Video Update: Checking for Safety Under the Hood

In the world of investing, you can’t simply rely on what management says to measure the safety of your investment.

You have to look under the hood.

In this week’s video update, Chief Analyst Adam Galas breaks down the metrics he reviews using one of our recent recommendations as an example.

Just like going for a checkup, he’ll run the tests to see beyond the surface of what makes a sound investment and safe income opportunity.

Click below to watch the video or scroll down to read the transcript.

Happy SWAN (sleep well at night) investing,

Brad Thomas Editor, Fortress Portfolio

Welcome Fortress Portfolio members to another weekly update.

This is a special edition because we have a lot of new members.

So I want to show you what goes on behind the scenes of Fortress.

Now, I recently had some blood tests done and the results were horrifying… showing that even though I had lost 80 lbs., I was actually on death's door.

And this goes to show that even when something looks perfectly normal on Wall Street, sometimes what's under the hood can make or break your retirement.

So let me show you exactly what I mean using Altria as an example.

Now, this is a recent recommendation, a 9% yielding Dividend King with 54-year dividend growth streak. And it just raised this dividend for the 54th year, 4% just as expected.

But you can't just rely on Altria managers saying, “Yes, the dividend is safe. Look, we did a 54-year streak.”

Okay, fine – but we as investors still need to look under the hood to know that the dividend is safe and dependable.

And that's where our 3,000-point safety and quality model comes in on a thousand different metrics.

Now, let me share with you one example of how we look under the hood and use a financial blood test to make sure that the companies we recommend have safe dividends that you can trust.

Below is an example of a company's balance sheet summary.

(Source: FactSet Terminal Summary of Altria)

This is about that as close to a financial blood test as you can get.

You can see that Altria has a debt to cash flow or leverage ratio of 2.1. And next year it’s expected to be 2.2.

(Source: FactSet Terminal Summary of Altria)

Now, rating agencies say three or less is safe. So this is a good ratio.

We can also see Altria has nearly a billion dollars in cash right now and $3 billion in borrowing capacity. So almost $4 billion that they can access very quickly.

Now, notice this here represents the major cholesterol in the financial arteries.

(Source: FactSet Terminal Summary of Altria)

You don't want to see a lot of debt maturing in any single year.

So this is very well spread out over time. And most after 2033.

You can see also this represents the kind of cholesterol a company has in its arteries.

(Source: FactSet Terminal Summary of Altria)

We're looking at unsecured debt, meaning that no assets are pledged against this debt. In other words, if Altria ran into some kind of emergency – if they had to say, pledge their factories to borrow more at lower interest rates – they could do it.

They have maximum financial flexibility.

Now, take a look at here. This is very important.

(Source: FactSet Terminal Summary of Altria)

We can see that the bond market believes in Altria’s smokefree future plans. So much so – that they're willing to lend to them for 40 years at modest interest rates. Initially 4%, now closer to 6.4%.

Now, how impressive is this?

Well, when the U.S. government went to the bond investors and said, “We want to sell bonds longer than 30 years – are you interested?”

The bond investors laughed them out of the room.

But when Altria goes to the bond market and says, “Would you like to buy 40-year bonds from us? We have a plan to go smoke free eventually and plan to continue minting money decade after decade.”

The bond market says, “How much you got?”

They cashed out one of the bonds. And they did a second bond also at 40 years.

The bond market just can't get enough.

Meanwhile, let's take a look at what the rating agencies say.

The S&P has a positive outlook for Altria with a predicted 33% chance that in the next two years Altria will go from a credit rating of BBB to triple BBB+.

(Source: FactSet Terminal Summary of Altria)

Now, BBB means a 7.5% percent risk of bankruptcy in the next 30 years. BBB+ means there is a 5% risk.

But we can see through credit default swaps, which are publicly traded insurance policies that bond investors take out, what bond investors think about the news of the day… instantly.

(Source: FactSet Terminal Summary of Altria)

You can see here the stock price variable going up and down.

(Source: FactSet Terminal Summary of Altria)

Sometimes it can crash and fall through the floor… but here you can see that Altria’s fundamental bankruptcy risk is much more stable.

Its risk has been falling steadily for the last six months.

So we've got the smart money on Wall Street, the bond investors, saying fundamental risk is declining… even though the price has been decreasing.

We’ve got rating agencies saying Altria's de-leveraging, they're getting steadily safer.

We've got management saying they have a solid 4% to 6% growth plan for decades to come.

And we've got all the analysts saying about 4% or 5%, also.

So we've got all the data that we can confirm on a quarterly basis.

And this represents just one summary section of the debt profile – one part among eight – just for the FactSet Research Terminal.

This is just one of the tools that we use in our models to ensure that you have the safest dividends. It costs about $2,000 a month.

We also have access to the Bloomberg terminal, which costs roughly the same.

Now, these represent just two of many of our data sources.

If you wanted to recreate all the data sources we have, it would cost us $6,000 a month.

But then you'd have to sort the data.

Without drowning in data. But at Fortress we have the data sorted into a 3,000-point safety model based on a thousand metrics that can look under the hood and take the financial blood tests of our companies.

This way, we can say with 95% statistical confidence, whether or not a company’s dividends are safe.

And that's how we can see a 9% yield for Altria, the highest yield in 14 years for the stock.

Which means this is the best time in a decade and a half to buy this Dividend King.

That's how we know this is a Buffett-like blue-chip bargain and not the next General Electric (GE) or Enron.

And that is what Fortress Portfolio is all about.

Now, look, there are going to be speculators out there having a great year.

I mean, look at ARK Innovation ETF (ARKK), for example. It's up 40% this year.

Well, congratulations. But guess what?

That is like the diet I was on previously that lead me to the edge of death’s door. Yeah, for a year or two, it might work.

You might feel great. You might be look fantastic. But under the hood, that's where the problem lies.

Because the next time there is an economic downturn, you’ve built your foundations on a house of sand.

While, Fortress is a bedrock.

It is built on sound financial science based on decades of research.

And we’re not just focused on how to earn steep dividends today… but how to retire rich and get steadily richer in the future.

That way, you cannot only enjoy your time with your grandchildren, but potentially leave them a nice fortune after you're gone – hopefully years or decades from now.

I want to thank you for joining us this week. And remind you to please send us your questions and feedback so I can respond to them in these videos and our monthly issues.

Just reminder, I can't provide personalized investment advice.

Until next week, this is Adam Galas, wishing you and your family safe investing and a healthy and relaxing weekend.