Portfolio - Mar 2015

Time is running away with me. Not only that I barely find time to post new articles, but yet again the DAX hit another all-time record yesterday: 12,375!. With stock markets rushing from one record to the next, it has become the biggest challenge ever to find value in the market to deploy capital. I am curious how I will master this exercise in the coming months… 

Anyway, it's time to have a closer look on the current state of my portfolio. This is my portfolio per end of March 2015:

Appreciation of the USD against the EUR has led to strong capital gains in my portfolio: Market value is 21% above historical cost. Average portfolio yield has significantly improved to 6.32%.  At the time when I bought my US holdings the EUR was much stronger compared to the USD, so I was able to get those stocks at a cheaper price. As dividends are paid in USD I now benefit from the stronger USD which is pushing my overall yield well above the 6% level. In consideration of Seadrill’s recent dividend suspension (leading to 0% dividend yield) this is a good development.    

On a stock-by-stock basis, Deutsche Post has further increased in value and represents my top holding with +110%. In the past months, Realty Income has also noticeably gained in value and has increased by 65% compared to its acquisition price. Seadrill is by far my biggest loss-making position with -70%. I have spent some time thinking whether I should dispose of this investment, but I decided to keep it and wait for better times. I believe the company could achieve a turn-around story in 1 or 2-years time, although the stock might never be able to return past dividend levels. On top of that I also do not believe that the oil price will stay at the present low level in the mid-term. So all in all, there are some potential upsides and I believe it’s too early to write this investment off.

It is also worth mentioning that I have added a new position to my portfolio: Global Dream REIT, a Canada-based office REIT with full exposure to the German office market. The purchase took place in March and a brief description will follow soon in the stock section.

Until then, keep on investing!

Portfolio - Dividends in 2014

With some delay I hereby publish my year-end dividend report for 2014. Finally time to check the cashflows to see how my dividend tree has evolved!

To put it bluntly: 2014 dividends could be way higher if I had invested more aggressively in the past years. The funds were there, but I was expecting a deep plunge of the stock market and therefore missed some good buying opportunities to build out my portfolio and boost dividend income.

Anyway, I am still satisfied with the EUR 606 that were earned in 2014. It’s a 40% increase to 2013 (EUR 431). Keeping in mind that I am pursuing a more conservative investment approach - with the general rule that no more than 30% of my total assets should be invested into the stock market - the result is still promising.

As a consequence of my strategy, I am sitting on a remarkable cash balance that added another EUR 404 of cash interest income (“Tagesgeld”) to my capital income. Against the background of an unprecedented low interest environment in Germany, this is quite an achievement.

In total, with EUR 1,010 for the year 2014, my capital income has now surpassed a symbolic mark of EUR 1,000.

I do well observe that my dividend income has been growing in the 3-year time period shown in the chart above. That holds true not only in absolute, but also relative terms, meaning as a share of total capital income.

One of my investment principles has always been to consider the ECB low interest policy when following an investment strategy. As long as I was able to get an interest of 1-2% on my cash holdings I was fine with a lower share of stock investments in comparison to my total assets. But since the ECB has gradually reduced the base rate from 0.75% in 2012 to currently 0.05%, my portfolio needed to be expanded to maintain an average return of at least 2% on total assets.

You might be asking why I am already satisfied with such a low yield and following such a conservative strategy. The reason is that I am not so much looking after a maximum return, but mainly aim at preserving or slowly increasing the value of my money. I want to stay liquid and keep all options open for the future, just for private reasons. It might well be that my girl friend and I will be buying an apartment or a house in 2 years time. Until then I don’t want to pump all my capital into an inflated stock market which could well plummet in the near future...

Stocks - BUY - AT&T

Long time no post. Sorry for that. I was busy and also lacking the motivation to edit new articles in the last months, but now I found some time and the motivation to carry on. There is some need to recap what has happened in the last months. So let’s start with new investments and portfolio changes.

I found a favorable time to get rid of my remaining E.on shares. When the company informed the market about its plans to split profitable and less profitable assets into two separate entities, the market received this as a positive signal. The price went up above EUR 15 in December, close to my initial acquisition price. So I decided to exit. In my opinion, there is no purpose to stay invested as shareholder in a company which reduced dividends repeatedly and which still finds itself in a transition phase.

After receiving the old funds, the stock of AT&T, which had been on my watchlist for quite some time, became fairly priced and so I decided to purchase 40 stocks for EUR 26.46.

AT&T is one of the two US telecommunication incumbents (the other being Verizon). It is the second largest provider of mobile telephone (after Verizon) and the largest provider of fixed telephone in the United States, and also provides broadband subscription television services.

Mobile data transmission has become more and more important in past years, reflecting the significance of smartphones in societies around the world. With the US market reaching saturation, AT&T has been expanding its footprint in Mexico and also awaits regulatory approval for its proposal to buy satellite TV company DirecTV for USD 48.5bn. The transaction aims at forming an integrated communications company with serious broadband reach and improved and more competitive bundled services.

I had my doubts about this massive acquisition price as mentioned in an earlier article. But strategy wise I believe this step makes sense, because revenue growth is slowing down and price competition is further increasing. 

At the same time, it is also worth mentioning that AT&T is part of the dividend aristocrat index, with a track record of more than 25 years (to be precise 30 years) of rising annual dividends. As such, I am not purely considering financial or strategic aspects, but also rely on the reliability and predictability of such a list.

At the time of the purchase, AT&T was providing me with a 5.50% yield-on-cost. Due to the current EUR devaluation in comparison to the USD, the yield-on-cost has further improved to 6.25%.

I take comfort in the stock also from the following facts:

• One of the two incumbent US telecommunication players
• Current market capitalization of USD 169bn
• Solid S&P A- investment grade rating
• Moderate 13x price-earnings ratio
• Healthy equity ratio of 30% as per FYE 2014
• Preliminary 2014 annual turnover of USD 132bn
• Preliminary EBITDA of USD 25.1bn (18.9% margin)
• Preliminary Net profit of USD 6.5bn (4.9% margin) – profit reduced in ‘14 due to USD 7.9bn of extraordinary pension expenses
• Expected dividend payout ratio of around 75% after DirecTV acquisition
• 2015 dividend of USD 1.88 translates into a 6.25% yield at given price and EUR/USD fx rate
• Dividend was raised 30 years in a row

Stocks - BUY - BASF

After a great summer in New York, I am back in Germany and back to my normal life!!!

The dip of the DAX in the past weeks turned out to be another good buying opportunity for me: After a disappointing release of the latest industrial production figures for the German economy and more reserved IMF growth forecasts for the global economy, the DAX lost almost 15% within just a few weeks: Down from a record of slightly above 10,000 back in July to slightly below 8,600 last week. In the meantime, we are back at a level close to 9,000. Overall, industrial stocks were among the biggest losers.

I felt it was a good momentum to put some cash into BASF which now ranges slightly below EUR 69. When the price fell below EUR 70 I felt that this is a fair value for the biggest chemical company in the world. On October 7th I collected 12 shares for EUR 69.67 providing me with a current yield-on-cost of 3.88%.

Unfortunately, the stock went further down to a level of EUR 65, which would have been even a better bargain. But, as usual, it’s quite difficult to time the market. After the stock slowly recovered back to EUR 70, it went 3% down again following the quarterly earnings release today.

Based on the earnings release, the Company cut its profit targets and abandoned its sales target for next year. Management signaled a weaker demand for basic, specialty and agricultural chemicals. According to the CEO “the reasons for this weak global economic development are obvious: Reduced growth dynamics of emerging markets and a delayed recovery in the European economy.” After all, BASF as a cyclical stock, is reflecting the state of the global economy and as growth prospects are weakening, so are the Company’s prospects.

I remain confident in BASF’s fundamentals and despite a slightly darker business outlook, I believe the Company is well prepared for any market scenario. Just to give an example: In 2009, the dividend was reduced by 13% (from EUR 1.95 to EUR 1.70), but it was quickly raised again in the following years. Investors holding on to the stock during the financial crisis were rewarded with more than 12% annual dividend growth ever since.

As of today, BASF represents one of the rather small positions within my portfolio. It's considered to be a cyclical investment and based on the somewhat unclear overall market situation, I am of the view that it’s better to be a bit cautious and keep some more room for further additions. That said, I believe, the Company remains one of the candidates that could be worth injecting some more money when times get rougher.

I take additional comfort in the stock based on the following:

• World’s leading international chemical company
• Current market capitalization of EUR 63bn
• S&P A+ investment grade rating
• 12x price-earnings ratio
• Healthy equity ratio of 43% as per FYE 2013
• Annual turnover of EUR 74bn in 2013
• Net profit of EUR 4.8bn (6.5% margin)
• 50% dividend payout ratio in 2013
• Dividend was raised 15 out of 18 times since 1994 (from EUR 0.36 to EUR 2.70 in 2013)
• Added 12 stocks for a price of EUR 69.67 generating a yoc of 3.88% based on 2013 dividend

Portfolio - Jul 2014

I am lagging in schedule for my semi-annual portfolio reporting so I am trying to catch up a bit today. I have been on vacation in July and there has been a change at work which required some more organizational work than usual. I was asked quite spontaneously to join our New York office to help out a bit for the next 2 months. I flew over last week and now live in a furnished apartment in Midtown Manhattan, not far away from Central Park where I will be able to enjoy summer and early spring in THE capital of the Western world. Life is treating me well at the moment!

Apart from the changes at work, this year has been rather quiet so far in terms of portfolio evolution and dividend investments. As I still believe in a more anti-cyclical investment approach, and not so much in a pure dollar cost-averaging (at all costs), I have been rather cautious so far. I missed the biggest part of the stock market rally, but also didn’t have that much funds to invest in 2011/12 since it’s not too long ago that I have just started my working life. 

The first half of the year went by very fast and there has been only P&G and Glaxo which were added to the portfolio in June and July respectively. This is my portfolio as per 31 July 2014:

The portfolio is doing pretty well at the moment and reached a gain in market value of ca. 15% before the recent correction. As per end of July, I’m 9% or EUR 1,058 ahead. On a stock-by-stock basis, Deutsche Post (+74%) is leading in terms of capital appreciation, followed by Royal Dutch Shell (+24%) and Realty (+11%).

Overall portfolio yield hasn’t changed much. It still stands at around 6% which represents my portfolio's target yield. I realized that I have accumulated quite a few positions which return more than 5.50% yield. In general, I believe this is a very attractive yield as entry price for a blue chip.

Since my last post in January, I reduced my position in E.on as the company is struggling a bit at the moment. I sold 30 stocks at a price of EUR 15 and incurred a negligible loss. It didn’t make sense to have my largest portfolio holding in E.on and that’s basically the only reason for that move.

Hopefully, the market correction will continue. This would allow me to buy into more positions. AT&T, HCP, and Capitamall are all stocks on my watchlist which are currently close to a 5.50% yield. Based on 2-3 more additions, I would be getting close to an estimated annual dividend income of EUR 800. Above that threshold, 25% German withholding tax will come into play and reduce dividend return.

Let’s see if more buying opportunities will arise in the coming weeks. 

Stocks - BUY - GlaxoSmithKline

It took several months until I pursued another investment in June (P&G). Loaded with funds, my watchlist has finally triggered another buy recommendation on Friday:

The stock of the global pharmaceutical player GlaxoSmithKline (“GSK”) was strongly oversold (-5% price drop) on Wednesday after a disappointing Q2 earnings release:

Group sales in Q2 declined 4% year-over-year (on an ex-divestment and currency adjusted basis) due to significant generic competition and an ongoing bribery investigation in China, which adversely impacted Emerging Markets sales growth. Profitability measured by earnings per share was down 12% (on an ex-divestment and currency adjusted basis) following pricing and contracting pressures.

Overall, results of GSK were well below expectations with both earnings and revenues missing consensus estimates. Following the Q2 release, GSK no longer expects any sales growth in 2014. Furthermore, GSK expects 2014 earnings to be broadly in line (on an ex-divestment and currency adjusted basis) with last year results.

Mr. Market punished GSK very hard for this disappointing quarter. During last week, the stock lost almost 8% in value in only three trading days. The price fell from EUR 19.75 to EUR 18.20.

While I am not satisfied with GSK’s earnings results either, I nevertheless tend to believe in the stock and its dividend potential. Even if one can raise doubts about the stock’s potential as a dividend growth holding - which I believe is an arguable statement as well given the successful dividend growth track record - the current high yoc of above 5.50% qualifies the stock as an attractive income holding.

I take additional comfort in the stock based on the following key facts:

• Among the top ten largest global pharmaceutical companies in the world
• More than 12 years of consecutive annual dividend increases
• Market capitalization of ca. EUR 100bn
• A1 investment grade Moody’s rating
• Sales of GBP 26.5bn and operating profit (EBIT) of GBP 7bn (26% margin) in FY 2013
• Net profit (after taxes) of GBP 5.6bn (21% margin) in 2013
• Ca. 70% dividend payout ratio
• Slightly low equity ratio of 19% but comfortable Total Net Debt / EBITDA of 1.5x
• Added 55 stocks at EUR 18.34

Portfolio - Dividends in Q2 2014

Second quarter of the year 2014 is over and down below you find a summary of the dividends I received during the period.

The portfolio hasn’t changed much in comparison to Q1, but dividends in Q2 are still a bit higher. This is due to the one-time payments I received from the DAX companies Deutsche Post and E.on. As already explained earlier, German companies prefer to reward their shareholders on an annual basis. Therefore, Q2 is not comparable to other quarters of the year. Most investors prefer receiving dividends on a more frequent basis, but I actually don’t mind receiving annual distributions as long as my annual passive income is increasing year by year.

Total dividends received (net of taxes) add up to EUR 159 in Q2. The Deutsche Post dividend represents the largest distribution with EUR 64, translating into a 5.78% yield on cost.

I do hope that there are more buying opportunities in the second half of 2014. At the moment, I am struggling to find reasonably priced stocks and as a result there hasn’t been many investments in 2014 so far. This is a drag on the dividend growth potential of my portfolio and I wouldn't like to have such a situation for the rest of the year. 

Stocks - BUY - Procter & Gamble

Yesterday, I added a position in P&G to my portfolio. The stock reached a yield-on-cost of 3.25% and triggered a buy-recommendation on my watchlist. At given yield, I feel comfortable adding this rock-solid blue-chip to my portfolio. I bought P&G at EUR 58.50 which I believe is a fair price. It’s not a bargain, neither it’s overly expensive. Aside from the satisfactory yield, I deem this to be a good investment towards achieving a higher diversification and a more investment-grade character of my portfolio, also when considering the relatively high portion of high-yield investments in the portfolio. The shift towards more stable companies is also underlined by the consumer product sector now being the largest sector within my portfolio.

I must admit that since my last stock purchase (Seadrill) in February, I was having a hard time deciding where to deploy capital. Looking back at the first half of 2014 from today’s angle, there have definitely been some buying opportunities when Dow Jones and DAX incurred a minor correction in February and March. However, for some reason I don’t remember anymore, I missed this opportunity. That’s too bad, because since then stock markets broke one record after the next.     

In parallel to the stock market rally, the ECB base rate recently hit another all-time low of 0.15% which I perceive as nothing else than a raid on my savings account. With a current outlook of several years of low-interest policy to come, I decided to buy another stock position. But, as already mentioned above, it’s not only the ECB policy which was supporting me in this decision:

   

• One of the top globally diversified consumer products companies in the world
• Exposure to emerging markets (40% of total sales)
• More than 55 years of consecutive annual dividend increases
• Market capitalization of ca. EUR 236bn
• Aa3 upper investment grade Moody’s rating
• Sales of USD 84bn and operating profit (EBIT) of USD 14.5bn in financial year 2013
• Ca. 60% dividend distribution ratio
• Comfortable Equity ratio of 50% and moderate Total Net Debt / EBITDA of 1.4x
• Added 20 stocks at EUR 58.42

Stocks - The desperate search for value in today's markets

This is just to give a short update on the current situation: I am loaded with funds (the fruits of my work efforts in 2013) and I have done my homework and pre-screened the market for attractive stocks. As I wrote in my previous post, I am ready to pull the trigger. At the same time, I am a bit puzzled about new record stock valuations and the rising number of M&A transactions in the market.

AT&T is currently yielding a bit more than 5%, which is okay, but not the yield on cost I am expecting for such a low-growth investment. In my opinion, this lies more in the area of 5.75%-6.00% in line with management guidance as to at which price they would start buying back shares. In addition, there is also uncertainty with regard to the added value of AT&T’s recent USD 49bn-acquisition of DIRECTV. Impact on shareholder value of the transaction is not so clear to me and a price of USD 49bn is anything, but cheap. In fact, mergers and acquisitions are often rather value destroying instead of value enhancing for shareholders of the acquiring company. At current market valuations, I could well imagine that AT&T is paying way too much in any case. That said, this investment at given yield seems not so attractive to me at the moment.

Next company on my watchlist was Pfizer. At least it was before the latest announcements in the news. Originally, my rule of thumb was to start adding at a yield on cost of 3.5%. Then I read about the lack of growth and the negative Q1 results. Given the sheer size and profitability of the company, the stock still seems okay to me and therefore this info is not a deal-breaker per se. I still feel confident in Pfizer’s research and management capabilities and the fundamentals of the company remain rock-solid. What is more worrisome is the current M&A activity in the sector. A lot of companies are currently looking for an-organic growth opportunities. Prices discussed for recent acquisition targets are beyond good and evil and, unfortunately, Pfizer is leading the magnitude of outrageous take-over offers with a final USD 106bn-offer for AstraZeneca. No matter if the deal is ever going to be signed, the impact on shareholder value and the company's fundamentals could be huge. Against this background, I am not really positive about the stock and its prospects anymore. So this is not an option at the moment.

Next one on my list is HCP or Capitamall Trust. Both companies are REITs and my rule is to start adding at a yield on cost of 5.5%. Aside from the fact that this yield seems currently out of reach, I feel that I should rather start adding blue chips to my portfolio instead of increasing the share of REITs. However, due to the lack of other investment opportunities I feel that picking one of the two is a satisfactory option. Therefore, they remain as a priority pick on my watchlist.

Unilever was another option on my list. Not long ago Unilever was considered cheap: In February, the price came close to EUR 27 with the stock offering a yield of approximately 4%. However, the picture has changed in the meantime and the stock is now close to EUR 32 offering only some 3.5%. This entry price is too high to me and hence I am waiting for the next correction.

Next one was Allianz, BASF, and Munich RE. Similar to Unilever, all options have ceased due to the DAX (and with it the three stocks mentioned) reaching new highs in the last trading days. As annual dividend payment dates for all three stocks have passed in the meantime, it doesn’t make sense to add now and wait for another year to receive the dividends. Much could happen during this time. To me, particularly the price of BASF is entering highly speculative territory and I wonder how much higher the price is going to get. That said, all stocks are currently no longer options.

Now, what conclusion can I draw from my thoughts above? Blue chips are currently more expensive than ever before. It is getting more and more difficult to find value in the market. In my opinion, there are clear signs that there is an asset bubble in the market. This might be the time to lean back and wait for the next correction. On the other side, there are no alternatives to stocks as the ECB is expected to release another landmark in the history of monetary policy during the next days. The next announcement is likely to pave the way to even higher market records as Draghi seems to be willing to fight the deflationary tendencies within the Eurozone. I am a bit clueless what I should do, but will keep you posted about any portfolio developments.

Watchlist - Apr 2014

Given that I have posted my first and so far last watchlist report back in Aug 2013, I thought it is time to provide an updated version, which highlights what type of companies I am following at the moment. I am ready to pull the trigger, but prices for almost all of my targets have again risen considerably in the past weeks.

Let's see if I still find a good buying opportunity in the next weeks. I will stay tuned and keep you posted about any new developments...