Monday, January 05, 2009

Free Cash Flow and Dividend Stocks

As we enter the new year, this is the bonus post that hopefully can make us rich in time to come!

Short Name Industry Subgroup Dividend Yield
SINGAP SHIPPING Transport-Marine 10.53
SIA ENGINEERING Commercial Services 10.05
MOBILEONE LTD Cellular Telecom 9.864
SINGAP AIRPORT T Airport Develop/Maint 9.859
DEL MONTE PAC LT Food-Canned 9.586
SINGAP REINSURAN Reinsurance 9.154
SINGAP PRESS HGS Publishing-Newspapers 8.599
CEREBOS PACIFIC Food-Misc/Diversified 8.503
SINGAPORE POST Transport-Services 8.17
SINGAPORE FOOD Food-Misc/Diversified 7.684
SINGAPORE EXCH Finance-Other Services 7.49
HAW PAR CORP Diversified Operations 6.964
SINGAPURA FINANC Finance-Mtge Loan/Banker 6.667
UNITED O/S INSUR Property/Casualty Ins 6.55
HONG LEONG FINAN Finance-Other Services 6.341
PARKWAY HLDGS Medical-Hospitals 5.804
GREAT EAST HOLD Life/Health Insurance 5.791
SING INV FIN Diversified Finan Serv 5.714
CHUAN HUP HLDGS Transport-Marine 5.263
UNITED OVERSEAS Commer Banks Non-US 5.208
RAFFLES EDUCATIO Schools 5.13
APB BREWERIES Brewery 3.168

This is a list of stocks that have never had a single year of negative free cash flow for the past 8 years and hence I would deem that they should be able to pay dividends for the foreseeable future.

As a surprise, high dividend yield is not selected as a criteria for this list but 15 out of 23 stocks have a dividend yield of more than 6% which I think as high considering that with their strong FCF generative ability, the co.s have less probability of cutting their dividends and what you see is likely to be what you can get as dividends. But don’t be too hopeful, co. mgmt can play the conservative card and decide to keep cash and not pay you.

Incidentally, out of the 700 stocks listed on SGX, only 30 stocks had never had a year of negative FCF and in my opinion, these should be part of the truly investable stocks on SGX.

This drives another point that I have made before. Most stocks on SGX are crap and it is not worth spending time investigating and investing in them.

This does not mean that this list represents ALL the investable stocks on SGX. Or that stocks that don’t make it to this list equals crap. Certainly not! It also does not mean that every stock on this list will turn out to be 5-10 baggers in the future. If this happens, I would require a 25% share of your future profits. But probably, I should have made so much money that I wouldn’t be blogging here. Right?

The list is generated with no regard to the qualitative aspect of the various co.s, like mgmt capabilities, co’s past actions, true source of their cashflow, shareholder friendliness etc. I would advise you to do a lot more work on each of these co.s if you are seriously thinking of putting money into them. Names that I would avoid now would be Parkway: seems like that they might run into cashflow problems with their huge expansions. Others would be Singapura Finance, Raffles Education. Singapura Finance: totally don't know what they do. Raffles Education: wary of what they are doing...

It is unlikely that 80% or even 60% of the stocks on this list will turn out to be spectacular investments. Looking at the 10 year performance to date for this list of stocks, a handful of them have actually declined 50% in the past 10 yrs, making them serious lemons!

Well, that’s investing. Something like finding your life partner. You never get 100% of what you want: e.g. no chores, no quarrels, honeymoon every day, guy’s nights out with no curfew, no anniversary Carat upgrade request but Omega watch present every year, yeah dream on... Hopefully, we get some of what we want, and live with some of what we don't want. And things don't turn out too bad.

My hope would be that this list gives similar results.

14 comments:

modeller said...

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Brendan Lee said...

Those who buy stocks and hold will suffer more in this financial crisis.

Anonymous said...

Those who DIDN'T buy stocks in this financial crisis and hold will suffer more.

Ricky said...

And those who like to argue will suffer most :)

Kay said...

I am rather curious. Where did you get the list of stocks with FCF ?

8percentpa said...

Hihi,

Studies have shown that if you deduct the returns of best 10 trading days from 1950s to 2000s, your investment return on the S&P drops from 10% to 5% or something. Which means that it doesn't make sense NOT to buy-and-hold for the long run. Well, that is in the normal world.

A recent Economist article showed that anyone who had diligently put money to buy stocks for the past 10 yrs would have seen -ve return and argued that these savers should simply just put money under their pillow. So in this case buy-and-hold sucked big time.

But I think Anonymous is right. As long as the world continues to grow, this crisis should be the great bargain of our lifetimes.

This does not mean that trading doesn't work. It can still make good return if one has the discipline, flair, strategy and mindset.

8percentpa said...

Hi Kay,

My sources are from some of the financial information providers like Thomson, Bloomberg, Reuters etc. Some universities has 1 or 2 machines for their students/ex-students to use.

Cheers!

8percentpa said...

Hihi,

Just to delve a bit deeper into trading. Assuming the following:

1. You make 10 trades of $1,000 per yr
2. Your odds of winning is 60%
3. You cut loss at -10% and take profit at +20%

On the 4 losing trades: you lose $400 and on the 6 winning trades you win $1,200. Hence total winnings is $800 out of $10,000 per yr. ie 8%pa.

This is quite as good as long term buy-and-hold. But we need to consider the time spent on doing this (assuming you have a full-time job). This means a lot of family time poured into this.

And also odds of winning at 60% and payout of 2:1 (+20% vs -10%) is probably as good as it gets. From my own experience and fr what I read, most people don't achieve these stats.

Also, we haven't factor in transaction cost. Based on $20 per trade: 20x(10buys+10sells) = $400. So returns become 4%pa.

Based on all these, I think trading to make big bucks is quite a tall order. But it doesn't mean that it's impossible.

I personally know people who can do that and do make good money and still have a full-time job. If you are one of them, do share your experience.

This blog have room for all views.

Cheers!

mitchell said...

Hi,
You mention only 30 stocks had never had a year of negative FCF on the SGX, can you share them?

8percentpa said...

Hi I compiled a recent list
It looks like this

STRAITS TRADING 69.27
CHINA MERCHANTS 13.1
VENTURE CORP LTD 12.5
SINGAP AIRPORT T 11.97
SIA ENGINEERING 11.05
CHINA AVIATION 10.22
SINGAP PRESS HGS 9.818
CEREBOS PACIFIC 9.259
MOBILEONE LTD 9.177
DEL MONTE PAC LT 9.13
SINGAP TECH ENG 7.982
SINGAPORE EXCH 7.959
SINGAPORE POST 7.911
RAFFLES EDUCATIO 7.253
HAW PAR CORP 6.739
UNITED O/S INSUR 6.522
HONG LEONG FINAN 6.436
BONVESTS HLDGS 6.417
GREAT EAST HOLD 6.404
FOOD EMPIRE HLDG 6.09
UNITED OVERSEAS 6.019
CHUAN HUP HLDGS 5.882
PARKWAY HLDGS 5.851
SING INV&FIN 5.825
OCBC BANK 5.726
SINGAPORE FOOD 5.376
GP INDUSTRIES 5.319
SINGAP TELECOMM 5.061
SMRT CORP LTD 4.755
RAFFLES MEDICAL 3.497
METRO HOLDINGS 3.448
APB BREWERIES 3.2
YEO HIAP SENG 0

Anonymous said...

Singapore Reinsurance posted a net loss in 2008, negative cash flow, would you want to take them out of the list now ?

8percentpa said...

A selection of stocks using similar factors is on the newest post of this blog, I think it doesn't include Singapore Reinsurance.

I did not decide which stocks went into the original list. I used a screening function using value factors to do that. The most important factor being very little negative free cashflow.

So in a sense, I cannot take out any stocks. The list is a starting point to hunt for value stocks. It is unlikely that 80% or even 60% of the stocks on this list (or all future lists) will turn out to be spectacular investments. I won't be blogging here if it did.

Anyways, I have added a Facebook page for the blog, do join as a Fan!

asicgel said...

halo,

That's very helpful information indeed. However, as most of us here are equity investor, it is more appropriate for you to get the "free cash flow to equity" because non on us here are debt holders. Thank you.

8percentpa said...

Very interesting suggestion, I would take it up when I do an update of the list. Which is dunno when... Time is a scarce commodity.

But having said that, most firms here do not have any debt, so the FCF is the same as FCF to equity.