September 17, 2014

Change the Way You Think About Business Ownership and You Can Change Your Life

Shortly after World War I, Raymond Poincaré, the Prime Minister of France, decided against partnering with Royal Dutch Shell to fund the energy needs of the French people.  One of his military commanders, Colonel Ernest Mercier, worked with 90 banks and businesses to establish a new oil company called French Petroleum Company (er, technically, Française des Pétroles Compagnie since they weren’t speaking English).  The name might sound prosaic but keep in mind this was the era of “General Electric” and “Standard Oil”.  The new undertaking began operations on March 28th, 1924.

Today, that business is known as Total, S.A. and it is one of the six supermajor oil powers on the planet.  Over the past five years, it has generated cumulative sales of more than $716 billion and earned profits of more than $55 billion after taxes.  Of that, it has paid out roughly $25 billion in dividends, reinvesting the remaining $30 billion in growth of property, plant, equipment, and intangible assets, among other things.

The Total, S.A. business is split up into 2,363,767,313 pieces.  We call them shares, because each is entitled to share of any profits.  If you could somehow get your hands on all of them, you would own the company lock, stock, and barrel.  All $55 billion in profit would have belonged to you and you would have been mailed the $25 billion in cumulative dividend checks which you could spend, reinvest, save, or give to charity.

Every single one of those 2,363,767,313 shares is owned by someone.  That is the nature of equity.  Ultimately, each one of those pieces belongs, directly or indirectly, to a man or woman.  From time to time, an existing owner wants to sell some of their pieces in the business.  Maybe they want to buy a new car.  Maybe they want to send their kid to college without student loans.  Maybe they want to donate to charity.  When they are ready, they approach a broker, and the process begins by matching them up with another person who wants to buy ownership in the firm.

Whatever they – the buyer and the seller – agree upon gets put in the newspaper and online as the most recent stock quote.  To keep you informed, your broker probably updates your account with what is known as the market value – the price at which you could sell your entire ownership stake based upon the most recent transaction price if you could find someone to offer you the exact same amount per share.

It is worth repeating: Someone, somewhere, owns each of those 2,363,767,313 shares.  

Total SA French Oil Giant Dividend Investing Making Money

Every business is divided into ownership, in one form or another. Your job as an investor is to find the best quality assets, the ones that will generate the most sums of cash, and then pay the most favorable price you can. Go through life collecting ownership, avoiding liabilities, and doing what you love, and you will find that things are far easier than you could have ever imagined. While the rest of the world squanders their life, you can be at your kid's baseball game or taking a cooking class.

 

Make Your Money Work For You So You Don’t Have to Work for Money

Now, consider that as of the final quarter of 2011, the median household income in the United States was $52,377.21.  That is, if your household earned exactly that amount of money before taxes, half of American households would earn less than your family and half would earn more.  

Put another way, as of the most recent statistics, if your family earns more than $4,364.77 pre-tax per month, you are at the threshold of the top half of society.  And not just any society; one of the richest societies that has ever lived in the entire history of mankind.  

With a current dividend of $2.61 (translated into United States dollars), it would take 20,068 shares of Total, S.A. to throw off enough cash for you to sit at home and do nothing but read or play video games, while still generating a cash household income higher than 1 out of 2 American families.  Those families have to get up in the morning, put on their uniform, commute to the office or factory, ask off to get vacation days, put up with co-workers, and deal with difficult people.  You, meanwhile, would just have to go to the bank to cash the dividend check.

The stock price for Total, S.A., again in United States dollars, is $46.63 as of a few moments ago.  You’re talking about an investment of $935,771. Throw in brokerage commission and let’s round up to $936,000.

What does that mean?  Simply, if you owned 20,000 shares of the French oil company, costing you $936,000, you could sit at home and collect roughly $52,200 per year before taxes without having to work.  Even better, you would be taxed 15%, not the 25% you would probably owe if you had earned your money from a traditional paycheck.  

All you need is 20,000 shares out of 2,363,767,313 in existence to out earn the typical American family.  That is only 0.00084610697% of the company.  When viewed in that light, it really isn’t that big of a challenge.  

Your Options for Specialization Are Nearly Endless

The best part:  That is only one company.  A single business.  There are tens of thousands of other publicly traded businesses out there; far more private ones.  If you don’t know anything about oil, you can find soft drink giants.  Or pharmaceutical labs.  Or discount retailers.  Or autopart distributors.  Or restaurant chains.  Or community banks.  Or insurance underwriters.  Or water utilities.  Or railroads.  Or software developers.  Or candy makers.  Or jet engine manufacturers.  The list is endless.  Find what you know, study it, specialize in it, then acquire ownership at prices that make it highly probable you have a chance to make money.

How do you get your name on those stock certificates or title deeds, trademark registrations or patent filings so the checks get sent to you?  The first, and most lucrative option, is to create the asset yourself.  That is the interesting part.  That is where the art, and science, of making money comes into play.  For most people, the next best option is to sell something.  Sell your time, vacuum cleaners, insurance policies, used cars – whatever your bailiwick is, sell something.  Make sure you sell it at a high enough price that it leaves a surplus after you’ve paid your bills and expenses.  We call this surplus profit.  

That profit is your capital.  It is what you can use to begin acquiring shares of ownership in assets that throw off cash.  When you buy an investment, you should be buying additional household income.  Then, wash, rinse, repeat.  The cycle becomes self-reinforcing.  Suddenly, you find your cash piles expanding on their own as dividends, interest, and rents roll in from past investments.  

This is the heart, and soul, of making money.  It is the underlying reality of becoming financially independent so you can focus on the things that really matter in life – spending time with your children, traveling, supporting important causes, and making the world a better place.   

Find assets that are worth owning.  Figure out who owns them.  Then find a way to get your name on the stock certificate or title deed.  Do it ethically, honestly, and by providing value to society.  The rewards are enormous.

Footnote *: This article isn’t about Total, S.A. at all, as most of you can probably tell.  That is merely an example I used because it is one of the largest companies in the world and my family has indirectly owned shares of the firm for years.  I have no opinion about the stock, don’t recommend or disavow it, and could have just as easily picked any other mega capitalization enterprise to highlight the concept we are discussing.

  • Gilvus

    Hi Joshua, Total S.A. is only offered as an ADR on the NYSE. That’s a 25% foreign tax on your dividend before it even enters your bank account…

    • Joshua Kennon

      We’re getting into more esoteric stuff here but, yes, 25% is withheld by the French Treasury on dividends paid. However, if certain qualifications are met, due to the American / French tax treaty, you can apply for a credit on your Federal tax bill for the taxes paid to the French government provided the shares are held *outside* of a tax-advantaged account, effectively recapturing the excess taxation and bringing it down to what you would pay on a comparable domestic entity. If I recall, it requires a whole worksheet about foreign taxes withheld and it gets into things like AGI, which can skew the net finalized credit that can be taken, but you wouldn’t pay the 25% sticker rate permanently; that money would find its way back into your pocket. The accounting firm that handles my family’s taxes always has some huge packet about it with the final recaptured amount and it is one of the few things

      This creates a somewhat paradoxical situation wherein most cases, you’d want to have foreign dividend stocks held in plain old brokerage accounts or directly registered, *NOT* in tax-advantaged retirement accounts. If you had the shares in, say, a Roth IRA or Traditional IRA, you wouldn’t be able to apply for that tax credit differential, cutting into your return.

      (In the case of my family, the setup is somewhat complex but we do, in fact, hold some shares through a qualified pension plan. However, the situation that led to that happening and our reasons for continuing to do it are rare and won’t apply to 99.99% of people.)

      This article gives a reasonably good explanation of how it works: http://www.fool.com/investing/international/2011/01/27/how-foreign-dividend-stocks-can-cost-you.aspx

      In any event, if you were collecting $50,000+ in foreign dividends from a French entity and the stock was held directly or in a street name, you may have 25% withheld at payment time but come April 15th in the United States, you are getting some of that money back in the form of a refund or credit on your tax bill.

      • Gilvus

        Thanks, Joshua. I guess the only time it’s worth the hassle is if you’re getting a great deal on a great company. In one of your other articles, you mentioned that if you could (hypothetically) pick five stocks and hold them forever, you’d buy Nestlé with Swiss Francs rather than buy the ADR with USD. Is that only a long-term thing to minimize risk, or do you think ADRs are fundamentally undesirable?

        • Joshua Kennon

          It probably deserves its own post, but some of it has to do with the fact that the sponsoring bank could theoretically end an ADR or ADS program. We were talking about a rare situation where I might theoretically, in extreme cases, possibly consider buying and holding for 50+ years. I don’t know what changes the bank will make so I’d rather just own my equity stake directly.

          There is also the tricky ADR / ADS passthrough fee rules. In most cases, the sponsoring bank takes a nominal fee – maybe 1¢ per share, per year – to cover its cost. That is normally not a big deal. If you had 20,000 shares and you paid 1¢ per share, you’re looking at $200 indirectly taken out of your dividend income without ever seeing it. However, if the underlying stock stopped paying dividends (e.g., BP in the oil spill disaster) to shore up its balance sheet, the bank would have the right, in theory, to begin deducting your account for the fees it was owed. Then, instead of collecting dividends, you’d start to see money get taken out of the account. The chances of that are small but it just seems unnecessary.

          I have no problem, per se, with investing in an ADR / ADS. In fact, we own some. But as a very broad, general rule, if I were going to take a significant position in a stock for a very long period of time, I would consider (at the very least) buying the shares outright and holding them in the foreign currency, either hedged or unhedged. It is a personal thing. I think 99% of people couldn’t care less and they are probably right.

        • Gilvus

          Thanks for sharing your thoughts, Joshua.

    • http://www.joshuakennon.com/ Joshua Kennon

      Update: Gilvus, the newer United States – France Tax Treaty will permit a 15% withholding tax on dividends for American citizens who own French stocks and are residing in the United States on the condition that the proper paperwork is filled out, which most brokerage firms can do for you. Source. When holding French dividend stocks within a tax-sheltered account, this has the net effect of increasing the intrinsic value one could pay for his or her shares. You still won’t be able to recapture the 15% taxes, meaning that a French company with identical earnings would need to trade at a discount to an American or British company to generate the same return, but, bottom line, this makes French stocks more attractive.

  • Anthony Russell

    Joshua,

    I currently work as a chauffeur in the Los Angeles area. Today was payday — I’m paid two days a month. Let me repeat that. Two days a month. The 7th and 22nd are the big days in my universe, for now. I make $8 /hr plus a gratuity that varies in percentage from 10% – 20%. I arise on some days at 3 AM to make sure I’m on time for a 5:30 AM pick up in Palm Springs. 

    This is what happens when you work for someone else. This is also what happens when you have no knowledge of how money can work for you. I used to be an actor; made a lot of money. But I knew zilch about investments, thus, I had none.  I had savings, which evaporate like water in the Mojave when not properly replenished.

    Several lean years later, a fellow ends up driving the very vehicles which heretofore transported him to film premieres like, ‘Lord of the Rings’, which starred his good friend, Sean Astin. I get recognized at LAX, while waiting for passengers in baggage claim.

    The upside to my job is being able to keep a roof over my family’s head while I educate myself on fantastic sites like yours. I’m able to afford subscriptions to direct response marketing newsletters that enable me to learn direct marketing techniques that can allow me to quit this job once I’ve reached a certain financial threshold, which is low because my lady and I keep our overhead to an absolute minimum. We have savings; not much but a start.

    I incorporate my real estate company, tomorrow. I will buy, rehab, and sell single family residences in certain L.A. sub-markets that are hot with buyers, right now. I will take that capital and segue into commercial deals. I like apartments, student housing and self-storage.

    To that end, I also build relationships with key players in the real estate industry who ride in my vehicle. Bankers, REIT managers, mobile home park owners, hoteliers, etc. If they are open to staying in touch I request their cards.  One of these execs is the Head of Governmental Affairs for one of the largest premium mall operators in the country. I’m her requested chauffeur and I take full advantage of my proximity to her.

    I plan to act again, as I maintain great relationships in the industry. But this time around, I will have my own production company, a litigator papering my deals — the one I have in mind has won major cases against the networks and studios and therefore knows where tricks are played during contract negotiations — and knowledge of what to do with my surplus profits.

    Thank you, Joshua, for being a major beacon on my new journey to financial independence.

    Anthony Russell

    • Gilvus

      Good luck in your journey, Anthony. Maybe one day we’ll all see you on the silver screen again :-)

      • Anthony Russell

         Gilvus,

        Thank you for your kind words. They’re appreciated.

        All the best,
        Anthony

        • Amoyaw

           Anthony, thank you for sharing a part of your life story, very inspiring as you are an extremely successful person for at least two reasons (1) the real test of a persons character is not when things are going right, but when they have gone wrong; (2) Life is all about the process as opposed to the end result. At the moment, if you are living and strategically planning like the way you have indicated in your post then you have aced these exams so regardless of what happens in the future clearly you have already done enough.

        • Anthony Russell

           Amoyaw,

          Eight months ago, when I started my current job as a chauffeur, I was homeless.

          For three months, I’d sneak into a building — where I previously paid $1,700 per month in rent; a 10 minute walk from the ocean mind you –, descend to the 3rd level parking garage and commence my nightly ritual:

          Lay a bath towel over an oil stain on the concrete floor (my mattress), throw a couple of windbreakers onto my canvas bag (my pillow), and position myself in front of a friends’  car so other tenants in the building would not see me.

          I snore like I’m calling hogs. To this day, I don’t know how I went undetected. Divine intervention, I guess.

          I never lost sight of where I wanted to be the entire time I was on that floor — in my own apartment, opening my own refrigerator and eating my own food, not having to bother my friends to take showers.

          In my book, wanting to wash your behind on a regular basis is very effective motivation.

          And you’re right. Life is process. A process that I find myself enjoying more and more of.

          Thank you, Amoyaw

    • Joshua Kennon

      Welcome to the site, and thank you for sharing your story! I hope you are tremendously successful and make tons of money on your rise back to the top!

      • Amoyaw

         Hi Joshua,

        Thank you for your message welcoming me to your site, it really did make a difference. In regards to this post and previous comments, isn’t the reality that most people will never develop the ability to live off investments for the simple reason that it requires a few qualities that are extremely difficult for many people to acquire with fluency and extremely difficult to maintain such as (1) Organization (2) Discipline (3) Self-Motivation.

        As a person who has studied and taught personal-development for over a decade, I observe that most people are struggling to cope with organizing themselves in their everyday lives due in large to the distracting forces that exist in society. These forces are designed and constantly trying  to steal peoples attention away from the real issue that they face in their lives, and in light of Munger’s discussion on social proof, when most people accept being distracted (for example, unconsciously following sports teams) week after week, for the average person to be contrarian would be almost impossible!

        Nonetheless, in spite of my critical rant (above), I do value this blog post for the simple reason that it has the ability to be extremely useful for a minority of individuals, who are equipped with the right skills or abilities to take your experiences and use them to full effect.

        Once again thank you for sharing your thoughts on the matter!

      • Anthony Russell

         Joshua,

        As I write this reply Benjamin Grahams’  ‘The Intelligent Investor’ rests six feet away on my bookshelf — I can’t wait until I tear into that tome. 

        Your site has been instrumental to my financial education to such an extent that I can hardly contain myself when I think about all the different business ideas percolating in my brain.  Focus is paramount. Discipline is mandatory.

        Thank you for your words of empowerment. I look forward to sharing my journey with you and your readership.

        All the best,

        Anthony

        PS — When are you going to finish that book??????? ;-)

  • James

    Ok so I just couldn’t help myself; I started buying some big european oil and gas stocks this morning. Most of them are down 20% in the past three months and most of them have a 5% dividend yield now. I did not buy Total because I’m not a big fan of France. And I bought 3 to spread my risk in case one of them has a BP like incident. And I did not go all in. If Greece exits the EU there is probably more downside.  One of the companies is Statoil (STO); seems like a well run company. Stock is down to $23 from $29 and during the credit meltdown it was down to $15. Dividend yield is 4% but closer to 3% after foreign dividend tax withhold. However, the payout is only 22% which leaves room for upside dividend growth.

  • http://www.facebook.com/nunon Nuno Nogueira

    Total seems like an interesting company to invest right now, with an earnings yield of 14.8% (vs 9% avg of the country) and a dividend yield of 6.3%. ROE is stable at 18% in the last three years (down from 29% in 2007) and financial autonomy is stable at 41% in the last five years.

    This a good company, being sold at 1.6 x operating cash flow and 1.1 book value, in a stable business and a great track record.