Investment Moats

Warren Buffett on not buying Verizon and AT&T for dividends $VZ $T

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Warren Buffett was talking to CNBC this morning and was asked why in this environment he wouldn’t buy AT&T and Verizon which have a toll bridge aspect to their business and can be seen as a utility.

The interesting thing is that he says he does not know how they look like 5 to 10 years from now. The key factor why he buys stocks is for future earnings NOT dividends.

He sees more value in them buying back shares like IBM. He is a fan of share repurchases as it reduces share count and increases ownership of current stockholders and increases intrinsic value per share if repurchases occur at attractive levels.

His thoughts are interesting because in a time where dividend investing is the rage, one needs to know that dividends is just one kind of investor returns. Share repurchases at below intrinsic valuation enhances existing share holders.

What’s interesting as well is, as much as we think we know the telecom business, it seems the future of telecoms is not as sanguine as it was made out to be. It could all turn out to be ok, but telecom have always been evolving and at certain stages it is not a very cash generating business. Buffett not buying means he doesn’t see a definite outcome.

Are we really at Peak Telecom?

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We just wrote an article talking about the defensiveness of telecoms as a service utility that people cannot live without. But I have talked much about telecom may not always be a fool proof cash generating business model [read here].

Here is another good telecom evangelist talking about it. Martin Geddes [profile here] have quite a profile talking about technology ecosystems especially on telecoms. U can follow future talk on the industry [here]

If you are big in telecom stocks, its good to read it as part of forming your own perspective.

Peak Telecoms >>

Here are my thoughts on how likely this will impact the Singapore Telecoms

  1. You are starting to see it. The ARPU is not jumping. There isn’t much drivers for the 3 telecoms. They are fighting for each other’s customers. At most they are upselling mobile data plans. Will this change with LTE? More deployment cost, but still little switching cost.
  2. Local content is non existent. The telecoms have a problem because in this part of the world piracy is rampant. Content piracy that is. You have China set top box and bit torrent of your favorite shows. But another problem is that, unlike other countries where there are local language content, there isn’t much for Singapore! People still like their Hong Kong shows, American shows and English Premier League more.
  3. The telecoms are not competing well on the cloud computing, value added service front as well. The people would prefer their Hotmail. Gmail and Yahoo Mail. To get cloud storage they would rather go Dropbox or Box. Why get it from Singtel if its more expensive but yet do not offer more upside? Perhaps its faster? Much of the Content have been delegated to Apple, Google and these Web 2.0 companies to provide.
  4. So if they have no value add and what we hold dear (contact list, number) is portable then what is Singtel, M1 and Starhub to us? A data pipe essentially.That is a commodity in itself. What is this pipe made up of? Cell towers and a intricate network of fibers and computers.
  5. With the setup of NBN Fibre Broadband it becomes an open market for competitors to setup their own broadband offering. Think there are no competitors? Perhaps you can check out ViewQuest, MyRepublic. On Hardwarezone you are starting to see adoption.
  6. We talked abit about FemToCell as an alternative to your Singtel, M1 and Starhub cell station via a well established fibre network. The missing ingredient now is a better WIFI offering. Next Gen WIFI could be the case. It lets your phone to easily switch between 3G/LTE and WIFI on its own upon detection. This is a boon for bandwidth intensive areas for Singtel, M1 and Starhub but more than all, with Fibre, Good Wifi Technology, cheap telecom equipment from Huawei, you can really make a play at the incumbents.
  7. These startups like ViewQuest and MyRepublic probably will not kill Singtel, M1 and Starhub, but will make them sit up to take notice that people can come in and compete cheaply. Margins will be eroded.
  8. Remember that this region is famous for piracy and China products? There are many China set top box on offer playing PPTV, PPStream providing free chinese content and probably English ones. What happens when they come with FemToCell? It allows smart startup to develop a crowd sharing ISP.
  9. The people are cheapskate and probably looking for viable cheap alternatives and if startups do it well, sooner or later people are going to realize there are alternatives and I do not have to stick with Singtel, M1 and Starhub who does not listen well to my needs.
  10. As Investors, it will be easy to see.
    1. Monitor the quarterly report of all three telecoms. If their local ARPU and Net Adds are all falling, you know they are feeling the heat.
    2. If you are in it for the dividends, when free cash flow is consistently less than dividend payout, that is a red flag.
    3. On the ground you will hear of it. Relatives and friends will tell you this hot new start-up or entry that delivers a cheaper mobile strategy.

    For now, the telecoms still are doing well. Lets see what happens in the next 2 years. 

    11. I run a free Singapore Dividend Stock Tracker . 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.

Defensiveness of Telecom stocks $T $VZ $VOD

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In a new study conducted, it shows that even if your income is low, it is difficult to live without your smartphone

  1. Smartphone ownership is the last things to be cut when income is reduced
  2. They would rather move into cheaper housing than give up their iPhones
  3. Income < 15000 yet they own a smartphone

When a twentysomething’s budget is tight, her smartphone is far from the first expense to go, suggests a new study from Nielsen.

The survey of 20,000 U.S. mobile customers found that smartphone ownership skews toward the young and the wealthy — exactly as you’d expect.

What is more surprising, however, is this nugget: smartphone penetration among young people in the lowest income bracket is higher than it is among older people in the wealthiest bracket.

Among 18- to 24-year-olds, more than half of respondents who make less than $15,000 each year said they own a smartphone. This might be explained if the parents of many college-age students footing their children’s phone bills. Still, even in the next oldest, post-college age group, the percentage of those in the same income bracket who own a smartphone was a mere 13% lower.

Making less than $15,000 in a year doesn’t stop 43% of these 25- to 34-year-old mobile customers from paying for a smartphone.

Meanwhile, fewer than 20% of respondents older than 45 who make less than $15,000 said they owned a smartphone.

This provides a moat that the service will always be required.

A Caveat here: This does not mean that telecom operators can enjoy fat margins. Competition is intense as the content is likely not provided by the telecoms but the rich content providers. Their old voice and text business gets cannibalize so they may see falling profits. Nash equilibrium plays an important role here.

I run a free Singapore Dividend Stock Tracker . 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.

David Rosenberg: Prepare your portfolio to be ready for recession

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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.