NESTLE LANKA(NEST.N0000) AGM Highlights(2014-05-22)

It's being a while since I made the last post here. Mainly due to recent changes in my work place.  Anyway thought of writing a short not about NEST AGM which I attended last week. Nestle AGM was held on 22-05-2014 at Sri Lanka Foundation Institute, Colombo 07.

As always NEST AGM is very investor friendly. For those who are interested, there was a free health check for share holder followed by Breakfast Cereals, Refreshments and a couple of foods trucks serving(LoL!).

 

Anyway I was not there for the food and drinks, but it is a gesture of goodwill towards the share holders and worth mentioning. I've been a long standing share holder of NEST. The purpose of this post is to share some important points raised by share holders as well as the answers given by management.

Shareholder Concerns & Answers

•  DPS is not there in the 10 Year summer : Personally I too have been annoyed by this. Without this data it is difficult to draw graphs you will see at the end of this post.

•  Suggestion subdivide shares and increase liquidity : One share holder make this suggestion and said that will raise the dividend yield for share holders (which is incorrect). Later on Mr Ganesan Ampalavanar (Managing Director) also explained that and said they have no plans for a subdivision. I also believe that it is pointless to go for a subdivision just to increase the liquidity as long as the price stability is there.

• Minimum Free Float : This is not a big concern for NEST. As market capital of NEST is over 5 billion they need to shed only 0.28% of shares to fall inline with the rules. Management explained that they have time till 2016 to do that and even after that they can appeal for more time.

• Break up of amount of money paid to farmers : Page 5 of annual report says 4.8 billion was paid for raw material purchases. I too was keen to know the break up (dairy and coconut). I know that as a policy Nestle do not give any hints about their business segments. That may be the intention of one who asked the question. Management said that they will consider this. But I don't think that they will give those information. It is true that this data is important for share holders but we have to remember that it is also important for competitors as well.

•  Reintroduce "Nespray" Brand : Some felt that "Nespray For Every Day" as a degraded product. Currently Nestle do not produce or import Full Cream Milk Powder. I think this is a strategic decision by the management as explained on next point. 

•  DCD issue : Some informed shareholders praised the management for the way they handled the issue. As explained by the management, Non of the products have been tested positive and they have completely stopped importing milk power. Currently Nestle is the largest milk purchaser in the island and all products are locally sourced. This might be the reason for discontinuation of Nespray. I think the profit margins are higher on other products where company have the price control(government have imposed a price ceiling for milk powder in SL). Also it is important to not that management said that if they were opportunistic, they could have destroyed the competitors during the crisis last year(not on those words Lol!). 

•  Complementary Gifts : Management categorically rejected the proposal of giving gifts for share holders in order to preserve the share values. Yeah! be a good share holder not a greedy share holder.

Dividend History of NEST

I said that I'm a long term investor of Nestle. If you need a reason Why? Following graph explain it very clearly.

Here is a gain/loss simulation of NEST from 2001. It is important to note the difference between annual gain with(1300%) and without(350%) dividend reinvesting.

Conclusion

If you too attended the AGM and have anything else to add or if you have some concerns about the content, you may comment below. I will try my best to answer you.

Happy Investing!

Dividend Analysis : UNION ASSURANCE PLC(UAL.N0000)

This is the first post of this year and market is showing positive signs already. Having gone through the CBSL Road Map, I'm excited about the next 24 months. Few things to not is Per-capita Income of $4,000 by 2016 is on track, Inflation target is around 5% for next two years and CBSL intends to keep interest rate low around 7.5%. This environment will increase the disposable income of individuals as well as industries. 

For this post I selected UAL because it had the second highest 5 year average dividend yield. With the expected increase in disposable income, I believe counters like UAL will perform better in the long run.

UAL.N0000

This is the out put from Health Check tool. As an investment UAL  is very safe.

Dividend history of UAL is as follows. Currnt payout ratio is 43%.

To me UAL is a perfectly safe investment, but not without a catch. UAL is a extremely illiquid counter. JKH hold 85% and top 20 share holders have locked nearly 98% among them. Free float is less than 2% and wild fluctuation of the share price is a result of this.

This is the order book at the time of writing this. If you are going to collect 1000 shares you will have push the price up by 10%

Here is a gain/loss simulation of UAL from 2003. Because of the illiquid nature of the counter, trading seems to be yielding better than dividend investing. But it is interesting to note that dividend investors never made a loss for the past 10 years.

Light Blue line indicate the YOY loss or gain
Dark Blue line is the annualized gain with dividend being re-invested
Red line is the annualized gain without dividend being re-invested

Conclusion

Unlike the other counters I went through before, UAL is unique due to it's illiquid nature. Things might change in the future as SEC has implemented rules on minimum free float.  For the time being I'm going to monitor UAL for a good entry point. If you managed to grab a good quantity at a discounted level, it will be great for a short term investment as well as a dividend investment.

Cheers..

Health Check Your Holdings : Tool

Have you ever wondered if there is a easy way to find out how healthy your holdings are? I've been thinking about a way to do it for a long time. I'm not a full time investor and I don't have time to go through financial reports of 280+ companies. Don't get me wrong here, I go through financials before I buy anything. But that is after pinpointing on a particular counter or two. How about the period before that? If there is a one click way to measure the health and safety of an investment that would be great. In this post I'm going to introduce you a tool, which I've been developing to do that. 

What to check?

This is probably the most difficult part. It is important to figure out a universal set of parameters to measure the health of an investment. As a dividend growth investor, I did that according to the most important criteria of dividend investing. They are listed as follows.

1. P/E : Valuation. You don't want to buy an over valued counter. Check the P/E for valuation.
2. ROE : If they can't make money, they can't pay you. Always check the return on equity.
3. Dividend Yield : At the end of the day, that is what you get. No dividend yield? Then don't buy it.
4. 5 Year Dividend Growth Rate : This is the protection you have against inflation. Inflation proof your investment.
5. 5 Year EPS Growth Rate : Don't speculate. If they don't earn, you don't earn. Check the earnings.
6. 5 Year Average Dividend Yield : Because current yield could fool you. Always check the past.

How to Weight?

There you have six parameters to check. Now it's a question of importance. Is earnings are more important than dividends? Can higher growth rate justify the higher P/E? Does higher return on equity makes an investment safe for share holder? Honestly I don't know the answers. There are lot of parameters to consider. But I know my math very well.
Warning! Spoiler Alert. You can enjoy the Cartoon and skip to next heading :)

I simply used the standard deviation of each distribution to determine the bands  and weighted each band while eliminating the extremes. I have posted the distribution graphs of above parameters on a previous post here @ CSE Scanner. Will not go deep into math here, but following is the basic idea. 

Lets look at ROE for example. There are 107 companies in CSE which have ROE less than 5%. If ROE is lower it is not a good choice for long term investment. So I have given zero rating for those companies. If ROE is in between 5-10 then they are weighted so that they will have a rating of 0-25%. ROE 10-20 is mapped to 25-50%, 20-30 to 50-75% & 30-40 to 75-100%. Companies which have ROE higher than 40 is capped at 100%.  This is done to eliminate the extreme cases such as CTC, NEST, LLUB, etc.

Using the Tool

Download the tool [here].
1. If you can't download, Try Firefox or Chrome browser.
2. This is a macro enabled work book. Once you download check the extension. It should be ".xlsm"
3. Don't use "Open with" option, Download first and then double click to open.
4. You should enable macros from Trust Center settings for it to work.

5. This need data connectivity to work. Did I say that before? This too will fetch real time data from financial times servers. You need to enable data connections from Trust Center.

If you managed to do above and open it, you will get this interface.

Just select the counter you want to check from drop down list in [Cell C2] and click [Fetch Financials] button. It is simple as that. You will get a rating of 0-100% along with other important data of the counter you selected.

Graphical presentation will allow you to identify the strengths and weaknesses of a counter easily. Notice the difference of NDB with respect to LFIN and GLASS. I found this very helpful when ever I ended up in a situation of this or that.

I will be using this tool in future dividend analysis posts and hope you also will find it helpful. Let me know if you have any problems with getting it to work. Also this will be the last post for this year. Wishing you a good year ahead and enjoy the vacation....




Update : 2014/08/03
 Tool was updated to give a prediction of future market price, dividends, etc. based on past 5 years of data. When you click "Fetch Financials" button, you will get an additional table on the bottom left hand side as follows. Content is self explanatory I think. What I mainly look for is the last column(Inv.Recov) which simply answers the question "How long will it take to recover my capital?" 

Also there are couple of things I need to state.

1.  This is a conservative forecast. In reality, chances are high that you recover your capital faster than indicated with dividends being re-invested.
2.  As a safety measure, this will not give a forecast for some counters (due to negative growth or insufficient data)
3.  This was written in good faith. Back testing proved forecasts are reliable, but future can not be predicted with 100% accuracy. User due diligence is always advised.

 

Safety First

Any type of investment carries a risk. Level of risk depends on the type of investment your made. In this article I'm going to rush through the most common risks involved in various investments and what you can do to minimize the those risks.

I have parked my cash in Equities, Unit Trust, Bank FDs, Real Estate and a small amount in gold. Actually real estate was inherited from parents and I keep them as diversified asset. Also technically I haven't invested on gold. I just happened to have some jeweleries (precious metals and gems) without any emotional attachment. 

For a fact I know that equity return do beat everything else. Some times ago I was thinking about selling some of the real estate and invest that money on equity. But I held myself back because it balance my portfolio perfectly. As equity do generate the highest return, it is the most risky one from all options.
Roughly calculated, my distribution is as follows.
-----------------------
1. Equity : 40%
2. Real Estate : 40%
3. Unit Trust : 10%
4. Cash(FD) : 10%
-----------------------
 

A Word About Diversification

Diversification is a must have strategy, but a very relative term. What I mean by relative is you always need a reference frame to talk about diversification. For example, my asset allocation above is diversified in terms of different investment options. But 98% of it is based in Sri Lanka. Any macro economic shock will effect all of them. Therefore in a sense I'm not diversified at all.

Also I have heard some investors say that they have a very diversified portfolio of 30 companies. Apparently all of their wealth is invested on equities and managed by one person. Actually number of counters in a portfolio is not an indication of safety or diversification. I think for a self managed individual investor, about 12-15 counters is the max. A full time investors may be holding as high as 30-40 companies in their portfolio. But that should be backed by the time and resources available to them. As I don't have much time, 5-6 counters is ideal for me.

Equity Investment : Find a Healthy Company

You can put your eggs in lot of baskets to minimize the risk or you can put all your eggs in few baskets and monitor them well. As I said before I don't hold much counters in my portfolio. Therefore how healthy my holdings are a major concern to me. Following is what I mainly look at when assessing the safety of an investment.

1. ROE : Return on equity is a measure of how much company makes with the invested money. I always look for companies which make over 20%. i.e. When Rs.100/= is invested they make it grow to Rs.120/= at the end of financial year.
2. Five Year EPS and Dividend Growth Rate : It is very important to make sure the company is growing at a inflation beating rate. I usually look for a rate over 10%(preferably 15%).
3. Dividend Yield and 5 Year Average DY : Most of the time I ignore anything which yield less than 3%. 5Year average yield of 4% or higher is preferred by me.

  
Rule of 72 will become handy here. Rule of 72 calculate the number of years which will take for the yield to double. You simply divide 72 by the growth rate. i.e If you invest in a company which yield 3% and growing at a rate of 10%, your yield will become 6% in 7.2 years. 

Technically that is not a rule, that is mathematics. Actual calculation is ln(2) x Expected Growth Rate. ln(2) is approximately 0.69 . Number 72 is a rounded value of 69.31xx. 69 is more accurate, but 72 is widely used because 72 can be divided by most numbers and calculation is easy to done in mind. If you want to find the number of years which will take to triple the yield, just use ln(3) i.e 1.098x

Unit Trust : Get Professional Service

Unit trusts are managed by a professional team of fund managers approved by the Securities and Exchange Commission of Sri Lanka (SEC). Fund managers have resources and technical expertise far greater than individual investors. Therefore I think every investor should hold at least one unit trust in their portfolio. A direct advantage I get from unit trusts is, fund manager send a report of their top 10 holdings monthly. I have invested in NDB Growth Fund and Income Fund. This was their October status.

I keep monitoring the changes in their portfolio every month to get an idea of what's happening beyond my radar. This is the changes in growth fund which I have been tracking for a long time.

Counters marked RED are the ones which disappeared from top 10 list following month.
GREENs are the ones which appeared in the list during the reported month.
If you track back the changes and price movements, you will understand how smart the fund manager is.

Another advantage is, Unit Trusts give you the access to Government Bonds and Treasury Bills which are not available for individual investors. Also capital and dividend gains from unit trusts are totally tax free. There are other benefits such as Automatic re-investment plans, Minimum transaction cost etc. Unit Trust Association of Sri Lanka is a great place to learn more about unit trusts. Also you may want to check out NDB Auto Wealth Planner, which is a nice simulator you can use to create customized plans for you risk appetite.
 

Cash at Bank : Shock Proof Your Portfolio

Yes, this will really shock proof your portfolio. Unexpected emergencies such as family health, theft, accidents, natural disasters can drain your wealth very quickly. Selling my holdings in a bear market is my worst nightmare. I usually keep 1 Year worth of my salary as cash at bank. You can choose 4 Months, 6 Months or even 2 Years according to your level of risk. I have 4 grand parents, my wife(hoping to have baby next year) and a brother to look after. Therefore I maintain a 1Year buffer. It is advisable to keep at least 4 Months of family expenses at bank.

A great thing to do is, spread your emergency cash in to small blocks and open one FD per month. We hold 1x 1Month, 3x 3Months, 6x 6Months, 12x 12Months FDs. If you do this, you will find about 4 FDs are expiring and renewing in every month. In case of an emergency, you can choose which one is best to close considering the amount required and maturity level. If you think maintaining so much FDs a headache, I do that even without leaving my room. I don't know about other banks, but with Sampath bank it is just a mouse click.

You can select the period, renewal option, interest payable period(Monthly, Quarterly, etc) and which account to credit the interest(if you select no automatic renewal). It is so easy and my life would have been very different without Sampath Bank. Let me know if other banks offer this facility.
 

Other Assets : Beware of Non Revenue Generating Assets

I'm not a gold fan and I hate to hold assets which are not generating any revenue. Remember the house you live in and your car is not an investment. In fact they will drain your wealth as you need to maintain those. If you are holding a farm land, an apartment or a vehicle which can be rented, that will be a real investment. Be very serious when you are buying a non revenue generating asset. Think about the lifetime cost and your opportunity cost before going shopping.

This post is long, but it summarize the entire content of my blog. Let me know if you have anything to add or something you don't like in the content. I wish you merry X'mas, be Safe and enjoy the vacation!

Cheers...

Dividend Analysis : LB FINANCE PLC(LFIN.N0000)

If you have not being following my blog from the beginning, this is a continuation of series of articles which I'm searching for undervalued dividend paying counters in CSE. I started the search after Scanning The Market for potential companies using CSE Screener. I looked at NDB and GLAS before. This time I'm looking at LFIN.

A Word of Caution

First I need to confess that I'm doing this based on one assumption. That is, "My initial screening revealed most under valued yet financially strong dividend paying shares in CSE". I have set my screening criteria in a way, so that I don't have to dig deep in to the financials. That make everything simple and I highly appreciate the simplicity in decision making process. 

I may be missing a hidden value of a company by not analyzing deeply. But the important thing is, it is safer to invest on something which I can understand in 30 minutes rather than a day. On the other hand there may be hidden risks too. But Cheaper valuation and higher dividend yield should protect me from those risks. That is why you find my posts are not that lengthy or full of numbers. I try to keep it short and sweet by being more graphical, so that a non financial person could digest the content in 10 minutes.

 

LB FINANCE PLC(LFIN.N0000)

I looked at the last annual report of LFIN. There is a special section I look at in any annual report. That is the ten year summary or decade at a glance. For my disappointment some of the information I wanted was not there. EPS was there but dividends per share(DPS) and average market price wasn't there. After going through the CSE data base and meddling with DFN data sniffer for a while (will share this tool in a separate post), I managed to gather the data I was looking for.

They only started paying dividends in 2008 and for the last 6 years they have been doing that consistently. I like consistent dividend paying companies. And their earnings also seems to be following the same trend.

Payout ratio is 27%. Earnings were flat for the last 2 years, but dividends were increased by 30%. That massive dividend increase make LFIN more attractive to me. Also have to mention that LFIN is trading near 3 year low now.

This is a simulation of annualised gain with dividend investing and YOY trading.

Light Blue line indicate the YOY loss or gain

Dark Blue line is the annualized gain with dividend being re-invested

Red line is the annualized gain without dividend being re-invested

 
Interesting to note:

• In 2010 LFIN price hiked from Rs. 30 to 170 in seven months. But there wasn't a crash as one would expect after such a massive hike.

• They paid a Rs.5/= dividend when EPS was little more than Rs.7/= in 2010. Now EPS is Rs.24/= and the pay Rs.6.5/= dividend.

• From the financials, Debt/Equity ratio of 9.4 is bit disturbing to me. With compared to NDB(1.5) and NTB(1.9) which sowed up in my initial screening, this is a highly leveraged company.

 

Conclusion

With dropping interest rates and expected economical recovery in 2014, I'm going to keep LFIN in my watch list. Exposure to gold loans and expensive debenture issues might effect future earnings. I like to wait till 2013 annual report comes out before jumping in. In the mean time, I will keep looking at other companies. UAL is next in my mind. Keep reading till then.

Cheers...

First Step of Investing : Saving

Saving is the first step of investing and it is the back bone of all investors. You can't invest if you don't have money. There is no free meal in this world. It is very important to understand that you can't make something out of nothing. People talk about Credits and Margins, I just laugh at them. It is simply not going to work and you must do it in the hard way. That is cutting corners and learning to live below your mean.

A Life Lesson

As I have said before, most professionals I know live from pay check to pay check. I was no different about 6 years ago. My wife is just starting her professional carrier as a charted accountant. 6 years ago I received the same paycheck as her and my annual saving was a minus figure. Just one year after my graduation I had about 5 Credit cards and all were fully utilized. That is how I ended up with a minus figure. Now looking back and comparing what I did in those days, It is amazing to see how my wife manage her day-today expenses with half of her salary. She don't use any credit cards, she cook at home and we don't have a vehicle yet.

After our wedding, we had some cash left in hand. Yeah.. She organized an amazing wedding(definitely worth a separate post). We banked that money and since then we have been opening one FD a month. We started with 1x One month FD, then 3x Three month FD and so on... Now we are in to 12x One year FD's and interest income is already close to her monthly expenses. That is the sweet retirement she is looking at. This armada of FD's is our primary safety net. Even if we loose our jobs, we don't have to sell our holdings to survive.

Importance of Starting Early

"The best time to start investing is yesterday and second best time is today"
Above statement says how important it is to start investing early. It is a exponential process and any delay will get exaggerated in the long run. Some want to be billionaires over night and some have stupid excuses against starting. To start you don't need to be big, but you have to be consistent. This is a growth forecast if you save Rs.1000/= per month @ 12% rate for 40 years.

Points to note:
1)In just 7 years, interest income will be higher than your annual investment.
2)In 40 years your will have saved over 10 Million, but if you delayed your start by 5 years you will have only 5 Million.

If you think 40 years is a lot of time, Here are some ways to boost your growth.
・ If you manage to find 15% rate it will take only 34 years to achieve 10M mark
・ If you start with a 100,000 and contribute 24,000 per year, It will take only 27 years
・ If you increase your monthly contribution to 5,000 it will take 22 years
・ If you manage to save 10,000 a month it is just 18 years

Other Factors to Consider

You should always keep inflation checked. Banks FDs are not really a way to beat inflation. But it is a must to start and keep on investing. Parking excessive amount of cash at bank is not advised. Currently bank rates are going down in Sri Lanka. I'm also searching for value counters to add my portfolio. You may want to see my dividend analysis on [NDB] and [GLAS]. I'm going to look at LFIN soon. Till then keep saving...

Self Performance Evaluation Tool

I said I will share the tools which I have developed over the time here. On a previous post I shared [CSE Stock Screener]. This is another tool to track your investments and benchmark the performance against Fixed Incomes.

Background

First coded in late 2010. At the earlier stage of my investment carrier, I had some problems with tracking my investments and evaluating the performance. At the early stage of any investors life, There are couple of common questions. What are you really doing? Is it worth the risk? What is the actual gain? Can I beat FD rates? This program is my attempt to answer that question in a quantitatively manner.

Introduction

In this excel sheet you have to enter your monthly investment amount, Annual dividends received, Current PF Value, Account Balance(i.e Cash), Withdrawals as well as Fixed Income Rate which you expect to beat(Yellow Cells). Currently it support from 2005 onward (Let me know if you wish to extend the time frame). 

Once you click on "BenchmarkMe" button, it will calculate the fixed income gain as if you had banked the cash. It will treat your monthly investments as a renewing one month fixed deposits. Most importantly, this will calculate the annualized % gain of your portfolio.

Why Benchmark?

It is very important understand what you have been doing over the years. I found that most investors don't keep a track of their monthly investments, dividends and withdrawals. Eventually they end up on thinking that they have earned a lot of money, but in reality they may not have beaten even AAA rated bank FD's. Mainly this is because of the illusion of visible portfolio value increase over the time. The question we fail to ask is "At what rate?" Remember inflation is very high in Sri Lanka, portfolio value may be increasing while actual buying power is decreasing.

Year 2013 is a hell of a year for Debenture Issues and there are couple of more to come. Some of them went as high as 16.5% and we saw a lot of folks go after them. I think this insanely high rates are stressing our entire financial system. I could not count more than 6 financial institutions which have ROE over 20%. How do they planing to pay 16% if they can't make more than that? NDB have ROE of 42%, You may have a look at my dividend analysis on [NDB here]. This is a good area for further research, but for this post I'm going to stick with the topic. I bench mark myself with 20% rate. I have been able to maintain an annualized gain of 23% over the years. Therefor debentures are not that attractive for me.
So go ahead and give your self a try. Let me know if you have any problems.

Download

Download the tool [here].
Note :
1) You should enable Macros from Excel Trust Center for this to work.
2) Clicking on clear button will clear all data(obviously). If you want to Re-calculate after a small change, just click on "BenchmarkMe" button again.
3) Make sure your system date is correct. Macro reads current date from system date.
If it is incorrect, You may not get the correct results

Cheers...