Tuesday, August 16, 2016

2016 High Dividend List - Singapore, US, Australia

It's out!

The second section of this year's list threw out a few interesting names in the tech, finance and other sectors and there's an interesting discussion point that would serve to transform fundamentally the way some of us might want to invest! Yes, it's a big deal. First, here's the list:

2016 Dividend List - Part 2

Again, since the list gone global, Singapore names were relegated. To just one in this second portion - SATS. This name had appeared multiple times over the years, it continues to be a good firm although valuation might be too expensive at this juncture. The issue with SATS could be more fundamental depending on how we want to look at it. More on this later.

There are actually a few interesting names here which we could discuss a little and interested parties could do more work. In my opinion, some of these are moat companies, but unfortunately time is always limited and there is not enough work done to be able to make buy decisions. Western Union is a global payment network that serves the un-banked, under-privileged class. Most of us in sunny Singapore perhaps only use Western Union for sending money to Philippines for domestic helpers. And this is their moat. It's a powerful business that the firm has built over many years and today links 500,000 financial institutions across the global. The big risk is how the internet and dotcom can disrupt the business but again this is an unknown. It might take years, or it might be like Uber vs taxis - taxis globally are suffering bcos of Uber. For payments into emerging markets, we haven't seen any strong global challenger yet, so perhaps Western Union is safe.

Symantec is another super interesting name as it is touted as the cybersecurity play. As everyone would know, cybersecurity is a big thing with global hacking and global scamming becoming so rampant. Large MNCs are actually at their wit's end against hackers. We heard about these large scale hacking at Sony, Target with credit card numbers stolen etc, and heard no solutions. Even in Singapore, we had these scams with our banks and the banks couldn't do much to recover the lost monies. It's a big problem. Symantec has a strong track record in anti-virus and this business generates superior free cashflow (FCF) year in year out. However anti-virus is actually quite different from cybersecurity. The firm had been trying to market itself as a leader but savvy investors know all too well. It just spent four billion dollars buying Blue Coat, a supposedly real cybersecurity play. So if they were already a leader, why spend the kind of Jho Low - 1MDB money buying Blue what? Well, there is not enough homework done to draw conclusions. It's something interesting but let's move on.

IBM, the tech stalwart, trading at 10% FCF for a few years now, with a 3% dividend and a $100bn revenue. Some say it's the big data / A.I. play given its strong branding with Watson (one of the real viable A.I. business solutions). Of course more than 50% of its revenue is recurring by locking customers in binding software contracts and it continues to move into ever higher margin businesses like consulting and platform solutions. But with such a big base, it is struggling to grow. Buffett also hasn't made money here although it could be said that of the three quick highlights, perhaps IBM would be the safest. It's the cheapest in terms of PE and FCF and mostly likely the one to sustain or even raise its dividends - that's what this post is about yah?

There are some interesting Australian names as well. Computershare stands out as a database for listed companies in this part of the world. There are a few comparables and the one in Singapore being Boardroom. The business is mundane but cashflow generative. They handle share registries and provide software that specializes in share registry and stock markets and also provide corporate trust services. It's like IBM's recurring annuity business and there are very few competitors globally. It looks good at a first cut but again, more work needs to be done. 

Okay, back to SATS. This is a great franchise selling food to Singapore businesses. Its core focus is of course its airline food business where it has a monopoly selling to all the airlines stopping here in sunny Singapore. With Changi expanding terminals out to T4 and T5, SATS would just ride on our traffic growth. It has other businesses like selling food to our beloved armed forces, food to cruises and ships and what not but those are pretty marginal. So what's the issue?

The issue is much more fundamental and something to really think about along the lines of ethics and the way we want to really invest. SATS also has an abattoir business which involves taking lives and hence putting some vegan investors off. Now this may not be a big deal to non-vegan investors but let's extent the concept further. 

Natalie Portman Vegan Quote


#37 on the list is Imperial Brands, the fifth largest tobacco company in the world. Again this is a strong dividend play that gives out 3.6% dividend while generating a stellar 6.5% FCF yield every year. And it will continue to churn out cash enough to drown investors. Tobacco is one of the best business in the world. It costs almost nothing to make cigarettes, decades of regulations have restricted marketing expenses to pittance, hence gross margins are super high at 70%. The irony is that despite such high margins, tobacco companies can raise prices year in year out with dictated tax increases which further improves margins. There are also no new competitors since new entrants cannot market their products and hence unable to grow their market share. As such, existing tobacco companies have become global oligopolies, maintaining their global share and piling up mountains of cash, all of them. Meanwhile despite the number of smokers declining (as they die out) and the number sticks smoked also dwindling, volume reduction had been more than offset by price increase and tobacco companies had grown earnings at double digits due to what we discussed, and will continue to do so for the foreseeable future. So it's not just strong FCF but strong and growing FCF!

Warren Buffett had described that tobacco companies are one of the best businesses to own, yet he doesn't own one. Why? Because tobacco and smoking is also the single largest cause of human death in the history of humankind. According to the website Tobacco Altas, tobacco had killed 100 million humans which is more than the number of death for WWI and WWII combined. Projecting forward, it would be responsible for 1 billion deaths by the end of the 21st century. Okay, some might dispute these numbers, but throw your own number, it definitely doesn't change the fact that tobacco killed a lot of people.

So here's the important point, do we want to invest in companies that are killing people? Or killing animals? Destroying lives? This is a big question and it is also difficult to draw the line. If we are still eating meat, then why stop buying SATS? Should these actions be synchronized? What about gambling stocks? Genting is another great business, but do we want to be partially responsible for destroying families? What about companies making firearms? Or companies involved in drugs? Or even Pokemon GO? Or for that matter, all addictive games since there are millions of youngsters throwing their lives away in virtual worlds when they could have done more in this real world? 

Buffett himself hasn't sorted this out. He had been lambasted for being invested in Coca Cola knowing that sugar causes obesity and hence a whole host of health problems. The argument goes that if the Oracle of Omaha is really ethical shouldn't he say or do something about sugar? So it's not easy to deal with. The investing world is also grappling with the so-called ESG compliant wave. ESG stands Environment, Social and Corporate Governance. This is not new, in the past it was CSR or Corporate Social Responsibility and now it's ESG. The idea is to invest in companies that are doing the right things, and doing things sustainably, i.e. not harming our planet, nor the society etc.

I guess as individual investors, we should draw the line that is right for us. For me it would be selling out all my tobacco, gambling, abattoir names over time. For others it could be just tobacco. Or it could be no Pokemon GO names. Something to think about when hunting stocks or rare Pokemon perhaps.

Here's the past list:
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

Thursday, August 04, 2016

2016 High Dividend List - Singapore, Europe, US

The annual dividend list is out! As per last year, restricting the list to just Singapore can only yield a handful of names, hence it's more worthwhile to see things from a global perspective. The criteria for the screen had not been change for years except minor tweaks. Here's the first 20 names:

2016 Dividend List - Part 1

There are two Singapore names in the list: Yangzijiang and UMS. Yangzijiang is a shipbuilder which unfortunately is stuck in a bad part of the shipping industry which would take years to unravel i.e. low probability of making good money relying on fundamental analysis. It might worth a trade but definitely not a moat company that value investors would buy and hold. On UMS, this stock started appearing in 2014 and its financials do look pretty good. It had been generating steady FCF since 2010 and currently trades at an impressive 12% FCF yield. Alas, there were also stories about the management which in this post serves to to flag out another important point - not to invest in companies with corporate governance issues.

One of the most fundamental principles in investing and perhaps in life is actually about integrity or trust. In the case of investing, it would be trusting the accounts, in life, it is about integrity. Sometimes, this is so fundamental that it is often overlooked and we get into big trouble because of it, like trusting a "friend" with money and never seeing the money or the "friend" again. In fact, because integrity is not 100% most of the time, we setup legal systems to deal with it. So if the accounts cannot be trusted, what's there to analyse? How do we apply fundamental value investing in such situations? The answer is we cannot, so when there is a reasonable doubt that the accounts or the management cannot be trusted, we are better off not looking.

Having said that, it's impossible to say if UMS is that bad, it's just one or two stories told in the market. There are more clear cut poorly accounted companies out there, some trading at multi-billion market caps. Sometimes, it takes years to figure things out. Sometimes even if it's figured out, the share price could pop! Re: Herbalife. The SEC ruled that it wasn't conducting its business correctly, but stop short of saying it's a Ponzi scheme and the stock pop! Such is investing, you can make money when you are wrong and lose money when you are right! 

Alanis Morissette's hit song really comes to mind!

It's like rain on your wedding day 
and good advice that you didn't take
and isn't it all ironic

Ok, back to investing, stock ideas and the dividend list, sadly the first part of this year's list didn't really give any good ideas. What stood out were the number of IT has-beens or energy related names which unfortunately would not be a good place to start. Would Cisco come back? How about a Chinese utility company? Not too exciting. 

If someone put a gun to my head and ask for one name, then perhaps I would suggest Michelin. This is not a high conviction idea. Again tires are pretty much old economy, and nothing to shout about. With self-driving cars and Ubers, the world view is perhaps one of "Who needs to change tires?" However, as long as cars don't fly, I believe tires will sell. Also a significant part of tire makers' earnings actually come from performance tires that we don't see as passenger car drivers and laypersons. These are tires that are used in aerospace, trucks, mining, construction etc. These had grown well over time and Michelin had been the dominant player in these are markets, alongside Bridgestone.

Michelin long term share price chart

Michelin's long term share price says as much. The chart above shows its stock price performance since 1990 and we see the familiar compounding chart. An investor could have bought the stock at 5 Euros in 1990 and made close to 18x today. Michelin generates 1-1.2bn Euros of Free Cashflow (FCF) today and trades at 16.7bn, i.e. giving investors a nice 6-7% FCF. The French are somehow simply just good at building brands. Who wouldn't love the Michelin Tyre man?

For some reason, to better its brand, it started its famous restaurant guide a hundred years ago and is now the Bible for food lovers worldwide. Singapore had the good fortune (some say bad) to actually see its version come out this year! For those who missed it, here's a portion of the Singapore's list (the well designed Michelin website does not make it easy to cut and paste the full list here)

Singapore's Michelin Guide (just one part)

So that's the first instalment of this year's dividend list with one important philosophy: find integrity, or not to invest in dubious companies, and one so-so stock idea: Michelin giving 6-7% FCF yield and a stolen food idea list (above) and as usual, we have all the past dividend list (below).  

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