Dividend growth investing

Dividend investing is not new. Far from it. But it seemingly has easy answers for people who want to invest their money. One uses a screener to look for increasing profits, dividends, EPS [… plugin more items] and then does a cursory analysis of the balance sheet to see if they are “financially sound” and the business model makes sense. One you have all this you look at any number of valuation models/online calculators like the dividend discount model and come up with a fair price. You buy if you see that the company is selling on a discount to the fair value.

I have several reservations about dividend growth investing as it is practiced by a lot of people at the moment. I believe that it is too superficial and glosses over several things which should be considered before investing. I am not in a position to criticise though — given my track record.

I think though that the next bear market will severely effect the dividend growth investors — by wiping out their collected dividends against capital losses i.e., loss in share prices. I would be interested to see how the dividend investors will react in such a case. For the sake of this study, I am going to link the blogs I have followed for some time.

Dividend Mantra
Passive Income Pursuit
Dividend Monk
Dividend Guy Blog

I am going to stop following them and check back with them when the next bear market hits i.e., S&P drops at least 20%.

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Liquidated my HP holding

As promised, I sold my HP position completely.

This was one of the most harrowing and hence learning experiences of my short investing career. It showed me how the qualitative aspects dominate the quantitative. How mis-management can wreak havoc to a company and how important the role of the BoD is.

I plan to write this in more detail but for now I am happy to get out at these prices. The stock may appreciate in the short term but frankly I am increasingly convinced that this company is not a great long term investment.

Introspecting my holdings

Jun 13, 2013 My portfolio will profit from an introspection, especially given that my performance over the last 2 years has been quite abysmal [src].

Equity Invested
Tier 1 ABB, Bouygues, Tesco, ArcelorMittal, CAF, PostNL, Intel, MunichRe sfr 19,000
Tier 2 Dell, E.On, France Telecom sfr 14,000
Tier3 Bank of America, Banco Santander, Hewlett-Packard sfr 13,000

Tier 2 are the ones which I would prefer not holding — if better opportunities arise. Tier 3 are companies which are either outside my circle of competence (BAC, SAN) or I detest holding them (HPQ). This is a sad state of affairs because out of sfr 46,000 invested sfr 27,000 is not in companies I really like. This needs to change.

I will actively try to shift my holdings towards Tier 1. In 6 months I will check back to see if I have succeeded in doing so.

Oct 25, 2013 It has been four months since I looked at my portfolio as a whole. Here is the current breakup in terms of the Tier structure I defined above.

Equity Invested
Tier 1 ABB, Bouygues, Tesco, ArcelorMittal, CAF, PostNL, Intel, Fortress Paper, Nam Tai sfr 26,000
Tier 2 E.On, France Telecom sfr 12,000
Tier3 Bank of America, Banco Santander sfr 10,000

I still have sfr 46,000 invested and only sfr 22,000 are in the companies which I don’t really like for one reason or another. I feel much better about my portfolio now then I did in June. Especially, after cutting down.

After 2 years at IB …

It has been 2 years since I opened my Interactive Brokers account. I paid sfr 160 in account management, received sfr 2,281 in dividends and my cumulative return has been a measly 1.86%. The cumulative performance graph is shown below.

SLI (green) vs My portfolio (blue)

SLI (green) vs My portfolio (blue)

Period (25 May) My portfolio Swiss Leader Index (SLI) Relative
2011-2012 -17.43% -12.22% -5.21%
2012-2013 25.75% 39.2% -13.45%

Given that my target return is 20% — in absolute terms, this is a very sobering fact. It would have been much better for me to invest in the Swiss Leader Index (SLI). It seems that with time the gap has increased instead of narrowing.

If this continues for the next 3 years then I will have to confront myself and switch to investing in indexes. At the moment I have an excuse that I am still in the early stages of my learning phase.

Bought Bouygues

I finally took the plunge and started a position in Bouygues. This is a small position of 50 shares and I will add if/when prices fall.

Bouygues has 30% shareholding in Alstom, 43.6% in Television Francais and 89.5% in Bouygues Telecom. It is also active in construction through its (almost-)wholly owned subsidiaries Colas (96.5% holding), B/CW and Bouygues Immobilier.

Bouygues is run by the Martin Bouygues and can be seen as a family owned enterprise, in the sense that Martin and his brother Olivier hold 21.5% of the share capital. Another 23.33% is owned by the Bouygues employees. Together they have nearly 59% of the voting rights. This lets the management, in essence, think really long term.

If you read the most recent quarterly report and the presentations, Bouygues is concentrating on increasing sales — not a very good variable to aim at, in my opinion. The trouble with the company is that the highly profitable construction business (and Alstom) are being dragged down by the very capital intensive Telecom business. When Martin was asked about the sale of Bouygues Telecom, he observed that this was not a correct time to do so. Meanwhile, this segments continues to suck money out of the rest. The competition between Bouygues, Vivendi (SFR), France Telecom (Orange) and Illiad (free) has seen Illiad gaining at the expense of the rest. The margins have shrunk and the profitability has suffered.

Nevertheless, the company remains cheap on a sum by part basis with an excellent balance sheet. According to 31 Mar, 2013 figures Bouygues has €3.9 bn in cash, €8.4 bn in LT+ST debt, and €600 mn in pension liabilities. At current market cap of €6.2 bn, the EV is €11.3 bn.

Colas, Alstom and TF1 are listed companies. Their value adds up €8 bn at current market prices. We are getting the rest for only €3 bn. Notice that Bouygues Telecom has sales of more than €4 bn. The rest i.e., Immobilier and B/CW we are getting for free.

A very good valuation of the company can be found here [valueandopportunity] — which arrives at a 67% upside at current prices.

How we decide by Jonah Lehrer

If the game is simple or obvious, then you’ve made a mistake. The game is never simple. You’ve always got to wonder: what am I missing ? – Binger

Instead of cursorily  looking at *all* the wisdom this book imparts, I will like to mention an amazing experiment described in the book.

The experiment was done by a Dutch psychologist Dijksterhuis. While considering a new car for himself, he realised that the amount of information given to him was overwhelming and his conscious brain was not able to come up with a decision. He came up with an experiment to show how our conscious brain is incapable of making the correct choice in such a situation.

The first experiment started by collecting a group of Dutch car shoppers. They were given a description of four different used cars. Each car was rated on four different categories – for example mileage, transmission, sound system etc. The experiment was designed in such a way that one car was objectively ideal with “predominately positive” aspects. After showing them the cars, Dijksterhuis split them into two groups. The first group was given time to consider the pros and cons while the second group was distracted by word puzzles. While playing the games the second group was suddenly asked to make a choice. The result was that the first group performed significantly better than the second. A little rational analysis is better.

In the second version of the experiment, with the same cars but rated them on 12 different categories – resulting in 48 different information pieces. In this case, the first group chose the ideal car less than 25% of the time while the second group did it more than 60% of the time.

A heartily enjoyable and interesting read. Highly recommended.

Monthly update: May 2013

A very interesting month starting with the clamours of “sell in May and go away”. The pundits were proved wrong and S&P returned more than 2% during the month.

Owing to the market being at an all time high, I did not do a lot of value finding this month. Meanwhile, I sold a substantial amount of my holdings.

I sold out of Roche, Transocean, Applied Materials, and Vodafone. I reduced Tesco because of concerns about CFD fees. I reduced ABB, Hewlett-Packard,  and Alcoa. A summary of these is as follows.

Company Action Profit
Roche Closed Sfr 1772
Transocean Closed Sfr 163
AMAT Closed $798
Vodafone Closed £157
ABB Reduced $749
Alcoa Reduced -$16
Hewlett-Packard Reduced -$338
Tesco Reduced £144

I bought one new position – PostNL. They have been crushed by the TNT acquisition by UPS which did not succeed and pension liabilities – which has been taken care of. The stock traded for as low as €1.46 when their TNT holding is worth around €2.5 per share. There is a risk of more additions to pension plans but it does not pose a significant risk to the balance sheet.

I started by buying 500 shares. It was a placeholder until I could buy a lot more. Unfortunately, the stock took off after only 2 days and I sit on a 15% profit. I hope it will come down soon – in which case I will make a bigger position at lower prices.

Company Comments
PostNL Added 500@€1.85
Eur 3000@Sfr1.233
Pound 5000@Sfr1.46

Adding it all together.

Item Value
Dividend Sfr 332.14
Withholding – Sfr 53.24
Other fee – Sfr 6
Interest – Sfr 40
Capital gains Sfr 3468.72
Total Sfr 3701.62

The monthly net was quite high. But remember that it has been the result of my Roche investment – which I bought nearly 3 years ago !

My portfolio composition is as follows.

Value of portfolio (31 May) Sfr 103,399
 Cash Sfr 55,531