and healthcare policy, both in the US and abroad.

(Source: HCP)

In the US alone, the rapidly aging population means that healthcare spending is expected to increase by about $2 trillion per year by 2025 and consume 20% of GDP. This means that the US government as well as private payers will be desperate to bend the cost curve lower. Blockbuster drugs and their high profit margins are an easy target for populist politicians to go after in this country and around the world.

For example, President Trump announced that:

“One of my greatest priorities is to reduce the price of prescription drugs. In many other countries, these drugs cost far less than what we pay in the United States. That is why I have directed my Administration to make fixing the injustice of high drug prices one of our top priorities. Prices will come down.”

The president has also said in the past that drug makers were “getting away with murder”, a sentiment many Americans share. And it is true that foreign countries do enjoy lower drug prices, largely because government involvement in healthcare is far more common. Of course, that is why most R&D recoupment is generated in the US.

But that’s not guaranteed to continue. Because even if Congress doesn’t enact outright price controls on drugs, it can easily lift the current ban on Medicare/Medicaid negotiating bulk drug purchases at a discount. That’s a far less controversial proposal that represents low-hanging, cost-saving fruit – one that could potentially hit margins across the entire industry.

In the meantime, Joaquin Duato, JNJ’s executive vice president and worldwide chairman of its pharmaceuticals segment, has said that insurers and pharmacy benefit managers are putting on extra pressure to lower drug prices. This is why the company’s pharma growth plans are focused on volume and not price. It wants to grow profits by expanding indications and launch new medications to treat more conditions, specifically in immunology and oncology.

The bottom line is that pharma is a wide-moat industry with huge potential for future growth. However, it’s also fraught with peril and risk. Drug makers face a never-ending hamster wheel of uncertain, time-consuming, and costly drug development. This means steady growth in sales, earnings, and cash flow is very challenging.

Only enormous economies of scale, highly skilled capital allocation by management, and safe and growing dividends make it worth considering the industry at all. Which is why I avoid all but the most proven blue chips in the industry, and recommend most investors do the same.

Bottom Line: These 2 Industry-Leading Blue Chips Are Likely To Make For Strong Long-Term Income Investments At Current Prices

The drug industry has a lot of favorable characteristics. It’s recession-resistant, wide-moat, and is potentially poised to enjoy a major secular global demographic growth catalyst in the coming years and decades.

That being said, it’s also one of the most complex, cyclical, and competitive industries in which you can participate. That means the best course of action for most investors is to stick with industry-leading, blue-chip dividend stocks – those with shareholder-friendly corporate cultures and proven management teams.

Johnson & Johnson and AbbVie represent the top names in pharma and biotech, respectively. And at current valuations, I am able to recommend both for anyone looking for low-risk exposure to this defensive industry. That being said, AbbVie has better total return potential, and its recent disappointing drug trial results mean that the company is far more undervalued. That’s why I bought it over JNJ for my own portfolio during the correction.

Disclosure: I am/we are long ABBV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Rift deepens between Apple, India's telecom regulator over anti-spam app

NEW DELHI/SAN FRANCISCO (Reuters) – U.S. technology giant Apple Inc and India’s telecoms regulator are at loggerheads over the development of a government anti-spam mobile application, with user privacy at the heart of a deepening rift between the two sides.

FILE PHOTO: A salesman checks a customer’s iPhone at a mobile phone store in New Delhi, India, July 27, 2016. REUTERS/Adnan Abidi/File Photo

The latest impasse comes after Apple in October agreed to provide some help to the regulator to tap into new iOS features to build the “Do Not Disturb” app, which allows users to report unsolicited calls and text messages as spam.

At issue has been Apple’s contention that allowing the app broad access to customers’ call and text logs could compromise privacy.

The arguments are the latest example of challenges faced by global technology players, who often need to balance user privacy while handling requests from governments and regulators around access to content on devices. In July, Apple removed apps from its Chinese App Store that helped users browse the Internet privately in order to comply with a new cyber security law.

In India, despite October’s agreement, the two sides have not met since November, and the Indian regulator told Apple in January it was still waiting for “basic clarifications” on what exactly can the iOS version of its app offer, according to a government source with direct knowledge and an email exchange seen by Reuters.

Apple told Reuters last week the government app “as envisioned violates the privacy policy” of its App Store. Apple said it had been working with government engineers and would “continue discussing ways they can design their app to keep users’ personal data safe”.

Apple’s stance, though, has irked the head of the Telecom Regulatory Authority of India (TRAI), R.S. Sharma, who says he will consult his legal team on how Apple could be pushed to help develop the application more swiftly.

“We will take appropriate legal action,” Sharma told Reuters in an interview. “This is unjust, it shows the approach and attitude of this company.”

He did not elaborate on what action the regulator might take.

Apple did not comment on Sharma’s remarks, but said that it shared TRAI’s goal of protecting customers from unwanted calls and messages.

The logo of Telecom Regulatory Authority of India’s (TRAI) “Do Not Disturb” app is seen on a computer screen in this illustration photo in New Delhi, India, March 22, 2018. Picture taken March 22, 2018. REUTERS/Adnan Abidi/Illustration

NUISANCE CALLS

Millions of Indians are inundated by telemarketing calls and other unsolicited text messages daily in the world’s second largest wireless telecoms market behind China.

The Android version of TRAI’s “Do Not Disturb” app was introduced in 2016. When opened for the first time, it requires users to grant the app permissions to access contacts and view text messages and then allows users to report them as spam.

Google has said keeping users’ information secure is its top priority and the company believes in “openness and in the ability of users to make purchasing and downloading choices without top-down enforcement or censorship”.

Apple said it would not modify its guidelines to allow any app access to contacts, see call logs or view text messages as those functionalities violate a user’s data security and privacy.

R. S. Sharma, head of Telecom Regulatory Authority of India (TRAI), poses for a photograph at the his office in New Delhi, India, March 16, 2018. Picture taken March 16, 2018. REUTERS/Saumya Khandelwal

TRAI’s Sharma disagrees. “Users should be in control of this data,” he said.

Apple said it has offered to have its technical teams meet TRAI, but a government source said the regulator was awaiting more details from the company before proceeding.

The tussle comes at a critical time for Apple as it looks to India as a key growth market where it is also in talks to expand iPhone manufacturing.

TRAI has in the past taken decisions that have dented the plans of other tech giants. In 2015, it called for the suspension of Facebook’s pared-back free Internet service, Free Basics, and months later it dashed the company’s plans by supporting net neutrality – a principle that says Internet service providers should treat all traffic on their networks equally – effectively barring the service.

Things could be tougher in Apple’s case, however.

Any outright legal challenge by Sharma – an official who has previously worked as the federal IT secretary – is likely to be harder for TRAI to pursue as it directly regulates only licensed telecom providers.

Nevertheless, Sharma could request the department of telecommunications – which he works closely with – to invoke a decades-old law that allows the government to impose regulations even on handset makers, according to two Indian lawyers who specialize in technology policy.

“It’s likely to be more of a public relations battle against Apple rather than a legal one,” said Kunal Bajaj, a former TRAI consultant.

Reporting by Aditya Kalra and Stephen Nellis; Editing by Euan Rocha, Jonathan Weber and Alex Richardson

Aluminum wrestles with steel over electric vehicle market

LONDON (Reuters) – When electric carmaker Tesla Inc. launched its first mass market model last summer, it sent a shockwave through the aluminum industry by largely shifting to steel and away from the lighter weight metal it had used in its first two luxury models.

FILE PHOTO: A Tesla Model 3 is seen in a showroom in Los Angeles, California, U.S. January 12, 2018. REUTERS/Lucy Nicholson/File Photo

The switch by Elon Musk’s Tesla to the heavier-but-cheaper metal highlights how steel is fighting back against aluminum, which had widely been expected to be the bigger beneficiary of the electric vehicle revolution.

Aluminum had been seen as the key to offsetting the weight of batteries in order to extend the range of electric vehicles, crucial to increased consumer acceptance.

But as makers of battery-powered cars look to tap into bigger markets with cheaper vehicles – and embrace technological developments in batteries and components – many are increasingly looking to steel to cut costs. The price of Tesla’s mass-market orientated Model 3 is around half of the £70,000 luxury Model S.

“Before the aim was ‘Let’s get the [electric vehicles] developed’, now it’s ‘Let’s get them developed at the right price point,’” says Mauro Erriquez, a partner at McKinsey & Company in Germany who specializes in the auto sector.

It is the latest tussle in a decades-long battle between steel and aluminum for market share among automakers, seeking to cut the weight of vehicles to help slash emissions and meet tough government pollution standards.

Steel is also winning back some market share among gasoline vehicles, such as the Audi A8. The latest model abandoned its heavy use of aluminum and shifted to a mix of steel, aluminum, magnesium and carbon fiber.

The competition between the metals has intensified amid rapidly growing demand for battery-powered cars.

Sales of electric and hybrid vehicles are due to surge to 30 percent of the global auto market by 2030, according to metal consultants CRU, up from 4 percent of the 86 million vehicles sold last year.

In China, the world’s largest auto market, sales of new energy vehicles are due to grow by 40 percent this year to top 1 million vehicles, according to the China Association of Automobile Manufacturers.

Tesla declined to comment, but in a filing with the U.S. Securities and Exchange Commission last month it said it designed the Model 3 “with a mix of materials to be lightweight and safe while also increasing cost-effectiveness for this mass-market vehicle”.

Other makers of mass market electric vehicles that have also chosen steel over aluminum include Nissan Motor Co Ltd’s (7201.T) Leaf, the world’s best-selling all-electric vehicle, and Volkswagen’s (VOWG_p.DE) e-Golf.

The e-Golf has 129 kg of aluminum and the Leaf uses 171 kg while Tesla’s luxury Model S contains 661 kg of the metal, according to A2mac1 Automotive Benchmarking. A detailed breakdown was not available for the Tesla 3.

(For a graphic of Metals used in vehicles click tmsnrt.rs/2G9OuvQ)

STEP CHANGE

Aluminum is still expected to benefit greatly from the electric vehicle revolution, however, especially from hybrids because they have two engines.

Both the combustion engine block and transmission are typically made of aluminum while the metal is also often used for housing the battery and motor in electric vehicles, according to auto metals specialist AluMag in Germany.

And, because it is expected to be years before pure electric vehicles become widely used – in part due to the lack of power charging networks – the growth of hybrids in the interim is expected to benefit aluminum.

According to CRU Consultant Eoin Dinsmore, demand for aluminum from electric and hybrid vehicles is forecast to increase ten times to nearly 10 million tonnes by 2030.

Aluminum was used in the first electric London black cab, which launched last year, spurring the reopening of a UK aluminum plant in Wales owned by Norway’s aluminum producer Norsk Hydro NYH.OL.

Slideshow (4 Images)

“We chose aluminum as a material as it is nearly three times lighter than steel in its raw form, and it absorbs twice as much energy in a crash,” said Chris Staunton, chief engineer of body structures for the firm that developed the taxi for the London Electric Vehicle Company (0175.HK).

Both Staunton’s firm and the London Electric Vehicle Company are owned by China’s Geely Automotive Holdings Ltd 0175.HK>.

(Graphic: Aluminum content climbs in vehicles – reut.rs/2FIHfLl)

BETTER BATTERIES

But aluminum remains more expensive than steel. Benchmark aluminum futures CMAL3 on the London Metal Exchange are around $2,050 per ton, more than three times the cost of LME steel rebar SRRc1 at $585 a ton.

The price gap between the types of aluminum and steel used in autos was not as wide, but still represented significant savings by using steel, industry experts said.

Meanwhile, stronger and cheaper batteries for electric vehicles as well as developments in the components that generate power and overall structural design have lessened the need for aluminum to cut weight to extend the range.

Since 2010, the cost of batteries have tumbled to as low as $114 per kilowatt hour from $1,000/kwh and are expected to drop further in coming years, according to AluMag.

“I think car makers are finding that as battery costs fall they can achieve their range requirement with an all-steel solution,” said George Coates, technical director for WorldAutoSteel, the automotive arm of the World Steel Association.

Improvements in the powertrain – the main components in a car that generate power – have also had a big impact.

The 2017 model of the Nissan Leaf extended its range by nearly 50 percent to 172 km compared to the 2011 version mainly by improving the powertrain, consolidating four separate systems into one, said McKinsey’s Erriquez.

(For a graphic on Aluminum vs Steel prices click reut.rs/2IS9oBr)

MATERIAL MIX

At the same time, the steel industry has developed Advanced High Strength Steel products, which are stronger and lighter than normal steel, and importantly, cheaper than aluminum.

“(Steel) companies like ThyssenKrupp (TKAG.DE) and ArcelorMittal (MT.AS), they’re not going to just give up this market share. There will be a battle for the material,” said Jost Gaertner, partner at AluMag.

Future models will likely contain a complex mix of materials, including various grades of steel, aluminum, carbon fiber, magnesium and plastics, automakers and consultants said.

BMW, which used large amounts of costly aluminum and carbon fiber in its i3 and i8, told Reuters it was not planning to increase the use of those materials in future electric models.

“There is no ‘one material fits all’ solution” for future electric vehicles, the German carmaker said in an email.

“We will continue to employ each material in a way and in a quantity which brings in its specific advantages.”

Reporting by Eric Onstad; Editing by Veronica Brown and Cassell Bryan-Low

Snapchat’s Celebrity Exodus Keeps Getting Worse

What do Chrissy Teigen, Chelsea Clinton, and Kylie Jenner have in common? They’ve all had beef with Snapchat over the last few months.

Over the weekend, model Chrissy Teigen became the latest in a growing line of celebrities to announce an exit from the platform. In tweeting her goodbye, Teigen cited the app’s unpopular update, the difficulties her fans have in finding her, and a Snapchat ad that seemed to belittle domestic violence by asking users if they would rather “Slap Rihanna” or “Punch Chris Brown.” (Brown pleaded guilty of assaulting one-time girlfriend Rihanna in 2009.)

Even though the company apologized for the off-color reference to domestic violence, the ad has not sat well with a number of public figures. Rihanna wrote a post on Instagram stories in which she criticized Snap for being dismissive of domestic violence claims and encouraged people to “throw the whole app-oligy” away.

Chelsea Clinton, former first daughter, also condemned the ad on Twitter, saying it was “awful that any company would approve this.”

Beyond doing reputational damage, celebrity outrage like Teigen’s presents financial risks, too. The company has already seen stock price declines twice this year after celebrities announced discontent with the platform. The company’s stock fell 5% after Rihanna’s statement on Instagram. In another instance, shares plunged 6% after Kylie Jenner said she didn’t like the app’s updated design and hinted that she didn’t use the platform as much anymore.

Facebook has also been the subject of a recent exodus and many celebrities have encouraged users to #DeleteFacebook due to its ongoing Cambridge Analytica scandal. But Snapchat is seen as more vulnerable to influencer-driven campaigns to stop using the service. Unlike Facebook’s peer-to-peer model, celebrities drive usership on Snapchat.

4 Habits of Ultra-Likable Leaders That Are Hard to Find

I often tell people that leadership is a journey. When you think you’ve arrived at the top of the mountain, look up. You’ll always find another peak to climb.

The truth about leadership is actually coming to terms with never arriving at an absolute truth about how to lead yourself and others — it’s an ever evolving process of learning and growing. And the best of leaders never stop evolving; their journey never ends.

As you journey down your own leadership path, consider some of the best lessons every good leader has learned to steer them to make good decisions and influence others. Here are four of them.

1. Every good leader turns away from arrogance.

Because society place so much value on external accomplishments, appearance, and self-aggrandizement, the virtue of humility is mistakenly viewed as soft or weak — it’s the skinny kid that gets sand kicked on him by the neighborhood bully. 

The Washington Post reports that, according to a 2016 College of Charleston survey, 56 percent of 5th and 6th graders believe that “the humble are embarrassed, sad, lonely or shy.” And when adults are asked to recount an experience of humility, “they often tell a story about a time when they were publicly humiliated.”

That’s the perception of humility. And nothing could be further from the truth.

Groundbreaking research by Bradley Owens and David Hekman, as reported by The Post,  concluded that a humble leader doesn’t believe success is inevitable. “He constantly tests his progress. He revises and updates plans, in light of new situations and information. Acknowledging he doesn’t have all the answers, he solicits feedback. He encourages subordinates to take initiative. He prefers to celebrate others’ accomplishments over his own,” states The Post.

That’s certainly a more accurate depiction which emphasizes the strength of humility, and as the researchers assert, it doesn’t weaken leaders’ authority. Rather, “it gives them more flexibility in how they use their power.” 

But here’s the thing: Calling oneself “humble,” however, is something a good leader cannot do; the very admission of it exposes them as potentially cocky. But I will say this — leaders with a humble disposition avoid the temptation of reacting from their bruised egos by wielding their positional power and weight for personal gain or to crush others. Instead, they draw from their inner strength, trusting in their integrity, self-control, and emotional intelligence to a different and better outcome.

2. Every good leader soaks up the wisdom of others.

Smart leaders stretch their knowledge beyond intellectual pursuits. They continually evolve by soaking up the wisdom of others, acknowledging that they don’t know it all. Remember this quote?

If you’re the smartest person in the room, you’re in the wrong room.

You must view yourself as a small fish in the great big pond of life — seeking out connections and appointments from those further down the path than you in order to master new things.

3. Every good leader practices patience.

A leader who practices patience and is slow to anger receives far less attention and acclaim than a charismatic leader with a commanding presence but a short fuse. Yet the former has the clear edge.

In one 2012 study, researchers found that patient people made more progress toward their goals and were more satisfied when they achieved them (particularly if those goals were difficult) compared with less patient people. 

Other research also found that patient people tend to experience less depression and negative emotions and can cope better with stressful situations. Additionally, they feel more gratitude, more connection to others, and experience a greater sense of abundance.

You can usually see through someone without patience because they tend to lack perspective and can’t stop their impulse from jumping into the worst conclusions. 

On the flip side, people who exercise patience have self-control — their conduct is steady, rational, and manageable. In conflict, they seek to understand first before being understood; they speak little — giving them a clear edge in communicating and diffusing someone else’s anger.

4. Every good leader is self-aware. 

In a study reported by Harvard Business Review, teams with less self-aware members substantially suffered; they made “worse decisions, engaged in less coordination, and showed less conflict management” as opposed to more self-aware individuals.

Self-awareness is crucial in leadership roles. They look at the whole picture and both sides of an issue. They tap into their feelings and the feelings of others to choose a different outcome to solving organizational or personal challenges.

Daniel Goleman, the foremost emotional intelligence expert, once said:

If your emotional abilities aren’t in hand, if you don’t have self-awareness, if you are not able to manage your distressing emotions, if you can’t have empathy and have effective relationships, then no matter how smart you are, you are not going to get very far.

7 Excuses You Use to Put Off Starting Your Business

I have talked with hundreds of people about starting a business. People often tell me would love to start a business–then follow up with a list of reasons why they aren’t able to take the first step. From “I’m not good enough” to “not enough savings” and everything in between, there are many reasons starting a business can feel impossible.

And I understand. Starting a business feels overwhelming. Though I knew from my first lemonade stand that startup life was for me, it took me years of hesitating before I finally took the plunge. Here are the seven common reasons you might be hesitating–and seven ways to overcome these fears.

1. I don’t know how.

The beauty of business is that you can learn everything as you go from web resources, books, and peers. Most libraries have a business desk staffed with knowledgeable librarians who specialize in helping people just like you get started with business planning. Many libraries have free online access to the Lynda.com training database so you can learn online free and at your own pace. When I first started my company, Google was my best friend–anything I didn’t know was only a few clicks away. 

With increasing numbers of people working for themselves, chances are you know at least one person who is self-employed. Take them for coffee, ask them how they got started. It doesn’t have to be in the same industry. Ask for introductions to other entrepreneurs they know.

2. I’m too young or too old.

I hear twentysomethings say they’re too young and sixty somethings say they’re too old. But it doesn’t matter. The average American will change careers 5-7 times. That’s careers, not jobs. Age is truly one of the most meaningless measures of readiness. You can learn new things, you can adapt to change, and you can start a business at any age. You’re never too young or too old do change your life and start something you’re proud of.

3. What if I fail?

I fail frequently and you will, too. Get comfortable with the reality that 99 percent of everything you do won’t work. But the 1 percent that does work is magical.

4. My parents don’t support my startup dreams.

There are a lot of difficult dynamics at play when discussing your life choices with parents. But unless you’re asking your parents to bankroll your startup, it’s not really up to them. You only have one life, build one that you’re proud of without worrying about the opinions of others.

5. I don’t have the cash.

It’s a common misconception that you need a lot of capital to start a business. If you have access to a computer and the internet, you can start any number of businesses. I started my business with a $500 credit card loan and a hefty chunk of student loans. A lot of the software you need is available free and there are a variety of businesses you can start small.  As you start collecting payments, you can grow your business.

6. What will my friends or partner think?

If your friends or partner don’t support your dreams, get new ones. Seriously. It’s hard to let friends and lovers go, but if they are only contributing negatively to your dreams, it’s time to let them go. Practice now by telling your friends about your business idea–they might surprise you.

7. I’m not good enough.

Stop it. You know you’re wrong about that. It’s going to be scary, but no one else is better equipped to make your ideas and dreams into reality.

Running your own business is a lot work and there are many stressful moments. But the real rewards of building something you’re proud of far outweigh the imagined obstacles. Now you’re ready to start a business–no excuses!