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...


 

Portfolio - Dividends in Q1 2014

The first quarter of the year 2014 is almost over and hence I am checking the cash dividends that entered my bank account during that period.

My portfolio is rather small in size and so are the dividend amounts that were deposited. But despite the small amount of invested capital, I am already taking note of the dividend compounding effect. This effect reminds me of a seedling which is slowly, but continuously growing out of fertile soil - that is my portfolio. :-)

I could quickly ramp up my portfolio in size just for the sake of generating more dividends, but I prefer to keep a cautious attitude towards the stock market and to act with prudence and care. History proves that market crashs occur frequently and are difficult to predict. Against this background, I prefer to build up my portfolio constantly throughout a longer investment horizon. At the same time, I am hoping for a stronger market correction within the next one or two years in order to expand more aggressively while reaching a higher yield on cost.

Many investors claim that market timing is a complete waste of time. But I am following my gut feeling here and I feel more comfortable with a sort of anti-cyclical investment approach. Although it could well be that I need to be patient for a much longer time than originally expected.

Let’s have a closer look at dividends received in Q1:

There has been total dividends (net of taxes) of EUR 133 in Q1. The annual coupon of Ekosem was by far the largest amount followed by distributions of Seadrill and TICC.

Based on EUR 133 in Q1, I might be able to add a whole new position to my portfolio at the end of the year: If I assume a EUR 133 per quarter this adds up to EUR 532. With more portfolio additions to come in the next months I might be able to exceed this amount and reach some EUR 700 which is an acceptable basis for initiating a new position.

As the DAX dividend season is approaching, I am thinking about adding a few more DAX companies to my portfolio. Based on my recent stock analysis, my favorites are BASF, Munich RE, and Allianz. Prices for the three companies rallied pretty much in the last trading days. Same holds true for Unilever and AT&T, which I consider as other suitable candidates…

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

Market - Feb 2014

I don’t know how you feel about it, but occupied with my daily job the 2 months of the new year went by so fast and 2013 seems already so long ago. I guess, same holds true for my last market update, which dates back to October 2013. Originally, I had planned to write new articles about market developments every 2 months, but I think it makes sense to be a bit more flexible with that rule. Sometimes, there are just too few things to report and sometimes my life just doesn’t allow for more frequent posting activities.

When looking back to my last article in October, there are quite some news and developments to report since then, in particular in regard to the US market.

It begins with Bernanke finally announcing to start with tapering the Fed’s bond buying program by USD 10bn per month, down from USD 85bn to USD 75bn starting with January 2014. Originally, markets feared a cut-down of the program, but the Fed’s commitment to leave the interest rate at its all-time low for a longer period of time led to general market reliefs. In the last days of 2013, the Dow Jones managed to climb up to a new all-time high of ca. 16,600. Since then, there was a minor correction back to a level of 15,400 in the first days of February. This was subsequent to disappointing US manufacturing data and uncertainties in relation to the Fed’s strategy going forward. In the end, Janet Yellen’s first speech as successor to Bernanke and new chairman of the Fed was positively perceived by the market.

Yellen is known to be a strong supporter of the current policy of quantitative easing and I expect her to stick to this inflationary policy for a while longer. Still, I am curious to see how this policy will evolve over time and how the US and other western economies will try to ascend from the depths of the financial crisis. The US is and will always be a particular case in this regard since it is a benchmark for the global economy and a raw-model for all western economies, which are still impacted by ailing public finances. The way the Fed deals with the US debt burden is exemplary itself as it relies solely on a policy of cheap money to stimulate the economy and reduce unemployment.

To the contrary, the ECB is required to implement fiscal rules for all EURO member states and even request structural reforms from the weaker economies in exchange for financial support. Interestingly enough, but the Fed seems to be the one which is currently making more progress, having almost reached its labor market goals (unemployment rate < 6.5%) and having started to taper further down to USD 65bn as per February 2014. One could therefore argue that the Fed is already in the process to tighten its monetary supply, although it is still a bit early to say that.

Whether this monetary strategy alone, without the encouragement of structural reforms, will be a success story is written in the stars. After all, the US Senate managed to pass a 2-year budget deal in December to ease automatic spending cuts and reduce the risk of a government shutdown. Against this background, it remains to be seen whether the US is on the right way to regain control of its public finances or whether it follows a simple and unsustainable strategy, which metaphorically can be well described as ‘kicking the can further down the road’.

As mentioned above, both the economic conditions of the ‘EURO-zone’ as well as the achievements of the ECB lag behind those of the USA and the Fed. However, this has more or less to do with the very foundations of the EURO-zone, i.e. its complex institutional structure and cultural diversity. The DAX, as a mirror of a German economy, which is currently working like clockwork, is therefore not a good benchmark for the EURO-zone as a whole. From a German perspective, the last reduction of the base rate down to 0.25%, announced by Draghi in November, sort of came as a surprise, even though it makes more sense within the wider EURO context.

This step sustainably pushed the DAX further up to new records above a level of 9,000. Due to the current deflationary tendencies within the EURO-zone, it is not unlikely that we will see another reduction of the base rate in the next months. This time, however, it would reach the critical level of 0% and could be interpreted as the very last portion of gunpowder in Draghi’s gun. This in mind, I currently do not see any alternatives to the stock market and therefore I stay invested while slowly increasing my exposure to the market proportionally to my savings rate.

While the upward trend of the Dow Jones and the DAX remain intact, the STI already left an upward trend channel during summer 2013 and regularly tests support levels at around 3,000 points. The Fed announcement on 22 May to begin tapering soon rang in a stronger correction of the STI, which has not recovered since then. In fact, the STI is currently tumbling up and down, being affected by fears about foreign funds continuing to flee out of Asia and the emerging markets.

To me, Singapore and the STI remain attractive. I would consider adding more exposure, but before I am in a position to do that, I need to keep an eye on my savings. Maybe, there are more opportunities soon when my 2013-bonus flows into my account...

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…

Portfolio - Jan 2014

As already explained in my last post end of December, price losses and dividend cuts for K+S gave me quite some headache last year. The recent upward trend of the stock represented and opportunity to exit this investment. I sold 17 stocks at EUR 22.50 and reduced my exposure to EUR 1,000 already at the end of 2013. Right after that the price went further up to EUR 26.00 and therefore I decided to enter a stop loss order at EUR 25.00 to sell the remaining part. The order was executed on the same day so the remaining 30 K+S shares left my portfolio as well. 

Overall, the K+S investment resulted in a 28% loss and has cost me EUR 439, but I decided that it is better to cut losses and use the funds for other investments.

Intel was the other candidate which I considered selling in December. When the company reported its Q4 results on 16 January, many analysts were not really delighted about the results: For FY 2013, the company reported USD 52.7bn in sales (down 1% yoy) and a USD 9.6bn profit (down 13% yoy). Forecasts for 2014 show that management is basically expecting a flat 2014. Dividends for 2014 are also expected to be held constant at 2012/13 levels. Given these key data, Intel's stock price went down more than 4% within the same day from an interim high at EUR 19.74. Intel fights against declining PC sales, which used to be its core business segment, and still finds itself within a transitional phase to mobile devices. 

I decided to exit at EUR 18.74 and took a EUR 200 profit with me which compensated me for my K+S losses. In my view, it still remains to be seen if Intel's mobile play can come out to be a profitable venture and it can take much time until that happens. Given that Intel is a rather cyclical stock and the bullish market atmosphere which could also well change in the course of 2014, I thought it is better to exit and use the funds for other investments.

That said, I entered into two new positions: 20 stocks of Philip Morris International at price of EUR 61.33 and a yield of 4.5% and 32 stocks of Seadrill Ltd. at a price of EUR 28.68 and a yield of 9.7%. Basic investment considerations for entering into the positions will follow soon in the Stocks section.

New portfolio composition is shown below:

In comparison to December 2013, expected dividends for 2014 increased from EUR 539 to EUR 612 due to the higher portfolio yield of 6.20% in comparison to previous 5.48%. This particularly has to do with the replacement of low-yielding K+S by high-yielding Seadrill as total invested capital remains almost the same. Interestingly, despite the higher yield I feel more comfortable with the new composition of the portfolio. I do hope though that this is not only a feeling...

Portfolio - Dec 2013

We are coming close to year-end and like for every dividend blogger out there, it is also time for me to review my portfolio and draw some conclusions:

- Total collected dividends in 2013: EUR 406
- Expected dividends for 2014: EUR 539
- Current book value: EUR 9,842
- Current gain in market value (MV): EUR 539.

There have not been any changes to the portfolio in comparison to Jun 2013 except for some trading activity on part of K+S and Realty Income. Realty was added to the portfolio in early December and in my view, it was attractively priced at EUR 29 (see latest post). My K+S exposure was reduced yesterday as it represented the largest position of the portfolio and was simply over-weighted given its price collapse in 2013. I sold 17 stocks at a price of EUR 22.25 and incurred a loss of EUR 189.

One can always argue whether waiting for a full recovery is the better strategy, but I concluded that I do not have any clear insight into the fertilizer market and that the chances of the market to find back to its cartel-like structure are difficult to assess. The fact that the conflict between Uralkali (Russia) and Belaruskali (Belarus) has also a political dimension does not make this assessment easier. I am convinced that the current exposure of EUR 1,000 fits much better to my overall portfolio.

I can well imagine following the same approach for E.on as well, but at the moment I still see more potential for this one, even if it might take considerable time to unlock it.

Intel is another candidate which could be worth selling. Not only would I incur a profit of +17%, but I could also replace it with a more stable company with similar yield like Philip Morris for example.

Clear winner this year is Deutsche Post which almost doubled (+91%) in value since beginning of 2012. I expect the dividend to be raised from EUR 0.70 to EUR 0.75 which is well in line with the concept of dividend growth investing.

Overall portfolio yield stands at 5.48%, slightly lower compared to the 5.69% as per June 2013. This is mostly due to the forecasted reduction of the K+S dividend and the USD/SGD/GBP depreciation against the EUR which had some negative impact on dividend distributions of Intel, TICC, SingTel and Royal Dutch Shell.

What are my goals for 2014? This is simple:

1. Write more articles
2. Closely monitor the market situation
3. Further grow the portfolio by 3-5 investments
4. Be patient and wait for the right investments

Happy new year to everyone! :-)