Altria Stock Analysis + BTI and PMI + Tobacco Industry


Altria stock analysis and fundamentals.

Reason for stock price decline.

Tobacco business overview

Discounted cash flows for MO

BTI stock – British American Tobacco

Philip Morris International

Are tobacco stocks a bargain?

Among the top 10 requested stocks to analyse over the last year were definitely Altria (NYSE: MO) and British American Tobacco (BTI). The reason is simple, we have declining stock prices and strong looking fundamentals. This article will explain what is going on and why is the market pricing these companies in a certain way by looking at MO, BTI and Phillip Morris International (PM).

altria stock analysis

Source: CNN Money – Altria Stock Price

2 bti stock price

Source: CNN Money – BTI Stock Price

Stock prices had done extremely well over the past decade, up till 2018.

Altria stock analysis and fundamentals

Let’s first discuss the fundamentals, which have been improving at first sight.

Altria’s fundamentals look excellent. Revenues are up over the last decade, albeit stable for the last 7 years (line 1), net income had been stable but exploded in the last 3 years (line 2), operating cash flows have been constantly positive and significantly increased in the last 12 months (line 3) while capex spending is minimal (line 4) which leaves plenty of room for high free cash flows (line 5).

3 mo fundamentals

Source: Morningstar MO Key Ratios

The just mentioned positive fundamentals translate into high shareholder rewards in the form of higher earnings, higher dividends and higher buybacks.

4 summary fundamentals

Source: Altria

However, we have to understand that the recent years earnings have been skewed by special items. Altria’s EPS in 2017 was $3.39 when adjusted for special items. The reported earnings per share were higher in 2017 due to tax items that increased earnings by $1.91 while earnings in 2016 were higher due to the gain on the AB InBev/SABMiller business combination.

5 earnings

Source: Altria

The actual earnings for the company have been $3.03 in 2016, $3.39 in 2017 and are expected to be between $3.95 and $4.03 in 2018. This means that the adjusted average PE ratio (using 3 years average earnings of $3.47) on the current stock price of $50 is around 14. The price to book value is 6, so one has to focus on the cash flows and book value is not really significant.

Reason for stock price decline

A company in a declining or stable sector is usually called a cash cow and cash cows are often looked at as you look at bonds, or even worse, annuities. If we look at MO’s revenue and dividends, it will give a better picture over what has been going on. Revenues haven’t been growing lately but dividends did grow over the past 10 years.

6 dividend

Source: Morningstar MO Key Ratios

The dividend is $2.86. On the price of $50 it gives a yield of 5.7%, a very good yield. The forward yield is at 6.5% as the dividend is expected to increase further. So, what investors expect from MO, is a stable dividend for as long as it lasts as smoking is slowly getting out of fashion.

Tobacco business overview

We cannot say the sector is in a positive trend, actually it is an industry that kills its customers.

7 smoking

Source: WHO

The trend is actually pretty clear when it comes to cigarettes consumption. Other threats are the FDA regulating nicotine in cigarettes, taxation, litigation, goodwill impairment, tobacco prices and who knows what ghosts can come out of the closet. I always urge investors in any company, to read its Risk section in the annual report. A quote from Altria’s 2017 annual report:

“Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA and UST and its subsidiaries, as well as their respective indemnitees”

8 the trend

Source: World in data

What makes this comparable, but different than a bond is the value at maturity. You expect to get your principal in full from a bond, with MO, you don’t know whether you will get a principal or how big it will be. Therefore, it is all about the cash flows. The value of an asset is the discounted sum of its future cash flows.

Discounted dividends for MO

Let’s assume that dividends grow by 9% over the next 6 years, are flat for the following 4 years and then start declining by 10% per year. This are the cash flows an investor could expect over the next 20 years.

9 dividends

Source: Author’s estimation

The 2037 dividend will be $1.79 in the above case to which I can attach an expected yield of 10%, as the dividends are declining, that would give me a 2037 stock price of $17.9. What we have to do now is to discount the future cash flows to the present value and sum up those values. When we compare it to the stock price, we get the net present value.

At a 5% discount rate, which is extremely low for stocks, the present value of the stock is $50. At an 8% discount rate we are at $39 while at a 10% discount rate we are at $33. To invest in Altria and other tobacco stocks, you need only two things, estimate their future cash flows, discount them to a present value by using your required rate of return and then compare to them to the price. That is what you can do, but what the market does is usually a bit different.

The key when discounting future cash flows is what discount rate to use. The usually used rate is one that puts a premium on the risk-free rate, which is usually US Government Treasury rate. If I take the yield on the 10-year Treasury note over the last 5 years, it had been declining up to mid-2016 and since then it has been going up mostly.

10 10 year treasury

Source: FRED

If I put a 300-basis points premium on a required dividend yield from a company, the required dividend yield in 2016 would be 4.8%, while in 2019 it would be 6%. Usually, when yields are low, even the spreads between the yields are low. So, I could add 200 basis points on the 2016 yield and 300 on the 2019 yield. We have then an expected yield of 3.8% in 2016 and then, due to the increase in the risk-free rate, it suddenly jumps to 6%. This is extremely important to understand when looking at cash cow companies like Altria. It firstly impacts the present value of the future expected cash flows and secondly, it changes the expected dividend yield.

If I keep a constant dividend of $3 for MO, when the market expects a 3.8% dividend yield, the price of the stock will be $78.94. If the markets require a 6% dividend, the price of the stock will be $50. Such things are never linear, but MO’s stock declined from $70 in 2016, went even above $75 in 2017, to the current $50. In line with the higher expected market returns due to higher interest rates.

11 3 year chart

Source: CNN Money – Altria Stock Price

This is what explains the pressure on the stock over the last 3 years on top of all the other issues.

The business

Then, apart from milking the cow, sometimes the management decides to do something exciting, something they maybe had to do earlier. They buy a competitor, or just part of it. MO announced paying $12.8 billion for a 35% stake in JUUL, the U.S. leader in e-vapor. The problem is that the deal is at 33 times sales, financed by a loan and focused on growth.

12 strategy

Source: Altria’s JUUL rationale

Investing in a growth business, increases the uncertainty for future revenue or profits, but increases the certainty on the $14.6 billion of debt.

13 financing

Source: Altria’s JUUL rationale

Apart from purchasing a stake, a stake, not the whole companies, MO also bought a 45% stake in Cronos, a cannabis company for $1.8 billion.

Suddenly, on top of the yield contraction, the company is turning into growth in a desperate move to counter the negative trend in its sector.

BTI stock – British American Tobacco

Similarly to MO, BTI declined too over the last 3 years.

14 BTI

Source: CNN Money – BTI Stock Price

However, the decline is much bigger due to the risk of a menthol ban in the US that gives 25% of profits to BTI.

On top of that, BTI, has a big debt issue as it quadrupled its debt in the last 10 years.

16 BAT balance sheet

Source: Morningstar

The debt is why BTI stock declined more that MO. Debt is a certainty, and when you acquire other companies by using debt, you are always buying at a premium in an uncertain world. And such an acquisition is the perfect example of what I’ve been discussing. They bought Reynolds at peak tobacco where the debt will remain at peak and interest rates have been going up while industry headwinds are getting stronger. This is a perfect example of short-term management thinking taking into account current interest rates, current premiums and current earnings not caring that those all change. Usually debt costs go up and earnings go down.

However, this is also in line with the prevailing strategy for tobacco companies over the past decades that focused on acquiring other smaller players. Such a pyramid strategy works well until it doesn’t.

1 comparison

Source: Bloomberg

Actually, over the past 5 years, BTI has been the worst performer.

Philip Morris International

PM stock is also under pressure and close to 7 year low.

The fundamentals look good and the dividend is also high.

17 pmi

Source: Morningstar PM stock

The interesting thing here is that cigarette volume sales are actually declining between 1 and 2% per year. The question is, like with the other stocks, what will happen which leads us to the investment strategy and whether tobacco stocks are a bargain?

Are tobacco stocks a bargain?

Well, that depends on you, what return do you want and who are you competing against?

When analysts are positive, pension funds check their target, they have to be invested and diversified and they buy as they have the money and must buy things. Further, it also depends on interest rates. When those are low, tobacco stocks look very attractive as any kind of yield is amazing. When yields are higher, then a declining industry is not so attractive and be careful not to jump into the growth trap.

If you are invested or interested in investing, you have to approach this from a scenario perspective. Nobody knows how will the environment look like in 10 years, if earnings are above expectations, interest rates etc, stocks will do good, if earnings go below expectations, dividends are cut, stocks will suffer. And here is the problem, you cannot know what will be the tax rate in 2024, you cannot know whether there will be a menthol ban or not, you cannot know what will other countries do and you cannot know what will the cannabis or vapor industry look like in 10 years.

So, now that I have welcomed you to the world of investing, one has to look at all these “cannot knows” and see about an investing strategy. My key message is to look at the future and then invest, I know the dividend is attractive, but think what happens and how you would feel if the dividend goes from 6% to 8%, then to 10% and consequently to 12% due to the stock price declining? What would you do and how would you feel? Let’s compare this in an example.

18 comparative table

Source: Author

If I sum up the present values of a stock with a $3 dividend, like the one we used with MO at a 10% discount rate and a PE ratio of 10 after 20 years to a stock that pays only $1 in dividends now, but growths that dividend at 10% over the next 20 years, the present value is similar.

So, the question is what you want and whether you can predict dividends in the future? Try to do such comparisons for as many stocks as you can, compare tobacco stocks to others, and if tobacco stocks come out on top of the hundreds you compared in a good, bad and neutral scenario, then you invest.

On a price of $50 – a dividend of $1 is 2%, a dividend of $3 is 6%. But the present values aren’t much different if one is my MO case and the other growth its dividend by 10% over the next 20 years.

My opinion

Now, if I take risk, in this case in the form of FDA, regulation, negative trend, interest rates etc. I want to be paid for it. That’s it. I personally think that across the globe, you can get equal of higher yields in growing industries, with much less regulatory risk and much less pressure and much less baggage.

For full disclosure, I did invest in tobacco when I was a kid, I think 2009 and 2005 or something like that. But, I was just buying a 3.5% yield, no debt and net cash. I would buy 20% under cash per share and sell 20% above cash per share. The company was Tobacco Industry Rovinj from Croatia. I called that compensation for passive smoking as a kid. Later the company got acquired by BTI.

So, my personal message is to simply compare what are the risks you are taking in comparison to the dividends you are getting. For example, a completely different story, but perhaps a bit more positive trend over the next decades can be found with Daimler.

19 interest rates daimler

Source: Morningstar – Daimler

The dividend yield is even higher, and in 20 years people are more likely to drive cars than smoke. So, it is as always, up to you to see how what fits your portfolio. What will happen to the stocks mentioned short term? Let’s leave that to speculators and media, we focus on investing here.

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Facebook Stock Analysis – Fundamentals, Culture and Business Methodology

  • Facebook’s corporate culture, based on growth hacking and data driven decision making, is a key factor when assessing the company.
  • The regulatory environment that frightens many, is a given is such a business.
  • The biggest risk for the stock, probably not for the company, is a recession, not regulation.

Facebook (FB) has behaved similarly to Apple (AAPL) over the past 12 months.

Facebook stock priceWhen stocks decline at such a fast pace over a short period of time, many start worrying about the business and the media emphasis on themes such as regulation creates a strong negative sentiment. However, as I wrote in my AAPL article a few days back, very often, the business itself simply keeps doing what it is meant to do. In both FB’s and AAPL’s case, make money.

When it comes to FB, something often overlooked is its corporate culture based on growth hacking and its data driven decision making. I sit down with Yaokai Jiang, a software engineer from the San Francisco Bay Area to discuss Facebook’s advantages when it comes to employees and business methodology.

Video structure:

1:15 Fundamentals

2:22 Underpriced ads

3:22 Regulatory environment

4:35 Software talent

5:25 Corporate culture – growth hacking

7:03 Data driven decision making

10:44 FB’s methodology

12:20 VR, AR

14:22 Investing risks – regulation

15:50 Blessing in disguise – GDPR

18:00 Recession risk

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Apple Stock Analysis – Focus on Long Term Investing

  • As a Buffett fan, I like to follow what he does and try to understand why he buys what he buys.
  • When it comes to Apple, the key is that Buffett is buying the business, while most others are speculating with the stock.
  • Having a business attitude when investing in Apple, will make things easier to grasp.

The first article I wrote about apple was in April 2016, on Apple’s 40th birthday. In 2018, I wrote another on why I think Buffett has been investing in Apple (AAPL). Since then, not much has changed for the business as AAPL is still printing cash, doing buybacks, paying dividends and strengthening its moat by enlarging its ecosystem.

The recent, China related revenue warning issue is significant, as lower guidance always is, but I would argue that AAPL is still the same business as it was in 2018, when the stock was above $200 and in 2016, when the stock was below $100. The media noise surrounding AAPL makes it really difficult to remain focused on an AAPL’s investment thesis, and makes it easy to shift your focus towards speculation. As would Buffett say about living in Omaha:

I like the lack of stimulation here, we get facts here.

Being an investor, means that you look at facts; earnings, which actually didn’t fall in comparison to Q4 2017, didn’t go negative as some are saying and the company bought back approximately 8% of shares over the last 12 months.

For more information, please check my video where I share my views on Apple:

0:00 Long term focus on AAPL
3:27 Why is Buffett buying AAPL
10:00 Apple’s stock and you!
10:36 The market on AAPL
11:27 Quarterly earnings comparison
12:28 Will AAPL go bust?

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Gazprom stock analysis

  • Gazprom is one of the most undervalued stocks in the world from a cash flow and book value point of view.
  • Many argue the problem is the management. I argue the management is doing exactly as expected.
  • If we look at future capex options, Gazprom might not be a bargain after all.

With a price to earnings ratio of 3, price to book of 0.26, a price to operating cash flow less than 2, $60 billion invested just in the Power of Siberia pipeline on a market capitalization of $48 billion, Gazprom (OGZPY) is extremely undervalued.

However, as value investors, we must look at what will be the future catalysts that might unlock that value. Some say it will be the completion of the Nord Stream 2, Turkstream and Power of Siberia pipelines that will lower capex and leave plenty of cash for higher dividends. On the other hand, one might argue about the profitability of such projects and whether OGZPY will be forced to invest in many new projects no matter the economics. Keep in mind that the yield on the Russian 10 year bond is 8.71%, thus the dividend of 5% is not really a bargain.

In the video I discuss:

0:24 Gazprom’s value

3:25 Gazprom’s management, and

7:39 an appropriate investment strategy for the stock.

Enjoy the video and please consider liking and following if you appreciate the content.


Micron stock analysis

  • To invest in Micron, one has to understand the industry’s cycle.
  • A PE ratio of 2.5, doesn’t mean much as it shows the past, not the future.
  • It is better to look at book value, the actual value of the owned PP&E, ROIC, industry cycles, Micron’s moat and the competition.

The fact that Micron Technology (MU) is one of the most followed and owned stocks is intriguing by itself. To invest in MU one should understand the semiconductor industry properly to take advantage of its inherent cycles. A look at MU’s stock chart shows how investors clearly don’t understand the memory industry cycle as periods of market exuberance are quickly replaced by sheer depression.

micron stock priceSource: SeekingAlpha MU

I sit down with an industry insider, Yaokai Yiang and discuss his investment thesis, investment activity and general view on MU. Enjoy the video.

Video content:

0:00 Micron stock analysis introduction

2:06 Micron short thesis

4:20 Memory industry overview

5:00 Earnings prediction for MU

6:24 Short thesis

7:15 Book value and business value

8:00 Micron stock and its fair value

9:00 Competition and moat for Micron

9:50 Can Micron go bust?

11:00 Next memory industry cycle

13:30 Dividends

14:00 The only moat in the industry is time

15:15 Investment strategy & risk and reward

20:18 Recession risk and impact on MU

22:15 Conclusion

Investing In Uranium – Bullish And Bearish Thesis On 5 Uranium Stocks

  • The bullish thesis for uranium is strong; growing demand coming from Japanese restarts and developing Asia, alongside production cuts.
  • However, uranium prices are low, so there must be a bearish thesis out there too.
  • I put Cameco, Kazatomprom, Uranium Participation Corp, Azarga and NexGen Energy into a risk and reward investing perspective.

Uranium prices have been subdued for more than a decade now. However, there are many uranium bulls calling for the perfect storm in the sector due to production cuts and expected demand growth.

I did a bit of preliminary research into the sector to see what is really going on and found lots of contradictory info. This led me to make 3 videos on uranium. The first describing the uranium bullish thesis. The second countering the bullish thesis with a bearish thesis and consequently, in the third video, analyzing 5 stocks from the sector to get a perspective what is the actual risk and reward when it comes to investing in Uranium.

Investing usually boils down to buying investments with positive asymmetric risk and reward. So, it is important to pair the potential risks and rewards to an actual stock price.

The bullish thesis video content:

0:47 Uranium price

2:18 Production cuts and demand growth

3:18 US procurement quota of 25%

3:35 Uranium growth story

The bearish thesis video content:

0:30 Conservative energy growth estimates

1:44 Ageing reactors

3:39 NexGen’s project and production cuts

5:26 At the mercy of the Kazakhstani Government

5:47 Cost curve

Discussing 5 uranium stocks:

0:50 Cameco (CCJ)

3:15 Kazatomprom

4:51 NexGen Energy (NXE)

6:46 Azarga (AZZUF)

8:00 Uranium Participation Corp (URPTF)

9:08 Investment thesis

$13 Million-Dollar Investment Bank Managed Stock Market And Bond Portfolio Review

A month or something ago, I was contacted by an investor that had just set up a portfolio with an investment bank. He told them that his risk tolerance is minimal and that he would like some capital appreciation in the long term. He asked me to review the portfolio and that is what we are going to do now.

Here is the video version, while those who prefer reading, can find the article below.

The topics:

$13 million-dollar investment bank managed stock market and bond portfolio review:

  • US equity portfolio exposure & issues
  • International equity portfolio exposure
  • Fixed income portfolio

General banking fees and value for money

  • Discussion about fees and risk reward opportunities

Investment strategy

  • Portfolio management
  • Risk and reward
  • What would I do differently?

Stock market and bond portfolio review

Here is how the portfolio has been structured:

US equity is 22.74%, international stocks 25.52% and as the requirement was low risk, 48.5% has been placed into US fixed income. This has been done by putting the money into 3 different bank funds (more about bank fees later). The yearly management fee is 0.9%.

Let’s start with US equity exposure.

US equity portfolio exposure

The portfolio positions are listed from the largest to the smallest. The client automatically replicates the positions held by the 3 funds within his account.

us equity portfolio

The largest position is Advance Auto Parts (AAP). I don’t know whether the fund bought the stock at the bottom in February of 2018 or it was a long term holding as the unrealized gains and losses in the above table go back to when the portfolio investment was made, which is February 2018.

AAP, has had free cash flows between $300 and $500 million per year over the last 10 years on a $10 billion market capitalization. I would expect the return there to be around 4% in the future. Auto parts are a competitive business but can be recession proof.

The next position is Comcast (NASDAQ: CMCSA), a company that recently won its bidding war and acquired Sky Plc for $38.8 billion. The all cash offer will put more pressure on Comcast’s balance sheet that already has $114 billion in liabilities. Plus, Sky Plc has had operating cash flows of around $2 billion per year in the last 10 years. This makes it a stretched acquisition as the interest on the debt will be close to the $2 billion of free cash flow coming from Sky.

Intercontinental Exchange (NYSE: ICE) is another stable company with high free cash flows and a potential return of around 4 to 5%. Free cash flows are $2 billion on a $42 billion market cap.

Danaher is the 4th largest US portfolio position (NYSE: DHR) is another stable company with $3 billion in cash flows on a $70 billion market cap.

Progressive Corp Ohio (NYSE: PGR) is an insurer and Kroger (NYSE: KR) is a grocer with similar characteristics as the above businesses. All have dividend yields of around 2%, stable business models, we can call them recession proof business models, and price to cash flow ratios of around 20 that should lead to a return of around 4 to 5%.

If we look at other portfolio positions, those mostly replicate the above. All good companies and fairly priced by the market. The portfolio also holds Google or better to say Alphabet (NASDAQ: GOOGL), American Express (NYSE: AXP), Mastercard (NYSE: MA) and we could easily say that the US equity portfolio reflects the client’s wishes: safety and quality.

US equity portfolio potential issues

I have two issues I want to discuss. The first is the value added in relation to the charged fee and the second is the fund management cost environment and investment process which is possibly even more important than fees.

Investment fees and value added

The first issue with the US equity portfolio part might be that there are 26 positions. If we look at professor and 1990 Economics Nobel prize winner Sharp’s seminal work on risk: Risk, Market Sensitivity, and Diversification, published in the Financial Analysts Journal in 1972, we see that as soon as you pass 20 positions in your portfolio, the risk equals the market’s risk.

Source: Risk, Market Sensitivity, and Diversification – CFA publications

We have seen that the expected returns from a price to cash flow standpoint will be around 4 to 5%. However, if we look at the top positions of the S&P 500, their price to cash flows don’t differ much from the ratios of the analysed portfolio and the businesses in the S&P 500 can be considered of quality too.

Source: iShares S&P 500 ETF

Microsoft (NASDAQ: MSFT) has a cash flow yield on price of 3.75%, Apple (NASDAQ: AAPL) of 8%, Amazon (NASDAQ: AMZN) of 1.8% but we might argue that in 10 years, AMZN might have higher cash flows than Kroger. Berkshire (NYSE: BRK.A, BRK.B) is a diversified portfolio focused on US equity by itself, it holds great businesses and it has a price to free cash flow ratio of around 4%.

This leads me to the question, is the 0.9% yearly fee our friend is paying for the above portfolio justified? One can buy the S&P 500 for a yearly fee of 0.04% which is 22.5 times smaller than what is being paid to the investment bank or there is always the option to simply buy Berkshire and let Buffett and his fellows manage the money at no cost practically.

To conclude on the investment fees, I don’t think that in this case, paying a yearly fee of 0.9% adds any kind of value given that the stocks might look a bit more conservative than the S&P 500 but such bet is based on past performance and not part of a strategy. In this digital era world, one might argue that Amazon is more defensive than Kroger.

Investment fund behavior

The thing when it comes to banks is that there is a lot your bank is not telling you.

Aside from the 0.9% yearly management fee, the bank makes money as they buy and sell through their own broker, perhaps they are even the market maker for the security, they pay for research, marketing costs, administration etc. that might not be included in the first fee you pay but might be included in the costs of the second fund that you actually don’t see. In this case, as the clients owns the positions directly, only the brokerage, custodian and market maker fees come into account, but that is still something extra.

Investment fund management process

Now, there is another thing when it comes to investment funds that is not discussed much. When things go well, all is good, but when things go south, some clients might want their money back. The investment manager is put into a tough spot because he then has to make investment decisions based on external inputs which might not be in the best interest of other clients. For example, if I manage a $1 billion portfolio, there is panic in the markets and clients want to cash in on $300 million. Liquidity usually dries up on the market too at such moments and you cannot sell your positions easily, especially your bond positions. (Remember that the positions discussed above are part of a much bigger fund)

The investment manager has no option than to sell the most liquid assets which might be the best assets to hold in the long term. Further, an investment manager has to be invested 100% all the time. Investment managers, collecting a fee of 0.9%, don’t have the option Buffett has. Buffett has $114 billion dollars practically lying on Berkshire’s bank account waiting for a market panic so that he can buy stocks on the cheap. (Buffett’s cash is invested in short term US Government Treasuries with an average maturity of 4-months – can be considered as cash)

This is something few think about when things go well, but crucial when things go south. Our friend has no influence on that and unfortunately this is where things often go wrong with funds managed by investment banks. An investment manager has to do as ordered, not as he wishes or what would be in the best interest of the client.

International stock portfolio overview

The international part is 25.52% of the whole portfolio and has a total of 68 positions. Since the inception of the portfolio, the performance of the international part has been really bad as almost all the positions are down with some like Ryanair (LON: RYA) down 34%. This is nothing strange given that international stocks and emerging markets have really suffered during 2018.

international stocks 1

international stocks 2

The largest position is Medtronic (MDT), followed by Unilever (UN), Compass Group (CMPGY), Aptiv (APTV) and Ryanair (RYAAY). There is a little bit of everything there with Tencent (TCEHY), BHP Billiton (BHP), the Indian Icici Bank (IBN), the Russian version of Facebook – Yandex (YNDX) and some interesting Chinese stocks like (WUBA) or South American payment processors like Cielo SA (CIOXY).

Now, Medtronic (NYSE: MDT) – the world’s largest medical device company makes most of its revenues and profits from the U.S. healthcare system but is headquartered in Ireland for tax purposes. Thus, this is not an international stock but goes under the international portfolio. Free yearly cash flows have been around $4 billion over the past 10 years and the market cap is $120 billion.

Nevertheless, holding 69 stocks doesn’t move the needle and we can expect them to perform equally as the market does. Therefore, one can simply buy the Vanguard Total International Stock ETF (VXUS) for a fee of 0.11% per year.

If I compare Vanguard’s top 10 positions and the portfolio we are analysing, I see that Royal Dutch Shell pls (NYSE: RDS) is in both portfolios, same as Tencent (TCEHY), Novartis (NVS), Roche (RHHBY) and Taiwan Semiconductor (TSM).

Source: Vanguard

So, a portfolio I am paying 0.9% to be managed has 5 positions that are also in the Vanguard Total International stock ETF top 10 positions with a management fee of 0.11%.

Let’s see if there is more value added in the bond portfolio.

US fixed income portfolio

48% of the portfolio is placed into a bond fund and the holdings are the following.

bonds 1

bonds 2

The majority of the bond portfolio is in US Treasuries, 18% of it, with maturities ranging from 2021 to 2026. The yield on those is less then 2% or around that. Then there is a bunch of other corporate bonds with yields between 1% and 4% on average and maturities ranging from 2022 to 2028 on average.

Now, the first thing is that if 9% of the total portfolio is in Treasuries, why would you ever have to pay any fees on that as with a $13 million dollar portfolio you can simply buy them yourself. Or, if you want, the Vanguard Treasury ETFs has a fee of 0.07%.

Secondly, the investment grade US corporate bond ETF from Vanguard, offers much higher yields for minimal fees.

Source: Vanguard

On a portfolio of 66 bonds, 60 excluding the Treasuries, I simply don’t see any difference except the huge fees. The intermediate corporate bond ETF, has a yield of 4.35% and is managed by Vanguard.

Conclusion – portfolio management and risk reward

The holder of this portfolio hoped that I can manage part of his portfolio and perhaps create an all-weather portfolio for his holdings. I declined because my current investing focus accepts a little bit more risk as we are focused on long term return maximization which isn’t what the goal of this portfolio is. I am completely devoted to what I do and creating another portfolio alongside building mine would be impossible. On the all-weather portfolio, I am partly working on it, but an all-weather portfolio focuses first on neutralizing risk and not that much on maximizing returns. You cannot get high, Buffett like returns with an all-weather and that is why I cannot focus my whole work around it and this portfolio. I takes at least a year of hard work to build a portfolio.

Secondly, if I would have to manage the money as required, the way explained above would be one way of doing it. I cannot charge $117,000 per year for the above as the investment bank is doing, I simply can’t. Well, you have it above for free.

What we actually did is that we have created a smaller part of the portfolio to follow my portfolio that I manage on my Stock Market Research Platform. This should add a bit more diversification as it is focused on absolute value and not that correlated to markets. Plus, there are some hedges too.

Portfolio risk reward

Now, what we still have to discuss are the risks of the above portfolio in relation to the rewards. We have seen that the yield on Treasuries now should be around 3%, and the return on equities could be at 4%, up to 6% on the international portfolio. Given the 10-year maturity of the bonds, that is what the holder can expect, deduct 2% inflation and you have a real return of about zero on the bond portfolio which would be closer to 2% with Vanguard.

50% of the portfolio is in stocks and given that the number of stocks held is 90, one should expect equal to market returns, US equity markets and international equity markets. The biggest risk here is a contraction in valuations. If global investors start to require a 6% investment yield in place of the current 4%, that could lead to a decline of 50% on global stock markets and a similar decline within the equity portfolio. Also, as bonds are priced in relation to interest rates, I would expect a significant decline in the bond portfolio too.

Thus, the upside is limited but the downside is pretty big. This is because there is no strategy behind the discussed portfolio, it is over diversified, there are no hedges in place, no real diversification as we have seen bonds and stocks move in correlation during the turmoil of the last few months.

What makes me sad is that most pension funds are managed in the above way with outrageous fees. In a video on Canadian pension funds I discussed how fees go up to 2% per year for practically nothing. This is outrageous and the first thing I would tell people to do is to start educating themselves about what can be done when it comes to investing their hard-earned money.

Perhaps, individual stock picking the way I do it will not be for most, but lowering a management fee from 2% per year to 0.1% makes a hack of a big difference within a portfolio. Actually, it makes almost a 100% difference on a long-term portfolio over 30 years based on current market return expectations.

If all that you change in your financial life and investment portfolio is that you get a lower fee or even eliminate fees, the above is how much it affects a $1 million portfolio over a 30-year period and 4% market returns per year. The differences are staggering.

Investment strategy

From a general perspective, an approach like the one discussed above offers no strategy, it is a purely market following and extremely diversified investment. Thus, such a general approach certainly doesn’t deserve to charge a 0.9% fee. The lack of alpha, the lack of an investment strategy, a portfolio that resembles an index is just part of what is not good in story we discussed up till now.

The following chart shows how there are different investment strategies and the one discussed today is probably the most obsolete. However, banks still manage to sell it to clients due to a lack of financial education.

My opinion would be that the investor should first create a clear strategy about what is the goal for his funds and then put that goal into a risk and reward perspective within a well-diversified portfolio based on a well-balanced strategy.

Such a strategy is what we focus on so if you enjoyed this kind of investment educational content shared above please follow, subscribe, like and share.

About the author: Sven Carlin, Ph.D. is passionate about investment research and value investing. He also manages the Sven Carlin Stock Market Research Platform based on long term value and business investing principles.

InterContinental Hotels Group Stock Analysis – Overview, Valuation And Investment Approach

  • A company that has seen its ordinary dividend increase 11% CAGR over the last 15 years, must be something special and well worth watching.
  • Asset light businesses are taking over the world due to their high margins and high returns on capital.
  • However, you have to buy them at a fair price. We discuss the expected investing return in relation to the stock price.

InterContinental Hotels Group (NYSE: IHG , LSE: IHG) is a stock that did very well over the past 10 years.

IHG stock price chart

The reasons for such a good performance lie in the high levels of free cash flows the company has been able to generate, its dedication to rewarding shareholders, ordinary dividend growth, industry tailwinds and many special dividends asset sales.

Given the asset light business model and positive long term industry trends, one could assume the growth to continue in the future. The free cash flows are used not only to reward shareholders, but also reinvested with a high return on capital. This is a characteristic only great businesses have. To quote Charlie Munger:

It’s obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn’t sell books, so there’s a lot of twaddle and fuzzy concepts that have been introduced that don’t add much.

In light of the above, I have analyzed the company and summarized my findings in the video.

Video content:

1:10 Company overview – business model, strategy, debt, shareholder orientation

7:12 The industry

8:00 Investment perspective and strategy

If you like this approach to investing; focused on great businesses but patient for opportunistic entry points, please check my Stock Market Research Platform.

Brexit – An Objective Investing Perspective

  • Politics aside, it is important to have a clear investing perspective on how can our portfolio positions be affected by Brexit.
  • For now, markets are pricing in more pain for Europe, than Britain.
  • There are some stocks that should be avoided and some that shouldn’t be impacted at all, on the contrary.

Brexit is a very hot topic in Europe nowadays. However, it is important to separate your investing perspective from whatever might be your political views. I sit down with Niche Masters Fund with head investment manager, Peter Barklin, and discuss his very interesting, objective investing perspective, on the potential implications of Brexit for us as investors.

Just as an interesting note from the video, European stocks (VGK) (IEUR) have been hit harder than UK stocks (EWU). This shows that the Brexit isn’t just all bad for Britain and that we must carefully weigh the pros and cons.

Video content:

0:00 Introduction
1:40 Brexit for investors
3:27 What to own
5:08 Brexit benefits
7:04 Brexit and Europe
10:05 Portfolio positioning
11:29 Brexit risk perspective

Enjoy the video.

Sven Carlin Research Platform:

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