Dividend Investing – Mark Lin (2011)/Others – Part Two

A continuation of the earlier post from Part One.

There are several other posts on dividend investing. Simply use the Search function on the site.

Original notes on paper were made on 28 Sep 2016.

P.39 – Expounding further on ‘Dividend Safety‘, a dividend stock is either equally risky if not lower in risk than the market. [As reference,  Lin wrote that the 10 year Singapore Government Bond yield was 1.7% in 2009, and 5.7% in 1998. Do recall the economic backdrop in those periods.]

The suggested formula:

P                                 =                                                             D/(K-G)

(Reference Price)  =   (Historical dividend payments)/(Cost of equity-Perpetual growth rate of dividends)

where Cost of equity = (risk free interest rate + equity risk premium)

In the example given, the rate of Gross Domestic Product (GDP) increase was used to substitute the Perpetual growth rate of dividends.

P.44 & 48 – ‘Capital Protection

Selected firm should have

  • historic operating margins [operating income/net sales – apparently this is before tax and interest payments; in my opinion these should be steadily high but not excessively lest it invites competitors]
  • low debt
  • product lines consisting more of necessities
  • (relatively) low working capital [apparently the formula for working capital ratio is the same as the current ratio; high working capital may hint at unsold goods or poor accumulation of accounts receivable – see explanation from Investopedia (no date)]
  • low capital expenditure (indicating that it is not a growth stock)
  • lengthy debt maturity duration [roughly (debt due in one year/total debt)]
  • lower proportion of debt at variable interest rates

If the company does not offer a breakdown of debt at fixed/variable interest rates, one can convert into percentage:

interest expense/total debt

A year on year rise in this estimation could point out two possibilities. First, an increase in debt of variable interest rates; second, old debts refinanced at higher fixed rates.

[Reflective note: Both reflect poorly on the firm.]

Overall, Lin suggests buying if the stock is undervalued (below the Reference Price, has low risk, and has high return). If the stock is fairly valued, at moderate risk and return, he proposes holding. (This is an extraction from his decision matrix on P.63).

Related References:

M1 (telecommunications) dividend yield in 2007 was 8%. Telekom Malaysia held 29.7% of its shares, while Keppel Telecom took 19.9%. Its market cap was SGD 1.8 billion. See UBS Investment Research – Singapore Outlook 2008. (5 Dec 2007).

Of 8 sampled S-REITS, it seemed only A-REIT had a very stringent performance fee criteria (in favour of the investor). This was 0.1% of property values when DPU (Distribution per Unit) for given FY (Financial Year) was more than 2.5%. There would be an additional 0.1% if DPU exceeded 5%. Others like SUNTEC REIT worked towards 4.5% of property income. A-REIT also charged a 2% management fee for each property – this ranked it in the lower tier. It followed the other REITS for Acquisition/Divestment fee rates.  See Germaine Tai. (Aug 2012). Singapore Property, Initiating on SREITS: Beyond Yields. Singapore. Asia Equity Research. Jeffries Singapore Limited. [You may persuse the physical copy (barring any changes) at Level 11 of the Lee Kong Chian Reference Library/Central Library near Bugis MRT Station or City Hall MRT Station. Do check with the National Library Board, Singapore for potential electronic access.]

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