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Value Series II: Target Employees Can Use the P/CF Ratio to Find Value

For Target employees building a Retirement strategy, focusing on undervalued stocks with a high Price-to-Cash Flow ratio can be a useful tool to improve portfolio performance and plan for the future, 'says [Advisor Name], a representative of The Retirement Group, a division of Wealth Enhancement Group.

'As market volatility continues to mount, Target employees should look for investment strategies that reward cash flow more than traditional earnings to help them achieve their long-term Retirement goals,' says [Advisor Name], a representative of The Retirement Group, a division of Wealth Enhancement Group.

In this article we will discuss:

1. Importance of Price-to-Cash Flow ratio in the evaluation of investment opportunities.

2. Long-term returns how value investing outperformed glamour investing.

3. Role of Price to Cash Flow ratio in retirement planning for Target employees & retirees.

Given current market volatility, we think now is a good time to revisit important value metrics with Target employees and retirees in our four-part series. Part two of this four part value series will examine the Price-to-Cash Flow ratio. But sometimes investors want to beat the market. Those investors should consider the following proven strategy that some great investors have used.

Value investors learned how to beat the average annualized returns of the S&P 500 decades ago - and many have decades of track record to prove it. The most famous value investor is obviously Warren Buffett, but so are Benjamin Graham, David Dodd, Charlie Munger, Christopher Browne and Seth Klarman. This style invests in four metrics that define a value investment. These are the Price-to-Earnings Ratio, Price-to-Cash Flow Ratio, High Dividend Yield and Price-to-Book Ratio. These metrics are strong indicators of undervalued security, as you will see. These cheap Target securities regularly beat the market. How they affect investing depends on some characteristics and how their investment returns are correlated.

Today we examine the Price-to-Cash Flow ratio (P/CF) as a tool for planning for the retirements of Target employees. Many feel that using cash flow rather than accounting earnings paints a more complete picture of a company's business performance that may help with investment decisions and investment performance. We understand researched solutions are important to Target employees. Below are the results of two Fama and French [1] backtests of cash flow yield (the inverse of P/CF ratio) data from 1951 to 2013. As of December 2013, the sample had 2,526 firms (Carlisle-PCF, P2). The value decile had the 269 stocks with the highest cash flow yield and the glamour decile had the 311 with the lowest cash flow yield. The glamour stocks average USD 4.74 billion in size and stocks are worth USD 4.80 billion. (The average is skewed by the largest companies. In context, the smallest company is worth USD 272 million today (much smaller than average but still investable for most investors).

Stocks having negative cash flow were excluded. Portfolios are formed June 30 and rebalanced annually. In this backtest, the two portfolios are weighted by market capitalization, so bigger firms drive the portfolio performance more and smaller firms less. Here the value decile has returned 16.7 percent compound (18.6 percent in the average year) versus 9.3 percent for the glamour decile (11.5 percent in the average year) (Carlisle-PCF, P3) This is because the value portfolios generated more cash flow per dollar invested compared to the glamour decile. 27.2 percent versus 4.3 percent for the glamour portfolio (Carlisle-PCF, P5). I used a rolling average. The 'average' I've quoted is for the full period. The rolling average is higher but never lower. The rolling average is the annualized mean return for each year-long period (sometimes called a 5-year rolling return) As we noted above, value's outperformance over glamour is not a historical anomaly.

Taking just the period from 1999 we see that even though the return is lower than the long-term average, value has remained the better bet. Since 1999, value outperformed glamour 8.7 percent compounded and 6.2 percent in the average year (Carlisle-PCF, P7) Possibly the popularity of simple value strategies has contributed to lower returns recently. I think it's because the market is still working off the massive overvaluation of the late 1990s Dot Com boom. We think a value-based strategy is best for Target employees and retirees Market capitalization-weighted returns can be used to show that the outperformance of value over glamour is not due to value portfolios with smaller stocks. They mean absolutely nothing unless you're running an index or hugging an index. It is easiest to just weight all positions equally in a portfolio. (If we are prepared to take a little more volatility in exchange for a little extra return, we can also Kelly weight [2] our best ideas). Kelly Weighting is based on the Kelly Criterion - a formula for determining what percentage of capital should be invested in each trade to achieve maximum long-term growth.

There are two parts to the formula (Kelly% = W-[(1 - W)/R]: the winning probability factor W and the win/loss ratio R. It is a winning probability that the probability trade will result in a positive return. The win/loss ratio is the sum of the positive trade amounts minus the negative trading amounts. Its result will tell investors what percentage of their total capital they should invest in each investment. Equal weight return statistics for cash flow yield are given below. The value returned 20.7 percent compounded (23.8 percent on average) against glamour's 9.3 percent compounded return (12.5% on average) in the equal weight backtests (Carlisle-PCF, P9).

And you might notice that there is a tiny advantage for the cash flow yield's value decile over the earnings yield's value decile: 20.7 percent to 20.1 percent. We'll examine the impact of that small cash flow win in coming weeks. Again the value portfolios generate more cash flow than the glamour portfolios - 24.6 percent versus 4.1 percent in the glamour portfolios. We saw last week that the average cash flow yield of the equally weighted value portfolio is a bit lower than that of the market capitalization-weighted portfolios.

This means that over the whole period, bigger stocks were generally cheaper than smaller stocks to buy cash flow. Not always, of course, but it is interesting nonetheless. In equal-weight portfolios, value has beaten glamour since 1999 by 11.1 percent compounded and 10.0 percent in the average year. Since the value portfolios generate more cash flow than the glamour portfolios (on average 24.6 percent versus 4.1 percent in the glamour portfolios) we value research just as much as Target employees and retirees do (Carlisle-PCF, P10). We saw last week that the average cash flow yield of the equally weighted value portfolio is a bit lower than that of the market capitalization-weighted portfolios.

This means that over the whole period, bigger stocks were generally cheaper than smaller stocks to buy cash flow. Not always, of course, but it is interesting nonetheless. In the equal-weight portfolios, value has outperformed glamour Since 1999 by 11.1 percent compounded and 10.0 percent in the average year (Another study analyzing the P/CF metric is listed below. Brandes study In a Brandes Research Institute Study, exhibit 6 shows global all-cap results across three price metrics. They confirmed a consistent premium across all metrics. Focus is on P/CF ratio and outperformance in decile 10 value stocks. The smallest outperformance between decile 1 glamour stocks and decile 10 value stocks is seen in P/B measurement, where the average outperformance was 7.1% (Brandes, p. 8) In the same Brandes study they tracked Price-to-Cash Flow in the U.S., Non-U.S. and Emerging Markets. In rolling 5 year annualized returns of price-to-cash flow deciles for 1980-2014, the lower price-to-cash flow deciles outperform the higher Price - to-Cash flow deciles.

Results are shown on the graph 'Appendix C: Figure 4' Using P/CF Deciles Findings by Regions. ' Even though all of the lowest Price-to-Cash Flow deciles outperform the high Price-to-Cash Flow deciles, the biggest premiums occur outside of the United States. Actually, the biggest premium is found in emerging markets where companies that generate more cash are better positioned to weather market downturns. This highlights how useful P / CF ratio analysis can be in planning for Target employees' and retirees' retirements Currently the average Price-to-Cash Flow (P / CF) for the stocks in the S&P 500 is 13.9.

But like the P/E ratio, any value below 15 to 20 is generally good. A study from Zach's confirms this. According to their testing, a P/CF of 0-10 delivered the best result (17.1% in 10 years). The second best was 10-20, up 10.2%. But at + 30, the odds are stacked against a loss (-2.8%). And over 40, the odds are even greater - -6.9%. You can see that low-price-to-cash-flow stocks outperform high-price-to-cash-flow stocks The Retirement group is a national group of financial advisors. We only plan for and design retirement portfolios for transitioning corporate employees.

And each representative of The Group has been hand picked by the Retirement Group in select cities throughout The United States. Each advisor was screened for pension expertise, financial planning experience and portfolio construction knowledge. TRG believes in teamwork to find solutions to our clients' problems. A conservative investment philosophy guides the team in constructing client portfolios with laddered bonds / CDs / mutual funds / ETFs / Annuities / Stocks and other investments. They handle Retirement / Pensions / Tax / Asset Allocation / Estate / Elder Care issues. This document uses different research tools and techniques. All attempts to estimate future results involve assumptions and judgments and are therefore only tentative estimates.

The law, investment climate, interest rates and personal circumstances will all change and will affect how accurate our estimations are and how appropriate our recommendations are. Such a plan requires ongoing change sensitivities as well as constant re-examination and alteration of the plan. So update your plan a few months before your expected retirement date and do an annual review. Nothing contained herein shall be construed as an attempt by the Retirement Group, LLC or any of its employees to practice law or accounting. We look forward to speaking with any tax and/or legal professionals you may select regarding the implications of our recommendations. Through your retirement years we will continue to update you on issues affecting your retirement via our complimentary and proprietary newsletters, workshops and periodic updates. Or call us at (800) 900-5867.

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Sources:

1. 'Layoffs and Job Cuts News - 2024.' The Layoff , 2024, www.thelayoff.com

2. .'Cognizant Technology Solutions Restructuring and Layoff Updates. ' The Layoff , 2024, www.thelayoff.com .

3. 'Cognizant Technology Solutions Pension Plan and 401(k) Details. ' Investopedia , 2024, www.investopedia.com .

4. 'Stock Options and RSU Details for Cognizant Technology Solutions. 5. ' Forbes , 2024, www.forbes.com .

5. 'Cognizant Technology Solutions Employee Stock Options and RSU Guide.' Business Insider , 2024, www.businessinsider.com .

What are the key benefits provided by Target Corporation's Personal Pension Account and Traditional Plan for employees approaching retirement, and how do these plans ensure financial security during retirement years? Understanding the synergy between these two plans is essential for retirees, as they work together alongside Social Security and personal savings to replace a portion of an employee's paycheck after retirement.

Key Benefits of the Personal Pension Account and Traditional Plan: Target Corporation's pension plan includes two components: the Personal Pension Account and the Traditional Plan. These plans work in tandem to replace a portion of an employee's paycheck during retirement. The Personal Pension Account provides pay credits and interest that accumulate over time, while the Traditional Plan uses a final average pay formula. Together with Social Security and personal savings, these plans help ensure financial security in retirement(Target Corporation_Dece…).

How can employees elect different payment options, such as the Single Life Annuity or the Joint and Survivor Annuities, within Target Corporation's pension plans? It is crucial for employees to grasp not only the financial implications of these choices but also the necessary spousal consent required when designating a joint annuitant, particularly if the chosen joint annuitant is not the employee's spouse.

Payment Options and Spousal Consent: Employees can elect different payment options, including the Single Life Annuity, which provides the highest monthly benefit and ceases at the retiree’s death, or the Joint and Survivor Annuity, which continues payments to a surviving spouse. To elect a non-spouse as a joint annuitant, spousal consent is required, and this must be notarized to ensure compliance with plan rules(Target Corporation_Dece…).

In what circumstances might benefits not be paid under the Traditional Plan, and what steps can employees take to ensure they remain eligible for their pension benefits upon termination of employment? Target Corporation's policy outlines several scenarios where benefits could be denied, making it necessary for employees to be proactive in understanding their rights and responsibilities concerning plan participation.

Circumstances for Denial of Benefits under the Traditional Plan: Benefits under the Traditional Plan may not be paid if an employee leaves before becoming vested (less than three years of service). Employees should ensure they meet the vesting requirements and maintain eligibility by avoiding termination before they reach the minimum service period(Target Corporation_Dece…).

What procedures should employees follow to report changes in marital status, address, or beneficiaries to ensure compliance with the requirements of Target Corporation's pension plan? Employees must understand the importance of timely reporting these changes to avoid potential issues with their retirement benefits and ensure that their pension plan information remains up-to-date.

Reporting Changes in Marital Status or Beneficiaries: Employees must promptly report changes in marital status, address, or beneficiaries to Target's Benefits Center to ensure their pension records remain up-to-date. Failing to do so can lead to delays or issues in processing pension benefits(Target Corporation_Dece…).

How does Target Corporation determine the final average pay used to calculate retirement benefits under its pension plans, and what factors may affect this calculation? Employees nearing retirement should be fully informed about how their compensation is considered in determining their pension benefits, including aspects such as bonuses and overtime that may influence their final average pay calculation.

Final Average Pay Calculation: Target Corporation calculates final average pay based on the five highest years of earnings out of the last 10 years of service. This includes regular pay, overtime, bonuses, and commissions but excludes items like workers' compensation or long-term disability payments(Target Corporation_Dece…).

How can employees begin the process of rolling over their Target 401(k) accounts into the Pension Plan, and what advantages does this Pension Purchase Program offer? Understanding this rollover option is vital for maximizing retirement benefits, as it can provide employees with a stable income stream while avoiding unnecessary fees typically associated with purchasing annuities outside the plan.

Rolling Over 401(k) into the Pension Plan: Employees can roll over their 401(k) accounts into the Pension Plan using the Pension Purchase Program. This option offers several advantages, including avoiding fees associated with purchasing annuities outside the plan and receiving a stable income stream during retirement(Target Corporation_Dece…).

What are the implications of a participant's age and joint annuitant's age on the payment amounts under the various Joint and Survivor Annuity options at Target Corporation? Employees should be aware of how age differences can impact their pension payouts, as the specific percentages payable under these options may vary based on the ages of both the participant and their designated joint annuitant.

Effect of Participant and Joint Annuitant’s Age on Payments: The Joint and Survivor Annuity options are influenced by the ages of both the participant and the joint annuitant. The younger the joint annuitant, the lower the monthly payout due to actuarial adjustments. Employees should consider these factors when selecting an annuity option(Target Corporation_Dece…).

How are retirement benefits managed during potential plan terminations or amendments at Target Corporation, and what protections are in place for employees in these scenarios? Employees should be well-informed regarding their rights in the event of changes to the pension plan, including how benefits would be distributed and under what circumstances they may remain fully vested.

Plan Terminations or Amendments: In case of plan terminations or amendments, vested benefits are protected, and employees will receive their earned pension. If the plan is amended or terminated, Target ensures that vested benefits are distributed according to the plan's terms(Target Corporation_Dece…).

For employees retiring or leaving Target Corporation, what options are available with respect to unused vacation time and how might this be factored into pension calculations? Understanding how accrued time off translates into benefits could have a significant impact on an employee's financial positioning upon retirement.

Unused Vacation Time and Pension Calculations: Unused vacation time does not directly affect pension benefits but can be included in eligible earnings calculations that determine final average pay. Employees nearing retirement should consult with Target’s Benefits Center to understand how unused time may impact their overall benefits(Target Corporation_Dece…).

How can employees contact Target Corporation for assistance with their retirement benefits to address any questions or concerns they may have about their pension plans? Accessing the right resources and support is essential for employees to navigate their retirement benefits effectively. They can reach out to the Target Benefits Center at 800-828-5850 for more specific inquiries related to their personal circumstances. These questions aim to enhance employees' understanding of their retirement benefits, ensuring they are well-prepared for their transition into retirement.

Contacting Target for Pension Assistance: Employees can contact the Target Benefits Center at 800-828-5850 for assistance with their retirement and pension plans. This center provides support with any questions related to pension options, payments, and administrative requirements(Target Corporation_Dece…).

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For more information you can reach the plan administrator for Target at 10 South Dearborn Street 48th Floor Chicago, IL 60603; or by calling them at 1-800-440-0680.