Monday, April 30, 2018

2018 Dividend List - Part 2

This is a continuation of the first 2018 dividend post.

The second part of 2018's dividend list consists of the other two tobacco companies and some other names. This screen was done before Philip Morris collapsed 15% on bad earnings so now they are even more attractive. The big investment question for tobacco is always whether we want to associate ourselves with the largest mass murderers in the history of mankind. Warren Buffett never did although some investors including yours truly here were never that noble. This reminds me of a quote from a recent good docu-movie - The China Hustle. 

"There are no good guys in this story... including me." - Dan David, Founder of Geo Investing.

So, buy tobacco, make money and do good. Maybe that's the moral of the story today. Meanwhile, alongside mass murderers, we have tech companies that innovated a hell of goodness that are featured here, Seagate, Qualcomm, IBM and UMS, the engineering and equipment manufacturer for semiconductor firms in Singapore. Each of these has its own idiosyncratic problems and hence while they generate strong free cashflow and distribute good dividends, they are caught in some form of value trap and hence get screened out. It is hard to say when the value gets unlock. Case in point: IBM had been such a trap for donkey years that Warren Buffett himself sold out of it. Perhaps Qualcomm might be the one to get out faster, but with its failed merger with Broadcom, it might take another 2-3 years before they can sort things out. 

Dividend List Part 2 of 4

The other interesting tech name could be Seagate. Storage had undergone tremendous boom and bust over the last 20-30 years. The whole story was very well depicted in another book called "The Innovators' Dilemma" which detailed the whole history, from floppy disks to hard disks to NAND and now SSD and server storage. Server storage is the protagonist in this current arc. As a result of the shift towards cloud, video streaming and the need for more storage at the FANG (Facebook, Amazon, Netflix, Google), server needs exploded. FANG became one of largest customers for semiconductor chips and fiber optics for their server farms. This goes without saying that storage would likely see exploding demand. Yet, this had not materialize because the consumer demand continues to decline and the growth of the new demand had not offset this decline. At its peak, the world consumed 500m hard disk drives (HDD) which had collapsed as people no longer buy PCs and laptops. But we should expect server HDD demand to outstrip consumer demand soon. In fact, Seagate's share price had gone up 100% in the last 12 months, although it still looked cheap (chart below)

Seagate's share price

The other interesting name closer to home is our own beloved SGX. This stock did nothing for the past 12 to 18 months while global market rallied partly due to the relative weakness of our own STI and also partly due to its own idiosyncratic issues such as the Indian equity derivatives that would not be allowed to trade on SGX. The stock went through a roller coaster as a result of this and finally the share price settled around where it was a year ago. But look at the financials, it's becoming quite interesting. It continues to generate a stable SGD 350m of free cashflow (FCF) and holds close to SGD 800m of cash on its balance sheet against a market cap of SGD 8bn. We know that when trading volume goes up, the leverage is huge as we saw that in 2007-2008. A repeat in 2018 and 2019, if it happens mean that FCF will double from current level and SGX would be hitting its previous high of $10. Conversely, the downside is quite limited because its strong balance sheet and FCF. Over the last five years, it almost never traded below $6. So we can say that the downside is likely to be floored at $6 while upside could be $10 or $11. At $7.50, the risk reward is quite favourable.  

For full disclosure: this author owned SGX since 2005

2009 Dividend List

Happy Labour Day!

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