Dividend Investing, Part Two- Are Blue Chips Solid Dividend Payers?

There is a foolhardy assumption that dividends paid by companies listed in the index are rock solid. This is not the case as I looked at a company that has experienced some sell-off in recent times; the biggest of them all, Singapore Telecoms (SingTel).

Data were taken from annual reports, from https://www.singtel.com/about-Us/investor-relations/annual-reports#

Somewhere in the early 2000s, dividend income from subsidiaries were moved from “Cashflow from Investing Activities” to “Cashflow from Operating Activities.” As such, data can be inaccurate. However, I suppose things cannot be too far off…

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
2013	5817.5	2058.6	3758.9	2517.7	66.98%
2012	5710.4	2248.7	3461.7	4111.4	118.77%
2011	6043	2004.6	4038.4	2356.6	58.35%
2010	5328.8	1923	3405.8	2084	61.19%
2009	5163	1918.3	3244.7	1989.4	61.31%
2008	5453.7	1879	3574.7	3435.4	96.10%
2007	4584.7	1789.8	2794.9	1920.9	68.73%
2006	4485	1713.5	2771.5	1733.8	62.56%
2005	4489.6	1428.1	3061.5	915.2	29.89%
2004	4594.7	1300.2	3294.5	764.8	23.21%
2003	3771.1	1667.9	2103.2	764.7	36.36%
2002	3088.1	2999.7	88.4	697.4	788.91%
2001	3533.5	1762	1771.5	1493.8	84.32%

There were a couple of years which should be disregarded. Year ending on 2002 should be disregarded due to the purchase of Optus. 2012 should be disregarded as there was a huge one-time special dividend payout.

Let’s remove them.

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
2013	5817.5	2058.6	3758.9	2517.7	66.98%
2011	6043	2004.6	4038.4	2356.6	58.35%
2010	5328.8	1923	3405.8	2084	61.19%
2009	5163	1918.3	3244.7	1989.4	61.31%
2008	5453.7	1879	3574.7	3435.4	96.10%
2007	4584.7	1789.8	2794.9	1920.9	68.73%
2006	4485	1713.5	2771.5	1733.8	62.56%
2005	4489.6	1428.1	3061.5	915.2	29.89%
2004	4594.7	1300.2	3294.5	764.8	23.21%
2003	3771.1	1667.9	2103.2	764.7	36.36%
2001	3533.5	1762	1771.5	1493.8	84.32%
			42719.2	28120.8	65.83%

One could see that based on 15 years of data, the average dividend payout is 65.83%.

SingTel was able to pay dividends effortlessly from 2001-2005. A check at the yield then was about 1-2%, which is low. Payout from FCF increases dramatically from 2006, as its yield increases.

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
2013	5817.5	2058.6	3758.9	2517.7	66.98%
2011	6043	2004.6	4038.4	2356.6	58.35%
2010	5328.8	1923	3405.8	2084	61.19%
2009	5163	1918.3	3244.7	1989.4	61.31%
2008	5453.7	1879	3574.7	3435.4	96.10%
2007	4584.7	1789.8	2794.9	1920.9	68.73%
2006	4485	1713.5	2771.5	1733.8	62.56%
		Total	32488.5	24182.3	74.43%

The last 3 years has been tough for SingTel.

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
		Total	8899.6	8144.5	91.52%

From the prospective of a dividend hunter, I wouldn’t say this business is one in which you buy and sleep on it, since share prices are not that depressed (EV/EBIDTA is still way higher than the other telecommunication companies). I can say with some confidence that current year’s (2017) dividend is UNLIKELY to be cut based purely from this year’s FCF and CAPEX, but the short future seems very rough.

2017	OCF	CAPEX	FREE CASHFLOW	DIVIDEND PAID	REMARKS
Q1	1736.8	504.5	1232.3	-
Q2	1121	479.7	641.3	1705.5	Already paid earlier this year
Q3	1263.3	623.6	639.7	-
Last Year's Q4	1208.3	527	681.3	1083.7 (Figure to match last year's total dividend payout)
Total	5329.4	2134.8	3194.6	2789.2	87.31%

Total dividend paid last year was 2789.2
Dividends paid so far (SingTel pays twice a year): 1705.5
Assuming dividends this year will equal last year's, next dividend should be 2789.2 - 1705.5= 1083.7

This will probably mean using up to 87.31% of the estimated free cash flow, provided this coming quarter’s performance matches last year’s. As a large company with multiple sources of revenue, I don’t expect any earnings surprises. 

As such, this is the average payout, for the last 4 years.

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2017	5329.4	2134.8	3194.6	2789.2	87.31%
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
		Total	12094.2	10933.7	90.40%

Hence, if the management were to cut dividends or offer a dividend guidance, it will mean that the short future does look bleak.

The key takeaway is that dividend payout percentage from the Income Statement does not adequately express the difficulty of paying dividends.

Update
SingTel announced its 4th quarter and Full Year result recently. These are the updated figures.

2017	OCF	CAPEX	FREE CASHFLOW	DIVIDEND PAID	REMARKS
Q1	1736.8	504.5	1232.3	-
Q2	1121	479.7	641.3	1705.5	Already paid earlier this year
Q3	1263.3	623.6	639.7	-
Q4	1416.3	652.8	763.5	1110	Announced 18-May
Total	5537.4	2260.6	3276.8	2815.5	85.92%

 

Year Ending	OCF	Capex	FCF	Dividends declared and paid	Percentage
2017	5537.4	2260.6	3276.8	2815.5	85.92%
2016	4647.7	1930	2717.7	2789.2	102.63%
2015	5170.7	2237.6	2933.1	2677.5	91.29%
2014	5350.3	2101.5	3248.8	2677.8	82.42%
		Total	12176.4	10960	90.01%

Dividend Investing (Part One)

After reading “The Little Book of Big Dividends,” the key takeaways are:

1)    Yield should be the last consideration

2)    Consistency of dividend payment is great, but you should be concern with the sustainability of the dividend payments.

3)    The ideal, dream company is one with the possibly of growing dividends. This is tough for a slow-grower (think blue chips!).

4)    Since REITs are paying out 90-100% of its cash flow, it is not recommended despite its high yield.

5)    Dividends are paid with cash

So what follows are my inputs to this wonderful book.

Safety of Dividends

A commonly used metric is known as “Dividend Payout,” and the steps to calculate it is simple:

a)    Get the value of total dividend pay out in cash

b)    Divide this value by net income.

c)     Express this value as a percentage, to get dividend payout.

There is a bit of problem here... earnings, reported in the income statement, are not cash transactions.

Some food for thought:

Expenditures are not expensed immediately in the income statement. If you were to buy a $4000 computer for your small business, it will turn up in the Cash Flow statement as a $4000 deduction.

However, depending on how your depreciate your computer, which is a management decision, you may choose to expense this $4000 over 10 years. So instead of a $4000 deduction in your income statement, you see a $400 deduction yearly, for ten years, in your income statement instead.

This is usually not a problem unless management is deliberately deceiving shareholders. Imagine a computer being expense over 20 years!

Trade Receivables are sums of money that customers owe to the company, and in the most unfortunate circumstances, they can become bad debt should these customers become insolvent and written off. But these sums are still considered as transactions in the income statement...

The cost of mergers and acquisitions does not show up in an income statement. Likewise, cash used in the purchase of companies, only shows up in the cashflow statement. The income statement will only show the profits declared from these newly acquired subsidiaries, but the it will show up under “Cashflow from investing activities.” Plenty of unethical managements had used M&A to shore up bottom lines, paying obscene premium for goodwill; but an honest management should adopt sound acquisitions.

(I think Singpaore Post’s M&A over the years make a good study on whether investors can tell if M&A is beneficial. Coincidentally, Singpost is well regarded as a solid dividend payer in the past!)

Over long term, cash flow should move in line with the income statement. Hence, if a company consistently pays above 70% of its earnings as dividends, one should really check its FCF.

The next article, I will attempt to dissect a blue chip company as a dividend payer. The idea of blue chip as a safe dividend payer is widespread, hence it will be interesting to see if this is so.

Why I Am Not Interested in Growth Stocks

 Before I proceed, it might be necessary to define what, in my opinion, constitute as a growth stock.

A growth stock is primarily a stock that is/has

-a high price-to-earning ratio, with earnings averaged out over many years, preferably 10 years (do note that cyclical companies usually have low PE ratios during bad years and high during good years).

-astronomical price-to-cashflow.

-companies which, in essence use its assets to generate revenue, and has a very high price to book ratio. This exclude firms that are mainly in the service industry, or does not own assets.

-a company with exponential revenue or order book growth that might (!) not be followed by an equivalent increase in cashflow or return on capital (ROC).

-rapid uptrend in prices, highly valued by the market, due to promise or just plain hot air of promise.

A growth stock might include one or all of the factors above.

Growth does not translate into an increase in profitability

A company that managed to increase its EPS from 50 cents to a dollar looks attractive until you realized that the capital invested increased five-folds. In short, the company has became less efficient.

My favorite metric is to use ROC to evaluate a company’s performance over at least 10 years. It does give off the warning bells very early for me.

Widely Followed

Everyone can read a bar chart—especially one that has increasing profits. What are the chances of institutions and traders, who are doing this full time, missing out on stocks like this? Everyone loves a good story, and chances are, if human beings give in to the temptation of both perceptively easy profits and social trends (how many times are you tempted to try a food stall just because the queue is really long?), the margin of safety for paying for growth isn’t going to stay around for long.

Tough to value a growth stock

The basics of discounted cash flow valuation comes from estimating a discount rate (higher discount rate for riskier business models), an estimated cash flow for incoming year, and lastly a growth rate. To compound this difficulty, an analyst has to input the growth rate for a great number of years. This is why every time there is a disappointing earning release, target prices from investment banks and brokerages for growth stocks shift dramatically.

Higher possibility of disappointments

The market pays too much attention on earnings—a whole lot of analysts are paid to guesstimate them. Quite often a company got into a bit of hurdle (think Raffles Medical and its operating costs), from government regulation (as what happen to Comfortdelgro’s bus business) to mere inertia and market saturation (think Apple). Subsequently the company fails to deliver on the numbers.

Competition

What happened to companies that were selling those coffee buns in Singapore a number of years back? The bubble tea mania? And now we have shops selling fidget spinners at almost 20 dollars? You used to see them everywhere, but eventually they fizzle out.

Profits attract competition, and competition erodes profits. It is very tough for businesses to build up some kind of barrier to competition (or what is popularly known as moat), and even more so for small business, which made up most of the stocks in the market.

The Bear Trend in S&P 500 Has Not Change

Yesterday's gravestone doji has neither been confirmed or denied by today's candle. I will still urge anyone I know to avoid take speculative positions.

The ARA deal

$ARA Asset Mgt(D1R)

Weeks ago, as I could not find any decent deals and that the market in US shown signs (in charts) of stalling, I decided to liquidate most of my fair-valued investments as well as event driven trades.

As such, the portfolio shrank and ARA Asset Management became, and still is, 50% of my entire portfolio, which is of a very modest amount. It was 50% because I couldn't find any outstanding deals, and it was a very low risk trade. Even when it fell from 1.71 to 1.68, I simply held on as I think there is nothing official being filed at SGX. Hence, no worries. At 1.68 it would be a 12% annualized return, but I do not want to increase my holdings due to risk.

So I am glad that the scheme is passed with overwhelming majority today at the meeting in Suntec today. Of course, a few investors were very vocal and rightly point out that retail investors are being denied of any future prospects in this company. Some questions were raised but not answered, and I am not sure if the board was simply not bothered, or that they were tired of answering questions that were raised earlier (than today). Still, none of them raised their voice and replied amicably.

Some of the questions that were raised but not answered:
a) Is there any way that AVIC/WP will take preferential shares?
b) Although ARA mentioned that they need capital, why is it that funds from the last rights issue utilized at such a snail pace (probably infer by the asking party if they really need these capital)

My view is that $1.78/share is a fair deal; though not an exciting or generous one, but good enough to entice most early investors to realize the profits and arbitragers to take on positions. I was the latter, since I felt that the safe price to enter ARA was below $1. Granted, there were periods in which I could buy it at that price, but I started investing really really late. Still, given the opportunity, I wouldn't say that I definitely will buy ARA because it was cheap based on earnings, and earnings, to me, is volatile.

While I can understand that many "long term" investors (funnily enough, they keep stressing this term when they stood up to question the board during Q&As), that is just how the game works. Investors who has bought before the announcement wish to realize their profits are not wrong to do so since,

a) there is a small but possible chance that the deal might be voted down and the price is certain to go back to where it was before the deal announcement due to traders.

b) there is not much upside to justify the risk.

And in selling their shares, the buyers are likely arbitragers.

Most people who voted yes knew that the future might be sweeter if they held on, but that is just how the game works. Move on and find another gem. It is the dream of all  investors to buy a stock and hold on till it is a multi-bagger, but sadly ARA wouldn't be one of them.

Kimly and M1

These two stocks taught investors a lesson today.

First off, M1. The telco announced that its
"... three biggest shareholders - Malaysian telco Axiata Group Bhd, Keppel T&T and SPH - confirmed on Friday that they are currently in the midst of conducting a strategic review of their respective shareholdings, which may or may not result in a transaction. The three respectively have 29 per cent, 19 per cent and 13 per cent stakes in M1 for a combined 61 per cent holding."

Right off the bat this morning, the stock advanced  to last Friday's height, at 2.28, almost equaling what was reached last trading day. However, the bulls lost steam rapidly and closed almost 1% lower than last closed.

I firmly believe that, for acquisition deals, trying to buy in before any confirmation is risky. With no price point in mind, there is no idea if the deal is worth the risk. With no timeline in place, this deal could become cold. Imagine a deal that pays only 4% a year? That is no higher than what a high-yielding dividend stock. One should also assess the possibility of the buyer's ability to make the deal possible-- if its financial health enable its acquisition.

***

Kimly is a new issue that just started trading today. Its IPO was beyond popular, and many investors took on the easily understood PE of 12x and guess that it is worth more than the commonly price 24 times PE of available issues.

So it was no surprise the stock went straight to 0.50$ during pre-market, and went as high as 0.565, before cooling down to 0.44. For investors who said hello at 0.565, that represents a 22% loss in a single day. I was prepared to only pay 35-40 cents a share for this stock, but its popularity turned me off.

Trading is a bet on human's emotion and crowd direction, while investing is about a company's worth. Nobody knows where this stock might head next.

***
These two popular issues taught investors two lessons today. One, never partake in an arbitrage until it is confirmed. Two, valuation is crucial.

The Optimism of Medical Stocks in SGX (Part Two) Singapore O&G

On previous post, I mentioned about how optimistically the market has guided investors on the prospects of medical stocks. Companies which has performed well are usually priced well above their NAV. One of them is Singapore O&G. I shall refer to it as O&G from now.

O&G debutted in the middle of 2015 and have you had the fortitude to hold on during the 2016 correction, it is currently a two-bagger. (Chart from Yahoo Finance)

  Granted, the stock does not pay much dividends. Below, from www.dividends.sg

Amazingly enough, although this stock does not offer much dividends per se, it will be difficult to pay higher dividends in the future. Dividend payout in 2015 was about 62%. It was 72.6% last year. Do not expect this company to be a dividend aristocrat (a fancy term for a dividend machine/stock)...

But I am sure investors are in for the capital gains :)

Above is the latest income statement for FY 2016, it does indicate that profits are up 64.8%, which is a frightening improvement. However, the income statement is one of the more superficial data.
Note that profit margin actually decrease slightly: from 32.5% to 30.7%

The question is, how well is this company performing based on return on capital?

2015- 25.74%
2016- 24.21%

Although ROC did not increase, it is still impressive as it is.

This company does not have any debts. Purist might find the goodwill sizable.

 Of special interest to me is the > 3 x of goodwill accumulated over the course of one year, more than 10 times of inventories, and little change to its cash and equivalents. Without knowing much of the business, one can tell that business was acquired using shares, as its equity based increased from 24m to 41.6m. It has also incurred plenty of payables.

Should one invest in O&G? That, I am not an expert of, since I invest mainly from the balance sheet. One thing for sure, the growth continues. Another year like this, the business would have gone two fold (rule of 72).

Stocks like O&G are what one call growth stock-- it is not the growth of its share price BUT the growth of its business. Share price did move accordingly with growth, and I say it is well-deserved. However, I will abstain from investing because many situation can arise and dampen its share price-- competition, weaker performance, etc. I still think it is prudent to look for downsides first then the upside.


The management of this company will be the key factor on how well this company fare in the future. As of now, it seems to be on a M&A drive, and the increasing share price will make it easier for them to do so. If so, I can expect them to increase dividends so as to entice these subsidiaries. One should pay attention to its cashflow so see it is sustainable. As of now, the story still looks sweet.

The Optimism of Medical Stocks in SGX

Source: From Stockfacts, www.sgx.com

Medical needs are non-discretionary and investors might view them as safe companies to invest in. However, it appears that investors are placing too much hope in the prices of their security, as you can see, there are companies that are being sold at more than 30 PE. The most outrageous of them belongs to HC Surgical Specialists Limited, a company currently focusing on colonoscopy procedures, with a PE of 52 (Google Finance says it is 62, well... it is expensive, nevertheless).

This company is less than a year old in the Catalist (secondary board) market, having reported its mid-year earnings on the 3-Jan. A declared dividend of 1.8 cents gives investors a 3.3% yield based on the current price of $0.55

One can dissect its earnings as much as one insist on, but a year of earnings, in Graham's words, "should not be taken seriously." The company did pledge to give away 70% of its earnings as dividends, which is highly unusual since the PE is high (reflective of investors' view on its future growth).

What is puzzling to me is that the company planned to put aside 2.8M of its raised capital on acquisition, and about half of that is spent on its very first acquired company-- it has not even started operation. Among the key reasons stated for acquiring this company (or human resource) is that Dr Julian has a potentially worthwhile network and also credible prior job experience. I leave this qualitative justification to insiders but I seriously doubt anyone can have a huge network given 5.5 years of experience.

Investing in growth is fine if you are an insider to the industry, but be cautious of this one. Few medical professionals (in which its entire non-independent and executive board members, are) make excellent businessmen.

Which investors have inspired you so far?

The very first that left a mark on me is Walter Schloss. The way he run his fund is largely unique, in which he will only take a cut off your profits and no management fees are involved. The way he picked companies seems most plausible to a small fry like myself. He had no desires to communicate with management for research, worked a fix amount of hours a day, and diversified his holdings among many companies. He had little help (besides his son), worked in a humble and tiny office, and had no computer. His philosophy is not to buy companies based on earnings but book value instead, since the latter does not vary much. He displayed courage in buying out-of-sorts companies. A pretty unique man whose responsibility and financial intellect would be hard to match.

The second investor is ironically Dr Mike Burry. He is a master stock picker of turnaround plays as shown in (https://www.google.com.sg/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwizgobCwo_SAhUMtY8KHeMwBYEQFggaMAA&url=http%3A%2F%2Fcsinvesting.org%2Fwp-content%2Fuploads%2F2013%2F07%2FMichael-Burry-Case-Studies.pdf&usg=AFQjCNFZtjDWV5PFznAoEZizA6AXIc8NVQ&sig2=z20lXDc79gki25KRfZXUYQ). This is a guy whose financial knowledge is entirely self taught, and his reasoning behind each trade shows a tremendous amount of research done. Without the fame of "The Big Short," he might be recognized more for his intellect rather than his courage.

The last person in mind is Sir John Templeton. Having read his book (https://www.amazon.com/Investing-Templeton-Way-Market-Beating-Strategies/dp/0071545638/ref=sr_1_2?ie=UTF8&qid=1487073194&sr=8-2&keywords=john+templeton), I think there are very few financial genius like him around. In one particular example, his niece described how he had noticed the tech bubble of 2000s blowing up and decided to start shorting companies close to the time where insiders are legally allowed to sell their holdings. This allow him to short stocks safely without the associated timing risk. He was also the first to venture overseas and picking Japan based on his knowledge of economics, followed by predicting that China would have been the next ideal country to invest in.

"If I have seen further it is by standing on the shoulders of giants."