Saturday, June 29, 2019

2019 Dividend List: 10 Years On

We started this dividend list in 2009 and in a blink of an eye, ten years flashed past. The list had since gone global as there are just that many (or few) dividend stocks in Singapore. Some of them had been bought out, some just weren't strong businesses to begin with and faltered and some others go in and out of the lists and a handful of names remained in it to this day. 

Last year, we dissected global dividend companies and discussed a few interesting names: Coach, Cisco, advertising companies. We see some of the same names this year and sadly, there isn't really good names or stories to share. The list tend to capture past business models with no growth such as brick-and-mortar shops without the new crowd drawing experiential retail innovation like Escape Room, Kidzania etc. I believe this is the key limitation of this list after looking at it for ten years. It spits out past business models and also fails to capture the exciting companies like Google, Live Nation and Netflix.

Well, that's value investing though, we want things cheap, so they don't come without caveats. Most would be cheap for some reason and once in a while we can find a gem. Here's this year's first few names:

2019 Dividend List - Part 1

This year's list featured the same retail and tobacco and old economy companies such as Evraz, a steel company that's at the top of the list. It's probably in a distress situation and the 15% dividend is unlikely to be sustained. Rio Tinto is not about to go bust, so it could be a candidate. Although I always like BHP with its pole position and better diversification across different commodities. So besides Rio, there isn't another name that I am keen to spend more time doing desktop research.

2019 Dividend List - Part 2

The same could be said for the second portion. These are another bunch of old economy names with the more interesting ones all discussed in the last few years: Harley Davidson, Tapestry, IBM and Western Union. BAE systems could be the only stock worth more research given the interest in defense growing as China and Russia try to strengthen their military might to compete with the US. North Korea could also turn belligerent again, who knows. But BAE might have its own issues for the stock to appear here. Or it could just UK's issue again. Given how the Brexit risk loomed larger this year, it's no wonder that this list featured so many UK stocks.

Given the paltry list this year, I thought we could relook at some of the interesting Singapore names. They are no longer featured because of either valuations or margins. To pass the screening, companies need to have FCF yield of more than 4.5% and margins of 8% and sadly, 1-2 Singapore companies failed the margin test while those with high margins are not cheap enough (hence failing the FCF yield criteria). Then, there are some who failed to ROE test (must be more than 10%) as they hold to much cash or equity, which dampens the ROE.

Nevertheless, here's my own curated list of the top dividend stocks in Singapore. I have held some of these for more than a few years and they had generated good dividend return (but unfortunately not too good capital return). So these are ideas for anyone trying to build a dividend portfolio but do your due diligence and double check on valuations and make sure you have a good margin of safety. 

Of the stocks in the list, I would think only Overseas Education would be worth buying today, but it's a micro-cap and there are different risks and considerations as well e.g. liquidity and getting taken out cheap if there's a management buyout.

1. SIA Engineering: Dividend 4.8%, Singapore Airlines' maintenance arm.
2. Vicom: Dividend 6.6%, largest vehicle testing and inspection company.
3. SGX: Dividend 4.8%, Singapore's stock exchange.
4. Overseas Education: Dividend 8.8%, international school in Singapore.
5. ST Engineering: Dividend 3.6%, defense and aerospace, also competes with SIA Engineering.
6. DBS: Dividend 4.7%, Singapore's largest bank.
7. Singtel: Dividend 5.1%, used to be Singapore's largest company. Looking to divest out of this. Wouldn't recommend anyone to buy now.

Friday, June 21, 2019

Thoughts #15: Esther Wojcicki's Wisdom

Esther Wojcicki is a panda mum (opposite of Tiger mum) who raise three successful girls who are changing the world as we speak. The eldest, Susan is head of YouTube. The second, Janet is a famous anthropologist and the third Anne founded 23andme - a DNA analysis startup.

Her key message to parents: just relax. Trust your kids to learn well. Her definition success: Being happy with yourself and happy with what you have achieved, and having some kind of goal in life. It should be the same wish for our kids. We wish they are happy and they achieved something meaningful at some point and continue to have some kind of goal in life.

Simple right?

No need to worry about streaming, PSLE, which university they can go, who they marry, what kind of job they would end of with. Just relax...That's how she raised three successful girls and they in turn want to repay her and bring their beloved mother to parties and tours so that she can enjoy.

And here's the irony and the punchline:

“I have been on more yachts than you will ever be on in your life. I have been on more private beaches, more private islands. And guess what? I like being with the regular people more. I like being on a regular crowded beach and watching everybody walk up and down. I find that more interesting.”  

Last but not least:

Ms Wojcicki’s take home message for parents, which is: “Have a good time with your kids. When you have a good time, they have a good time. Life is an opportunity to have fun, why not do it?”

Monday, June 10, 2019

Charts #22: Another Property Chart

Here's another city property chart that looked interesting. How much space can USD 1m buy? Does it really make sense? The record is now held by Monaco at 16 square metre. This is not to say property is a bad investment though.

If we think about it, this is just another greater fool game in a different scale, or as we had discuss, the reflection that the value of money will just keep getting eroded with inflation and QE. If we look at this chart in twenty years, maybe Monaco will be 8 square metre and the rest of the cities will see some positions swapped. The last city will also be much smaller than the 200 square metre listed here.

Saturday, June 01, 2019

Lessons Learnt: Hyflux - Part 2

This is a continuation of the previous post.

In the last post, we summarized the Hyflux debacle and discussed the lessons learnt.

1. Always limit or risk capital to an amount we can lose
2. Map out all the scenarios and probabilities and keep monitoring them.

Today we delve in #2 and share the third and fourth lessons further below. In our due diligence on Hyflux eight years ago. I would say that I did not do this well. Hyflux scenarios and probabilities should have looked like the following:

60% - business as usual, Hyflux continued to operate as successful as it had since IPO. In this scenario, things pan out as we wanted, perp holders get back their money when Hyflux redeemed them in 2018 or 2020. This would be the base case or good scenario.

30% - Hyflux business deteriorates or the external environment changed, causing some cashflow problems. But Hyflux should manage to pull through either with bank credit lines or with the Singapore government awarding it yet another project. Or Hyflux raised equity or debt to fund itself.

As a side note, this was partially played out in 2016 when it raised yet another round of perps. It should have served as a warning sign, but back then, no one suspected anything. Hyflux was going strong and Tuaspring was touted as a gamechanger. 

10% - Hyflux fails for some reason. This is the worst case or disaster scenario. In Hyflux's case, this scenario is playing out now. 

Investors complaining Hyflux's epic failure

In my analysis, I did not pay attention to this last scenario. I would never had ascribed a 10% probability of failure at that time. But maybe it should be a 1% or a 5% probability event. I should have considered it. Let's for learning sake mapped out how things would be like if I had ascribed such a scenario. Say, we ascribe a remote scenario that Hyflux would fail. The probability that Hyflux would fail is higher than say, DBS or UOB would fail. Then logically it means that 6% is not good enough. This was because DBS or UOB perps were at 5%. Between Hyflux at 6% and DBS at 5%, which investment is better? I would say DBS.

Inverting the thinking a bit, the question should also have been asked clearly: at 6% yield, we get back our capital after 16.7 years. Will Hyflux fail in the next 16.7 years? Hard to say but if it happened would this still be a good investment? The answers are clear on hindsight, now that things had happened. It would be hard to answer these back then, but still, these questions ought to be asked. It could meant a different decision: not to invest at all, or bid lower and put less capital at risk, or maybe buy DBS perps instead.

There was also a lot hype when the offering was launched. It was way oversubscribed and hence such risk hedging thoughts were thrown out of the window. So, on hindsight, there is a sub-lesson here (which again, we already know): the crowd is not always right, be fearful when others are greedy.

The other mistake was also the lack of monitoring. After I bought these, I was just happily receiving coupons and occasionally read some annual reports and followed the news. That's it. I didn't even know Hyflux issued more perps in 2016 until a few months later. Then when things really turned south, I still wasn't monitoring as hard. This brings us to the third lesson.

3. Act fast don't hope

As things deteriorated. I held hope that Hyflux could turn around. The perp prices fell from 80c to 50c to the dollar. I could have sold! That way, with the coupons clipped over the years, I would have lost a mere 10-20% of capital rather than 60%. This would prove to be a lesson that I had not learnt well. I had never cut loss well. I cut losses only to see stocks rebound 50% and fail to cut those that go down a lot more. It would likely take more years to hone this skill better.

Hope is a dangerous thing

This has to do with judgement. In Hyflux's case, we had determined that the business model was flawed. It needed to bid for projects and cost overrun could be very detrimental. When they issued another perp in 2016 and when the initial warnings came, I should have paid more attention. Judgement can only be honed over time and experience. It is also about understand the business model, the situation and all that is at stake. When the bond prices finally reacted and fell to 50c, it was supposed to be a big warning. Yet I failed to do more detailed due diligence. It wasn't my priority until everything blew up. Hence there's a last lesson here from Hyflux.

4. Focus on the best businesses

Investing is a full time job. If you want to make money, you have to devote the time and effort. But in today's world, where got time? We have our day jobs, family, kids, friends, social and community activities. It's just so difficult. This is so even when I am passionate about investing. Imagine someone who is not passionate but wants to invest because he or she thinks it's good passive income, easy money.

So in order to be able to invest and sleep well, we can only buy the best businesses because we don't have time to monitor any deterioration. Having said that, good businesses also get disrupted and we need to stay on top of things when we see these happening (Singtel, which I have, comes to mind). If we buy the best businesses, those with strongest economic moats which we had discussed before, generating strong free cashflows at reasonable valuations, then our capital would have more protection. 

In conclusion, here's the four lessons again from the Hyflux debacle:

1. Always limit or risk capital to an amount we can lose
2. Map out all the scenarios and probabilities and keep monitoring them.
3. Act fast don't hope
4. Focus on the best businesses

Hope this would help us avoid future debacles, huat ah!