A Review of Investments for 2015

2015 has actually turned out to be a horrendous year, or a wonderful year, depending on how you look at it as an investor. Checking against the STI, I realised it has actually suffered a -14.3% dropped compared to this time last year. Taking into account 3% of dividends which the STI index would not have accounted for, that would actually be -11.3% net in terms of total returns.

So if you're sitting on a 11.3% loss, you're pretty much doing market normal. You're normal. On the other hand, if you've been buying throughout the year when the market dropped, it's probably going to turn out great in the longer run. That is, provided you didn't buy a bunch of junk! You had a lot of guts and I wish you success! You're probably abnormal.

My stock investment has returned an IRR of -1.2% for 2015 inclusive dividends reinvested into the portfolio. So I guess I should take some satisfaction that I have outperformed the market for the 6th year running. Can I gloat somewhat?

However, my long term IRR has continued to slide: from ~20% (2012-13, 4-5 years), to 17.3% (2014, 6 years), and now ~12% (2015, 7 years). A case of reversion to mean? Still, 12% over 7 years is not a bad long term performance. I'm consoling myself.

The shares portfolio is taking on a more global outlook as I've started investing into other regional ETFs (esp. Europe, Asia-Pac and Japan) on top of my current holdings of Singapore and US shares. If this was a fund management company, I should probably use some other global benchmarks. But I'm not, so I will continue to reference STI as my benchmark, because that's what my opportunity cost is. I'm only accountable to myself.

Bought:
  Anheuser Busch (US)

  ARA Asset Mgt
  Aspial (bonds)
  Boustead
  Capitacom Trust
  Capitaland
  CIMB Asiapac Div ETF
  Exxon Mobil (US)
  Global Logistic
  HongKong Land
  JMH
  Keppel
  Lyxor Europe10 ETF
  Lyxor Japan10 ETF
  M1
  OCBC
  Second Chance
  The Hour Glass
  Union Pacific
  YZG
  Zagro Asia

Rights Issues Subscribed:
  ARA Asset Mgt

Sold:
  nothing!

Lots of buying, not much selling. To be precise, I've sold nothing throughout the year. I've been a stooge. Gave nothing away.

Dividend income grew marginally to $11,168 for 2015. This would have been higher of course, except that I chose to accept all options offered in the form of scrip dividends (i.e. additional shares in lieu of cash) as per previous year. I'm too lazy to figure out what the exact dividend amount would have been. But I estimate it would likely be in the region of $14,000 for the shares portfolio. That's not enough to live off my lifestyle on, yet.

But from an overall perspective, the total portfolio of shares, unit trust, investment-linked and cash/bonds has finally breached the 7-figure zone. The journey is progressing well. The point of "inflexion" (a.k.a. financial independence) is coming.

Despite a tumultuous 2015, here's wishing you a wonderful 2016 next. Happy New Year!

My US Team of Dividend Stocks 2015

Like my Singapore Team (of dividend stocks), Team USA has been giving good returns. Below figures are the annualised Internal Rates of Return (IRR) for my investments in these US stocks, inclusive dividends. IRRs would have been even better if not for the 30% withholding tax on the dividends.

GOALKEEPER

(1) Berkshire Hathaway-B (9.5%). Warren Buffet and Charlie Munger. Need to say more? Several of below companies are also held by Berkshire.

DEFENSE

(2) Johnson & Johnson (15.6%). Household products for healthcare and beauty.

  
(3) Proctor & Gamble (7.3%). Household products - toiletries, diapers, etc. We consume plenty of their products without realising it.

  
(4) Exxon Mobil (16.0%). Big oil. Almost everything that moves need it. 

  
(5) Anheuser Busch (20.6%). Beer and theme parks. But it's mostly beer. Addiction.

MIDFIELD

(6) Wells Fargo (26.0%). Big Bank USA. Essential function for a working economy.

  
(7) McDonalds (9.8%). Junk food USA. Kids just love it, dunno why. Struggling of late from menu complexity, and competition from more fashionable competitors.
  
(8) Walmart (-1.7%). Low cost supermarket and departmental store. Has mass market appeal for the price conscious.

  
(9) Union Pacific (12.5%). Railways and long haul cargo via land.

FORWARD

(10) IBM (4.5%). Information technology - Big Data and Data Analytics. Buzzwords of the decade. Still waiting for Dr Watson to make an impact.

(11) Philip Morris (15.0%). Cigarettes. Global addiction, big time.

RESERVE

(12) Chevron (0.6%). Another big oil, similar to but smaller than Exxon Mobil.

(13) Target (29.1%). Another departmental store, similar to Walmart. I prefer to shop at Target though.
--

Interesting contrasts over the performance of Walmart compared to Target, and likewise between Exxon and Chevron. Big oil has of course suffered in recent months. But perhaps gradual recovery in sight. Sounds like an opportunity to continue buying more. Target has done better as I bought at its throes of poor performance over its Canadian fiasco which it subsequently exited.

Many of the companies derive much of their revenues from the global market and continue to thrive, in general. Don't think there will be any significant changes I need to make to this team.

I'm keenly watching a few players to bring on board. Maybe Disney and Visa?

Related:
A US team of dividend stocks

Disclaimer: 
By no means a suggestion to buy any of these stocks. I bought them at different times and have owned most of them for a few years as my approach is generally one of "buy and hold".

3 Events in Recent Weeks

Thoughts on 3 events over these past weeks:

1. SGX Crashed. Traders must have moaned and groaned until it was recovered. Pity those software and systems engineers involved in the fiasco. Must have stressed until 'lao sai'. Who benefits? Maybe nobody. Who suffers? Those who trade. But being a value investor, it was a non-event. Fascinating, and marginally amused.

2. Oil Slips. It's been a steep and slippery slope downhill. Beginning to look like Gold. Who benefits? Those who use a lot of oil in the first place. So transportation companies ought to benefit. Yeah for SIA! Who suffers? Those who make money selling oil. Oh no for Chevron. How will it affect Union Pacific? Mixed feelings, given that it is a transportation company but its current business loads seemed to be from moving fuels around. Not doing anything, but watching with interest.

3. The Glass Splits. Not that it's broke, but the shares of The Hour Glass went through a stock split of 3 shares for every 1 share. Effectively, that meant the price also dropped to 1/3, all else unchanged. Interestingly though, there was quite a bit of selling thereafter. Probably some people didn't know what had happened and thought it had crashed. Sounds like an opportunity, so I bought more.

A US Team of Dividend Growth/Value Stocks

Aside from investing in SGX stocks (My World Cup Team (of Dividend Value Stocks)), I also own a smaller portfolio in US stocks as part of my globally diversified investment portfolio. Other regions are held in the form of Exchange Traded Funds and Unit Trusts.

At the moment, my US team looks like this:

Goalkeeper:
  Berkshire Hathaway-B

Defense:
  Johnson & Johnson

  Proctor & Gamble

  Chevron

  Anheuser Busch

Midfield:
  Wells Fargo

  McDonalds

  Target

  Union Pacific

Forward:
  IBM 

  Philip Morris

Berkshire Hathaway is a steady goalkeeper that has proven its worth over the long history since its founding by Warren Buffet and Charlie Munger.

The defensive line of 4 is made up of various companies that are likely to float in good time or bad. Toiletries, consumer medical and household products are things that have high repeat value, regardless the market situation. Oil will always be needed, until alternatives start to make oil irrelevant. But I can't see that happening anytime soon. And beer, will continue to be guzzled, perhaps even more so when things aren't looking good.

The midfield line up is an interesting variety of a financial heavyweight, fast food, large scale retailer and nation-wide train system. Of these, perhaps the more risky one is Target as it continues to face difficulty with its troubled expansion into Canada struggling. The Canadians are really not too enthu' with them.

The forward line up of IBM and Philip Morris will take some time to pan out. It's hard for a smoker to cut a smoking habit. A rapidly growing emerging market will likely generate an increasingly higher demand for their products. Of course, there are many risks given that this is a really unhealthy business and will face regularity pressures with high taxation and domestic product alternatives. IBM ... hmm ... let's see how this IT behemoth transforms itself. It has pretty much given up everything that is a commodity - i.e. the hardware business.

Two interesting key attributes of most of the above companies: (a) many are holdings of Berkshire Hathaway, and (b) they are dividend growth champions! Ironically, Berkshire itself doesn't give out dividends. Warren Buffet has always said that his company can do a better job of capital allocation and it makes more sense for them to invest the money than to give out as dividends. Besides, US tax the dividend payouts. As a Singaporean investor, I would lose 30% from withholding tax for dividends that are paid out.

The first team with the above 11 players are doing well.  However, my bench isn't doing too well - i.e. Coach. My holding in Coach has dropped a third in value.

Coach has been suffering from competitive pressures from Kate Spade and Michael Kors. Its attempt to generate more sales via atfactory outlets has devalued its branding. But still, we see many ladies holding Coach products. The company's financials look good. Let's see if it survives the challenge from the new brands and turn things around over time.

It's an irony isn't it? The problem is the Coach. Muahahah!

Union Pacific - Choo Choo Train, Ran Away

[Source: Union Pacific]

When Berkshire Hathaway swallowed up BNSF Railway, it also disposed all its shares in Union Pacific that it had previously held. The reason for doing so didn't seem to be a case of negative views on Union Pacific, but rather, to avoid complications over anti-monopolistic concerns from regulatory bodies arising from Berkshire owning two big railway companies. The rail business seem to be experiencing a boom of late.

Can't buy BNSF, but Union Pacific is certainly available. So I looked at its financials.

Its debt levels seems low at the 40-50% bracket, compared to most US companies.

Dividend yield isn't yet great at below 2% with a payout ratio of 32.35%. But its DPS has been growing steadily year on year. In fact, its DPS has more than doubled over the last 5 years. In addition, its DPS has remained significantly below its EPS each year. Looks like it has a lot of room to continue on this trajectory of DPS growth.

Margins look great with gross margin at 73.47% and net profit margin at 20.25%. Which suggests that this is a very profitable business. PE ratio may be a bit on the high side though.

My previous impression was that the rail business is a capital intensive business. Seems like that doesn't detract from its profitability. I was probably influenced by the situation faced by our very own SMRT. After years of being seen as a great defensive dividend stock, all it took was one wonderful massive train breakdown incident and voila, end of party. It went south rapidly and stayed that way for much of recent years.

Rails are sticky business. It's difficult for new entrants to come in. One has to lay lots of line to create the network and invest in a lot of assets (trains, switching systems) to get going. I don't think there will be any new competition anytime soon in the US. For a large country like the US, rails make more sense than airlines and shipping lines to move large volumes of goods around. Airlines can move stuff fast, but they are notoriously difficult to make the margins and can't carry much. Ships need a lot of upkeeping and fuel, and can't reach land-locked areas. Rails appear to have that significant niche.

Stock Data
Market Capitalization (USD 'mil)	92,623.99
Common Shares Outstanding ('mil)	906.0138
52 Week High (USD) (10/06/2014)	102.500
52 Week Low (USD) (24/06/2013)	74.250
52 Week Return (%)	32.000
Average Volume ('mil)	3.1823
Beta	1.04

Financial strength
Current Ratio	1.05
Quick Ratio	0.88
Long Term Debt to Equity (%)	41.80
Total Debt to Equity (%)	45.12
Interest Coverage Ratio (TTM)	14.58
Free Cash Flow to Firm (TTM) (USD 'mln)	2,086.00

Margin
Gross Margin (TTM) (%)	73.47
Operating Profit Margin (TTM) (%)	34.36
Net Profit Margin (TTM) (%)	20.25

Dividend §
Annual Dividend per share (USD)	1.4300
Dividend Yield (TTM) (%)	1.45
Dividend Yield (Annual) (%)	1.78
Payout Ratio (TTM) (%)	32.35
3-Year Growth Rate (%)	29.73

Valuation
Historical P/E Ratio	21.69
P/E Ratio (TTM)	20.92
P/BV (latest interim)	4.35
BVPS (latest interim) (USD)	23.4787
EPS TTM (USD)	4.8841

Ratios & Other data
ROA (%)	4.62	6.52	7.47	8.55	9.06
ROE (%)	11.72	16.09	18.12	20.51	21.35
DPS (USD)	0.5400	0.6550	0.9650	1.2450	1.4300
EPS (USD)	1.8683	2.7640	3.3606	4.1375	4.7102

[Source: POEMS, as at 12 Jun 2014.]

Looks like a great buy right? So I did. A couple of days later, I discovered to my horror that the value of the shares I had bought had dropped to half the price I paid! Holly crap. What happened? 

A couple of frantic checks later, I realised that it had undergone a 2-for-1 split, effective the day I bought the shares. Such coincidence! I hadn't thought to check if there were any news on such things then. A couple of frantic e-mails with the online broker, it was subsequently ascertained that I had indeed been credited with the split shares. So it was all good in the end. I had not stupidly paid double the value for my Union Pacific shares. Phew. Bodoh bodoh.

Lesson learnt: Check for news of stock split, merge and dividend ex-dates before diving into a buy.

Choo choo! She'll be coming round the mountain when she comes ...

Related:

Union Pacific - Investor Relations