Finally, after two brief discussions about Fed funds rate and four different stock exchanges, we arrived at this topic.
What target price? what floor price? Sell now? Buy later?
Usually most common questions I see in Facebook posts.
Like I mentioned last time, there’s just no way of figuring out what will be the market share price of a company as I have explained in a previous post. See in a new tab (https://perennialinvesting.wordpress.com/2015/09/13/most-basic-and-conservative-probably-way-on-valuing-a-company/)
*you might want to open these kind of links in a new tab instead*
I do not see spending my energy and time determining the useless questions above. Rather, I spend more time in checking a company’s financial statements and determining its intrinsic value (if impressed by its financials).
Recognizing (pesonally) that I prefer dividend providing companies (companies that shares their earnings through an annual/quarterly payout to its shareholders), I see these companies as good long-term investments down the road regardless of economic conditions when purchased at bargain prices.
More importantly, you want to seek dividend providing companies with yields higher than the current U.S. Treasury.
Let me give a brief explanation, U.S. treasury rates are guaranteed by the U.S. government. Therefore, if you parked your savings or funds for investments there, it will give a guaranteed return by the time the bond is due PLUS NO RISK in your capital. (As long as you hold on tight until the bond reach its maturity and not sell for ANY reason).
Right now, if you’re investment horizon is 5 years, you would look at the current yield at that year at this website (http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield)
As of 9/25/2015, 5 year treasury rate is at 1.48%.
That just means that the U.S. will be giving you 1.48% annually until the 5th year whereby it’ll return to you your savings/investment FULL. (Regardless of which country you are from right now, I believe the U.S. government treasury rates are the standard rates to base other complex discounted cash flow and other capital asset pricing model (CAPM)–which is beyond this blog/discussion)*
Remember, this is ‘guaranteed’ return along with your capital by the U.S. government, unless of course the government itself goes into bankruptcy. I doubt that will ever happen. Do you?
The essence of this is to just seek for a competent company who could give you more than 1.48% to compensate you for the risk that you are taking.
There are certain terms that pundits use when it comes to comparing yields, such as basis points, spreads, etc—which we won’t discuss to simplify things.
Going back, If you’re a long term investor, I think this should definitely be one of your considerations prior to purchasing any company.
You worked hard for your money, and now it’s time for that money to work for you.
By investing that into different competent and good quality company/ies, you make your money work for you through achieving capital appreciation (stock market price going up after you purchase) and/or dividends.
As of 9/22/2015, the top four dividend providers in the Philippines are as follows (http://www.topyields.nl/Top-dividend-yields-of-PSE.php):
Philippine Long Distance Company (TEL) with 4.92%
DMCI Holdings (DMC) with 3.33%
Belle Corporation (BEL) with 3.14%
Globe Telecom Inc (GLO) with 2.89%
Now, how do you get a company’s dividend yield?
It is the amount of money given by company annually (dividend rate) over the company’s market price. Easier way is to go to a financial website (scroll down below for the list).
For demonstrative purposes, I used the Financial Times website (http://www.ft.com/home/us)
Due to numerous companies enlisted in this website, it is better to type in the entire company’s name.
Annual dividend yield stated is 4.92%, same as stated.
So, what is the dividend rate (how much actually is the company giving its shareholders per share)?
Now we will use simple math, as stated earlier:
Dividend yield = dividend rate divided by market price.
To get the dividend rate, we transpose the market price and multiply it with the dividend yield. Remember that 4.92% is in percentage, change it into decimal form or to 0.0492 before multiplying it with TEL’s price of 2,268. As a result we get, 111.59 pesos per share.
Yes, that’s how much you get annually per share of this (TEL) company.
Now, you’ve increased your financial vocabulary =)
Anyhow, this is just to know how much you actually earn per share if you bought shares in any company of interest.
Let’s now compare these top five companies with some of the metrics I use.
Dividend payout ratio. According to Investopedia, this is the percentage of earnings paid to shareholders in dividends. Personally, I refrain investing in companies that has >80% ratio.
There are two ways in figuring out the payout ratio. First, it can be calculated by this formula; dividend per share over earnings per share. Second, dividends paid by the company divided by its net income.
In this case, I’ll use the latter to see the bigger picture.
DMC and Glo appears to be more conservative with their payout ratio at 52.04% and 70.62% respectively. Tel and Bel (rhymes?) are at awkard position when handing out their dividends at >100%.
In short, they are giving away MORE from what they earn to their shareholders. As an investor, this is not what I want to see. (I was once a shareholder of Tel).
Dividend computed annual growth rate (CAGR; Past 5 years). As an investor, I want to put my money where a company can grow its dividend consistently and has a previous track record. There are only few (I think) companies in the Philippines who are able to do this when compared to stocks in the U.S. or Canada.
For example, Coke Cola (KO; one of Warren Buffett’s all-time favorites) has been giving dividends year in and year out, recessions, booms and bust, for 52 consecutive years. Royal Bank of Canada (RY) has been paying dividends to its loyal shareholders since 1870’s (140+ years and counting). Over time, their dividends had grown.
Okay, let’s check the aforementioned companies’ dividend CAGR for the past half decade.
Tel actually dropped 4.13% in dividend growth, while Bel has just recently given out dividends (2014; according to my data gathering). DMC had an outstanding growth, while Glo had 5.47% CAGR.
Nice to know information: Tel had given 41,598 million PHP in 2011 and currently gave 33,681 million PHP. Glo had provided 8,251 million Php in 2011, while handing out 10,772 million Php TTM.
Big numbers right? Well, just remember that dividends are serious responsibility (shareholder appreciation) for these Blue Chip companies unlike for some small, zero-earning companies listed in the Philippine Stock Exchange.
Debt to equity ratio (D/E). Yes, we see this again. I personally require DE to be seen most of the time in several of my metrics. I would require <0.5. the lesser, the better.
According to the latest quarter numbers, the following are observed.
Despite the outstanding growth in Glo’s dividend growth, it did not impress me here at 1.05. Bel’s 0.16 appears to be conservative along with DMC’s 0.58. While Tel had 0.86.
Nice to know information: Glo has a total debt of 70,280 million PHP, while Tel has 143,738 million Php or 70 Billion pesos and 144 Billion pesos respectively. In short, it does not matter how much debt a company has as long as it has an understandable DE ratio. Scroll up to see what I meant by this when comparing Tel and Glo’s numbers.
I do suggest a deeper historical performance review of any company (including revenue, operating margins, return on invested capital, etc.) that may be interesting for you to invest. We know historical performance does not guarantee future developments, but it is worth knowing where the company has been with its financial performance. (and not just chart prices)
Okay, I guess we’ll stop here. If you are interested in learning about companies giving dividends in Hong Kong or India, click on the next parts of this blog.
A quote to go by
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D. Rockefeller
Disclosure: I do not have shares in any of the companies mentioned in this article and don’t plan to initiate purchase within the next 24 hours. I would not receive any compensation for doing this article. I am not a professional financial analyst. This is just a hobby. Lastly, my work is not error-free, but I strive for it to be. Do not consider as a buy or sell advice. Invest at your own risk.
If you are interested in this similar approach to investing and would seek updates, I wish to invite you to this Facebook group SEEKING VALUE (https://www.facebook.com/groups/SeekingValue/?ref=bookmarks)
Part 1: Which Company Shares I Should Buy, Now that the Fed Kept Rates Unchanged?
Part 2: S&P500, Philippine Stock Market, Hong Kong, India, and the Fed Funds Rate.
Part 4: In Hong Kong, Which Company has a Good Recent Performance of Handing out Dividends.
Part 5: In India, Which Company has a Good Recent Performance of Handing out Dividends.