Hi there, thanks for stopping by!

As promised in my latest blogpost Passive Income Review 2016 and Preview I will to give you a brief overview on the stock purchases I made this year.

In 2016 I invested the amount of Swiss Francs 16’600 (CHF; trades more or less at parity to the USD) into stocks of following five companies: Coca Cola, Walt Disney, Diageo, HSBC and Bayer.

I target a year over year growth of my dividend income of at least 15 % whereas

• half of that growth is expected to come from organic growth (dividend hikes) plus dividend reinvestments and
• the other half derives from new acquisitions.

According to my projection, the five stock investments I made in 2016 will increase my 2017 dividend income by at least CHF 500. I expect that amount to grow by around 7.5 % each year due to organic growth and dividend reinvestments.

In 2016, Bayer, Diageo (I collected one of two semester dividend payments in 2016) and HSBC (I collected two of the quaterly dividend payments in 2016) already contributed to my income in the amount of CHF 205. In 2017 I will get dividends from Coca Cola’s and Walt Disney’s for the first time.

Now my considereations regarding the stock investments.

Coca Cola

In December, 76 shares were acquired at a price of USD 40.3.

I view consumer staples and health-care shares as the backbone of my investment portfolio. I took some exposure into cyclical sectors and raw materials in the last two years as I saw attractive oportunities. In the long run though I want to give my stock portfolio a more defensive shape. There are some companies in these sectors I find interesting (e.g. J.M. Smucker) but stock prices are yet not there where I would feel comfortable.

I’ve had an eye on Coca Cola for some years. The stock has been trading in a range between USD 38 and USD 48 since 2012. I saw USD 40 as an interesting entry price and put a corresponding electronic order which was executed in December 2016.

I am well aware that the phenomenal earning per share (EPS) and dividend growth of the last decades are not likely to be replicable, but Coca Cola is still a very solid business with attractive prospects. More than half a century the company increased its dividends year over year. I don’t view a stagnant stock price over some years per se as a bad thing especially not when you reinvest the dividends and benefit from the compound effect.

Coca Cola’s payout ratio stands between 60 and 70 % which is higher than the decades before. It is very obvious that EPS-growth did not not keep up with the dividend increases of the last few years.

But  the company has a strong balance sheet which has even improved in the last years. Coca Cola is sitting on over USD 20 Billion in cash. So, plenty of options for acquisitions (like the bottling operations from SABMiller in Africa) and future growth.

Walt Disney

In November, 40 Shares were acquired at a price of USD 91.8.

I had an eye on Walt Disney for months and wrote about the company in one of my blogposts in October 2016 (Disney is a wonderful company but is the Price fair?). Since then, the price came down quite a bit and I made the purchase slightly above USD 90. Certainly not cheap but I am fine with that price.

Diageo

In June, 132 shares were acquired at a price of GBP 20.75

Spirits and beer producer Diageo is a consumer staples company I have been looking at for several months. It has a great product portfolio with brands such as Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Guiness Beer etc.

Unsurprisingly, you almost never see that company becoming really cheap. There is a wide economic moat and growth perspectives look very promising to me. I consider my purchase as “acquiring a piece of an attractive business for a fair price”.

HSBC

In June, 466 shares were acquired at a price of GBP 4.6

A relatively large portion of my investment portfolio already consists of bank stocks. From the perspective of a long-term dividend growth investor (I want to hold my investments for decades unless fundamentals significantly deteriorate) I have quite mixed feelings concerning banks. There are

• some few undervalued jewels,
• several fine businesses trading at an attractive price and of course
• many value traps.

I think the banking industry as a whole  is one of the very few investment segments where shareholder value has been destroyed over decades.

Fair enough. When I saw the stock price of HSBC being beaten down ahead of the Brexit vote I just couldn’t resist. In my view, HSBC is one of the very few banks to consider as solid businesses to invest in, of course always under the condition that the price is right and that there is a sufficient margin of safety.

When I made the investment in May 2016, the stock price was significantly below book value and price earnings ratio looked attractive to me. HSBC’s debt profile is robust and the bank’s core capital has been significantly strengthened. In August 2016, HSBC announced to start a share buy-back plan in the amount of USD 2.5 Billion (to finish early 2017) and to hold dividends steady.

Bayer

In January, 30 shares were acquired at a price of EUR 103.

Bayer operates in four segments: pharmaceuticals, crop science, animal health and  consumer health with well-known brands such as Aspirin, Alka Selzer, Bepanthen, Elevit, Supradyn, Rennie etc.

Bayer showed good performance in the past with strong EPS-growth and nice dividend history.

I had an eye on the company all trough 2015 and was particularily pleased to see the stock price coming down from EUR 140 to around EUR 100 in January 2016 at the time when I entered the position.

In May 2016, Bayer publicly disclosed to make an all-cash offer of USD 62 Billion to acquire the agriculture company Monsanto. The offer was increased to USD 66 Billion when Bayer and Monsanto finally came to an agreement regarding the merger. The closing of the transaction is expected by the end of 2017. Over 85 % of the offered amount has to be financed by a combination of debt and equity. Bayer will carry over USD 40 Bn in debts after the merger and promised to start deleveraging quickly.

There is no doubt, that Bayer has a track record of sucessfully acquiring companies, but this is by far the largest one ever. Bayer knows when there is an attractive investment oportunity, but from a perspective of a shareholder I see some downsides:

• the combined company will be more subjected to cyclical factors, the generation of  profits and cash will become more volatile.
• the relatively high debt load will be a drag for the next years to come. Bayer promised to strictly deleverage after the merger which is fine, but there is less room for dividend hikes.
• financing in part with equity will lead to a dilution for shareholders.

As said, I take a long-term view in regard to my investments and unless there will be a severe recession (such as the last one we saw from 2007 to 2009) over the next years, the combined compay has the potential to deliver double digit EPS-growth in future and – hopefully – shareholders will be compensated appropriately for their patience.

 

What do you think about the companies I invested in? Which investments have you made in 2016? Feel free to share your thoughts.

 

Disclaimer

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

 

 

Wow! Isn’t it amazing how fast that year seems to have passed? So many big events and important factors having an influence on financial markets (Brexit, US presidential election, monetary policy by central banks etc.).

My portfolio has done pretty well so far and my dividend income for December 2016 (net dividend payments received in Swiss Francs which trades more less at parity to the USD) increased year to date by around 2o % due to the acquisition of HSBC stocks, organic dividend increases and dividend reinvestments.

Royal Dutch Shell (RDS)

In 2009, I acquired 200 stocks of RDS for around CHF 5’000 and since then consistently reinvested all dividends into the same company. Today, the  stock count stands at 290, an increase of almost 50 % in seven years. That’s the magic of the compound effect! Also considering the stock price increase since 2009 that investment has paid off handsomely so far.

Today, RDS is to some extent a different business mainly due to the acquisition of the British multinational oil and gas corporation BG Group. After the combination, RDS is one of the world’s top liquified natural gas company. Over the medium and longer term that acquisition may substantially strengthen RDS and has already positioned the company as the world’s second-largest public oil and gas company behind ExxonMobil. But that move also led to an elevated leverage. In combination with a low oil price level which puts pressure on the generation of free cash flow this is to the substantial detriment of the risk position and the financial flexibility of the company.

It seems, that the acquisition is quite well on track. The company is committed to reduce debts mainly through asset sales and “pledged” to keep its “iconic dividend” intact. The last time, RDS had to cut its dividends was 1945 and since then, decade over decade, shareholder benefitted from increasing payments.

Chevron Corporation (CVX)

Plummetting oil and gas prices forced CVX to streamline, which the company did at an amazing pace. CVX is also vigorously slashing capital spendings. The company targets a positive Free Cash Flow after dividends by 2017. With mega-projects coming online in the next quarters they substantially contribute to the company’s cash flow and profit generation. With these projects ramping up, less capital spending is needed, revenues and operational cash flow are expected to improve significantly even in a low oil price environment. For the future, CVX is set to focus on less capital intense, shortcycle and high margins projects and underlined its priorities in deleveraging and increasing dividends over time.

CVX increased its quarterly dividend for the fourth quarter from USD 1.07 to USD 1.08 per share, that’s the 29th consecutive year the company elevated its dividend payout. The last hike is relatively small but an important message to us shareholders underlining the confidence in the company’s financial strength and optimism regarding future performance.

Exxon Mobil Corporation (XOM)

Compared to the other oil-majors, XOM is very strong from a financial standpoint and robust in terms of operational results. But plummetting oil and gas prices took a toll on that company too, putting free cash flow and profits under enormous pressure. The debt level more than doubled in recent years. In April 2016, the rating agency Standard & Poors downgraded XOMs Rating from AAA to AA+ Outlook stable. The downgrade is in my view more symbolic than effectively to the detriment of the borrowing conditions of XOM. AA+ is still very comfortable.

XOM has paid dividends for more than 100 years! In April 2016, the company increased the dividend by 2.7 %. This makes 34 years of consecutive annual dividend hikes in a row!

As an integrated oil company with such strong upstream and downstream operations and with one of the largest chemical businesses of the world, XOM should be able to adapt to a prolonged period of low oil and gas prices and deliver robust results in the future.

Hongkong and Shanghai Banking Corporation (HSBC)

HSBC is one of the largest banking and financial services companies in the world, headquartered in London.

I acquired the stocks ahead of the Brexit vote, when I felt that they traded at a significant discount to book value per share and price earings ratio looked attractive. The company is diversified and well positioned in growth markets, mainly in asia. The debt profile seems relatively robust.

There is no questions there a several challenges for the company. As a global bank in an ultra low interest rate environment with falling revenues and high regulatory requirements HSBC is certainly facing strong headwinds. As a systemically relevant bank HSBC has to fulfill capital requirements expressed in the Tier 1 Common Capital Ratio (CET) which puts the bank’s core equity capital in relation to its total risk-weighted assets and signifies the financial strength. HSBC made significant progress in this respect being able to boost the CET from below 12 % to 13.9 % (compared to the previous year). This was mainly achieved by the disposal of assets in Latin America.

The third quarter earning report shows that the company also made progress regarding operating expenses and achieved a positive jaws in 3 Q 2016 which means that HSBC – being confronted with falling revenues – managed to slash spendings even faster and to protect the profitability (see blogpost Positive Jaws Ratio improves finances).

The company announced to hold the dividend steady and started a share buy-back program this summer expected to finish early 2017.

Orange SA (ORA)

Orange is a French multinational telecommunication Company with over 250 millions customers around the world and over 170’000 employees.

After some years of declining profits due to weaknesses in its main market France and due to cut throat competion in the European telecommunication market,  Orange’s last quarterly earning reports showed steadily improving results. Being in my view a fine business, it seems to me that I overpaid, when I acquired stocks of Orange in 2010. Even taking into account the dividends collected in the past six years, the total return of that investment is more or less zero.

But I still like my position in Orange, the fundamentals and growth catalysts look just fine to me. The company is so large and well positioned in attractive markets and benefits from a strong name. What I also like is the sound financial condition with a moderate debt level.

Unilever (ULVR)

I like that company for its attractive and stable business model, the strong brands with household names and products such as Lipton Ice Tea, Magnum Ice Cream, Axe, Rexona, Knorr, Persil etc. The company is broadly diversified, well positioned and should benefit from several catalysts for future growth and being able to comfortably weather headwinds in some markets.

The current dividend yield at costs of my investment stands at 3.6 %. In the past decades, earnings per share and dividend grew decently around 5 % per year which makes the business a stable cash generation machine.

 

How was your December in terms of dividend income?

 

Disclaimer

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.