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

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

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.

Stocks - DAX Preview

The DAX (German stock index) dividend season is approaching and in anticipation of the upcoming distributions I am currently screening the DAX for interesting portfolio additions.

One special feature of the DAX is that companies do not distribute dividends on a quarterly, but rather on an annual basis. Another characteristic is that 27 out of the 30 companies distribute in April or May. Only ThyssenKrupp, Infineon, and Siemens already held their shareholder meetings in January/February. Out of the three, which have already declared and distributed their 2013-dividends, only Siemens is relevant to dividend investors: ThyssenKrupp distributed no dividend at all this year and Infineon, as a tech-stock, returned only somewhat disappointing 1.5% to its shareholders.

While reading other blogs I follow, I came to the conclusion that many investors solely focus on US companies when building their portfolios. Of course, this is due to many reasons: For example taxes (25% withholding tax in Germany), foreign currency translation, the classical home-bias effect, or the less distinctive German equity culture compared to the US. The latter is also incorporated in the fact that there are no real German dividend champions like Coca Cola, which have a similar outstanding track record of more than 50 consecutive annual dividend increases. Companies here do not seem to put the same emphasis on a strong dividend track record and hence distributions are more volatile. As a result, they are often adjusted upwards and downwards following swings of the economic cycle.

All aspects described above play a role in the investment process of an international investor. That said, it is hard to forego US stocks when creating a global well-diversified dividend portfolio. On the other side, I believe that some exposure to Europe's pillar of stability does provide an added value to such a portfolio and is able to further enhance diversification.

Germany is among the top economies worldwide. It has a very broad and well-diversified economy with lots of industrial heavy-weights and competitive brands. Everybody knows the automotive brands BMW and Porsche for example. Against this background, adding German stocks to a global dividend stock portfolio should be viewed as a natural portfolio excercise.

Following the recent correction of the DAX and the Crimean referendum, which was held yesterday, there might be a good buying opportunity in the coming days. When reviewing the DAX on search for attractive dividend plays, I came across three particular companies I consider worthy to take a closer look at, both from a domestic as well as from an international investor’s perspective.


      1. BASF

 

• World’s leading international chemical company
• Current market capitalization of EUR 70bn
• S&P A+ investment grade rating
• 13x price-earnings ratio
• Healthy equity ratio of 43% as per end of 2013
• Annual turnover of EUR 74bn in 2013
• Net profit of EUR 4.8bn (6.5% margin)
• 52% projected dividend payout ratio in 2013
• Projected dividend of EUR 2.70 translates into a 3.5% yield at the current price
• Dividend was raised 15 out of 18 times since 1994 (from EUR 0.36 to EUR 2.70 in 2013)

    
    
      2. Munich RE

 

• World’s leading international re-insurance group
• Current market capitalization of EUR 27bn
• S&P AA- investment grade rating
• 9x price-earnings ratio
• Sector specific equity ratio of 10% as per June 2013
• Operating result of EUR 4.4bn in 2013
• Net profit of EUR 3.3bn (75% margin)
• 40% dividend payout ratio in 2012
• Projected dividend of EUR 7.25 translates into a 4.9% yield at the current price
• Dividend was raised 8 out of 10 times since 2003 (from EUR 1.25 to EUR 7.25 in 2013) 

    

      3. Allianz

 

• Among the top-3 international insurance groups
• Current market capitalization of EUR 55bn
• S&P AA investment grade rating
• 9x price-earnings ratio
• Sector specific equity ratio of 7% as per end of 2013
• Annual turnover of EUR 111bn in 2013
• Net profit of EUR 6.3bn (5.7% margin)
• 38% projected dividend payout ratio in 2013
• Projected dividend of EUR 5.30 translates into a 4.4% yield at the current price
• After dividend was cut to EUR 3.50 (2008) from a peak distribution of EUR 5.50 in 2007, the dividend was raised each of the last 5 years ever since

Stocks - BUY - Seadrill

I have been following stock articles on Seadrill for quite some time and as the stock price dipped in the past weeks, I decided to add some exposure to the industry in the context of recent portfolio rebalancing activities. I am aware that Seadrill is a high-yield investment with considerable risk similar to TICC and Ekosem, but to me the dividend yield of around 10% represents an adequate risk premium.  

Seadrill provides offshore drilling services to the oil and gas industry on a global scale. The company owns and operates one of the youngest fleets by age within the industry, comprising 64 offshore drilling units and 23 more units under construction. Its business model is very capital intensive and as a result the company incurred significant amounts of debt in the last years. While Seadrill showed substantial growth and rising dividends in recent years, it still finds itself within a ramp up phase therefore regularly funding distributions from a mix of operating cashflow and debt financing.

Whereas the industry, just like the oil price, is very cyclical in nature and therefore adding more volatility to my portfolio, Seadrill’s order backlog amounts to ca. USD 20bn which is quite impressive given the ca. USD 3.8bn of revenues within 9M 2013. This strong order backlog provides investors with some mitigation to potential external shocks.

• 2nd biggest provider of offshore drilling services (after Transocean) with global footprint
• 4 consecutive annual dividend increases
• Market capitalization of ca. USD 17.3bn
• No rating issue by S&P/Moody’s/Fitch
• Acceptable equity ratio of ca. 28%, but aggressive Total Net Debt / EBITDA of 4.8x
• Added 32 stocks at price of EUR 28.68 generating a yield of 9.7% 

Dividend history of the company is not very long due to its very recent inception in 2005 and there are definitely some doubts about distribution sustainability, but even if the currently very high dividend yield of > 10% got cut, I believe that it would remain within an acceptable range for a non-investment grade investment. I am aware that this stock is not the best fit to a dividend growth strategy, but nonetheless I consider it to be a great addition, also when considering its impact on total dividend return of my portfolio.

Stocks - BUY - Philip Morris International

My year-end portfolio review led me to the conclusion that there were some stock positions in my portfolio which turned out to have problems with their business models, be it in the sense that they were hit by external market forces or had to undergo a fundamental change of their business model. In many cases, such characteristics are associated with stagnating dividends or even dividend cuts. Both features do not fit to the concept of dividend growth investing. I therefore felt that it is time to do some portfolio rebalancing. 

As indicated in my article in January, the above mentioned characteristics exactly describe the developments of K+S and Intel. Besides the realignment of their business models, both companies are also rather cyclical in nature: K+S, being a producer of potash, depends on a great number of external factors such as general economic conditions, cyclical trends in end-user markets, supply and demand imbalances, weather conditions, and last but not least the potash price itself. Intel, simply being active in the technology sector, the most cyclical of all sectors.

I decided that the next investment should provide some exposure to less cyclical sectors like consumer products. While the usual suspects like Coca Cola, Procter & Gamble, and Johnson & Johnson trade at substantial premiums and feature rather modest dividend yields of 3% or below, I turned to the tobacco industry and its global player Philip Morris, which currently generates a yield of  > 4.5%.

 

As can be seen in the chart below, the recent correction represents a good opportunity to buy this solid blue chip:

• Biggest producer of cigarettes worldwide with almost 30% global market share
• Exposure to mature & emerging markets: Western Europe, EEMA, Russia, Asia, Latin America, Canada, etc.
• 5 consecutive annual dividend increases
• Market capitalization of ca. USD 120bn
• S&P A investment grade rating
• However, negative equity and high leverage but this seems to be not so unusual for this industry sector (still need to further investigate why this is so!)
• Added 20 stocks at price of EUR 61.33 generating yield of  4.5%

Although the company recently reported some anticatalysts for further growth like higher governmental taxation, low-priced competition, challenging regulatory laws and illicit consumption, I am still of the opinion that the fundamental trend of PM remains intact. Even if growth conditions in some of its mature markets like Western Europe do not look favorable at the moment, PM has still the power to offset declining revenues in its overly regulated markets through organic growth and acquisitions in emerging markets. This characteristic holds even during recessions as people do not cut down expenses for everyday products like cigarettes…

Stocks - BUY - Realty Income

There is one new position to report which I added to my portfolio in December. This was actually against my recommendation not to enter the market at current prices (see Market – Oct 2013). There was, however, one fundamental change in November which allowed me to act against my own recommendation: This was Draghi’s announcement to once again reduce the base rate (from 0.50% to 0.25%). This step represents another cut-back on my savings account and as a result I freed up more resources for additional dividend investments.

In the past weeks the stock price of Realty Income came down to a level of EUR 30 (USD 40) and was within an acceptable range. Hence, I entered at EUR 29. Timing could have been better as the price went even further down to EUR 26.60. But, as usual, you never get the cheapest entry point. 

Many experienced dividend investors are currently discussing the impact of Fed tapering and are more defensive towards investments in REITs. As a long-term investor I remain confident in Realty’s business model and its track record:

- Equity REIT (no mortgage REIT)

- Portfolio of 3,800 commercial properties across the US

- 74 consecutive dividend increases

- Market capitalization of USD 7.4bn (largest US commercial REIT)

- S&P BBB+ investment grade rating

- Equity ratio of 60%

There are many articles and lots of extensive stock analysis on seeking alpha and other websites so I refer to these sites for a detailed analysis.  

I hold no position in this stock or in the sector and deem a yield of 5.50% attractive enough as entry price. 43 stocks at EUR 29 are enough for now. Further additions are possible if considered suitable from a portfolio perspective.