Monday, March 27, 2017

Buying Singapore Savings Bonds

Investing is a fascinating game in a sense that no formula ever works all the time. There is no "Bao Jia" or sure wins. There are no programmable solutions, no absolutes and we must always break the rules to win. There is also no such thing as never. Warren Buffett himself broke his own rules so many times, in order to win. He said he would never buy tech stocks, yet he bought IBM and Apple.  He concluded airlines won't make their cost of capital, yet he bought airlines! 

Airlines, the one industry that was guaranteed to lose money! How to be a millionaire? First, make a billion dollars and then buy an airline! That's the infamous running joke in investment circles for decades. To ward off that taboo, Vietnam's most famous LCC (low cost carrier) airline deployed the auspicious red color and bikini girls to market itself. So far, it had a successful IPO, but we shall see!

VietJet and its bikini girls

Singapore Savings Bonds or SSB is also an idea that is somewhat against the rules in value investing practice. Value investing targets high single digit return, not 1-2% return over 10 years. So why are we discussing SSBs here? Shouldn't we talk about Colgate and Unilever and Moutai?

Ok first let's look at what's SSB all about? 

SSB was launched in 2015 with underwhelming response but had since grown to be slightly more popular. According to a recent ST report, 32,000 people had invested S$810 million in SSBs. This is 16x more popular than the conventional government bonds which require investors to hold to maturity i.e. 30 years for the longest issues. With SSB, we can sell and get back capital plus interest any time. However, the total investment so far is way below the S$4 billion target. 

As another gauge of its popularity or rather un-popularity, we have hundreds of thousands of retail investors in the stock market (triangulated from 1.6m SGX CDP accounts with some that are likely dormant), the mere 32,000 in SSBs again pales in comparison despite the product being investable at just S$500! The lowest denomination for stocks would usually be four digits.

Why the un-popularity one might ask. I guess it's really about the lack of marketing and distribution. This is a product directly launched by MAS (Monetary Authority of Singapore) which obviously had no marketing track record and the banks, even though they are distributing the product, had no incentive to sell SSB since it sucks deposits out of their balance sheet and they don't earn anything by selling more (only S$2 per transaction!). Also, the interest rates are really not palatable to investors. The table below shows how it works.

SGS interest rates

SSB works differently from a conventional government bond as you can redeem it anytime. But because it provides this optionality, the interest rate is also slightly lower. Hence depending on how long you put in, the interest rate you get is different. Reading from the table, it says that if an investor put the money in for 1 year, he stands to earn 1.02% interest. This is similar with some of the fixed deposit schemes out there but as you can see, the interest rate creeps up the longer one holds. At 4 years, we get to 1.5% and at 10 years, we get to 2.27% (look at the average return per year not the interest in the middle row). This is actually close to where the conventional 10 year bonds are trading at.

The chart below shows that 10 year Singapore Government Bonds are trading at 2.24 to 2.32% yield. So, it's really not too different from SSB yield at 10 years. The trouble with bonds is that the global low and negative interest rate environment had really caused yield to collapse. Reading from the same table below, we see that 30 year bonds are trading at only slightly higher 2.5% yield. Holding this for 30 years gets you just 2.5% per year! Singtel gives you c.4% dividend with growth potential in India, Thailand and Indonesia! 

SGS prices

Ok, so bonds are really too boring for value investors. We are talking about 1-2.5% return over decades. So why bring it up here? The argument here is that this instrument should really be competing with cash, not compounders or value stocks. This was the original intent by MAS, and if we think about it, it's really thoroughly thought through and quite beneficial to small retail investors. We all have dormant cash lying all over the place. This cash earns 0%. What we should do is to put some of our dormant cash into this (lowest denomination starts at $500!). If and when we need the cash, we can just take it out (but we do stand to lose the additional interest for the subsequent years). Everything can be done online. It's that easy.

Ok but what about fixed deposit schemes offered by the bank that are better? Well, they are usually for only 3-6 months and we have to keep rolling to enjoy the good rates. It's really a bit too much hassle for most working people and only retired aunties and uncles can afford to do that - queuing at the different banks to roll fixed deposits and get free Fitbit or porcelain sets. The irony here is that most aunties and uncles usually roll the same pot of money just to get that additional 20-30bps, but if they had put into SSB, they stand to earn up to 2.27% over time, more than 100bps incrementally. 

As astute investors, we should also deploy some capital here bcos it's better than cash. Most investors usually have some cash, say 5-15% to have the optionality to buy great stocks if and when the opportunity comes. This cash earns nothing but if it is deployed into SSB, it stands to earn at least 1%. If it so happens that the cash is subsequently needed in a few months, we still get the accrued interest. So, it's essentially cash but earning interest.

SSB details

There is one last point to make which is listed in the details above. There is actually a cap on how much SSB one can hold. It's $50k per issue and $100k across all issues. That's like not enough to pay the ABSD for some who are thinking of buying their second properties. This is likely a precaution given that our Government is super cautious. We don't want some shady billionaire putting in one billion and then earning $20m per year out of this. Another caveat is that CPF and SRS funds cannot be used, unfortunately.

So, that's in short the idea that's against the rules. Investing and portfolio management is also about relative benefit more so often than absolute benefit. This is a lesson that some may never learn because we have been thought to think in binary terms - something is either good or bad, right or wrong. A portfolio is never like that. If this is better than cash, we should buy this over cash. We judge a stock by its relative upside vs other stocks in the portfolio. Never only looking on its own merit. By always thinking in relative terms, we can then upgrade our portfolio part by part and hopefully some day achieve optimization.

That's practical investing!

Disclaimer: this author bought the SBAPR17 GX17040N SSB tranche.

Friday, March 10, 2017

2017 High Dividend List - 1H version!

The annual high dividend list is here! This will be the first list for 2017 with a second list coming out closer to the end of the year so as to shorten the waiting time for these highly popular lists. Over the years (this is the 8th year), these lists had become an attraction of its own, drawing lots of traffic for the site. Although the rest of the stuff is actually pretty good! :)

Final Fantasy, one of the most popular game series in the 1990s and 2000s might be an analogy that some readers could relate to. The game is in its fifteen reiteration and every series features a few beautiful computer generated female leads that had captured the attention of the male game players. Somewhat like what the dividend list is trying to achieve for this site. Haha! Anyways, the female lead for the latest reiteration is captured below.

Lunafreya from FFXV

Okay. Let's move on!

It's been difficult to screen for good names in the last few years given the conditions of the markets. As interest rates declined globally into negative territories, the global hunt for yield had affected bonds, property and stocks. It has become almost impossible to find good and high quality bonds giving decent interest income, meaning at least high single digit coupons. In today's markets, only crap companies that cannot find capital come out to ask for money and pay out 6-8% interest to some gullible investors. Meanwhile, good firms can borrow at low single digit interest rates or maybe no interest at all! In fact, Nestle short term bonds pay close to zero interest and at one point traded at negative yield. So, just to reiterate, bond yields had collapsed big time. In property, we see the same phenomenon as rental yields get compressed. In Singapore, good properties are now selling at 2.5-3% rental yield when it used to be able to go to 3.5-4%. Gone are the days when we could buy good nice condos below $1,000 psf.

As for stocks, again, it's the same story. We used to be able to find great companies having dividend yields of 4-5%. Today, we would have to settle for 2.5 to 3% which would be pretty good already if the companies are world-class and strong cashflow generators. In the past, the dividend list just focused on Singapore but we would only see a handful of names which doesn't really make up a list. Hence the list had since gone global a few years ago and this current one has 55 names. Again, the criteria for selection hasn't changed much over the years. We are mostly screening for consistent free cash flows, dividends, margins and ROEs. The first part of the list is attached below.

2017 Mar Dividend List - Part 1

We see some familiar names in this first part/tranche with some international names like Symantec, Vivendi and Mattel, companies with partially outdated models trying to transition in the new economy. This happens a lot with quant screens and hence, in the end, it pays to really dig and really understand the fundamentals of businesses. As for the Singapore names, we see a few this time: UMS (which we discussed last year), M1, Mapletree Industrial Trust, Silverlake Axis, Ascendas India and Yangzijiang. I would comment that there's nothing interesting here. REITs are tricky giving the upcoming interest rate hikes in the US and shipbuilding is too treacherous. Silverlake Axis could be interesting but there might be some corporate governance issue which was flagged out by a short seller report last year. M1 - well, it's going nowhere, Singapore doesn't need four telcos...

The second part of the list (below) sees a few tobacco names which had also appeared regularly. Tobacco stocks are usually screened out because they churn out huge cashflows but yet trades at a discount because some large and reputable investors tend not to invest in these stocks given the damage tobacco had done to humans. Tobacco is the single, largest cause of human deaths in the history of humanity. However, as with all things in life, the only constant is change and we might be at the cusp of a revolutionary change in the tobacco industry.

2017 Mar Dividend List - Part 2

About 16 months ago, Phillip Morris, the world's largest tobacco company (well actually there are only four big listed ones and they are almost as big) invented a new kind of cigarette which uses a high tech device to heat tobacco leaves instead of burning them. Without burning, the smoke content with smoking is reduced to virtually zero and second hand smoke is eliminated, although there is still a bit of the smell. But the biggest value proposition is this - it reduces the toxicity of tobacco by over 90% and the firm postulates that in a few years, traditional tobacco products will be gone. If this happens, tobacco becomes more like alcohol (still a vice but much less harmful) and deaths by smoking would be reduced dramatically. Millions of lives would be saved. This is a game-changer.

Phillip Morris first launched its product called iQOS in Japan last year and it became a huge success, garnering 10% market share in one year and the rest of the big tobacco firms are scrambling to come up with competing products. If this trends continue, we really might see the end of traditional smoking and big and ethical investors can buy tobacco again. Tobacco companies would at least double just based on its valuation expansion. And this would be good valuation expansion from low teens PE to high teens (not your 40-50x PE). So, this is really major although we are probably seeing the change in terms of decades rather than years.

This second tranche also has a few good Singapore names such as Singtel, SGX and ST Engineering. We will dive into more about STE or ST Engineering today. This is an interesting name to look at in today's world given its business in defense. The world has become a more dangerous place in the last few years with the war in Syria, North Korea getting more belligerent and China exerting its military power. ST Engineering boasts 30-40% of its earnings from defense, albeit mostly for the Singapore government, and hence should stand to benefit from this trend. 

2017 Mar Dividend List - Part 3

The other part of its business is similar to SIA Engineering's aircraft maintenance which had seen a few years of poor conditions as new airplanes were introduced and maintenance requirement cut but the industry should be poised for a rebound and again ST Engineering will benefit from the recovery. This is a company that had consistently generated a few hundred million dollars of free cashflow annually over the years and trades at 4% FCF yield which it pays out 2.5-3% in dividends. Alas, the stock gapped up about a month ago and we might need to wait a while to get it at a reasonable margin of safety.

Finally, let's talk about the last portion of the list. The last tranche has quite a few good value/quality companies like Coca Cola, IBM, both Warren Buffett's holdings and Coach. This luxury bag name had been undergoing transformation in the last few years as its customers moved away to newer brands like Michael Kors. But Coach does have a strong tradition and in luxury, having that is a big, big plus. You can't get Audrey Hepburn to have breakfast at another jewellery store today or get Neil Armstrong to wear the Apple Watch to the moon. Luxury is about telling unforgettable stories. Coach had less of that super marketing legacy but with 75 years of history, it's still a force to be reckon with. In the worst case, some big boys like LVMH or Gucci would simply buy it out if it gets too cheap.

In Singapore, we also see old favourites like SATS and Boustead again as we lowered the dividend cut off to 3%. Alex Huntgate had done a great job at SATS in the last few years and needless to say, FF Wong's 20 year legacy at Boustead continues going strong! So, that's about it, we shall screen again in the later part of the year and do check back for more!

Here's the past lists:
2016 Dividend List - Part 2
2016 Dividend List - Part 1
2015 Dividend List - Part 2
2015 Dividend List - Part 1
2014 Dividend List
2013 Dividend List - Part 2
2013 Dividend List - Part 1
2012 Dividend List
2011 Dividend List
2010 Dividend List
2009 Dividend List