Trade on negative sentiments – only

I last added on to my position in mid April at the peak of the previous market cycle. Big mistake. The market went down afterwards and that’s my first experience of “Sell in May and go away”.

Lesson learnt. What we buy matters but when we buy them matters too. It’s hard to keep a full bladder and that that’s discipline to manage and control. 

A new resolution for me thus is to only buy when the market is fear, on dips and and on peaks.

Thoughts of my portfolio

I just bought more of QSR, LBTYA, SRG and KHC. Except for SRG, these are all ‘platform companies’ that relies heavily on M&A as a pillar of growth. 

In addition to the above, there’s also LBRDA, LILA, BUD, AME, AXTA and ST. All are ‘platform companies’. Broadly speaking, I can group them into:

  • Telecommunications 
  • Consumer goods
  • Industrials

In an era of stagnated growth, what’s better than to create value through leverage and the reduction of cost? All companies are managed by top management with strong track records, especially John Malone and 3G Capital.

That said, I am concerned about the impact of raising interest rates. Right now, although these companies enjoy stable and predictable cash flow, they are all highly leveraged and higher interest rates will be a major dampener of their growth. 

Fortunately, their respective access to capital appears to be in good shape. QSR and KHC has the further backing of Berkshire Hathaway with its mighty cash pile. For the John Malone companies, the proper hedging instruments (fixed i/r) are also in place. This helps them to avoid surprises. 

All seems well then. But the risk is getting a little too high for me to stomach. Only BRK.B and AAPL are ‘safe’ in my portfolio, plus my cash holdings, and they make up 35% of it. But that will not do. It’s time to deleverage, and reallocate my portfolio to companies that will benefit from the raising interest rates. More of BRK.B, cash and maybe WFC then. 

LBTYA: Liberty Global 

Bought more of LBTYA at 34.7.

EV/EBITDA ratio of 8.34, below the US cable tv average of 11.31 and its 10 year historical median of 9.53. (Kindly note that I did not examine if there’s any one off income.) 

My benchmark isn’t quite accurate as Liberty operates in the Eurozone but it will do since I am managing my own portfolio. There’s also more to why I am buying LBTYA than valuation 

It’s hard to value John Malone’s companies as they are always unorthodox in their practices. That said, his preference is for his companies to be valued by the cash they generate. The cable cowboy was after all the first person to use EBITDA and his track record showed that he does know how to use it to its fullest effects.

His strategies are multi-fold – leverage stable predictable cash flow, financial engineering, tax shield, and stock buybacks – to accelerate the growth of his companies. Truth be told, no one quite knows what’s going on with his companies. 

So why am I buying into his company? 1) relatively cheap valuation, 2) tailwind for telecommunications and 3) John Malone and his team of world class operators! 

I can go on and on about the alignment of interest between management and shareholders, the unique moat created by a series of other John Malone companies but what’s important are the 3 points above. 

Check out the book Outsiders if you haven’t and you’ll know why I think John Malone is a world class operator.

Portfolio (Apr 2017)

Breakdown of Portfolio on Apr 2017:
Key Changes: Sold Hutchison Port Trust and Liberty Media, and took up positions in John Malone’s Liberty Broadband, Sensata and a new group of companies by 3G Capital.

Companies managed by 3G Capital follows the same formula that has proven to deliver market beating performance. 1) Strong Capital Allocation capabilities 2) management obsession with cost and 3) stable predicatable cash generating businesses.

Warren Buffett: 20%

  • Berkshire Hathaway (BRK.B)

John Malone: 25.9%

  • Liberty Global (LBTYA)
  • Liberty Global LiLac (LILA)
  • Liberty Broadband (LBRDA)
  • Liberty Media SirusXM (LSXMK)

3G Capital: 12.2%

  • AB Imbev (BUD)
  • Kraft Heinz (KHC)
  • Restaurent Brands International (QSR)

Others: 22.8%

  • Apple (AAPL)
  • Ametek (AME)
  • Axalta (AXTA)
  • Seritage Growth Properties (SRG)
  • Sensata (ST)
  • Asia Pay TV Trust (S7OU)

Cash Position at 19.1%

It is critical to win with your customers and suppliers.

It’s crucial to find a company that wins with its customers and suppliers. Otherwise it runs in the risk of incurring wrath from them.

If customers turns against you, you run the risk of depriving yourself of income streams. Look at Valeant and potentially Transdigm. They acquire companies that own monopolistic products and jack up the prices of the products after the acquisition. This corroborates with Citron Research view in its short report. 

If your supplier turns against you, your cogs might increase, or you get lousier credit terms, or worse, you are held hostage if they refuse to supply you.

At the end of the day increasing your profit margins just because you can builds your company on a shaky platform.

QSR: Restaurent Brands International

Bought QSR at 56.41.

It is hard to value QSR properly. Based on traditional metrics like PE ratio, QSR is overvalued (PE Ratio at 39, PB 7.78, PFCF 22)

Given the company’s unique operating model as an heavily leveraged acquisition platform, I have eventually reached at EV EBITDA to value the company 12.43, which is lower than the Global Restaurent industry median of 13.12. The metrics is used as it is a capital neutral valuation metric and it suggests that QSR is fairly valued.

With 1) a strong culture of capital allocation, 2) the cost obsession of its management 3) meritocratic, performance driven and ownership centric management and 4) the Operator Owner model led by 3G Capital, QSR has the makings of a good company that is shareholder friendly.

Fundamentally, QSR has an asset light operating model that generates annuity from its Burger King business. However, acquisitions might change its operating model – Tim Hortons operations is more asset intensive at the moment. Nonetheless, as a whole the company generates substantial and reliable cash flow that can be leveraged to fund further acquisitions.

Finally, there remains tremendous room for QSR to grow its business. Global Rev 603bn vs QSR Rev 4bn in 2016.

https://www.ibisworld.com/industry/global/global-fast-food-restaurants.html

Time Management

How do you spend your average day? According to a Huffington Post article, here’s what’s considered a balanced lifestyle.

Breakfast – 22 minutes
Shower – 21 minutes
Commute – 1 hour 26 minutes
Checking social media – 18 minutes
Work – 8 hours 7 minutes
Reading newspaper/online – 18 minutes
Lunch break – 53 minutes
Spending time with family/friends – 49 minutes
Personal time – 1 hour 6 minutes
Dinner – 1 hour 6 minutes
Life Admin – 45 minutes
Watching TV/Films – 1 hour 3 minutes
Sleep – 7 hours 26 minutes

http://www.huffingtonpost.co.uk/2013/06/07/seven-hours-work-life-balance_n_3401624.html

Dividends or no Dividends?

The buzz term for investing nowadays seem to be income investing as evidence by the increasing popularity of terms such as Dividend Aristocrat and Dividend King. In fact,  there is a part of me that now thinks many investors associate good companies with steady dividends. Just check out websites such as simplysafedividends.com by Brian Bollinger.

Dividend stocks are amazing. For one, they provide a steady stream of income. It is even better in countries like Singapore where dividends are not taxed, unlike countries like the USA.

However, there is a case to be made for greater investor discretion when it comes to investing in dividend stocks. There is even a case to be made for more people investing in companies that pays $0.00 dividends – companies such as Warren Buffet’s Berkshire Hathaway and John Malone’s Liberty group of companies. If you were to have a look at my portfolio, I guess you can say I am biased!

But first, let’s talk about why people invest in companies that pays out dividends. I see two  main reasons for this.

  1. Dividends are an important marker of company quality. Companies that pays out dividends are usually companies that are able to generate stable cash flow. Think about companies such as Coca Cola, Wells Fargo and IBM. They are all fantastic companies with strong capacity to generate cash.
  2. A good dividend policy indicates and ensures Capital Discipline within the company. By retuning capital to its investors, management is able to ensure judicious us of capital generated from daily operations.

Point 1 explains why dividend stocks are favourites of investors, especially for those near retirement. The strong ability of companies such as Coca Cola to generate cash indicates an intrinsic strength (moat) that allows companies to tide through difficult times, and all the while providing investors with steady income.

Point 1 is fairly simple to understand. However, I find Point 2 more interesting. A good dividend policy indicates capital discipline. But what does it mean to have a good dividend policy? Are there instances where no dividend policy is a good dividend policy? Of course there is!

As point 2 asserts, dividend payout is an indicator of capital discipline. A company should only retain as much earnings as is sufficient for its investment needs. Companies with too much capital on hand will lead to inefficient use of capital. Occasionally, we will end up with a company that spends too much money on random projects with limited accountability (like Google for example although they are improving). This happens when the company runs out of further opportunities to invest in its own business. When this happens, investors will be better off when the companies returns capital in the form of dividends. (Companies can also return capital through share buybacks but that’s another story.)

There is a big problem with dividend payouts though. With the returned capital, investors are now stuck with a reinvestment decision. Of course they can use the returned capital to supplement their income, but if they want to reinvest the money, the responsibility of finding new investment opportunities is now back in their hands. So much for passive income!

This leads me to my next and final point.

There are rare occasions when you have an excellent capital allocator as a company CEO. These CEOs have a knack for spotting excellent opportunities to deploy capital generated by their companies. When you have such a CEO at the helm of the company, investors can and are better off if they are relieved of capital re-allocation decisions. With a CEO that has a strong track of good capital allocation decisions, investors are much better off with  a zero dividend policy. You can trust that the CEO will do a much better job than you at reinvesting the money generated by the company’s operations. In his 2012 letter to shareholders, Warren Buffet wrote a segment explaining this in greater detail.

You know whats better? Such companies are apparently rare and extremely precious gems in the investing realm. In his book, the Outsiders (I am doing a book review on it), Thorndike discovered that such CEOs generated the best returns for their investors. Warren Buffett stands out as among the best of this elite group of CEOs.

This perspective has influenced my investment decisions tremendously. Over the past year, I have begun to favour companies ran by CEOs that have strong capital allocation track records and modified my portfolio allocation accordingly. I have since allocated 35% of my portfolio to comprise Warren Buffett’s Berkshire Hathaway and another 35% to John Malone’s Liberty group of companies. Both are top notch CEOs with strong track records of capital allocation.

In case you haven’t realised, I belong to the group of investors who would rather do without reinvestment decisions. It is not easy, and neither is it my full time job, to find new investment ideas to put the returned capital to good use. Hence, as much as possible, I rather have someone make those decisions on my behalf. This led to my preference to invest in companies with low  dividend payout ratio, favouring instead companies with a CEO that has a strong track record of capital allocation (Neither Buffett nor Malone’s companies distribute cash dividends). This way, I don’t have to worry about reinvestment decisions, or in other terms new ideas to make my money work.

 

At the end of the day, people have different objectives for their investments and dividend stocks do meet the needs of certain investors. However, with the great fanfare for dividend stocks today, I thought it might be helpful to share a slightly different perspective on investing here. Hopefully, you will find this sharing helpful.