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Blue Chips but at what cost

December 7, 2013 by Kyith 12 Comments

We taken this list of blue chips from the Dividend Stock Tracker

(Click to see larger image)

This is probably a good list that people look forward to adding.

Competitive Advantages and Clean Balance sheet

As blue chips, they do enjoy some competitive advantages that enable them to earn rather good return on investment.

And their balance sheet are rather clean. If you look at the debt to asset about 4 of them are running net cash and the other 2 are rather low leveraged.

You will probably expect them to not be a going concern for the next 10 years

Lukewarm Free Cash Flow Yield and Earnings Yield

Except for the 2 leveraged companies Sing Post and SPH, the others have a much lower free cash flow and earnings yield.

Dividends get paid out of free cash flow, and if free cash flow remains low, that is the low yield you will expect.

If you are a dividend investor, such yields would probably not hat you expect.

You will probably expect the dividend yield to grow.

Not just grow, but grow at an above average rate compare to other entities such as REITs, Business Trusts.

2 Ways Companies Grow

Generally, for business to grow, they usually take 2 prongs:

  1. Organic growth.Depending on market saturation and how much opportunity left, business grow by producing more goods or services to gain market share. This will need more capital investments depending on the nature of business.
  2. Acquisitions and investments. Strategic acquisitions or investments in new segments over time may create a new blue ocean for the business. This will depend on how much of the free cash flow or earnings are paid out as dividends. The more you pay out the less you have for investments. You can make up for it by taking on debts.

In short, share holders returns translate to :

Dividend + Share Buy Back = Organic growth of free cash flow paid out + (ROIC x free cash flow reinvested)

It goes competing that since these are blue chip, their segments are rather saturated, or that to increase their market share, they must do it better than their competitors. While they are kings locally, the international segment is a different story.

Opportunities plenty but that would mean being better than others. They have found that challenging.

The last column shows the payout ratio, and most of them pay out a large % of earnings as dividends.

Still because of their size, they can make acquisitions like what SATS and ST have been doing.

In the case of SPH and SingPost, they realize that buying blue oceans are rather cheap.

The question is whether they can develop into substantial segments that are meaningful to the share holders. This will determine the (ROIC x free cash flow invested) portion. Of course, usage of debt in the short run than pay off is viable as well.

  • SATS Svcs have been acquiring complementary business which increases their cash flow. Since they are unlisted, we do not know if they overpaid for a cash flow that on face value does not look to produce anything more other than for it to grow organically
  • SIA Engineering have been forming joint ventures for a long time and at no significant capex increases. Still that has slowed down a fair bit
  • Sing Post have been acquiring and when compared to their core mail business, the ROIC pales in comparison because their advantage in the mail business is just too much
  • SPH have been buying media sources in different channels. They are rather small in significance and are still banking on a leveraged property model
  • Vicom is rather niche and looks to stay niche for a long time

If everyone thinks they are good…..

Then perhaps they are priced like they are good. A look at the EV/EBITDA shows that the lowest is 13 times.

In the undervalue space, my gauge of fair value unspoken is usually 8 times with 6 times being cheap. That is not always the case.

Of course if the valuation is as such I would expect high growth to come from them.

In high growth, they will look value, because a consistent 20% growth for 4 years will cut the current EV/EBITDA by half.

That will make the current share price look a bargain.

The question is can we expect this kind of free cash flow growth from these blue chips. (An exercise  to all to tabulate the past free cash flow growth for the next 10 years to get a realistic idea)

There is a price for quality and you got to figure that out

Update Aug 2013: James Montier at GMO coincidentally came up with a quality piece: No silver bullets in Investing

One might argue that having exposure to value and small makes good sense. However, from my perspective this is true if and only if the golden rule of investing holds: “no asset (or strategy) is so good that it can it be purchased irrespective of the price paid.” Even value (cheap price to book) and small cap stocks are not guaranteed to outperform independent of their pricing!

The best time to buy them

If their growth rate does not amount to that high, you are probably paying for something dear.

Like what Eric Kong from Aggregate Asset Management says, if you buy something dear, you better hope they don’t screw up their ROIC. Because when ROIC gets impacted the share price will plummet.

That’s what happen to SMRT.

What was rock solid competitive edge on first look suddenly becomes susceptible.

That is when the opinion about their competitive edge gets challenged by the masses.

Your job is to discern whether there is a long term impact or whether there is a value proposition.

And most of the time the line is rather fine. How is SMRT looking to you? Still remember everyone wanting to edge in to it because what could go wrong with it.

The other best opportunity to purchase is when there is a systematic sell down, when these blue chips gets mispriced enough.

Summary

The difficulty always is prospecting by looking at historical and projecting forwards.

A blogger who used to blog tells me always buy by valuing based on conservative scenario and the upside will take care of itself.

If you buy by a sanguine growth rate of 20%, you better XXXking make sure they get that, otherwise you are probably paying $2000 for an IPAD

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

For my best articles on investing, growing money check out the resources section.

Filed Under: Value Investing Tagged With: sia engineering, sph, st engineering, vicom

Why does ST Engineering, Keppel and Sembcorp need to compete in the same industry

January 30, 2012 by Kyith 8 Comments

So I was reading The EDGE and in this article profiling ST Marine, it raised an interesting point:

“Recently, ST Engineering began building on its engineering capabilities to develop an environmental engineering business – similar to the ones that Keppel and Sembcorp Industries have.”

What I find it strange is that why does 3 Temasek-linked companies need to fight for the same pie?

Perhaps that is where Singapore’s ONLY capabilities lie. They can only do these kind of engineering work.

Perhaps this pie is big enough and lucrative enough to be gobbled up by all and still earn supernormal profits.

Perhaps they are given a mandate to pursue this by the government.

Another interesting thought:

How come Keppel and Sembcorp ended up being at the fore front of rig building? Why is it the shipyards in Korea, Greece and China are unable to do what we do?

Filed Under: Business Tagged With: competitive advantage, keppel corp, SEMBCORP, st engineering

David Rosenberg: Prepare your portfolio to be ready for recession

July 28, 2011 by Kyith 2 Comments

I came across this summary from Barry Ritholtz site on what David Rosenberg, a mega bear recommends investors to be ready in the event of a recession. How ready is my portfolio then?

His 7 point plan to be ready for the next recession includes:

1) “High-quality corporates” plus companies with “A-type” balance sheets and “BB-like yields.”

I think what he is referring here are big US companies that have great balance sheets yet have above average yields.

These would be your Consolidated Edison, Dominion, Verizon, AT&T.

In Singapore context, the ones that are closest are your STI listed companies that have above average yields.

Amongst them for me are SPH, Singtel, Starhub, Venture, ST Engineering, SIA Engineering, SATS,Ascendas REIT, Capitamall Trust.

I currently only have SPH, Singtel, Starhub that matches this category. I do also hold ST Engineering units which would classify under this.

2) Reliable dividend paying Stocks (including preferreds).

These are stocks or preferred shares that pays a stream of dividend even during the recession. They might reduce their payouts or halt payouts but that will still be a good return in the recession.

Amongst them is your DBS NCPS, OCBC NCPS and Hyflux CPS for preferreds. There are your REITs and Business Trusts.  There is your blue chip dividend stocks like those mentioned in (1).

So currently in my portfolio that would be almost everything! (Since I am a dividend investor)

3) Low debt-to-equity ratios, high liquid asset ratios, good balance sheets, no heavy debt.

Basically it is those company with high quality balance sheets. They don’t have too much debts and have ample cash to pay off contingency.

Currently in my portfolio,

Starhub – Debt to asset is 44% but Operating Cash Flow enables Starhub the capability to pay of debts in 1.4 years. Safe.

Aims Amp REIT – 30% Debt to Asset, Debts may be maturing and in need of refinance. Not that Safe.

Cache Logistic Trust – 30% Debt to Asset, recently on an acquisition trail. Gearing is going up and up. Not that Safe.

First REIT – 12% Debt to Asset. Yet with more cash that net debt its even lower. Although need to refinance but ok. Safe.

GRP – Net Cash. Safe.

Singtel -  20% Debt to Asset, operating cash flow enables Singtel to clear debt in 1.3 years rough. Safe.

SPH – 34% Debt to Asset. On the high side but still with good cash flow generating capability, should be not a big problem.  Medium Risk.

Singapore Post – Almost 30% Debt to Asset. On the high side. Medium Risk.

Sabana REIT – 24% Debt to Asset. Net debt it is 20%. Limited re-financing options for Shariah REIT. Medium Risk.

Sarin Technologies – Almost Net Cash. Safe

Straco – Net Cash. Safe

ARA – Almost Net Cash. Safe

PEC -  Net Cash. Safe

Global Investments – Net Cash. Safe.

4) Hard assets: Oil and gas royalties, REITs –  focus on income stream.

I don’t have that much Master Limited Partnerships or MLP but do have enough REITs as mentioned.

5) Sectors / companies with “low fixed costs, high variable costs, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity.” This includes utilities, consumer staples + health care.

These would be the companies with strong economic moats.

Starhub and Singtel – Oligopolistic utilities that people cannot do without.

Aims Amp REIT, Cache Log and Sabana – Tenants may not renew but that will impact income but not a going concern.

Singapore Post, SPH, Straco – Affected by recession. Income affected but should not be a going concern.

ARA – Competitive business advantage should still see it relatively unaffected.

PEC, Global Investments. GRP, Straco – Strong balance sheet should still see it being around, but to different degrees business will be affected. There may be periods of low to negative income.

6) Alternative assets that do not rely on “rising equity markets” or are independent of volatility trades.

Not much but likely I will add SDS, VXX, TLT which are either ultra short ETFs or treasury ETFs and USD ETFs when the first signs approach.

7) Precious metals. Specifically, he puts a $3,000 target on Gold.

I don’t have Gold or Silver in the portfolio.

Conclusion

All in all, a portfolio ready for recession is not one that WILL NOT GO DOWN. It should let you ride the volatility and still be around after the next recession.

My suggestion is to pare down on those that are much more affected by market cycles and also those that in past recession have shown to have a lot of weak holders.

Hedging and taking advantage with Short ETFs, USD ETFs may be a good way to balance things up.

Gold and Silver may spike and go down and would likely only recover mid recession.

Cash is still your best friend most of the time. It enables you to pick up those things you missed out on last time and this time make sure you do not.

So how ready are your portfolio?

For those interested in tracking my most current holdings, you can review my portfolio over here. Learn to use our Free Stock Portfolio Tracking Google Spreadsheet to track stock transactions.

Filed Under: Contrarian Tagged With: ascendas reit, AT&T, capitamall, consolidated edison, DBS NCPS, dominion, Hyflux CPS, OCBC NCPS, recession, SDS, singtel, st engineering, starhub, Verizon, VXX

To all my friends holding ST Engineering Shares: Watch out below!

February 9, 2011 by Kyith 1 Comment

Ok so I posted 2 charts on SMRT and SATs cutting below their 200 day moving average and 1 chart on SIA doing the same thing.

Now I encounter another one in ST Engineering. These are some very significant profit taking signals. What is going on?

 

Is it we may have extended as far as we can go and are following the China market down? Many blue chips are slowly turning or is this just a rotation?

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Filed Under: Dividend Investing, Singapore Stocks Tagged With: Dividend Achiever, st engineering

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Kyith Ng is the founder of Investment Moats, which mentors you on wealth management towards Financial Independence

Investment Moats shows how you can build wealth through stock market investing, dividend income investing through a value based approach. And then to distribute wealth.

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