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This is How Small Business Owners Can Take Full Advantage of the Tax Cuts and Jobs Act
April 13, 2018 6:00 am|Comments (0)

Tax time is no one’s favorite time of year. But for small business owners, this year’s filing deadline at least comes with the promise of better rates ahead: Many of the changes included in the Tax Cuts and Jobs Act, passed by Congress in December, are going into effect.

As entrepreneurs, we should expect to benefit–at least, temporarily–from the new tax plan. My company, Manta, conducted a poll in January and found that 83 percent of business owners anticipate their companies will be positively impacted by the changes. Nearly as many, 80 percent, said they support the Tax Cuts and Jobs Act.

Some are already feeling the benefits of having more money in their pockets, according to another poll we conducted last month. 34 percent of small business owners said their business income had increased as a result of the tax reform, just three months into the year. 42 percent have already changed their budgeting or financial planning because of the new tax law.

It’s time to start preparing for the changes–if you haven’t already.

For the most part, the provisions of the Tax Cuts and Jobs Act that benefit small businesses go into effect this tax year — meaning they won’t impact the returns that are due this month. 

The 58 percent of small business owners who have not yet adjusted their budgets should get started, however. While that big refund check may be a year away, it’s not too early to plan accordingly and make sure you take full advantage of the potential savings. 

The first step is to review your company’s legal structure and determine how it will affect your taxes. One of the most important changes in the new tax law allows pass-through entities (such as S corporations and LLCs) to deduct up to 20 percent of their business income.

However, this doesn’t apply to certain professional services firms. Review your situation with a tax professional or attorney–you might be able to adjust your business structure to take advantage of this deduction. 

Make the most of your company’s tax savings.

The Tax Cuts and Jobs Acts allows businesses to immediately write off the full cost of new equipment and other property, instead of depreciating the expense over five or more years. The new law also protects these write-offs from being rescinded in the future. 

This is great news for business owners who want to invest in their growth. According to our polls, 28 percent of small business owners plan to use their tax savings to invest in new technology and 21 percent plan to open a new location or expand. The immediate write-off should make these investments (and your cash flow) much more manageable in the short term.

Just check with your tax advisor before making a major purchase–you could run into unforeseen obstacles. For example, the depreciation rules for “heavy” SUVs–those with a gross vehicle weight above 6,000 pounds–are different than for light trucks and vans. You want to be prepared for the potential impact on your taxes.

Streamline your expense tracking and tax prep.

Make sure you accurately track and document all business expenses. Our polls found that 21 percent of small business owners still use paper receipts to track expenses.

Think about that for a second. It’s messy and inefficient, and you risk losing receipts or miscategorizing expenses.

Hiring a pro is probably the best way to ensure that you take full advantage of the new deductions and stay on the right side of the law. The U.S. tax code is confounding to even the most experienced business owners–20 percent of poll respondents told us they didn’t understand all the deductions available to them. Whatever else Congress accomplished with the Tax Cuts and Jobs Act, they definitely didn’t simplify things.

Use a mobile application or accounting software to scan and save digital copies of your receipts and categorize the expenses. Then, when tax time rolls around, you can output a well-organized report or import the data directly into your tax prep software. And if you use an outside accountant or tax preparer, they’ll greatly appreciate you providing a digitized expense report instead of handing over shoeboxes full of paper receipts.

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Buy This Oversold Blue-Chip Bank With A 5.4% Dividend
April 8, 2018 6:01 am|Comments (0)

On April 4th, Bloomberg reported that HSBC (HSBC) is considering an exit or sale from smaller consumer operations such as Bermuda, Malta, and Uruguay. In addition, the bank plans to expand its asset management division and is currently looking at a potential merger with a rival.

In our view, the news confirms that the group’s management will remain committed to transforming HSBC into a more focused and more efficient banking institution. More importantly, even though HSBC’s operations in Bermuda, Malta, and Uruguay are small compared to the group’s total assets, we believe a potential sale of these units would have a positive impact on the bank’s capital position, supporting stock buybacks and special dividends.

The recent rise in LIBOR should support HSBC’s NIM

LIBOR has grown by more than 130bps since the beginning of the year. Such a notable increase is currently among the most widely discussed topics. Several analysts suggest that this is an early indicator of a bear market or even a severe financial crisis. In our view, the increase has been driven by idiosyncratic reasons, in particular, higher supply of short-term Treasuries and lower demand from corporates due to the US tax reform.

Source: Bloomberg

With that being said, despite the reasons of the rise in LIBOR, HSBC should benefit from higher short-term rates. As shown below, the bank discloses its NII (net interest income) sensitivity to a shift in yield curves. However, this analysis is based on a parallel shift, while yield curves in most global economies continue to flatten.

Source: Company data

What is important here is that HSBC has a variable-rate loan book. More importantly, a significant part of its credit portfolio is priced off short-term rates. This suggests to us that the rise in LIBOR should be a positive for the bank’s asset yields and its NIM.

Source: Company data

One may argue that higher short-term rates will also affect HSBC’s funding costs, especially given that wholesale sources and corporate deposits are generally tied to the short-end of the yield curve. The caveat here is that HSBC has a unique funding position. As shown below, the bank has one of the lowest LtD (loans-to-deposits) ratios among European banks. In other words, HSBC does not need expensive deposits in order to fund its loan growth. HSBC had been struggling from abundant liquidity for many years as a low interest rate environment has virtually crippled its NIM. Given that rates have started rising, the bank’s excessive liquidity is gradually turning into a positive that will protect HSBC’s NIM in a rising interest rate environment.

European banks: Loans-to-deposits ratio

Source: Bloomberg, Renaissance Research

Saudi Aramco’s IPO

Saudi Aramco (Private:ARMCO) has appointed HSBC as an adviser on its much-awaited IPO. JPMorgan (JPM) and Morgan Stanley (MS) will also act as consultants. As such, HSBC is the only non-US bank that will have a crucial role in Aramco’s IPO.

Anecdotal evidence suggests that while many US and UK investors are skeptical on Saudi Aramco’s IPO, as state-owned oil companies have been underperforming their private peers for quite a while now, Chinese investors would be interested in Aramco’s shares. Hong Kong Exchanges and Clearing (OTCPK:HKXCF) (OTCPK:HKXCY) plans to introduce the so-called Primary Connect program, which would allow mainland Chinese investors to participate in initial public offerings on the HKEX.

We believe Aramco’s IPO would strengthen HSBC’s position in the region. In our view, it would also underpin the fact that HSBC is a global banking group with unique access to Chinese investors.

Buybacks and dividends

HSBC pays a $ 0.51 dividend per ordinary share or $ 2.55 per ADR. That corresponds to a 5.4% dividend yield, based on the current ADR price. We believe that a 5.4% dividend from a global blue-chip bank with a strong presence on Asian markets looks very attractive.

Additionally, it is also worth noting that the bank has temporarily suspended its buyback program due to technical reasons related to the issuance of additional Tier 1 capital. We expect HSBC to announce a new buyback in the second half of 2018.

Final thoughts

The shares have fallen by almost 15% since January, and we believe this sell-off represents a great opportunity to buy a global bank with an attractive dividend yield. HSBC has excess capital, thanks to its US unit, and, as a result, we expect the bank to announce a new buyback program in the second half of the year.

If you would like to receive our articles as soon as they are published, consider following us by clicking the “Follow” button beside our name at the top of the page. Thank you for reading.

Disclosure: I am/we are long HSBC, JPM.

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.

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This Week in the Future of Cars: Working Through the Chaos
April 6, 2018 6:01 pm|Comments (0)

About 8 months ago, Tesla CEO Elon Musk warned his troops that building the Model 3 would require “production hell.” For once, the man known to sometimes be a bit too optimistic about timelines nailed it. Last year’s Tesla’s production numbers were dismal; now, according to numbers released this week, they’re looking up.

Meanwhile, WIRED’s Transpo team explored why self-driving car crashes look different from human ones; how the electric car could fare after Environmental Protection Agency rolled back fuel economy standards this week; and why an electronic logging rule has truckers shaking their horn-honking fists at the Trump administration.

It was a messy week. Let’s get you caught up.

Headlines

Stories you might have missed from WIRED this week

  • Last Friday night, Tesla announced that its Autopilot feature was activated when a Model X carrying driver Wei Huang crashed into a highway barrier last week, killing him. As senior writer Jack Stewart reports, the crash comes amidst a wider debate about the role of humans in semiautonomous vehicles. Should engineers ever expect (imperfect) to compensate for (imperfect) tech?

  • EPA Administrator Scott Pruitt went ahead and rolled back rules that would have forced the auto industry to nearly double 2012’s fuel economy standards by 2025. But transportation editor Alex Davies explains why there’s still hope for electric vehicles: China’s aggressive electric vehicle quotas and environment-loving millennials.

  • When a video showing the fatal collision between a self-driving Uber and a woman on an Arizona road came out, it almost made sense at first—of course the car didn’t see the pedestrian on a darkened road. But as I discovered, self-driving car crashes and fender-benders don’t look like human crashes. Car software can miss things that seem obvious to humans, and yet also prevent collisions that look downright unpreventable.

  • Tesla’s last week of the first quarter looked pretty good, Model-3-production-wise. But as Jack reports, the electric carmaker still needs to bring consistency to its production line.

  • Contributor Nick Stockton reports on the hottest topic at this year’s Mid-American Trucking Show: electronic logging devices. The tech, now required by law, replaces the pen and paper logging systems that truckers have used to keep track of their hours for decades. But truckers aren’t happy with the new system—and had hoped the Trump administration would fix it.

Educational Work Distraction of the Week

If your goal is to waste time like a WIRED transportation staff writer, have I got a tip for you. Streetmix lets the armchair urban planner fuss about with the elements of the city street, adding bike lanes, bus lanes, sidewalks, parklets, and streetcars as they see fit. The game—created by Code for America whizzes back in 2014—is a good reminder of the tradeoffs that cities face every day. Because there’s only so much street space!

Required Reading

News from elsewhere on the internet

In the Rearview

Essential stories from WIRED’s canon

Last year, when the Trump administration swept into Washington, Alex anticipated the conversation we’d be having today: Can the federal government really roll back pollution regulations? As he explained then, it will have a hard time—and it’s all because of California.

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Avoid This High-Yield Value Trap And Buy An Insanely Undervalued Blue Chip Instead
April 4, 2018 6:05 pm|Comments (0)

(Source: imgflip)

The core strategy of my high-yield retirement portfolio is to build a diversified collection of quality dividend growth companies bought at good to great prices. That means that I’m more than willing to consider beaten down industries and in today’s market that means pipeline MLPs have my attention.

Chart

BPL Total Return Price data by YCharts

That’s thanks to a perfect storm of negativity that has beaten down even the highest-quality blue chip MLPs to ridiculous levels. However, at the same time, I’m also aware that the pass-through business model of MLPs means that they have certain risks that investors need to watch out for.

Because the fact is that no matter how great an MLP’s core business may be, and how impressive its distribution growth record appears, at the end of the day any payout that isn’t safe isn’t worth owning.

Buckeye Partners (BPL) is one MLP that I’ve been watching closely because it’s become a favorite among income investors courtesy of 20 years of consecutive distribution growth. Readers have asked me to take a look at it because the MLP’s recent slide has sent the yield to an all time high.

(Source: Ycharts)

So I decided to do a deep dive on Buckeye to see whether it is a classic deep value opportunity or a yield trap to be avoided. Unfortunately as much as I would love to recommend Buckeye at today’s apparently mouth watering valuation, I can’t due to what I consider to be a very real risk of a future payout cut.

On the other hand Enbridge Inc (ENB), which I consider to be the Berkshire Hathaway (BRK.B) of the midstream industry, is indeed a screaming buy today. That’s because its fundamentals are rock solid, including a generous, safe, and fast growing payout that signals enormous market beating total return potential. Enbridge’s yield is also at some of its best levels ever. In fact today is the best time in nearly a quarter century to add this industry blue chip to your portfolio.

(Source: Ycharts)

Let’s take a closer look at why I think investors should avoid Buckeye right now, and instead choose the far superior Enbridge.

Buckeye Partners: Great Payout Growth Track Record But…

Buckeye Partners got its start in 1886 as the Buckeye Pipeline company, and part of John D. Rockefeller’s Standard Oil empire. Over 30 years ago it converted to an MLP. Today it owns a highly diversified collection of midstream assets under two business segments.

(Source: Buckeye Partners Investor Presentation)

The first is its domestic pipelines and terminals, (51% of 2017 adjusted EBITDA), business which owns:

  • 6,000 miles of pipeline
  • 110 delivery terminals
  • 115 active liquid petroleum product terminals
  • 57 million barrels of liquid petroleum product storage capacity

The other major segment is global marine terminals, (46% of 2017 adjusted EBITDA), which owns a network of marine terminals. These are located primarily on the East Coast and Gulf Coast regions of the United States as well as in the Caribbean, Northwest Europe, the Middle East and Southeast Asia:

  • 22 liquid petroleum product terminals located in key global energy hubs
  • 120 million barrels of liquid petroleum product tank capacity

The remaining cash flow comes from the merchant services business, (2.5% of 2017 adjusted EBITDA), which markets liquid petroleum products in areas served by the other two business segments.

95% of cash flow is from fixed fee contracts. In recent years Buckeye has moved away from its legacy FERC regulated pipeline business and been focusing more on growing its marine storage business.

(Source: Buckeye Partners Investor Presentation)

Since 2010 it’s acquired over 75 storage terminals, including a 50% stake in Vitol, a Dutch owner of global oil storage and import/export terminals. That last deal was completed in 2017 and Buckeye paid $ 1.2 billion for its stake. In September 2017 Vitol and BPL bought out VTTI Energy Partners, VTTI’s MLP, for $ 476 million in cash.

The VTTI deal added 15 marine storage terminals to Buckeye’s portfolio, as well as two new facilities under construction in Panama and Croatia. In addition BPL and Vitol are planning expansions of VTTI’s terminals in Antwerp and Rotterdam that will further fuel growth in distributable cash flow or DCF. DCF is the MLP equivalent of free cash flow and what funds the distribution. VTTI’s cash flow is 100% fee based with no direct commodity exposure, making it a perfect fit for BPL’s low risk business model.

(Source: Buckeye Partners Investor Presentation)

Over the past seven years, Buckeye has invested over $ 8 billion to grow and diversify its operations, resulting in some truly impressive cash flow growth.

(Source: Buckeye Partners Investor Presentation)

Going forward, Buckeye’s growth plans rely on two major growth catalysts. The first is the ongoing growth of global oil demand that’s largely being fueled by strong economies in emerging economies such as India and China.

(Source: Exxon Mobil Investor Presentation)

In fact, according to Exxon Mobil (XOM), by 2040 global oil consumption is expected to rise 20%, or about 20 million barrels per day. This is likely to create strong demand growth in oil storage and import/export terminals.

Which ties into Buckeye’s other major growth catalyst, which is America’s accelerating energy boom.

(Source: EIA)

Thanks to incredible growth in efficiency caused by OPEC’s 2015 oil price war, US shale production costs have plummeted to about $ 30 per barrel. Companies like Exxon are investing heavily into even more advanced fracking and drilling technology and believe they can lower this to about $ 20 per barrel.

The combination of hyper prolific and low cost shale formations such as the Permian basin, (about 70 billion barrels of recoverable reserves), and huge growth in overseas demand is why US oil and oil condensate production is expected to rise by about 30% in the next five years to about 13 million barrels per day. In fact the International Energy Agency or IEA projects that the US will increase its oil exports from 2 million barrels per day today, to 5 million barrels per day by 2023. That would make the US the world’s largest oil producer and the second largest net exporter behind Saudi Arabia.

Buckeye has already launched an open season for a potential 600 miles Southwest Texas Gateway pipeline connecting West Texas’ Permian basin with export facilities in Corpus Christi. Once long-term fixed fee contracts are in place it expects to start construction on the pipeline which would move 600,000 barrels per day to export terminals on the Texas coast.

In addition to the Southwest Texas Gateway, the MLP is also working on expansion projects connecting Midwest refineries to major markets such as Chicago and Philadelphia. This is in addition to several other projects in Florida, New York State, and Pennsylvania. In total, Buckeye expects to spend about $ 300 million on growth capex in 2018, to increase its highly stable and recurring cash flow.

The highly predictable and recession resistant nature of that cash flow is what has allowed the MLP to create one of the most impressive payout growth records in the industry. Specifically Buckeye delivered unit holders 30 uninterrupted years of distributions, including 20 straight years of increases. Also helpful was that Buckeye was one of the first MLPs to eliminate its incentive distribution rights or IDRs when it bought out its general partner in 2010. This allowed it to stop paying 50% of its marginal cash flow to its GP, which both lowered its cost of capital, and allowed for faster payout growth to regular investors.

Or to put another way, Buckeye was a dividend achiever and well on its way to becoming an aristocrat. However, that dream is now dead, because Buckeye has fallen on some very hard times. In fact it now faces immense growth challenges that potentially threaten its sky high distribution.

…Massive Risks Mean Distribution May Not Be Safe

Metric

2017 Results

Revenue Growth

12.3%

Distributable Cash Flow Growth

0.7%

Unit Count Growth

7.7%

DCF/Unit Growth

-6.5%

Distribution Growth

3.1%

Distribution Coverage Ratio

1.0

(Source: BPL earnings release)

As you can see BPL enjoyed strong top line growth in 2017 thanks to its large investments over the previous year. However, that didn’t translate to what counts, DCF. In fact thanks to $ 346 million in new units it sold in 2017 its DCF/unit actually declined, causing its distribution coverage ratio to fall to 1.0. In the MLP industry 1.1 is considered the minimum safe level to allow for continued long-term distribution growth.

(Source: Buckeye Partners Investor Presentation)

Buckeye actually has a pretty terrible history of maintaining a safe coverage ratio. This is due to that same strong payout growth streak. Basically BPL’s issue has been that it’s historically retained almost no DCF to fund growth, but relied exclusively on debt and equity markets for growth capital, (47% debt, 53% equity).

That was okay a few years ago when oil prices over $ 100 and record low interest rates made MLPs the darlings of Wall Street. However, today any MLP that relies exclusively on external capital is at a huge disadvantage. This is because if BPL wanted to pursue its historical funding model then it would not be able to grow profitably.

Weighted Average Cash Cost Of Capital

9.6%

Historical DCF Yield On Invested Capital

7.7%

Gross Investment Spread

-1.9%

(Source: Morningstar, FastGraphs, GuruFocus, earnings release)

That’s because the MLP’s cost of capital is now nearly 14%. Meanwhile the average interest rate it enjoys is still a reasonable 4.5%. However, Buckeye faces major challenges to borrowing heavily in the fixed debt market. That’s because it has a BBB- credit rating, meaning just one notch above junk bond status. If BPL gets downgraded even once its future borrowing costs will increase significantly and raise its cost of capital even more.

(Source: Buckeye Partners Investor Presentation)

And with $ 1.25 billion in debt coming due in the next two years that’s not something that Buckeye can afford.

This means that the majority of the MLP’s liquidity, ($ 1.13 billion at the end of 2017), is from its revolving credit facility. The trouble is that this is variable rate debt, with a cost of LIBOR + 1% to 1.75%. Today this means that BPL’s revolving credit interest rate is between 3.66% and 4.41%, and has risen 0.86% over the past year.

Worst still? That credit facility has strict covenants in place that limits its debt/EBITDA ratio to 5.0, (5.5 after an acquisition for a brief time). Today Buckeye’s covenant leverage ratio is 4.3. While that is still nicely below its cap it does limit the amount of borrowing the MLP can do to fund its growth.

This is why BPL had to resort to highly dilutionary secondary offerings in 2017 under its ATM program. In addition it’s now pursuing some alternative financing techniques that might threaten the safety of the current distribution.

In fact, management recently announced that:

Buckeye believes that greater unitholder value can be generated by maintaining its distribution rate and retaining capital rather than by continuing distribution growth.” -BPL statement

In other words the MLP’s 20 year payout growth streak is dead. But on the plus side the MLP says that “Buckeye has never cut its distribution and has no intention to do so now.” However, ultimately the MLP may have no choice.

That’s because to fund its growth in 2018 Buckeye recently issued $ 265 million in class C units, with investors having the right to buy an extra $ 50 million later for a total of $ 315 million in potential additional equity.

These class C units pay a distribution equal to BPL’s regular units, but in stock, instead of cash. But these units convert to regular units that do pay cash within two years. That means that potentially BPL is facing between 5.5% and 7.1% dilution by the end of 2019. In fact the lower BPL’s unit price falls the greater the potential dilution will be, since those class C units are getting paid in stock.

That means that Buckeye would need to grow its DCF by at least 6% to 8% by the end of 2019 in order to cover the distribution and avoid a potential payout cut. The trouble is that management doesn’t provide DCF guidance that far out. However, the analyst consensus is that BPL’s cash flow will shrink 14% in 2018 and then remain flat in 2019.

Now analysts can be wrong of course, and BPL’s legendary status as a safe income stock means that many investors are probably assuming that management won’t cut the payout unless absolutely necessary. But keep in mind that there is one final risk that might make it necessary.

The marine storage business, while fixed fee, is not under the kind of long-term, (5 to 25 year), contracts often seen in the pipeline business. Rather these contracts usually range from one to three years in duration.

Here’s why that matters for BPL investors. In 2017 Buckeye’s marine storage facility utilization fell from 92% to 88%. That is because the huge oil supply glut has now reversed, thanks to OPEC partnering with Russia to cut output by 10%.

Thanks to an extra 1.5 million bpd in oil demand projected for 2018, this means that what was once a huge surplus of oil that filled global storage facilities, today the world is facing a 2.3 million bpd shortfall that is rapidly emptying them.

And since BPL’s top three marine storage customers account for 59% of that segment’s revenue, they have a strong position to negotiate from once contracts expire. But won’t increased demand from US exporters help raise utilization rates? Eventually but not necessarily by 2019 when the MLP’s class C units convert to common units and increase the distribution cost by up to 8%.

Want some even worse news about those OPEC + Russia cuts that are hurting the storage business? Well they were set to expire at the end of 2018. That potentially created some hope that increased oil production would once more start refilling global storage facilities.

However, Saudi Arabia has indicated it wants to prolong those cuts well beyond 2018 to maintain long-term global oil prices of about $ 70. In fact the so called “Vienna Consensus”, or the partnership between Russia and OPEC, is now apparently considering a formal 10 to 20 year extension of those cuts.

If that actually happens it effectively means that Russia joins OPEC and the cartel would greatly increase its influence in global oil markets. More importantly for BPL investors, it would mean that the major growth catalyst, (major expansions of marine storage), for which the MLP is planning might face several years of highly variable cash flow.

That could create nasty downturns in DCF just when BPL is facing a potentially large dilution cliff and its payout coverage ratio has absolutely no safety cushion. All of which means that BPL’s sky high yield is not a market mispricing of a blue chip MLP. Rather it represents a warning to investors that this distribution might be set for its first cut in over 30 years.

That means that Buckeye represents a potential value trap, and I must recommend that all but the most risk tolerant income investors avoid it. On the other hand Enbridge Inc is a high-yield blue chip that has indeed been unfairly punished by the market’s all consuming hatred of the midstream industry.

Enbridge: The Gold Standard Of Midstream Remains A Future Dividend Aristocrat

(Source: Enbridge Investor Presentation)

Enbridge was founded in 1949 making it among the oldest midstream operators in North America. It owns one of the continent’s most extensive and integrated energy transmission systems including:

  • 34,410 miles of natural gas pipelines
  • 17,511 miles of oil pipelines
  • 11.4 billion cubic feet/day of gas processing capacity
  • 437 billion cubic feet of gas storage capacity
  • 307,000 barrels/day of natural gas liquids or NGL production capacity
  • 3.5 million natural gas utility customers
  • 3GW of renewable energy capacity

You can think of Enbridge as almost a regulated utility because its wide moat, cash rich assets are vital to the health of North America’s booming energy industry. That’s why regulators on both sides of the border grant it guaranteed returns on equity usually in the low to mid teens. The actual permitted ROE on its gas utilities is usually over 10%, which is better than the US average for regulated utilities of 9.6%.

The key competitive advantage Enbridge has is that while a single pipeline is useful to customers, an extensive network is invaluable because it allows oil & gas producers to sell their commodity products in far flung markets at the highest possible price.

Enbridge’s network is among the best on the continent for two main reasons. First in Canada Enbridge owns the Mainline system, which at 2.8 million barrels per day of capacity accounts for 70% of Canada’s total oil pipeline capacity. The mainline is connected to numerous regional oil pipelines that connect to 3.5 million barrels per day of refining capacity, making it the go-to choice for many of America’s largest oil producers.

Enbridge has historically been focused on crude oil pipelines, but in 2016 it purchased Spectra Energy to add Spectra Energy Partners’ (SEP) giant network of gas pipelines to its empire. Today Enbridge’s gas pipeline system is one of the largest on the continent and transports 20% of America’s natural gas. One of the main reasons for buying Spectra was because combining its gas pipelines with Enbridge’s means that the company’s gas transportation network can now tap into several key growth markets.

For example in the US liquefied natural gas exports and NGL production/transport are expected to be major growth opportunities in the coming five years. In fact by 2022 analysts project that US gas production will rise by 34%, and NGL production by 51%.

Meanwhile the Western Canadian Sedimentary Basin is expected to be a strong source of Canadian natural gas production as well. In fact over the next decade analysts project 9% annual growth in Canadian gas production, most of which will flow through Enbridge’s gas pipeline system.

Finally, through Spectra Energy’s Valley Crossing pipeline, which was just approved by FERC and has a capacity of 2.6 billion cubic feet/day, Enbridge has access to the thriving gas export market of Mexico. Mexico is in the process of switching over its coal fired power plants to natural gas. Its largest utilities are signing 25 year fixed-rate (with annual inflation adjusters) contracts with Spectra. And since Enbridge owns 83% of Spectra’s shares the majority of that cash flow will end up in the parent company’s pocket.

Which brings me to the three biggest reasons to invest in Enbridge. The first is the extremely low risk nature of this regulated toll booth business model.

(Source: Enbridge Investor Presentation)

Enbridge’s average contract length is 20 to 25 years, and its cash flow sensitivity to commodity prices is just 4%. In addition 93% of its customers are large investment grade corporations or regulated utilities. This means there is very little counterparty risk, (that bankrupt customer defaults on payments).

In addition Enbridge’s balance sheet is composed almost exclusive of fixed rate, long-term loans, meaning that just 3% of its DCF is at risk from rising interest rates.

(Source: Enbridge Investor Presentation)

And since the company has a policy of paying out just 55% to 65% of DCF as dividends, it ends up retaining about two to three times as much cash flow to fund internal growth as most MLPs.

Combined with the strongest credit rating in the industry, (tied with EPD, MMP, and SEP), and no IDRs, this means that Enbridge’s cost of capital is very low and allows it to grow profitably.

Weighted Average Cash Cost Of Capital

3.9%

Historical DCF Yield On Invested Capital

5.8%

Gross Investment Spread

1.9%

(Source: Morningstar, FastGraphs, GuruFocus, earnings release)

Note that Enbridge’s DCF yield is currently artificially suppressed because of the Spectra Energy merger. As its growth projects come online that figure will climb rapidly. And speaking of growth few midstream companies are as well positioned to take advantage of America’s energy boom as Enbridge.

(Source: Enbridge Investor Presentation, note figures in CAD)

In fact over the coming three years Enbridge has $ 17.6 billion in growth projects scheduled to come online. More importantly it has already raised the funding to complete them, with no anticipated needs to tap the fickle equity markets before 2021.

(Source: Enbridge Investor Presentation, note figures in CAD

Enbridge’s growth plans are expected to generate 10% growth in adjusted cash flow from operations, (what it calls DCF), through 2020.

(Source: Enbridge Investor Presentation, note figures in CAD)

That in turn is why Enbridge is expecting to grow its dividend at 10% annually through 2020. That’s the same year it becomes a dividend aristocrat by hitting 25 consecutive years of payout increases.

(Source: Enbridge Investor Presentation)

More importantly for long-term investors by 2020 the company expects to be generating about $ 5 billion in annual excess DCF. That can be invested in Enbridge’s enormous shadow backlog of growth projects. These are projects that don’t yet have contracts, and are expected to be completed beyond 2020.

(Source: Enbridge Investor Presentation, figures in CAD)

This collection of projects that management is working on for the long-term represents as much as $ 30 billion in highly profitable investments. How realistic is that shadow backlog? Well given that the coming US energy boom is expected to require up to $ 900 billion in new midstream investment by 2040, I’d say it’s pretty reasonable.

Usually such a backlog would be expected to take four to five years to complete, meaning that Enbridge would be able to fund $ 20 billion to $ 25 billion of it with retained DCF. The rest could easily be funded with low cost debt, with no further equity issuances needed. Or to put another way Enbridge has successfully shifted to a self funding business model, as Kinder Morgan (KMI), Magellan Midstream (MMP), and Enterprise Products Partners (EPD), have all done or announced plans to do.

This is great news for investors because it means that Enbridge’s strong growth potential is very unlikely to be quashed by a low share price, as is the concern for Buckeye Partners and other non self funding MLPs.

The bottom line is that Enbridge is truly one of the bluest of blue chips in the midstream industry. And it offers one of the best combinations of generous but safe yield, and excellent long-term growth prospects.

Payout Profiles: Looks Can Be Deceiving, Enbridge Is The Far Better Choice

Stock

Yield

Distribution Coverage Ratio

Projected Payout Growth

Total Return Potential

Buckeye Partners

13.50%

1.0

0% to 1%

13.5% to 14.5%

Enbridge

6.60%

1.53

6% to 9%

12.6% to 15.6%

S&P 500

1.90%

3.3

6.20%

8.10%

(Sources: earnings releases, GuruFocus, FastGraphs, Multpl, CSImarketing)

The most important aspect to successful long-term dividend investing is the payout profile which consists of three parts: yield, payout security, and long-term growth potential.

When it comes to yield Enbridge offers more than triple the S&P 500’s paltry payout, but Buckey Partners offers an even richer forward yield. However, any distribution that isn’t safe isn’t worth owning. That’s why payout security is so important.

This is composed of two parts. First a good coverage ratio, which Enbridge has, but Buckeye is badly lacking. Remember that most MLPs have coverage ratios of 1.1 to 1.2, and Buckeye’s is likely to decline by 0.05 to 0.7 in 2019 when its class C units convert to common units.

The second part of payout security is a strong balance sheet. After all as many midstream operators showed during the oil crash, too much debt means that credit rating agencies and creditors can force a payout reduction even if the distribution is well covered by cash flow.

Stock

Debt/ Adjusted EBITDA

Interest Coverage

S&P Credit Score

Average Interest Cost

Buckeye Partners

4.4

4.9

BBB-

4.50%

Enbridge

5.0

4.7

BBB+

4.60%

Industry Average

4.4

4.5

NA

NA

(Sources: Morningstar, earnings releases, FastGraphs, Gurufocus)

At first glance, it appears as if Buckeye actually has Enbridge beat in certain key debt metrics. It sports a lower leverage ratio, higher interest coverage ratio, and even enjoys slightly lower borrowing costs.

However, note that Buckeye has a far weaker credit rating. In addition, its borrowing costs could rise given that it’s now so reliant on variable rate loans under its revolving credit facility. Meanwhile, Enbridge’s energy empire continues to enjoy strong access to low cost borrowing that is bringing its borrowing costs down over time. That’s even in a rising rate environment.

For example, on January 9th, a subsidiary of Spectra Energy Partners was able to sell $ 800 million in long duration bonds at highly favorable rates.

  • $ 400 million in 10 year bonds with an interest rate of 3.5%
  • $ 400 million in 30 year bonds with an interest rate of 4.15%

Remember that as 83% owner of Spectra Energy Enbridge lists that MLPs debt on its consolidated balance sheet. And because its borrowing costs are actually declining as it refinances, Enbridge’s interest coverage ratio is only going to improve over time. In contrast Buckeye’s is likely to decline in the coming years.

(Source: Enbridge Investor Presentation)

And given that Enbridge has no further need to borrow to complete its growth plans, by 2020 its leverage ratio is expected to decline to about 4.5. That’s in line with the industry average and given the low risk nature of its decades-long contracts, might be enough to get it a credit upgrade to A-.

Finally, we can’t forget long-term payout growth potential. Under a best case scenario Buckeye Partners’ distribution remains intact, but remains essentially frozen. The analyst consensus is for 1% DCF/unit growth over the next decade. That’s despite the enormous growth potential of the midstream industry. Basically what analysts are forecasting here is that Buckeye Partners’ high cost of equity is likely to require so much equity dilution that DCF/unit barely grows at all. This means that investors buying BPL today are counting pretty much 100% on its distribution remaining intact, despite its worsening liquidity trap.

In contrast Enbridge’s enormous growth potential, in all aspects of North American, (and even international), energy means that it can be expected to continue generating strong dividend growth for years, if not decades to come. Remember that Enbridge already owns 3GW of renewable power and is investing heavily into offshore wind in Europe.

Put it together and you get both MLPs potentially offering market crushing total return potential. But Enbridge offers that in a low risk package while BPL’s potential is totally reliant on a highly uncertain distribution and its incredibly low valuation.

Valuations: Both Stocks Are Dead Cheap, But Only Enbridge Is Worth Buying Today

Chart

BPL Total Return Price data by YCharts

To say it’s been a rough year for midstream investors would be an understatement. The entire industry has been hammered, even blue chip giants like Enbridge. However, Buckeye has been decimated which is why so many value focused income investors are attracted to it.

Stock

P/DCF

Implied Growth Rate

Yield

Historical Yield

Buckeye Partners

7.3

-0.60%

13.50%

6.60%

Enbridge

8.3

-0.10%

6.60%

3.20%

(Sources: earnings releases, Gurufocus)

That’s certainly understandable because on a trailing 12 month basis BPL’s price/DCF, (MLP equivalent of a PE ratio), is incredibly low. Usually a stock trading at single digit multiples indicates atrocious fundamentals such as: a payout not covered by cash flow, a dangerous balance sheet, and no growth prospects.

Buckeye does still have decent DCF growth prospects, though that 2019 dilution cliff is a major concern that will keep DCF/unit from rising significantly over time. The question is whether or not the market pricing in -0.6% DCF/unit growth over the next decade is reasonable. I tend to think that BPL’s DCF/unit will be able to achieve a positive, though small figure, meaning that it might be an attractive ‘dirty value” investment.

After all the yield is currently more than double its historical norm and is at an all time high. This means that, assuming you believe management can preserve the current distribution, it’s literally the best time ever to buy Buckeye Partners.

However, note that while BPL is trading as if it were marked for death, Enbridge is trading nearly as cheap! In fact ENB is also priced as if its DCF/share were not going to grow at all over the next decade. Given the company’s: enormous and fully funded growth backlog, even bigger shadow backlog, self funding business model, and the industry’s strong tailwinds, I find such a pessimistic forecast preposterous.

The final way I like to value an income stock, and a good rule of thumb I recommend for many investors, is to compare its forward yield to its five year average yield.

(Source: Simply Safe Dividends)

Usually over the long-term yields are mean reverting to a certain level, meaning that this historical comparison can be a useful approximation for fair value. Note that Enbridge’s forward yield is actually 6.6% after the recent dividend hike.

Under this methodology, both MLPs are insanely cheap, with BPL trading at half its fair value, and Enbridge being about 89% undervalued. However, this methodology only applies under “all else being equal” conditions. In other words had BPL’s fundamentals not deteriorated to the point that it’s in a liquidity trap and its distribution is at risk, it would certainly be a screaming buy. However, given the decline in its payout profile I can’t recommend BPL except for the most risk tolerant investors.

However, ENB’s fundamentals are not impaired. In fact they are strong and moving quickly in the right direction. That means that I have no problem giving Enbridge my strongest possible endorsement at today’s prices.

That is of course, assuming you understand and are comfortable with that blue chip’s risks.

Enbridge Risks To Consider

While I’m a big fan of Enbridge no stock is risk free.

First realize that as a Canadian stock US investors face a 15% tax withholding in non retirement accounts. Fortunately a US/Canadian tax treaty means that US investors can deduct a dollar for dollar tax credit that reduces US dividend tax liability. However, be aware that to use the simpler 1040 tax form you are limited to $ 300/$ 600 per individual/couple. That applies to your entire portfolio’s foreign tax withholdings. Above that limit you need to use the more complicated form 1116.

In addition Enbridge pays its dividends in Canadian dollars. That means that there is some currency risk because should the US dollar appreciate against the Canadian dollar then your effective dividend payment will be less.

As to risks to Enbridge itself? Well there are several. First let’s get the recent FERC rule change out of the way. On March 15th the Federal Energy Regulatory Commission changed a 2005 rule that allowed for income tax allowance to be applied to cost of service contracts on interstate pipelines regulated by FERC. The market flipped out over concerns that many MLPs would see a permanent decrease in DCF. In recent weeks MLPs and midstream companies have looked at the rule and most have said it will have no material impact on their cash flow or growth plans. These include:

  • Enterprise Products Partners (EPD)
  • Kinder Morgan (KMI)
  • Energy Transfer Partners (ETP)
  • MPLX (MPLX)
  • Spectra Energy Partners (SEP)
  • EQT Midstream Partners (EQM)
  • Tallgrass Energy Partners (TEP)

Enbridge has officially stated that:

it does not expect a material impact to its previously disclosed financial guidance over the 2018-2020 horizon as a result of the Federal Energy Regulatory Commission (FERC) revised policy statement on interstate pipeline tax allowance recovery in Master Limited Partnerships (MLPs) nor from FERC’s Notice of Proposed Rulemaking (NOPR).” -Enbridge Statement

Now it should be noted that Enbridge Energy Partners (EEP) will be one of the few MLPs affected, due to how its contracts are structured.

Enbridge Energy Partners, L.P. (NYSE:EEP) derives a portion of its revenue from a Facility Surcharge Mechanism that applies cost of service tariffs which would be impacted by this policy change. As a result of lower tax rates under US Tax Reform, EEP previously guided to a decrease in distributable cash flow (DCF) of $ 55 million for 2018. This new FERC policy would cause a further decrease to DCF of roughly $ 80 million on an annual basis, or roughly $ 60 million on a prorated basis in 2018.” – Enbridge Statement

However, while this will have a significant impact on EEP, Enbridge will not actually take a hit to its cash flow. That’s because:

Under the International Joint Toll mechanism, reductions in the EEP tariff will create an offsetting revenue increase on the Canadian Mainline system owned by Enbridge Income Fund Holdings Inc. (ENF). Financial guidance at ENF remains unchanged; however, this could provide a further tailwind for financial results. The combined impact at both EEP and ENF are offsetting for Enbridge on a consolidated basis.” – Enbridge Statement

Finally, there’s Spectra Energy Partners which has said the following:

Spectra Energy Partners LP (NYSE:SEP) does not expect any material impact to its financial guidance from the FERC policy actions. Roughly 60% of SEP’s gas pipeline revenue comes from negotiated or market-based tariffs and therefore not directly affected by the FERC policy revisions. The remaining 40% of gas pipeline revenue is from cost of service based tariffs which could be subject to tax recovery disallowance. The liquids assets within SEP are predominantly negotiated tariffs and also not materially affected by the policy revisions. SEP anticipates no immediate impact to its current gas pipeline cost of service rates as a result of the revised policy, and therefore, no impact is expected to its previously provided 2018 financial guidance. Any future impacts would only take effect upon the execution and settlement of a rate case. In the event of a rate case, all cost of service framework components would be taken into consideration, which is expected to offset a significant portion of any impacts related to the new FERC policy. Any unmitigated impacts are not anticipated to materially change SEP’s distributable cash flow outlook beyond 2018.” – Spectra Energy Partners Statement

So that Spectra statement may be a bit confusing, so let me clarify it. What Spectra is saying is that potentially about 40% of its gas revenue MIGHT be affected by the rule change, starting in 2020. That represents about 36% of total cash flow for the MLP. However, Spectra would only be facing a potential price cut on what it charges customers if, and only if, they file a rate case with FERC.

Or to put another way if a customer complains that Spectra is overcharging then FERC might force Spectra to lower its pipeline rates. However, keep in mind that in 25 years Spectra has never faced a customer complaint or been forced by FERC to reduce its pipeline rates. In fact Enbridge has actually be charging sub FERC cap pipeline rates and is planning to file rate cases to increase its pipeline tariffs

The bottom line is that Enbridge has sailed through both tax reform and the FERC ruling with no material impact and has reaffirmed its previous guidance, both for 2018, and through 2020. All of which means the company remains on track to deliver solid growth over the next three years. That’s because it has already raised all the capital it needs in order to fund its enormous growth backlog.

But here is where the potential risk crops up. Because whether or not Enbridge actually does have enough money, (as management believes), depends on two things. First its projects come in on time and on budget.

There is no guarantee of this for two reasons. First President Trump’s new 25% steel tariffs could potentially raise the average cost of a new pipeline project by $ 76 million, and over $ 300 million for larger ones. The good news is that these have been waived for most countries, including Canada, which is the largest steel exporter to the US.

This means that as long as those waivers remain in place Enbridge should not face additional construction costs. However, those waivers expire in May and are largely believed to be a bargaining chip for the ongoing NAFTA negotiations. That means that they might end up taking effect and causing Enbridge to have to revise its capex budget higher, potentially requiring it to raise more capital.

The other concern I have is over Enbridge Energy Partners, which is one of the few MLPs to get hit hard by the FERC ruling. Canadian credit ratings agency DBRS has warned that the FERC ruling’s $ 80 million hit to DCF, “would eliminate a significant portion of the remaining cushion currently embedded in EEP’s ratings…and could significantly weaken” the MLP’s credit metrics.

The problem is that Enbridge Energy Partners previously cut its distribution by 40% in an effort to make it sustainable and achieve a 1.15 coverage ratio. This was considered a safe and sustainable level that would allow EEP to fund its portion of Enbridge’s growth efforts without relying on equity issuances at insanely dilutive prices.

However, the FERC change means that EEP’s coverage ratio will now fall to about 1.0, meaning it will effectively have no cushion in case anything goes wrong. And since EEP’s unit price has now collapsed even more, its cost of equity has now risen to about 14%.

Worse still, a credit downgrade at this point might end up lowering its credit rating to junk, which would mean that EEP would have to raise far higher cost debt in the junk bond market. With interest rates potentially set to rise in the coming years, (Morningstar projects 10 year hitting 4.5% by 2022), that might make it impossible for EEP to grow profitably.

Unless there is a dramatic turnaround in EEP’s unit price soon, Enbridge might be forced to bail out its MLP via a roll up. In other words it might have to buy Enbridge Energy Partners because it’s no longer capable of serving the function it was created for. That would be to raise cheap capital independently of the parent company.

However, the issue here is that Enbridge doesn’t have the cash to buyout EEP, so would likely either have to issue debt, or pay for the transaction with a lot of shares. But with Enbridge’s share price in the toilet that would be highly dilutionary and could force it to scale back its future dividend growth plans.

Now note that I’m not saying that an Enbridge rollup of EEP is necessarily a sure thing. After all as my colleague Daniel Jones has pointed out, EEP could simply cut its distribution again in order to preserve its credit rating and free up enough DCF to fund the equity portion of its backlog. However, this too might cause Enbridge Inc some troubles down the line.

That’s because cost of equity isn’t the distribution yield, but rather the DCF yield since this represents the dilutionary cost of selling new units. Or to put another way since new units represent a permanent claim on future DCF, the DCF yield is what investors need to focus on.

When a stock cuts its payout, even if the yield is sky-high, the price will usually fall in proportion to the cut. That means that if EEP were to cut the payout another 30% for example, the price might fall 30% as well. In that case EEP’s cost of equity would rise to about 18% and it would remain locked out of equity markets for the foreseeable future.

That means that going forward EEP would likely have to adopt a self funding model, in which it needs to retain enough DCF to fund the equity portion of any future growth capex that Enbridge might find for it.

Remember that Enbridge’s shadow backlog is enormous and its investment thesis requires it to be able to raise enough low cost capital to execute on it. That means that while Enbridge itself is not facing a liquidity trap, EEP’s troubles might end up hindering its ultimate growth potential.

Any future rollup might end up helping to solve this EEP problem, however, Enbridge could only pursue such a course if the share price recovers strongly. Given the market’s distaste for the midstream industry that might take a long time.

Bottom Line: Enbridge Is A High-Yield Blue Chip Worth Buying, Buckeye Partners Is A Potential Yield Trap To Avoid

Don’t get me wrong, I’m not rooting for Buckeye to fail and I sincerely hope management can ultimately preserve and eventually grow the distribution. However, given the challenges the MLP faces including: a worsening liquidity trap, a large dilution cliff coming in 2019, and negative short-term fundamentals in a key growth catalyst, I consider it a high risk stock.

On the other hand, Enbridge, while offering less than half the yield, has a better risk-adjusted total return potential. That’s because, despite its own challenges, Enbridge continues to have: ample access to low cost capital, a massive and diversified growth pipeline, and far less reliance on external capital markets.

This ultimately means that Enbridge is a source of not just generous, safe, and fast growing income but is more likely to generate market beating total returns in the future. And at today’s valuation I am more than willing to recommend Enbridge even for conservative income portfolios.

As for Buckeye? Well I’m avoiding it for now, until management can show me how it can plausibly make the payout sustainable. If you must own BPL, I recommend making sure it’s only as a small part of a well diversified portfolio.

Disclosure: I am/we are long ENB, SEP, EPD, MPLX, EQM.

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.

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The (Chinese) Empire Strikes Back: This Dividend Stock Soars
April 4, 2018 6:01 pm|Comments (0)

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Trump to unveil China tariff list this week, targeting tech goods
April 2, 2018 6:00 am|Comments (0)

WASHINGTON (Reuters) – The Trump administration this week will unveil the list of Chinese imports targeted for U.S. tariffs to punish Beijing over technology transfer policies, a move expected to intensify trade tensions between the world’s two largest economies.

U.S. President Donald Trump delivers remarks on the Infrastructure Initiative at the Local 18 Richfield Training Site in Richfield, Ohio, U.S., March 29, 2018. REUTERS/Yuri Gripas

The list of $ 50 billion to $ 60 billion worth of annual imports is expected to target “largely high-technology” products and it may be more than two months before tariffs take effect, administration officials have said.

The U.S. Trade Representative’s office needs to unveil the list of products by Friday under President Donald Trump’s China tariff proclamation signed on March 22.

The tariffs are aimed at forcing changes to Chinese government policies that USTR says results in the “uneconomic” transfer of U.S. intellectual property to Chinese companies.

The agency’s “Section 301” investigation authorizing the tariffs alleges China has systematically sought to misappropriate U.S. intellectual property through joint venture requirements, unfair technology licensing rules, purchases of U.S. technology firms with state funding and outright theft.

China has denied that its laws require technology transfers and has threatened to retaliate against any U.S. tariffs with trade sanctions of its own, with potential targets such as U.S. soybeans, aircraft or heavy equipment.

On Sunday, Beijing slapped extra tariffs of up to 25 percent on 128 U.S. products including frozen pork, as well as wine and certain fruits and nuts in response to steep U.S. tariffs on imports of aluminum and steel announced last month by the Trump administration.

Fears have arisen that the two countries will spiral into a trade war that will crush global growth.

TARGETING ‘MADE IN CHINA 2025’

U.S. technology industry officials said they expected the Trump administration’s list to target products that benefit from Beijing’s “Made in China 2025” program, which aims to upgrade the country’s domestic manufacturing base with more advanced products.

The state-led program targets 10 strategic industries for replacing imports with Chinese-made products: advanced information technology, robotics, aircraft, shipbuilding and marine engineering, advanced rail equipment, new energy vehicles, electrical generation equipment, agricultural machinery, pharmaceuticals and advanced materials.

“Foreign technology acquisition through various means remains a prime focus under Made in China 2025 because China is still catching up in many of the areas prioritized for development,” USTR said in its report justifying the tariffs.

U.S. Trade Representative Robert Lighthizer has said that preserving America’s technological edge is “the future of the U.S. economy.”

Reports that the tariff list may also include consumer goods such as clothing and footwear drew strong protests from U.S. business groups, which argued that it would raise prices for U.S. consumers.

LIMITED TIME FOR TALKS

While there have been contacts between senior members of the Trump administration and their Chinese counterparts since Trump announced his intention to impose tariffs, there has been little evidence of intensive negotiations to forestall them.

“The administration is following the Japan model from the 1980s,” said a tech industry executive. “They’ll publish a Federal Register notice of tariffs on certain products, then try to reach a negotiated settlement over the next 60 days.”During his first stint at USTR in the Reagan administration, Lighthizer employed similar tactics to win voluntary Japanese export restraints on steel and autos.

Wendy Cutler, a former deputy USTR in charge of Asia negotiations, said that addressing the sweeping intellectual property allegations identified by USTR would require major changes to China’s industrial policy. A 60-day settlement may not be realistic in that case.

“I think they’ve set up a high bar for what they need to achieve, in order not to impose these types of tariffs and investment restrictions,” Cutler said.

Reporting by David Lawder; Editing by Peter Cooney

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Trump's Call to Start a Space Force Tops This Week's Internet News Roundup
March 18, 2018 6:01 pm|Comments (0)

People look for inspiration and happiness in a vast array of places. Some see school kids walking out of class across America to take a stand for gun control and find hope. Others note that 7-Eleven now has customizable tater tots and are filled with joy. What do they get when they look at the internet? All that and a lot of bickering and tweets about calzones. Here, dear friends, is what everyone was talking about online last week when they weren’t talking about the new Avengers: Infinity War trailer.

Rex-It

What Happened: President Trump announced Rex Tillerson was being replaced as secretary of state on Twitter.

What Really Happened: Folks like to make jokes about Donald Trump running America via Twitter, but last week he announced an executive decision on the platform that was definitely not funny—at least not to the head of the State Department.

Yes, the change in Secretary of State—one of the most important, if not the most important, cabinet positions—was announced via social media, as if Trump was every parody of himself imaginable. For those who wanted more than just a tweet of notice about the new state of affairs, that was forthcoming … also via Twitter, of course.

Those around Tillerson, who had just arrived back in the country, were surprised by the news, suggesting that Tillerson himself wasn’t entirely prepared for what had just happened.

There might, it turns out, have been a reason for that, if one response from the State Department is to be believed.

OK, perhaps it was a little disingenuous to say that no one saw this coming, as some pointed out.

Unsurprisingly, the White House has a different take on the way everything went down.

Except, it turned out, chief of staff John Kelly’s message might not have been entirely clear.

There really is something to be said about Twitter’s role in all of this, isn’t there? Still, things couldn’t have been that bad, because Tillerson did make an appearance later that day to talk about his firing and smooth everything over.

OK, maybe it was kinda bad. (Tillerson’s failure to thank the president did not go unnoticed by, well, anyone.) Still, perhaps the split between Trump and Tillerson was for the best.

This is worth noting, as well. The State Department aide who put out the earlier statement saying that Tillerson didn’t know why he’d been fired? Yeah, there was a price to pay for saying that.

The Takeaway: Quick, we need a catchy way of talking about former Exxon CEO Tillerson now that he’s been ousted!

That’ll do.

Move Along, Nothing to See Here

What Happened: House Republicans announced they were closing their investigation into collusion between the Trump campaign and Russia during the 2016 election, saying there was no evidence of such actions.

What Really Happened: Last week, with little warning, the House Intelligence Committee’s investigation into Russian interference in the 2016 election just … stopped.

“Case closed”? Sure, if you say so. And, it turns out, they really did say so.

There are others who might disagree with that take, of course…

As news of the surprise closure started to go wide, it was perhaps worth turning to the ranking Democrat on the committee to see if he had anything to say about the whole thing.

That would be a yes, then. And, sure, it seems suspicious to say the least that the Republicans just shut down the investigation unfinished with so much still out there unanswered, but surely the Democrats on the committee were given adequate warning that the investigation was being closed, right?

OK, but at least all the Republicans are agreed that this move was the smart one?

Well, fine, yes, that’s a little awkward. Still, at least one of the leading Republicans on the committee didn’t disagree.

Oh, come on. As the week continued, it eventually started to become clear even to the Republicans that this had been a mistake, with this headline putting it best: “Republicans Fear They Botched Russia Report Rollout.” Gee, you think?

The Takeaway: In what could only be described as a spectacular piece of timing, the Republicans announced that there was nothing Russians had done in regards to the 2016 election in the same week that the Trump administration finally signed sanctions into law against 16 Russians for their efforts to interfere with the 2016 election. There’s nothing like being consistent.

Meanwhile, Over at the Department of Justice…

What Happened: Special counsel Robert Mueller’s investigation took aim at the Trump Organization.

What Really Happened: Meanwhile, you might be thinking, “I wonder how special council Robert Mueller’s Russia collusion investigation is going? I’m sure that, if the House Republicans were right and there’s certainly nothing going on, he’ll be wrapping everything up too, right?” Funny story: He’s not wrapping everything up.

Yes, in what is pretty much the opposite of wrapping things up, Mueller is subpoenaing the Trump Organization’s records, which is … kind of a big deal, to say the least. Certainly, that’s what people on social media seemed to think.

But what could it all mean? Some people had theories.

And how is this going down with those targeted?

Somewhere, Devin Nunes is wandering around the halls of Congress, muttering to himself, “But I said nothing happened…!”

The Takeaway: It’s worth pointing out that the Mueller news dropped on March 15, which amused certain people online.

Oh, Canada

What Happened: Forget “Commander in Chief,” perhaps President Trump’s title could be “Gaslighter in Chief.” Or, maybe, “Man Who Should Perhaps Never Talk in Front of a Tape Recorder Ever.”

What Really Happened: This might sound like the kind of old-fashioned, unnecessary posturing of people stuck in the past, but once upon a time it was widely expected that the President of the United States wouldn’t be the kind of person who would boast about lying to the head of state of a friendly nation.

Those days, dear readers, are long gone.

Yes, the Washington Post obtained audio from a fundraising speech in which Trump boasted that he’d made up information that he used in an argument with Canadian Prime Minister Justin Trudeau over whether or not the US runs a trade deficit with Trudeau’s country. (It doesn’t.) “I had no idea,” Trump can be heard to say on the tape. “I just said, ‘You’re wrong.’ You know why? Because we’re so stupid.” As you might expect, people were thrilled about this display of, uh, political maneuvering? Sure, let’s go with that.

As the media struggled to understand what was happening, the White House press secretary attempted to smooth out the situation by, well, repeating the lie.

There is, also, a surreal second story to this audio of Trump that has nothing to do with lying to Justin Trudeau. Instead, it had to do with the “bowling ball test.”

As multiple outlets looked into the matter, it slowly emerged that it was probably all made up. Not to worry, though; according to the White House, it was just a joke.

The Takeaway: There’s really only response to this entire exchange, isn’t there?

Space Force? Space Force!

What Happened: When it comes to America’s manifest destiny, there’s only one direction left to go: To infinity… and beyond?

What Really Happened: With all the bad news going around the the White House, you can’t blame the president for wanting to change the narrative somehow. And you only get to do that, he knows, by thinking big and reaching for the stars. Last week, Trump gave a speech that showed just how literally he took that advice.

Sure, going to Mars is definitely thinking big, but is it thinking big enough? Not to worry, however; Trump was right there with the next big thing.

Space Force! Just the very idea got the media excited, and asking questions like, “For real?” and “What does that even mean?”, not to mention “Do we have to?” Sure, not every outlet took the idea seriously, but that’s the lamestream media for you. Everyone else was into the idea, or calling the president a laughingstock. It’s hard to be a leader. But at least Twitter understood the potential of Space Force.

SPACE FORCE!

The Takeaway: Make no mistake, people may joke now, but Space Force is the future.

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This 1 Job Interview Tip Makes You Sound More Well-Spoken
March 16, 2018 6:01 pm|Comments (0)

Interviews aren’t easy. Trying to make a good impression in a condensed period of time while under pressure makes us all nervous. That’s why preparing for interviews is so vital. Now, more than ever, hiring managers have very high expectations of applicants.

Smart people talk in simple terms.

Studies show people who try to sound important and smart by using long, complex words actually sound less educated and are less respected. The more basic and simply you can speak, the more believable you are. This makes sense. If you have to over-complicate things with a long-winded answer, it can give the impression you are:

None of these are things we wish to convey in a job interview. The solution is to master a three-step process for answering interview questions.

The “experience + learn = grow” model.

Most hiring managers use behavioral questions in interviews. These types of questions require a more-than-one-word answer. The key is to answer with just enough detail, but without going over-the-top. At Work It Daily, we teach job seekers the following format for answering any question concisely.

Experience — Summarize a situation from your past that validates you have the experience they’re looking for.

Learn — Share what the experience taught you.

Grow — Emphasize how you plan to use what you’ve learned to be more valuable to the employer.

For example, if a hiring manager asks, “Tell me about a time when you had to deal with a difficult customer,” you might answer:

Experience
“Once, an irate customer called our toll-free line and I answered it. The person had received damaged goods in the mail and was furious. I let him vent his frustration without interruption. When he finally finished, I thanked him for his honesty and apologized for the inconvenience. It was amazing how much his attitude changed when I didn’t try to make excuses. I asked him what he thought would be the best course of action and he suggested having a replacement sent overnight at our expense. I agreed and set it up. By the time we were done, he was complimenting the company on what great customer service we had.”

Learn
“What I learned that day is angry customers want to be heard, and focusing on the solution instead of what went wrong is the key to success.”

Grow
“Now, I’d like to use this knowledge, along with some of the other valuable customer-service lessons I gained at my last job to help exceed your customers’ expectations as well.”

See how easy it is to concisely convey your expertise when you follow this format?

P.S. — Asking questions is as important as answering them.

The best interviews are a two-way dialog. You should leave feeling like you had a meaningful conversation with the hiring manager. To do this, job seekers must also prepare questions to ask in the interview. Knowing how to sound well-spoken is only half of the equation. You also need to know how to appear engaged and excited about the role. The questions you ask can help you connect more deeply with the hiring manager and leave a stronger impression.

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Dolls Who Code: Barbie-Branded Coding Lessons Start This Summer
February 20, 2018 6:08 pm|Comments (0)

Barbie has had many careers: Aerobics instructor, paleontologist, and scuba diver, to name a few. Now, the 59-year-old doll is taking on yet another role—teaching girls to code.

Toymaker Mattel announced a series of Barbie-branded coding lessons at the annual International Toy Fair in New York, which kicked off last Saturday. The new curriculum is the product of a partnership with Mountain View, Calif.-based startup Tynker, which makes educational programming tools for kids. Mattel and Tynker began their partnership three years ago, but up until now the only brands made available to the startup were Hot Wheels and Monster High, the popular toy car line which has long been targeted at boys and another doll brand that never quite reached Barbie fame, respectively. Now, Tynker will be able to incorporate the iconic doll and her posse of injection-molded friends into their software curriculum for kids.

“We believe Barbie is a beacon to empower girls,” Mattel CEO Margo Georgiadis told Fortune in an exclusive phone interview ahead of the toy convention. “So we will continue to leverage Barbie to inspire girls to pursue the things they love.”

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Girls—and therefore, women—are significantly underrepresented in STEM (science, technology, engineering and math). The gap starts early, but by the time they get to the workplace, women make up less than one-quarter of those employed in STEM occupations. Georgiadis, who took over as CEO of Mattel early last year, has made it her mission to “techify” the company’s aging product lineup. That includes everything from creating more early coding toys for young kids to embedding natural language processing capabilities into Barbie’s Dreamhouse. According to Georgiadis, there are many other initiatives planned for utilizing Barbie to inspire and teach girls to enter STEM-related fields.

Mattel and Tynker say that programming “experiences” created by the startup’s standing partnership with the toymaker have already reached nearly 4 million kids. Now, with Barbie’s help, Georgiadis wants to reach a collective 10 million children by 2020. According to Tynker CEO Krishna Vedati, the new curriculum will be for kids in kindergarten and up, and will introduce them to basic programming concepts via seven learning “modules,” to be launched this coming summer. (A basic version of the curriculum will be available for parents and teachers free of charge; a premium one that allows for grade-specific tracking and more personalized functions will come with a subscription fee.)

“Obviously, Mattel is an iconic brand,” says Vedati, whose company has also inked partnerships with Microsoft-owned Minecraft to create educational products for kids.

Mattel is an iconic brand, as are many of its product lines. But it has also had a hard time transforming its portfolio to compete in today’s world (think the move to online shopping and the ubiquity and allure of mobile devices). In its last quarterly earnings report—which included the peak holiday season—the company posted a 12% decline in sales. Barbie, however, was a bright spot: up 9% in that same quarter. So who knows, maybe the controversial doll will actually be able to help diminish the gender gap in STEM, at least when it comes to getting girls into the field (keeping them there is a different story). After all, it won’t be Barbie’s first groundbreaking foray into a new career.

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Why This CEO Started a Secret Company to Compete with His Existing One
February 10, 2018 6:01 pm|Comments (0)

Eighteen months ago, FreshBooks CEO Mike McDerment did something that might blow your mind. In secrecy, he started a brand new company to compete with his existing one.

Finding Space to Experiment.

In my recent interview with McDerment, he described a moment in the winter of 2013 when he had been feeling uneasy about the steady growth of his business. Freshbooks, which had long been the darling of the DIY bookkeeping industry, needed to keep innovating to remain competitive.

The reality, which McDerment recognized, is that software products, by their very nature, are malleable and constantly changing. In today’s business landscape, consumers expect products to be constantly improving.

But how do you make major changes in a way that does not disrupt existing users? Especially when their livelihood depends on your product?

How does a company allow for the exploration required for innovation without screwing up what it’s already getting right?

McDerment asked himself these questions. And he believes he’d found the answer by rolling out an updated product, but not under the FreshBooks brand.

And so, he started BillSpring.  

Newcomer BillSpring could market its product as “in development,” thereby creating the space for experimentation and attracting new users with its updated design.

Sure, this strategy is logical, but it’s jarringly unconventional. However, McDerment says Freshbooks has sought to establish a culture of putting people at the center of every decision, so for him, it was an obvious move.

Being Human-Centered.

FreshBooks took the coveted first place spot in the highly competitive Great Places to Work survey. The secret sauce, according to McDerment, is the company’s ability to embody a human-centric approach to all facets of the business: from product development, to hiring and training.

Employees aren’t the only people who matter when it comes to making decisions at FreshBooks. Customers are in constant focus–a concept McDerment calls customer proximity.

To make sure that all team members understand customers, all newly hired employees spend a month in customer service. And this pitstop in customer service occurs without exception, not even for the new CFO, who had taken three companies public. Despite not having any customer-facing interactions, he too spent 30 days getting to know customers on the front lines of customer service.

As a result of this mentality, the company is hyper-sensitive to customer satisfaction. So in retrospect, the decision to create a completely separate brand is no surprise. In fact, it’s a considerate way of introducing change.

A Considerate Approach to Introducing Change.

Whether change is as simple as a minor feature update or something as significant as starting a whole new company to compete with, the consideration of the impact on all people involved should always remain at the forefront.

It’s not just what Freshbooks values, but as so many companies have proven, it’s just good business. 

Eighteen months after the experiment, Billspring had shown improvements in business performance and customer satisfaction, exceeded those of Freshbooks. At this point, McDerment finally decided it was time to come out of hiding, dissolving the Billspring brand and merging the products back under Freshbooks. 

“When we launched we didn’t want our users to worry. So if they said ‘you know what? It’s great but not right for me’ then they could return to Freshbooks classic,” McDerment says. “We did everything in our power to not destabilize our users’ business, and so the vast majority of people recognized that and chose the new version when they had the chance.” 

The Takeaway: Create the Conditions for Innovation.

The extreme stealth-mode approach may not be the right answer for other companies looking to navigate change and growth, but creating the conditions for change and growth is–for the organization and, more importantly, the real people they serve.

Despite the radical time and cost investment, McDerment stands by his 18-month experiment to deliver positive outcomes for its employees and customers. Ultimately, affording the freedom of time and space is what has enabled the award-winning success that the company enjoys today.

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