Common Stocks and Uncommon Profits (1960) by Philip A. Fisher
In this concise and compelling book, the author outlines an approach that has come to be known as growth investing. He seeks companies that have very strong growth potential and may produce gains of several hundred percent in a very short time. However, unlike "get-rich-quick" schemes, his approach is based on a comprehensive analysis of a company and a thorough understanding of everything about its business, prospects, and so forth. He presents 15 sensible points to look for in a company, such as a product or service with great growth potential; management effectiveness and integrity; strong research and development; large and improving profit margins; outstanding labor, personnel, and executive relations; good cost and accounting controls; and a long-range outlook. He argues that much of the useful information concerning these points can be obtained via the "scuttlebutt" method, which involves tapping into various branches of the business grapevine to get a multifaceted, in-depth view of a company.
After discussing when to buy and to sell growth stocks, the author addresses the "hullabaloo about dividends." He basically considers the payment of dividends to be a poor use of a company's money, which I agree with in the limited context of a company with strong growth potential that is capable of re-investing all of its money into its business in ways that are highly effective in producing strong growth that will promote accelerated capital appreciation for shareholders. However, this depends on a lot of assumptions (critically, whether that strong growth can be realized), which is why it only makes sense not to pay a dividend if a company meets the 15 points he outlined for a growth company.
The author also presents 10 "don'ts" for investors that generally constitute good advice. For example, he says that investors should not: (a) buy into a promotional company that has no track record; (b) buy a stock because they like the "tone" of the annual report; (c) quibble over eighths and quarters (i.e., fail to buy or to sell a stock because the market price is a few pennies away from their target price); (d) overstress diversification (he recommends concentrated portfolios); and (e) follow the crowd. He concludes with some general advice on how to go about finding a growth stock, which at the time depended strongly on his "scuttlebutt" method. It might be easier nowadays with the wider access to information and customized stock screeners, but his emphasis on conducting a comprehensive analysis of a company -- to a greater extent than what 99% of investors likely do -- remains as valid today as it was over 50 years ago. Overall, I think his approach can be extremely successful, but it requires a tremendous amount of work (it would basically make investing a full-time job) and a keen eye for analyzing a company and its growth prospects.
Note: I read this book in May 2012.
Saturday, May 26, 2012
Thursday, May 24, 2012
A Warning About Mini-Tender Offers
On May 1, I received an e-mail from my brokerage indicating that there was a "non-mandatory/reorg tender" offer for shares of General Dynamics (GD), a stock that I own. The e-mail was a form letter with no details about the offer, so I was in the dark about it. On May 4, General Dynamics issued a press release that provided some insight. A firm called TRC Capital was seeking to purchase up to 2 million shares of GD directly from shareholders; however, their offer price of $66.95 was 4.4% below the price at which GD was trading at the time of the offer ($70.06). Not surprisingly, General Dynamics recommended that shareholders reject the offer. I had no intention of parting with my GD shares anyway, so I ignored the offer and no action was taken.
I did some searching and found out that this was a "mini-tender offer" and that TRC Capital frequently makes them. In a nutshell, it is an offer to buy less than 5% of a company's outstanding shares directly from shareholders, typically below market price. If a shareholder tenders his shares to the offering firm, then the firm can turn around and sell them immediately on the open market, booking a nice little profit (because the current market price is higher than the offer price). If the market price happens to fall below the offer price, which is actually what has happened with GD, then the firm does not have to buy any tendered shares, yet the shares can remain "locked up" and bought later by the firm when the market price rebounds. If this sounds like a lousy deal for shareholders, that's because it is! The firm is basically hoping that ignorant shareholders will tender their shares without bothering to read the terms of the offer and without realizing that they are likely getting a below-market price for their shares. Surprisingly, this unscrupulous practice is legal.
If you ever receive an offer to tender your stock in a company, the first thing you should do is contact your brokerage and/or the company in question to find out the terms of the offer and be sure to read the fine print. If the firm making the offer is seeking to acquire less than 5% of the company's outstanding shares, then that is a red flag and indicates it is a mini-tender offer. It is likely to be a bad deal for shareholders, so my advice is to reject the offer (you probably will not have to take any action; you can simply ignore the offer). In contrast, if the offer is more legitimate (e.g., the entire company is being acquired), then it should be obvious in the offer details and you will likely be offered a premium over the current market price for your shares. Regardless, an investor should always fully investigate an offer to determine whether it is in his best interests.
For more information, see the SEC page about mini-tender offers and a great article from Investing Daily that discusses these offers and provides background on TRC Capital.
I did some searching and found out that this was a "mini-tender offer" and that TRC Capital frequently makes them. In a nutshell, it is an offer to buy less than 5% of a company's outstanding shares directly from shareholders, typically below market price. If a shareholder tenders his shares to the offering firm, then the firm can turn around and sell them immediately on the open market, booking a nice little profit (because the current market price is higher than the offer price). If the market price happens to fall below the offer price, which is actually what has happened with GD, then the firm does not have to buy any tendered shares, yet the shares can remain "locked up" and bought later by the firm when the market price rebounds. If this sounds like a lousy deal for shareholders, that's because it is! The firm is basically hoping that ignorant shareholders will tender their shares without bothering to read the terms of the offer and without realizing that they are likely getting a below-market price for their shares. Surprisingly, this unscrupulous practice is legal.
If you ever receive an offer to tender your stock in a company, the first thing you should do is contact your brokerage and/or the company in question to find out the terms of the offer and be sure to read the fine print. If the firm making the offer is seeking to acquire less than 5% of the company's outstanding shares, then that is a red flag and indicates it is a mini-tender offer. It is likely to be a bad deal for shareholders, so my advice is to reject the offer (you probably will not have to take any action; you can simply ignore the offer). In contrast, if the offer is more legitimate (e.g., the entire company is being acquired), then it should be obvious in the offer details and you will likely be offered a premium over the current market price for your shares. Regardless, an investor should always fully investigate an offer to determine whether it is in his best interests.
For more information, see the SEC page about mini-tender offers and a great article from Investing Daily that discusses these offers and provides background on TRC Capital.
Tuesday, May 22, 2012
Dividend Increase: VOD
Vodafone Group (VOD), which pays semi-annual dividends, announced its final dividend payment for 2012, which will be 6.47 pence per share. When this payment is added to the interim dividend payment of 3.05 pence per share from earlier this year, the regular dividends for 2012 (excluding the special dividend from Verizon Wireless) will total 9.52 pence per share, which is a 7.0% increase over the 8.90 pence per share paid in 2011. Due to exchange rate fluctuations, I will not know the exact amount of my dividend (which will be my first payment from VOD) until it is paid on August 1.
Wednesday, May 16, 2012
Stock Bought: VOD
Today I bought shares of Vodafone Group (VOD), a multinational telecommunications company headquartered in the United Kingdom.
I wrote about some of the reasons why I like VOD when I initiated a small position in the stock in March. At that time I indicated that I was planning to buy more shares pending the availability of cash and a price that remained attractive. Today's dip of nearly 2% in the stock's price provided me with the opportunity for which I had been waiting, enabling me to increase my position in VOD before the ex-dividend date of June 6 for the final dividend payment in 2012 (VOD pays semi-annual dividends).
I bought 50 shares of VOD at the price of $26.87 per share, which happens to be the same price at which I initiated my position. Consequently, I now have a total of 80 shares at the price of $26.87 per share, giving me a 5.40% yield on cost. At the current dividend rate, excluding any special dividend, I can expect to receive $116.84 in annual dividend income, which is $73.03 more than before. I am now satisfied with the size of my position in VOD, so I do not have any additional purchases of the stock planned at this time.
That said, I also have no other purchases planned for May because I have depleted the cash in my brokerage account. Thus, I will simply be watching the market from the sidelines for the next 2-3 weeks until I have more capital to invest from monthly savings.
I wrote about some of the reasons why I like VOD when I initiated a small position in the stock in March. At that time I indicated that I was planning to buy more shares pending the availability of cash and a price that remained attractive. Today's dip of nearly 2% in the stock's price provided me with the opportunity for which I had been waiting, enabling me to increase my position in VOD before the ex-dividend date of June 6 for the final dividend payment in 2012 (VOD pays semi-annual dividends).
I bought 50 shares of VOD at the price of $26.87 per share, which happens to be the same price at which I initiated my position. Consequently, I now have a total of 80 shares at the price of $26.87 per share, giving me a 5.40% yield on cost. At the current dividend rate, excluding any special dividend, I can expect to receive $116.84 in annual dividend income, which is $73.03 more than before. I am now satisfied with the size of my position in VOD, so I do not have any additional purchases of the stock planned at this time.
That said, I also have no other purchases planned for May because I have depleted the cash in my brokerage account. Thus, I will simply be watching the market from the sidelines for the next 2-3 weeks until I have more capital to invest from monthly savings.
Tuesday, May 15, 2012
Book Review: Beating the Street
Beating the Street (1993) by Peter Lynch
This book can be considered the sequel to the author's 1989 book One Up On Wall Street, which I previously read and enjoyed. Similar to that book, this one is largely autobiographical. In the first half of the book he provides some general discussion of investing (with a sprinkling of "Peter's Principles" along the way) and a retrospective account of his time as a mutual fund manager at Fidelity. One of his most important points comes in Chapter 2 (entitled "The Weekend Worrier"), where he tells investors not to get scared out of stocks whenever they hear prognostications of economic doom and gloom from market commentators. If a major crisis does occur and the stock market tanks, then investors should ride it out while buying their favorite stocks that have been pulled down with the rest of the market. In the second half of the book he discusses how he went about selecting the 21 stocks that he recommended to the readers of Barron's magazine in early 1992. While it was nice to gain some insight into his thought process, I surprisingly did not find the discussion to be particularly interesting or useful to me, perhaps because it was too specific to extract many general points. The book concludes with "20 Golden Rules" that are quite good, but they are presented in a short list without any extended discussion, which was disappointing. I would have preferred a book organized around these rules rather than (or in addition to) the discussions of his stock picks.
Note: I read this book in April-May 2012.
This book can be considered the sequel to the author's 1989 book One Up On Wall Street, which I previously read and enjoyed. Similar to that book, this one is largely autobiographical. In the first half of the book he provides some general discussion of investing (with a sprinkling of "Peter's Principles" along the way) and a retrospective account of his time as a mutual fund manager at Fidelity. One of his most important points comes in Chapter 2 (entitled "The Weekend Worrier"), where he tells investors not to get scared out of stocks whenever they hear prognostications of economic doom and gloom from market commentators. If a major crisis does occur and the stock market tanks, then investors should ride it out while buying their favorite stocks that have been pulled down with the rest of the market. In the second half of the book he discusses how he went about selecting the 21 stocks that he recommended to the readers of Barron's magazine in early 1992. While it was nice to gain some insight into his thought process, I surprisingly did not find the discussion to be particularly interesting or useful to me, perhaps because it was too specific to extract many general points. The book concludes with "20 Golden Rules" that are quite good, but they are presented in a short list without any extended discussion, which was disappointing. I would have preferred a book organized around these rules rather than (or in addition to) the discussions of his stock picks.
Note: I read this book in April-May 2012.
Wednesday, May 9, 2012
Dividend Growth Investing: The Role Of Diversification
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Dividend Growth Investing: The Role Of Diversification and it presents some of my thoughts on diversification, including counterarguments to two common criticisms.
Note that my articles appear under the username "Dividend Growth Machine."
Note that my articles appear under the username "Dividend Growth Machine."
Tuesday, May 8, 2012
Stock Bought: MCD
Today I bought shares of McDonald's (MCD), one of the largest restaurant companies in the world, with over 33,000 restaurants serving about 68 million people per day in 119 countries. It is a well-known brand with its signature Golden Arches and popular menu items that include Big Macs, Quarter Pounders, Chicken McNuggets, Filet-O-Fish sandwiches, and their classic French Fries, as well as a variety of beverage, dessert, and breakfast selections.
I think McDonald's is a stable, well-run company with good long-term prospects. MCD also happens to be a great dividend growth stock. The company has increased its dividend for 35 consecutive years -- every year since initiating its dividend payout in 1976. It has a 5-year dividend growth rate of 20.4% and the most recent increase (in December 2011) was 14.8%.
The stock's price decreased by more than 2% today after the company reported April sales that were lower than analysts' expectations. However, it is worth noting that the company's monthly sales still grew by over 3% worldwide and its year-to-date sales growth is higher than for the corresponding period in 2011. I don't pay much attention to technicals, but I did notice that today's dip moved the stock's price below its 200-day moving average to a 5-month low. On a fundamental basis, it put MCD in what I consider to be fair-value territory with a P/E of about 17.5 (previously, I felt the stock was a bit overvalued). I decided to take advantage of this price decline and increase my position in this excellent company.
I bought 15 shares of MCD at the price of $93.46 per share. Given that I had capital appreciation on my existing position, I was not able to average down, but that's okay. I now have a total of 50 shares at an average price of $88.84 per share, giving me a 3.15% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends from MCD of $35.00, which is a nice increase compared with the $24.50 I was getting before this purchase. Given that the stock will go ex-dividend near the end of May, I will start receiving my higher dividend with the June payment. MCD will now contribute a total of $140.00 to my annual dividend income, which is $42.00 more than before. MCD has also become the largest position in my portfolio, slightly above Philip Morris International (PM).
I think McDonald's is a stable, well-run company with good long-term prospects. MCD also happens to be a great dividend growth stock. The company has increased its dividend for 35 consecutive years -- every year since initiating its dividend payout in 1976. It has a 5-year dividend growth rate of 20.4% and the most recent increase (in December 2011) was 14.8%.
The stock's price decreased by more than 2% today after the company reported April sales that were lower than analysts' expectations. However, it is worth noting that the company's monthly sales still grew by over 3% worldwide and its year-to-date sales growth is higher than for the corresponding period in 2011. I don't pay much attention to technicals, but I did notice that today's dip moved the stock's price below its 200-day moving average to a 5-month low. On a fundamental basis, it put MCD in what I consider to be fair-value territory with a P/E of about 17.5 (previously, I felt the stock was a bit overvalued). I decided to take advantage of this price decline and increase my position in this excellent company.
I bought 15 shares of MCD at the price of $93.46 per share. Given that I had capital appreciation on my existing position, I was not able to average down, but that's okay. I now have a total of 50 shares at an average price of $88.84 per share, giving me a 3.15% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends from MCD of $35.00, which is a nice increase compared with the $24.50 I was getting before this purchase. Given that the stock will go ex-dividend near the end of May, I will start receiving my higher dividend with the June payment. MCD will now contribute a total of $140.00 to my annual dividend income, which is $42.00 more than before. MCD has also become the largest position in my portfolio, slightly above Philip Morris International (PM).
Saturday, May 5, 2012
Book Review: Top 40 Dividend Growth Stocks For 2012
Top 40 Dividend Growth Stocks For 2012: How to Create and Manage a Dividend Growth Portfolio (2012) by David P. Van Knapp
I had read rave reviews of previous editions of this e-book, so I bought the newest edition as soon as it came out earlier this year. Chapters 1 and 2 are introductory and provide an overview of the book, reflections on 2011, and a look ahead to 2012. Chapter 3 explores the conceptual foundations of dividend growth investing, introducing the reader to dividends and compounding. Chapter 4, which I think is the best chapter in the book, provides a fairly comprehensive discussion of the pros and cons of a dividend growth investing strategy. Chapters 5, 6, and 8 address the three phases of the author's approach to implementing the strategy, which involves: (1) finding excellent companies; (2) valuing stocks; and (3) portfolio management. I thought the chapters on finding excellent companies and valuing stocks could have been expanded a bit. Chapter 7 provides a scoring system for selecting dividend growth stocks, which I found to be just okay (I could quibble about some of the criteria and the point scales). Chapter 11, which comes near the end of the book for some reason (I think it would have been better near the beginning, perhaps after Chapter 4), provides a good discussion of the role that dividend growth investing can play in retirement planning. Collectively, I think Chapters 3-8 and 11 form the strongest part of the book, providing an excellent discussion of the basics of dividend growth investing.
Chapter 9 introduces the author's list of the top 40 dividend growth stocks for 2012 and Chapter 10 provides a one-page score sheet (using the aforementioned scoring system) for each stock. I found this part of the book to be mediocre. One issue for me was that the author restricted his list to stocks with minimum yields of 3% (or close to it). I understand his rationale for doing that, but it resulted in the omission of many excellent companies that are superior to several of the companies that made the list. A more critical issue was the lack of value provided by the score sheets. Each sheet has a summary of quantitative data that is somewhat minimal (e.g., few multi-year trends are shown) and a summary of the company (its "Story") that tends to be very basic. While I appreciate the author's intention to make the score sheets simple enough for readers to understand and construct on their own, I expect a costly e-book to provide me with in-depth stock analyses. Quite frankly, the score sheets were of no use to me because my own stock research produces better information than what I found in this book. Chapters 12-14, which conclude the book, provide previous lists of top 40 stocks, a short resource guide, and the requisite disclaimer.
In summary, my overall impression of the book is mixed. On the one hand, I think Chapters 3-8 and 11 provide an excellent introduction to dividend growth investing and how to implement the strategy. On the other hand, I think the top 40 list and score sheets provided in Chapters 9 and 10 are mediocre and cheapen the quality of the book. However, this is far from a cheap e-book ($40). For that reason, if the main update from year to year is the top 40 list, with only minor revisions to the rest of the text, then I probably won't buy a future edition. My personal preference would be for a stand-alone e-book on dividend growth investing (based on Chapters 3-8 and 11) at a more reasonable price, with the top 40 list offered as a supplement for separate purchase each year.
Note: I originally read various parts of this e-book from January to April 2012, then re-read it from start to finish in April.
I had read rave reviews of previous editions of this e-book, so I bought the newest edition as soon as it came out earlier this year. Chapters 1 and 2 are introductory and provide an overview of the book, reflections on 2011, and a look ahead to 2012. Chapter 3 explores the conceptual foundations of dividend growth investing, introducing the reader to dividends and compounding. Chapter 4, which I think is the best chapter in the book, provides a fairly comprehensive discussion of the pros and cons of a dividend growth investing strategy. Chapters 5, 6, and 8 address the three phases of the author's approach to implementing the strategy, which involves: (1) finding excellent companies; (2) valuing stocks; and (3) portfolio management. I thought the chapters on finding excellent companies and valuing stocks could have been expanded a bit. Chapter 7 provides a scoring system for selecting dividend growth stocks, which I found to be just okay (I could quibble about some of the criteria and the point scales). Chapter 11, which comes near the end of the book for some reason (I think it would have been better near the beginning, perhaps after Chapter 4), provides a good discussion of the role that dividend growth investing can play in retirement planning. Collectively, I think Chapters 3-8 and 11 form the strongest part of the book, providing an excellent discussion of the basics of dividend growth investing.
Chapter 9 introduces the author's list of the top 40 dividend growth stocks for 2012 and Chapter 10 provides a one-page score sheet (using the aforementioned scoring system) for each stock. I found this part of the book to be mediocre. One issue for me was that the author restricted his list to stocks with minimum yields of 3% (or close to it). I understand his rationale for doing that, but it resulted in the omission of many excellent companies that are superior to several of the companies that made the list. A more critical issue was the lack of value provided by the score sheets. Each sheet has a summary of quantitative data that is somewhat minimal (e.g., few multi-year trends are shown) and a summary of the company (its "Story") that tends to be very basic. While I appreciate the author's intention to make the score sheets simple enough for readers to understand and construct on their own, I expect a costly e-book to provide me with in-depth stock analyses. Quite frankly, the score sheets were of no use to me because my own stock research produces better information than what I found in this book. Chapters 12-14, which conclude the book, provide previous lists of top 40 stocks, a short resource guide, and the requisite disclaimer.
In summary, my overall impression of the book is mixed. On the one hand, I think Chapters 3-8 and 11 provide an excellent introduction to dividend growth investing and how to implement the strategy. On the other hand, I think the top 40 list and score sheets provided in Chapters 9 and 10 are mediocre and cheapen the quality of the book. However, this is far from a cheap e-book ($40). For that reason, if the main update from year to year is the top 40 list, with only minor revisions to the rest of the text, then I probably won't buy a future edition. My personal preference would be for a stand-alone e-book on dividend growth investing (based on Chapters 3-8 and 11) at a more reasonable price, with the top 40 list offered as a supplement for separate purchase each year.
Note: I originally read various parts of this e-book from January to April 2012, then re-read it from start to finish in April.
Wednesday, May 2, 2012
Monthly Review: April 2012
Here is a review of what happened in April:
Dividends: I received a total of $169.13 in dividends from the following stocks:
Dividend Increases: I was pleased to see dividend increases announced for three of my stocks (click on the stock to see my post about the increase): At this point, 12 of my 22 dividend growth stocks have increased their dividends this year. (In case you're wondering why I have posted about only 9 dividend increases: CNI increased its dividend on the day I bought the stock, and HRL and T announced their dividend increases for 2012 back in late 2011.) The average increase has been 9.1%, which is great.
Savings: This month I saved $1,702 (58.3%) of my net income, which is my highest monthly total thus far this year. Quite frankly, I don't think I can do much better than that. It was nice to get over the 50% mark for the third month in a row. This results in year-to-date savings of $6,164, which puts me 51.4% of the way toward my goal of $12,000 in savings for 2012. Thus, I am ahead of schedule for meeting my savings goal.
Transactions: I bought just one stock this month (click on the transaction to see my post about it): This purchase will increase my annual dividend income by $30.00. I did not sell any stocks for the fourth consecutive month. My portfolio now has 22 stocks with a market value of $52,106.60 (including cash), which is a 4.1% increase over last month's value of $50,046.40. Most of the increase reflects the addition of new capital, but a sizable chunk came from dividends and capital gains.
Seeking Alpha: In April I started contributing articles to the investing website Seeking Alpha. The following three articles were published (click on each title to go to the article):
Looking Ahead: I expect to receive less in dividends in May than I did in April, but that's okay. As we head into the summer months, my savings rate will take some major hits due to a few large annual and semi-annual expenses that will be incurred primarily in May and June. I will likely do some traveling to visit family and friends during the next few months (though I have not made definitive plans yet), which would result in additional expenses. Thus, my summer savings will not be great (at least when compared with my spring savings), but I can take solace in the fact that I have already made great progress toward my annual savings goal. Given that I may not have much new capital for investment this summer, I won't be making many purchases, but I will still likely be able to make one purchase per month.
Dividends: I received a total of $169.13 in dividends from the following stocks:
- CNI: $6.37
- GPC: $24.75
- ITW: $14.40
- KO: $15.30
- MDT: $13.34
- NVS: $56.47
- PM: $38.50
Dividend Increases: I was pleased to see dividend increases announced for three of my stocks (click on the stock to see my post about the increase): At this point, 12 of my 22 dividend growth stocks have increased their dividends this year. (In case you're wondering why I have posted about only 9 dividend increases: CNI increased its dividend on the day I bought the stock, and HRL and T announced their dividend increases for 2012 back in late 2011.) The average increase has been 9.1%, which is great.
Savings: This month I saved $1,702 (58.3%) of my net income, which is my highest monthly total thus far this year. Quite frankly, I don't think I can do much better than that. It was nice to get over the 50% mark for the third month in a row. This results in year-to-date savings of $6,164, which puts me 51.4% of the way toward my goal of $12,000 in savings for 2012. Thus, I am ahead of schedule for meeting my savings goal.
Transactions: I bought just one stock this month (click on the transaction to see my post about it): This purchase will increase my annual dividend income by $30.00. I did not sell any stocks for the fourth consecutive month. My portfolio now has 22 stocks with a market value of $52,106.60 (including cash), which is a 4.1% increase over last month's value of $50,046.40. Most of the increase reflects the addition of new capital, but a sizable chunk came from dividends and capital gains.
Seeking Alpha: In April I started contributing articles to the investing website Seeking Alpha. The following three articles were published (click on each title to go to the article):
- The Psychology Of Dividend Growth Investing: Defining Success
- Dividend Growth Investing Strategy: Benefit From "Other Persons' Mistakes"
- Dividend Growth Rates: Using The Past To Estimate The Future
Looking Ahead: I expect to receive less in dividends in May than I did in April, but that's okay. As we head into the summer months, my savings rate will take some major hits due to a few large annual and semi-annual expenses that will be incurred primarily in May and June. I will likely do some traveling to visit family and friends during the next few months (though I have not made definitive plans yet), which would result in additional expenses. Thus, my summer savings will not be great (at least when compared with my spring savings), but I can take solace in the fact that I have already made great progress toward my annual savings goal. Given that I may not have much new capital for investment this summer, I won't be making many purchases, but I will still likely be able to make one purchase per month.
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