My Stock Holdings (November)

November brought down prices of a lot of my stocks, most notably Singapore Post and ST Engineering. I would probably not average down any time soon unless capitulation takes place. At the meantime, their dividends will keep me satisfied. 

I had also bought k1 Ventures at a price of $0.20 on 10 November. This was prior to the capital reduction exercise conducted by the company, in which it gave out $0.015/share to shareholders. k1 Ventures is a investment company and has a great track record of delivering returns to shareholders. It is a bit of a pity that I had noticed this company so late. Between 30 October 2013 to 29 January of this year, the company had return $0.11 of dividends. That's 50% of the price I paid, excluding any capital gains! A risk involved in buying the stock at such a late stage is that most of the monies made from divestment gains had already been given out, hence returns may not be as great as before. Future investments made by k1 Ventures may not be as successful but given the track record, I am willing to place a small amount of money with them in hope of reaping a good returns. However, writing on hindsight with the price standing at $0.183 now, it is unnerving that the stock seem to drop with everything I might touch. The opposite of Midas Touch, perhaps the market is currently not optimal for new investments despite good fundamentals. 

The pie chart shows the current distribution in my portfolio. In the month of November, I received dividends from Keppel Reit and Singpost. Hence the dividends I had received from start of the year to date is $713.19. 

Gordon Growth Model on Singapore Post (S08.SI)

Singapore Post (S08.SI) is Singapore's postal service provider for over 150 years. To combat the trend of declining mail volume, the company had been diversifying into e-Commerce business. This was done primarily through acquisition of e-Commerce related companies like TradeGlobal and logistics provider like Jagged Peak.

Currently at a closing price of $1.80, Singapore Post has a market capitalisation of $3.88B and annual dividend of 7 cents. In this post, we shall attempt to gauge what is an appropriate valuation of Singpost using one of the valuation methods I learnt in school.

Gordon Growth Model

In earlier posts I used to value stocks, I projected EPS growth and applied suitable P/E to arrive at a value expected in the future. A new method I've actually learnt in my finance class in school is actually the Gordon Growth Model. Basically in the model, the intrinsic value of an asset is determined by the size and timing of all future cash flows, discounted to the present value using the asset's required rate of return. 

Hence, for a stock valuation, the future dividends of the stocks are discounted to the present to get the estimated stock price it should be today. 

Using Gordon Growth Model, the formula for a firm paying constant dividends is: 

Share Price = Constant Dividend / Discount Rate

Another scenario which a firm paying a constant dividend growth, and the equation is:

Share Price = Expected Dividend in a Year's Time / (Discount Rate - Expected Dividend Growth)

The Discount Rate we are talking about here is actually gotten using the Capital Asset Pricing Model (CAPM) and the equation goes like this:

Discount Rate = Risk-free Rate + Beta (Market's Rate of Return - Risk-free Rate)

Now we can start hunting values to fit into the CAPM equation. For risk-free rate, we can refer to the yield of Singapore's 10-year government bond, which currently stands at 2.47%. For market's return, we can refer to returns generated by STI ETF since inception in April 2002. The total annual return inclusive of reinvested dividend is 7.21%. Beta of Singapore Post can be found in Reuters and it is at 0.52. Substitute them all into the CAPM equation and the discount rate equals to 4.93%.

Which Dividend Model and Value?

To be conservative, the constant dividend model should be chosen. This is based on the dividend history where SingPost maintained a constant 6.25 cents dividend for 8 straight years. With the recent dividend at 7 cents combined with a discount rate of 4.93% = 0.0493, the expected share price actually comes up to $1.42. This is a far cry from the current $1.80. 

However, if you are actually optimistic about the dividends from Singpost, you can try estimating the share price using the dividend growth model. Since dividend did actually grow by 12% after 8 years, one can conservatively approximate that dividend grow by 1% annually. Using the constant dividend growth formula, the share price will increase to $1.80. This is practically the current price. 

Based on these two sets of share prices, one can conclude that SingPost is actually overpriced to fairly priced. In my opinion, with SingPost's acquisition spree recently, it is safer to guide for constant dividend since cash flow will be tighter. 

Dividend Reinvestment Plan (DRP)

Recently I purchased the Keppel Reit while in search for good income stock. Admittedly Keppel Reit is not a fantastic Reit to own but I decided forge ahead to buy this stock mainly because of its DRP (Distribution Reinvestment Plan) feature. DRP, simply, is a dividend scheme that allows the investor to claim shares as dividends instead of cash. So what’s the deal about DRP?

Compounding Power + 0 Commission

I had always been a fan of compounding interest because of its power to grow wealth exponentially given the necessary time. Supposed you re-invest all of the dividend back into Keppel Reit, you can double the value within 10 years (at prevailing dividend yield of 7%, constant dividend and price). Receiving cash and not investing it, you will need 14 years to receive to get back the capital. I had tried to “reinvest” my dividends in Singpost before but I stopped doing it because of the commissions needed to buy and sell small lots – roughly around $10. So while many books advocate the need for dividend reinvestment, there is a limitation because of the commissions needed. Hence one of the attractive feature of DRP scheme is that it eliminates commissions from brokerages when you reinvest dividends.

Investing Discipline

Another advantage of DRP is forcing the investor to invest long term. This is one of the main intentions of companies when they offer DRP schemes and it is also my reason to invest with them. When u opt for DRP, the odd lots you receive periodically make it very hard to divest your holdings. It is a strange concept, but personally, by receiving these odd lots, I’d be forced to commit to the company. As a result, I get to reap the results of compounding returns through long term investing. As someone that gets tempted to sell whenever share price is up, this is a very good self-imposed discipline plan.

While I like the idea of DRP, there are many who will do not like DRP. Admittedly there are disadvantages to DRP and here are some of them

Selling is a Problem

While DRP commits you to a company, it also makes the selling process very hard when you decide to take the money elsewhere. Because of the odd lots, you either have to sacrifice the extra commission fee or just keep the odd lots. However, with the scaling down of trading size to 100, keeping odd lots is less costly.

Investing in a wrong company

A huge disadvantage of DRP is actually if you invest in the wrong company, and this is the biggest hurdle I had to clear before I decided to opt for DRP. Suppose I invested in 1000 shares of Keppel Reit for $1 per share. When it announces dividend of $0.017 per share, I get 17 shares at the price suppose the issued share is also at $1. If the share price tanks to $0.80 1 year later, I actually will have a 20% capital loss on that dividend compared to 0% if I opted for cash! This is the scariest part of DRP that you will have to consider before opting for it.

In this case however, I reasoned that I want to opt for DRP because I see the viability of the trust in the long term. Also, the regular dividends that Keppel Reit issue are very beneficial in terms of compounding power. So I feel that in the long term, the compounding effect will overweigh capital loss notwithstanding the fact that depressed share price will have chance to recover in the long term. In addition, when prices are depressed you get to receive more shares as dividend assuming dividends are CONSTANT.

Having said my piece, what are your thoughts to DRP? Will you subscribe to it given the option? Will you specially hunt for companies that have DRP? Leave your comments! 

My Stock Holdings (October)

Student life is killing me. At my last year of study, who knew things would be so tough. Final Year Projects, meetings upon meetings. Presentations and presentations. Deadlines and more deadlines. Nevertheless for my own sake and maybe to some extent yours, here's my holdings in October 2015.

No change in holdings but it seems that the market is doing well for the last month.

There are no dividends issued for the month of October, therefore it stands at $616.49. 

A number of investment activities in the upcoming month:
Number one is to ballot for some IPO shares of Jumbo. A review of the IPO can be found in Mr IPO's website. I almost always ballot for IPO to sell on the first day unless its a very compelling business. Jumbo does not look to be the exception but I think Jumbo can open at least above $0.30. With only 2 million shares for public subscription, hope is not high to get the shares.

Number two is to indicate to opt for Keppel Reit's dividend in form of shares. I will explain this scheme/decision in the next post, hopefully before the next monthly report.