Dividend Income December 2016

Posted on December 17, 2016 in Investing

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.

Taking different perspectives in life

Posted on December 10, 2016 in Lifestyle

That’s not a chart, it’s s a castle

Yesterday evening I was reading financial reports of a company I am considering to invest in. While I was studiying the chart of that company showing the development of the stock price of the last months, my son came to me and asked what I was looking at. 

“That’s a chart.” I said. 

My son replied with a smile: “No dad. That’s a castle”. 

That made me laugh. How cute! And indeed, I could immediately recognize the resemblance, just think of the castles shown in Disney films. Interstingly, all of a sudden I could see much more: a mountain range, a skyline, a fire, icicles, a cave with stalagmites and so on. 

What I nice reminder that each thing and each experience in life can be looked at from various perspectives.

Thinking outside the box 

Education, worklife and daily routines over time let us unlearn our essential ability to look at things from different perspectives which leads to an extremely one-dimensional thinking. To a certain degree this makes us stuck.

We tend to limitate ourselves.  

Just take as an example the general concept and deeply rooted set of beliefs in our society  “expecting” that someone has to

  • immediately “find” a job after school, university etc.
  • work eight to nine hours a day
  • work until he or she is 65 (or even longer)
  • work hard, be ambitious and loyal towards the employer and in exchange get a good salary
  • use almost the entire salary to consume and feel good about that

Where are the limitations when you look at the points above? They lie in the assumptions that someone

  • does not have many other purposes in life other than working and consuming
  • wants to depend on an employer and wants to get a job instead of creating opportunities (for example by pursuing the path of an entrepreneur and/or as an investor)
  • does not invest in productive assets and therefore the salary is the only source of income
  • increases spendings for consumption over time and consequently has a falling savings rate (if any)
  • relies on an ever growing salary which leads to high dependency on a job

There is a high probability that these general assumptions are not applicable to all of us and yet they seem to set the framework for our lives.

There are many cool alternatives

I know people who earned a salary far below average and nevertheless were able to stop working at the age of 50 years to travel the world. Some of them were even much younger when they quit their job. How is this possible?

In fact it is quite simple: they aligned their spendings, led a down to earth lifestyle and invested wisely. They took a decision and chose a different pathway to become financially independent instead of “working in order to consume for decades”.

So the basic concept of working “9 to 5” for almost the entire life is just one way of life.  There are uncountable other possibilities.

Breaking limitations

Looking at things from different perspectives is extremely refreshing and shows us plenty of options. Thinking outside the box is the base for creativity, the ability to address challenges with new ideas and solve complex problems. It’s a different learning process than through emulation and memorising facts.

We all have choices and can have an influence on many variables. We just have to relearn to see them. If you don’t want to work for decades and pursue something you are really passionate about, you can go for it. It is possible. It’s all a function of how much you need to live well, how much money you accumulated and how hard that stash is working for you. In a nutshell it boils down to the savings rate. 

It is the right and duty of each of us to take control of our life, take care of our loved ones, to pursue our dreams, rise to the top of our capabilities and to find fulfillment.  

If your household was a company, would it be an attractive investment?

Posted on December 3, 2016 in Investing, Lifestyle, Personal Finance

graph-compound-effect

Hi there. Appreciate you stopping by!

Let me ask you a question.

Would you invest in a business that makes USD  100’000 in revenues and grows that amount by 10 % annually?

“Yes, if the price is right” you might answer. Investing in a growing business can make a lot of sense, after all such a revenue growth rate is to some extent an indicator that the business offers good products or services to its customers.

Fair enough.

And what would you say if the annual overheads of that company were USD 90’000 and grew by 12 % every year alongside with the revenues?

Hmm. Not so attractive anomymore, am I right?

The reason is quite clear and intuitive: although that company is able to consistently increase revenues by a remarkable annual rate of 10 %, profits are squeezed year by year as costs grow even faster. Such a business is not attractive as an investment. It is pretty clear, that the fundamentals of that company are leading to losses, eroding shareholder value over time. The prospect would be daunting. After just a few years, dividend payments would be cancelled or slashed or – even worse – be financed with additional debts which is to the detriment of the financial flexibility and risk position of the business. The compelling revenue growth of 10 % in our example came at very high costs and sooner or later such a company would be out of business.

Companies are considered to make profits

As an investor, you are primarily interested in “your” company to make sustainable and growing profits. That’s the way shareholder value is created and increased over time. Successful companies (such as Johnson & Johnson, Coca Cola, Nestlé, Walt Disney) have a certain “financial behaviour”. For decades, they

  • focus on making sustainable and growing profits
  • tend to increase revenues faster than costs in order to boost profits
  • consistently reinvest a portion of their profits to grow their business, improve products and processes and to make acquisitions
  • use the power of the compound effect to their benefit
  • invest in productive assets in order to increase their economic moat and ensure increased future profits
  • focus on business oportunities, new products and services to establish new sources of income to make profits
  • take on debt to grow their business and increase financial flexibility
  • pay out between 30 % to 60 % of the profits to the shareholders in form of dividends and/or by buying back shares of the own company

Profits are the essence of successful businesses and consistently being reinvested make these companies real compounding machines. The difference between revenues and costs should be as wide as possible and – ideally – grow over time.

Households are considered to earn as much as possible in order to consume

The equivalent of profits in terms of households are their savings, defined as the difference between income (take-home-pay etc.) less spendings.

Interestingly, people have a different measure of success, when it comes to households and their personal finances. While companies are considered to make profits, individuals are generally considered to

  • work hard
  • be ambitious and loyal employees
  • rely on having/getting a well paid job
  • earn as much money as possible
  • feel good at spending money and showing their consumption habits
  • invest only a minor part of their income in productive assets such as stocks
  • rarely take profit of the compound effect
  • take on debts to invest in just one asset class  wich is in general their house in which they live (therefore that investment is not productive)

So, the focus of households is quite different from companies and is set on the renumeration for working hours and consumption. Or just simply put:

“One earns to spend”

Both – businesses and individuals alike – are considered to manage  resources efficiently and handle economic risks. But more often than not, households act irrationally when it comes to their finances. High consumption is perceived as a “successful lifestyle”.

Just let’s take a highly paid executive for example, making USD 500’000 annually and getting a pay rise of 10 % every year. The general perception is: “he or she made it” – Right?

Most people wouldn’t even change their perception, if they knew that our highly paid executive took a mortgage of USD 1 Mio. to finance the house and yearly spendings accounted for USD 400’000 annually and are set to grow by 12 % each year. Savings are eroding year by year finally turning negative in the medium term. What’s the result? Accumulated wealth will decrease and finally additional debts have to be taken on to sustain the lifestyle level. High consumption is litterally eating away the savings of the highly paid executive putting him or her in a financially risky position.

Remember, if a company showed these financial fundamentals, no one would consider an investment in such a business as it would be considered as unattractive. Just think of it: the mortgage by far exceeds ten times the yearly savings of the highly paid executive. A company with debts higher than three times yearly profit is already considered as highly leveraged and risky.  Rating agencies such as Moody’s, S&P and Fitch wouldn’t even consider a company with such fundamentals investment grade.

Although the highly paid executive in our example arguably and objectively is in an uncomfortable financial position, few people would see it that way.

High income and high consumption of individuals are considered as measures of success

Why is that?

In my humble opinion, it is deeply rooted in our society and part of our education system and worklife. We are consistently trained to be good, loyal and ambitious employees and in exchange we are put in a position to consume. “The more the better”.

What’s the problem with consumerism and depending on a job?

Someone who works hard just to spend most of his or her  income is caught in a ratrace and is in a very risky position. There is usually just one source of income. People depend on a specific job and more often than not on an increasing income level to keep pace with their “standard of living”. It is very hard – and sometimes impossible – to change high fixed lifestyle costs in the short run. Taking a position with a lower income level e.g. to work on something he or her is passionate about would be perceived to be to the detriment of the “standard of living”.

Escaping the ratrace

Consumerism is not per se a bad thing, but it can make you stuck. You don’t have many options. How can you lead a voluntary life if you exist from paycheck to paycheck? It’s impossible to truly pursue your dreams and rise to the top of your capabilities.

You should save. As much as possible and as much as you feel good about and even increase your savings rate over time. After all, that’s what successful companies do. They increase profits, they grow, they thrive financially.

So should you.

Aim for a higher savings rate to streamline your finances and to gain financial flexibility.

Invest in productive assets, diversify your income streams and put your money to work for you instead of the other way around.

Make money your friend.

J.M. Smucker stock caught my attention

Posted on November 12, 2016 in Investing

In terms of the financial markets, some massive sector movements following the US presidential election caught my attention: consumer staples stocks such as Nestlé, Diageo, Henkel (brands: Persil, Perwoll, Syoss, Schwarzkopf etc.), Beiersdorf (brands: Nivea, Eucerin, Labello etc.) and Coca Cola declined in a range of 5 to 10 % in just a few days. Money flew into cyclical stocks, into banks and healthcare companies and I wouldn’t be too surprised if these sector rotations continued so, at least in the near term. Read more… »