Sunday, November 05, 2017

2017 Oct High Dividend List - Part 2

This is a continuation of the previous post.

We are at the second post of this October's dividend stock list. This is the first year that we are doing a bi-annual list. This list has 54 names and we gone through half of those names already. Due to the configuration of Bloomberg, I was only able to capture 15 stocks each, which results in the list being divided into four parts. In the last post, we have Part 1 and 2. Now we shall discuss Part 3 and 4. This is not to be confused with the Part 1 and Part 2 of the posts. So, if each part of the list can contain only 15 names, how many names would there be in Part 2 of the posts? Confusing?

Yeah, that's also how Singapore set exam questions to confuse primary school kids.

The next two lists truly reflect one of the key ideas being talked about in 2017 - the Death of Retail. In the next 20 or so names, we see various retail names like Kohl's, Macy's, Foot Locker and Next PLC just to name a few. As these names get sold down, their dividend yield gets higher but meanwhile they are still generating strong cashflows and margins, well at least that was still true in the last three years, hence they show up easily on these screens. It is hard to say whether they will survive. But what's becoming clearer is that some retail formats are better. Convenient stores and supermarkets will still be around. Innovative concepts (Muji stores, Ikea stores) will still be around. But department stores, hypermarts, undifferentiated malls and shopping centres, these are tough. In short I would avoid these retail names.

Part 3 of 2017 Oct Dividend List

Perhaps the name to highlight in Part 3 would be Harley Davidson. This is a unique brand that has strong appeal to all bikers and its brand image, I would argue, goes beyond motorcycles and is attractive in a few ways. Harley Davidson stands at the pinnacle of motorbikes much like Rolls Royce is known as the most prestigious car every built. It is also analogous to Johnnie Walker Blue Label for whiskey and Patek Philippe for watches. Every biker's dream is to ride or own a Harley Davidson someday. But unfortunately, the draconian traffic regulations and hot weather makes that very much less appealing in sunny Singapore.

Nevertheless, Harley sells 250,000 bikes globally and has a target to reach 50% non-US sales by 2027 (currently at 37%). It has 50-60% market share in the luxury bike segment and generates a significant portion of its earnings from merchandise, customization and financing. These are recurring revenue streams. Harley riders are a unique bunch that won't mind spending a lot on their bikes even when they need to borrow money to achieve that. But there is a limit to such behaviour. Bike unit sales had dropped for the last few years as a result of the collapse of the oil and gas industry (which somehow has a disproportionately high number of Harley riders in the US) and the general weakness of the global economy had squeezed this segment of the population - the disenfranchised workers that would want to own or already owning Harleys. However with such a strong brand name, Harley should bounce back with a vengeance. Having said that, I am adopting a wait-and-see for this stock since there are more interesting names to buy globally. (To be revealed below)

Part 4 of 2017 Oct Dividend List

In the last part of this list, we see a few Singapore names, SATS, M1, UMS, Silverlake, KSH, Cogent and Zhongmin Baihui. Some of these names were discussed briefly in the past but given their small market caps, it would be always be high risk and high return. Much higher than we like it to be. Today, we shall talk a bit more about SATS which had been on this list on and off for many years. There was also a previous discussion in 2016. I had the opportunity to study more about this stock recently and had also visited the newly open T4! Hence it might be timely to give a quick update.

SATS' business is about delivering prepared food in Singapore. It had done a tremendous job in Changi and had expanded quite aggressively to other peripheral markets. It also has some business in Japan and most importantly, it delivers food to the Singapore Armed Forces. There are some issues with the quality of food as every male who had been through army would know, but hey, that's good for investors because recruits can never complain! But the biggest issue facing SATS is always labour cost. It is highly labour intensive and had been squeezed by the clampdown on foreign labour.

The company spins a good story with regard to how it has automated its processes, insofar mitigated the cost of higher labour. In the new Terminal 4, it's all about automated baggage check-in functionality and robot deliveries. These are visuals that sticks and investors appreciate the story better. A good PR and investor relations team is able to add 1-2x multiple premium to a stock! SATS would be in the top quartile in Singapore when in comes to investor relations.

In terms of fundamentals, the firm had also delivered. CEO Alex Hungate had done a great job and we have seen operating margins maintained at 10-13% for the last few years. The company had also delivered revenue and profit growth, which explained the stark contrast between SIA Engineering which had not seen revenue and profit growth for many years. However both stands to benefit from Singapore becoming an aerospace hub with more flights in and out of the country.

Given the strong share price performance over the last 18 months, I would advise buying if only it corrects a good 15-20% from here. SIA Engineering or ST Engineering with a c.5% dividend yields  look like better bets! So that's all for this year's October list!

Here's the past lists:

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