Adding New Companies To The Watch List

In these times when valuations in general are high one has to have patience and remember the saying that what goes up sooner or later must come down. It is also important to keep focusing on individual companies and not get distracted by how the market as a whole evolves.

With the above in mind, I have expanded the Watch List to encompass even more companies. My reasoning is that the more companies I monitor the greater the likelihood is that a buying opportunity will surface. A larger Watch List also increases the opportunity for me to diversify my portfolio and the passive dividend income. Expanding the Watch List means more work, but I'm convinced that it will pay off. The observant reader may already have noticed that I have added the following companies to my Watch List:

Hufvudstaden is a Swedish real estate company that acquires and manages office and retail properties in central Stockholm and Gothenburg (Swedens two bigest cities). The property portfolio consists of 30 properties, but in very attractive locations. The rental vacancy rate is low and the region of Stockholm accounts for the majority of the earnings. Profit and sales growth has been stable over time and the company is very conservatively financed with an equity ratio of almost 60% and an interest coverage ratio around 7. Hufvudstaden has raised the dividend 19 years in a row and the dividend has been increased on average by almost 8% a year since 2006. The company is together with Castellum my favorite picks in the Swedish real state business, but unfortunately, the market valuation is high right now, 

Aflac sells additional insurance coverage in the United States and Japan. In total, the company has over 50 million customers worldwide. Approximately three quarters of the company's revenue comes from Japan, while the remaining part comes from Aflac's US operations. The company is focused on providing additional coverage to people who are already insured through their employer. Aflac has raised its dividends 31 years in a row and is at the moment traded at a P/E-ratio around 9. The low valuation has primarily to do with the strong dependence of the Japanese economy and exposure to European debt. The yield is on the low side at 2.5%, but a payout ratio of approximately 24% leaves rom for future dividend increases. The dividend has increased by 20% on average per year over the past decade, which is impressive.

Bahnhof is an Internet Service Provider that sells data and broadband services to individuals and businesses manly in Sweden, but also in Europe. The company offers services like hosting, broadband and IP telephony. Bahnhof also provides services that provide anonymity on the internet, something that the company believes strongly in. One of Bahnhof's strengths is their good reputation among customers, which means that the company doesn't need to spend much on marketing at the moment. Bahnhof has had a really nice revenue and profit growth since the company went public. The dividend has increased by an average of 50% per annum and profits by 30% since 2007! 

Gjensidige is Norway's largest or second largest (depending who you ask) insurance company with operations in Scandinavia, Europe and the Baltics. Gjensidige has shown a healthy earnings growth rate the last couple of years. During the period costs have been kept down and the proportion of profitable customers has increased, which has contributed to the profit growth. The dividend has increased by a total of 31% since the company started distributing in 2010. The P/E-ratio is 16 at the moment, the dividend yield approximately 4.2% and the payout ratio 70% based on the past 12 months earnings. Gjensidige has a large exposure directly and indirectly to the Norwegian housing market, something one should be aware as a potential investor.

My plan is to return to the companies mentioned above in future posts. For those of you who want to see the valuation metrics as well as my assessment of fair price regarding the companies above feel free to visit my Watch List in the main menu of the blog. 

Have a nice day!

Adding New Companies To The Watch List

In these times when valuations in general are high one has to have patience and remember the saying that what goes up sooner or later must come down. It is also important to keep focusing on individual companies and not get distracted by how the market as a whole evolves.

With the above in mind, I have expanded the Watch List to encompass even more companies. The more companies I monitor the greater the likelihood is that a buying opportunity will surface. A larger Watch List also increases the opportunity for me to diversify my portfolio and the passive dividend income. Expanding the Watch List means more work, but I'm convinced that it will pay off. The observant reader may already have noticed that I have added the following companies to my Watch List:

Kone (One of the world's leading companies in the elevator and escalator industry from Finland, with operations in 60 countries and an impressive profit growth averaging 30% per year since 2005.)

Toronto Domino Bank (Canada's second largest bank which has had the highest profit and sales growth of all the major banks in the country. The dividend has increased by an average of 10% per year over the period 2005-2014.)

Royal Bank of Canada (Canada's largest bank with 80,000 employees and 40% of its revenue from the international market, of which 18% comes from the US).

Bank of Nova Scotia (Canada's third largest and most international bank with operations in over 55 countries and more than 19 million customers worldwide. The bank has had a dividend growth of about 7% on average the last ten years.)

Nolato (an industrial conglomerate listed on the Swedish Mid Cap with operations in telecommunications, industrial and medical devices. The company has raised their dividends by nearly 500% since 2005.)

Beijer Ref (another Mid Cap company engaged in trading and distribution of cooling components and air conditioning. The company has grown it's dividend considerably during the last teen years even if the dividend has varied in size over the years.)

I will return to the companies mentioned above in future posts. For those of you who want to see the valuation metrics as well as my assessment of fair price regarding the companies above feel free to visit my Watch List in the main menu of the blog. 

The Season For Dividends Is Upon Us

Spring is like second Christmas for us dividend investors residing in Sweden, since the majority of the Nordic companies distribute their dividends that time a year. I would have preferred that Swedish companies, like their American counterparts, would payout dividends quarterly so that my dividend stream would become more evenly distributed, but things might change in the future, who knows.

This is how my dividend stream is distributed over the course of the year.

My dividend season has, as you can see above, already started with dividend payments coming in from Apple and Deere & Co. However, it's during March that the season kicks off properly. April is by far the most prominent dividend month followed by May, March and June, in descending order.

Having both a trip to the United States and dividend season to look forward to next month is great. What does your dividend season look like?

Have a nice day out there!

How To Act In Anticipation Of And During A Market Downturn?

Most companies in my portfolio have been reporting their fourth quarter results lately and in the meantime the stock market has continued its journey upward. Buying opportunities are getting fewer and far between, which has made the Watch List look less exciting than in a long time.

Longing For The Market Downturn
I can honestly say that I long for a general downturn. It may seem strange to some, but for us who want to buy quality companies at a discount, and in the process increase our dividend stream significantly, the scenario is tempting. 

Image courtesy of cooldesign images at FreeDigitalPhotos.net

I have started to contemplate whether or not I should seize with the monthly purchases and await the coming stock market downturn. Because a significant drop in stock prices will come sooner or later, the big question is when. Maybe I'll have to wait a month or so, maybe until next year or even longer. 

The question is if I'm prepared to stay outside the market for as long as it takes? And how would I act if the stock market started plummeting today? How many positions would have time and the courage to take before the stock market climbed back to previous levels? 

How Did Things Turnout In 2007?
If we look at history, the major stock market crashes have become steeper and steeper and the recovery time has become shorter and shorter. In connection with the last major downturn, the Swedish index OMXS30 hit bottom, October 27 2008, after about 4 months and the market stayed at that level for about 6 months. The time one had to buy bargains was in other words more limited than one might think. OMXS30 had after about 20 months recovered to the same levels as before the crash.

I'd like to think that I would have bought large amount of shares in great companies during the 6 months we stayed close to the bottom.The likelihood however is that this wouldn't be the case if the stock market crashed today. I probably would burn too much ammunition early on and not have much left once we reach the bottom.

In Summary
What then can we conclude from the reasoning above? Well, atleast the following - We don't know when the next stock market downturn will begin, nor when we will have reached the bottom, or for that matter how long we will stay there. What I know for certain is that I'll lose money if I stand outside the market for extended periods of time. If I continue to buy regularly and disciplined  as the market falls chances are I will still have some firepower left when the stock market has plunged more than 30%.

What's My Plan Going Forward?
I will continue to purchase stocks with regularity. When the market starts to fall, I will increase the frequency, but not to the point that I burn all my capital at once.
When the stock market has once again recovered I will revert to, something in the line, of one purchase per month. I know that the thought of a market crash seems unlikely to many at this point in time, but that's exactly why we should mentality prepare for one.

Work Less And Let Your Capital Work Overtime

There are many of us in Sweden, and the rest of the world for that matter, that get into our cars each morning and drive to an office with colleagues that we haven't chosen. There are many of us that can't slow down because we are solely dependent on the funds that our employer transfers to our bank account at the end of the month. 

For me this is not the life I want until I turn 65 (or whatever the retirement age will be at the time). The government in Sweden has of late proclaimed the need for us to work more and retire later in life. I find this to be somewhat of a paradox since the need for labor is lower than ever before historically, thanks to technological developments in IT and engineering.

* Image courtesy of Master isolated images at FreeDigitalPhotos.net

But is it really such a bad fate to be forced to work until 65 or longer? What if I get more responsibility and more control over my work or even become manager? 
Sure, with a higher position you are likely to be able to influence your work situation, but the fact remains that someone else still decides who your colleagues are, where your office is located and the objectives you must meet. The downside to taking on more responsibility is also that the time you are expected to work and be available often tends to increases. 

A passage from one of Bob Dylan's lyrics is applicable in this context:

Might be a rock 'n' roll adict prancing on the stage

Might'll have money and drugs at your commands, women in a cage

You May Be A business man or some high degree thief

They May Call You Doctor Or They May call you Chief.

But you're gonna have to serve somebody, yes indeed

You're gonna have to serve somebody,

Well, it May be the devil or it May be the Lord

But you're gonna have to serve somebody.

There will always be someone to whom we will be held accountable, whether we work full time, part time or are self-employed. My goal however is that the ones that I have to serve are mainly my family and not a manager until I'm in my seventies.

Does this mean that I hate to work and want nothing more than to lie on the couch and watch TV all day? Of course not. I want, like most of us, to work, but not because I have to. I want to be able to take time off without feeling stress or anxiety. That is why mine and my family's goal is to have a passive income amounting to our living expenses, so that we can control our time.

What then should wage workers like myself do to improve our situation?
Those of you who read this blog already know the answer to the question - invest our savings in stable dividend companies with solid track records and competitive business models. The beauty of investing in stable companies with growing dividends is that the invested capital is put to work instead of you needing to work overtime.

Companies in a well-balanced dividend portfolio will ensure that profits and dividends in the long run increase, giving you protection against inflation. By also reinvesting the dividend the growth of the passive income accelerates further. So what are you waiting for? Put your money to work so you do not have to work overtime in the future!

Does A Dividend Investor Have More Options?

A company can choose to reinvest all its profits in the business or to distribute some of the profits to the shareholders in the form of dividends. Dividends gives us shareholders a cash flow regardless if the price of the stock goes up or down. A cash flow that is to our disposal to do with as we see fit.

I got a intresting comment from a reader a time ago, who argued that dividend investors through the cash flow from dividends have more choices than investors who buy companies that don't distribute their earnings. The number of options are grater for the dividend investor he argued.

Image courtesy of Master isolated images at FreeDigitalPhotos.net

I agree, not surprisingly, with the statement, but what are these options that a dividend investor have? Shareholders of dividend companies can choose to do one of the following with the dividend they receive:

- Buy more shares in the distributing company. This option is recommended if the original investment was done right from the beginning and you have invested in a company with a stable earnings dividend history. A company that has distributed dividend over a long period of time tends to have an proven business model and strong competitive advantages that allowed them to grow large and remain viable for such a long time.

- Buy shares in another lower valued company of similar quality. The market will never be perfect and there will always be companies that due to irrational market concerns are undervalued relative to their fair value.

- Invest money outside the stock market - fine art and real estate are viable investment options. However, I believe that stock investing is by far the best form of investing for us who are employed and I will therefore for the foreseeable future have most of my capital invested in stocks worldwide.

- Cover daily living expenses or indulge in a little everyday luxury. Using the dividend for any type of consumption is not something I plan on doing in the near future, but the possibility is there non the less.

- Transfer the dividend to a savings account in anticipation of better buying opportunities - which I partially done recently. It's no secret that I and many others feel that the stock market is overvalued and that there are few buying opportunities right now.

In addition to financial instruments such as options and warrants dividends are the only way for a private investor to make money from a stock without selling off their shares in the company. 
The beauty of dividends is that they are passive and, in most cases, a recurring income. Can you think of any more options a dividend investor has compared to those how solely own shares in non-distributing companies?

Monthly Report - January 2015

Time flies when you're having fun and it's already time for january's monthly report. The Swedish stock market has continued to rise a month into the new year, and at the time of writing is up by over 7%. I have mixed emotions about this fact - it's nice that the portfolio has increases in value, but at the same time it's frustrating seeing the companies on my watch list becoming increasingly more expensive.

As of right now I don't plan to completely stop buying on a monthly basis. Provided that there there is value to be found out there, I will aim to continue investing regularly. 

Purchases During The Month
Not a single purchase was made during the month of januari. I hope to find som value in February.

Development Of Our Passive Income
For me and my family time is among the most precious things we have. We hope that our passive dividend income will help us gain more control over this important resource.
I've mentioned it before, but it may be worth mentioning again, that the passive income in the monthly report correspons to the current annual dividend per share multiplied by the number of shares I own. To try to clarify this further - the passive income on an annual basis is the equivalent to what I would have received in dividends had I owned all the shares for a whole year.

Despite the fact that no purchase was made during the month, the passive income has increased in SEK thanks to dividend increases from Atlas Copco, H&M, Handelsbanken and Fortum. However due to a weaker Krone the amount is unchanged in dollars from last month. The passive income on an annual basis is, at the time of writing, about 2600 dollars on a annual basis and covers approximately 6% of our annual cost of living.

This is how far we have come in relation to the first 10 years of our long-term savings goal;

The graph above shows that we are already well-postioned for hitting the target for 2015. However, if the markets continue to rise during the year it may be difficult to achieve the goal for the year despite the excellent starting position.

The Month Ahead
In recent months most companies on my watchlist become more expensive. The only company that looks cheap at the moment is Bonheur, but the risk associated with the stock is also higher than for other companies on the watch list. My estimate of sustainable VPA and future dividend growth is dependent on the price of oil and the condition of the Bonheur's rigs. I'm looking forward to reading through Bonheur's and as well as my other companies reports this month. Which company will increase its dividend and by how much? Will we see a dividend reduction from Bonheur?

The following companies in my portfolio will release their reports in the near future:

- Friday, 5 FEB - Industrivärden
- Monday, 9 FEB - Beijer Alma
- Tuesday, 10 FEB - Coca Cola
- Thursday, 12 FEB - Mekonomen
- Wednesday, 18 FEB - Bonheur
- Tuesday, 24 FEB - Deere & Company

I will try to post my thoughts on so many reports as possible here on the blog. As usual I am hoping for buying opportunities in these and other companies on my watch list.

Have a great day!

Apple Reports First Quarter Earnings 2015

Apple reported its financial results for the first quarter during the past week. The results came in significantly better than the same quarter last year and beat analyst expectations. Below I will present some key data from the report and my own reflections.

Results For The Fourth Quarter Compared To The Same Quarter In 2014

- Sales came in at 74.6 billion dollars - an increase of 30% from the previous quarter (57.6).

- Unit sales in millions for the major product categories were as follows:

•  iPhone 74.5 (new record)
•  iPad 21.4
•  Mac 5.5

- Net income increased by 37% hitting the 18 billion dollar mark (9.5). No other company has reported sucha large profit for a single quarter before!

- Earnings per share were 3.06 dollars, an increase of 48% compared to the same quarter last year (2.07). EPS increased so much more than the net profit, because of the massive buybacks Apple executed earlier in the year. The number of shares outstanding have been reduced by 7%.

What Are The Main Reasons For The Strong Results?

• Record sales of the iPhone, which during the first quarter accounted for almost 70% of Apple's income.
• Higher margins - up from 37.9 to 39.9 percent.
• Share Repurchases

What Else Was Positive?

• Appstore deliver record income.
• Apple PAY launched in October already accounts for almost 70% of all mobile payments in the US.
• Sales in China have increased significantly.
• Apple has spent 130 billion on share buybacks and dividends, and still has 178 billion dollars left in treasure chest.
• 30 automakers have pledged support for Carplay during 2015t.

My First Reaction To The Report

It is very encouraging that both sales and profit increases so dramatically for Apple. The company will surpass my prediction of sustainable VPA by a wide margin if it continues at this rate. iPad sales did not quite liv up to expectations though. The lower iPad sales is most likely a result of cannibalization, since the iPhone 6 Plus is approaching iPad Mini's screen size.

As of late Apple is becoming a more shareholder-friendly company, which previously executed split, dividend increase and above all share repurchases testify to. With this in mind It will be interesting to see by how much they will raise the dividend in the next quarterly report.

Apple's strength and weakness is that the company primary is depended on a product category, a dependence that is greater than ever before. At the same time the current depth of the iPhone lineup is strong. Although iPhone is the product category that has grown the most, Apple also has a number of product categories and services that have grown considerably in recent years, albeit at a slower pace. Products and services such as Apple Pay, Carplay, iWatch, App Store, Mac, Apple TV, make me feel confident that Apple will expand its earnings base in the years ahead. Even if we remove the iPhone completely out of the equation, Apple still is a strong company with a solid historical growth.

If I previously had any thoughts of selling they have all but vanished. Apple will have a place in the portfolio for a long time. You can, as usual, find my Watch List and Stock Portfolio in main menu.

Have a good day

One of the worse quarters in McDonald's recent history

A couple of days ago the fastfood giant released its report for the fourth quarter and also the full year. In this post I will present some key data from the report and my own reflections. 

Results For The Fourth Quarter Compared With The Same Quarter In 2013.

- Sales decreased by 7% to 6,6 billion dollars (7).

- Net profit was 1,06 billion for the period, an decrease of 21% (1,4).

- Earnings per share (EPS) decreased by 19% to 1,13 dollars (1.4).

Results For The Financial Year 2014.

- Sales decrease by 2% to 27,4 billion dollars (28).

- Net income was 4,7 billion for the period, an decrease of 15% (5,6).

- Earnings per share (EPS) decreased by 8% to 4,82 (5.55).

Factors That Influenced The Results Negatively.

• Tough competition primarily in the US continues to weigh heavy on McDonald's profitability. Sales decreased 1.7% and operating earnings with 15% in the final quarter due to lower guest influx and sales in existing restaurants.
• McDonald's is also losing market share in its largest established market, Europe, where sales fell by 1% and operating profit by 14%. Russia and Ukraine has had weak development in the European segment, were the company's restaurants closed down due to the conflict in Ukraine.
• McDonald was also sentenced to pay the equivalent of 0.31 dollars per share in additional taxes, which is a one time cost.
• The supplier scandal in China had a negative impact on profits equivalent to about 0.23 dollars per share.

What Was Positive Then?

• On 18 September McDonald rose its dividend by 5% for the 39th year in a row.
• The fast food giant also bought back the equivalent to 2% of its total share count during 2014.
• McDonald's continues to open and renovate restaurants around the world. The company will also focus on increasing the number of franchise restaurants primarily outside the United States.

My View Of The Report
This report is one of the worse from McDonalds in recent years. If we disregard non-recurring items the result does not look as bad, but regardless of one-off items, earnings growth is negative. Here is how sales and EPS has developed during the past five years:

The picture above is pretty clear since EPS and Revenues are at their lowest levels since in 2010. McDonald's CEO Don Thompson admits that the company continues to face headwinds and that market environment is challenging. He stressed that the company is going to continue to focus on improving the customer experience, and he remains convinced that McDonald's can boost growth and create value for shareholders over the long term.

In order to boost growth McDonalds must increase the comparable sales and guest influx in existing restaurants within the established markets of Europe and the US. The company has for this reason developed three strategies to increase their relevance with their customers:

• Modernization and improvement of McDonald experience (trademark, restaurants, menus and customer service).
• Shorteing and simplifying the ordering and payment process with new technology such as mobile, web, and payment solutions. McDonalds has for this reason joined Apple Pay.
• Use existing resources more effectively to realize the points above.

To date, the implemented measures have apparently not had the desired effect since McDonalds is losing customers to competitors in their two main markets. I think that the fast food chain needs to reinvent its self somehow, to be able to reach mine and later generations (1980 to 2000) to really get the growth ontrack.

McDonald's is, despite the recent growth problems, a stable and shareholder-friendly company, that has raised dividends for 39 years in a row. I believe that the fast food giant is worth buying up to a price of about 87 dollars. You can, as usual, find my Watch List in main menu.

What is your view on McDonalds latest report?

Johnson and Johnson's Report For The Fourth Quarter Of 2014

A couple of days ago the pharmaceutical giant released its report for the fourth quarter and also the full year. In this post I will present some key data from the report and my own reflections. The figures below are excluding items affecting comparability.

Results For The Fourth Quarter Compared With The Same Quarter In 2013.

- Sales decreased by 0.6% to 18.25 billion dollars (18,35).

- Net profit was 3.6 billion for the period, an increase of 1.2% (3.5).

- Earnings per share (EPS) increased by 2.4% to 1.27 dollars (1.24).

Results For The Financial Year 2014.

- Sales increased by 4.2% to 74.3 billion (71.1).

- Net income was 16.3 billion for the period, an increase of 8% (13.8).

- Earnings per share (EPS) increased by 8% to 5.97 dollars (5.52).

Factors That Influenced The Results.

• The main reason for the improved results was that total sales increased by approximately 16.5% for the pharmaceutical segment. It was mainly the US market that contributed to the growth in sales with a growth rate of 25% over the previous year. Drugs such as Olysio / Sovraid, Remicade, Simponi among others have mainly driven the increase in sales.
• The business segment Medical Devices and Diagnostics contributed negatively since sales fell 9% to 6.6 billion dollars during the year.
• Sales of consumer products decreased 3.6% to 3.6 billion. The decline in sales was primarily due to lower sales internationally.
• The strong dollar and other items affecting comparability effected the results negatively.

The report is a testament to Johnson and Johnson's (JNJ) strength, since the company now has managed to raise ernings for 31 years. Forecasted earnings was yet again raised and this time to 6.12 - 6.27 dollars per share, from the previous 5.85 - 5.97 dollars.

The focus on new drugs has paid off for Johnson and Johnson, the business segment pharmaceutical has been a growth engine for the company and will continue to be so in the future. I would have preferred to have seen revenue growth across all business segments, but price increases and the strong dollar has made 2014 a challenging year. However, I think the business overal has a bright future ahead. With the worlds population getting older and older, our need for medicines and medical equipment will not subside, but rather increase in the future.

One of the company's main strengths is its defensive operations that are relatively evenly distributed between three strong business segments. This is how revenues are distributed between the different business segments:

There are just a handful of companies in the world that come close to Johnsons and Johnson's defensive qualities and impressive cash flow. The company also has increased dividends for as many as 52 years in a row. The company has an impressive amount of cash at its disposal - over 30 billion dollars.

Valuation
The price I'm willing to pay the most (my Price Cap) for Johnson & Johnson is 84 dollars. My Price Cap is based on the following assumptions:

• I estimate that JNJ will have an average dividend growth rate equivalent to about 9% going forward.
• I deem sustainable EPS to be roughly 5.5 dollars and sustainable P/E-Ratio to be 20 based on the companies defensive qualities.

You can find my valuation data under my watch list in main menu. Unfortunately, I am afraid it will be some time before the company sink to the level of my Price Cap, but he who waits for something good never waits to long.

Have a nice day!

Does Owning More Stocks Always Translate Into More Work?

Inspired by Dividendmantra I have been thinking about my criteria regarding portfolio composition, and primarily the number of companies I think is reasonable to own. One of the reasons that I have set an upper limit of about 20 companies, is that I have assumed that it would be too much work to monitor a larger number of companies.

But is it really true that a larger portfolio automatically needs more looking after than a smaller one? The answer is, as usual, it depends on the circumstances. Monitoring ones portfolio to closely can even have the opposite effect. One potential drawback I can see, is that it is easier to get distracted by the amount of information we are bombarded with daily. It is easy in such a context lose focus ones strategy driven by rumors and hearsay. 

What then are the factors that determine how carefully we need to monitor our companies?

I think, unsurprisingly, that the quality of the companies that one owns determines the level of monitoring required. I can offhand identify the following key factors that I think determine how careful one needs to monitor their stock portfolio:

- Do the companies you own have sound businesses and persistent competitive advantages or is it easy for competitors to steal market share? Companies that have clear competitive advantages, are more likely to have sustainable profits than companies that run the risk of losing market share to competitors.

- What are the risks associated with the markets that your companies operate in? Are there political, regulatory and other risks that may affect a company's future earnings? Fortum is a company that, because of its operations in Russia, requires me to follow the stock more closley than I would otherwise.

- How dynamic are the industries that your holdings operate in? Companies that operate in a fast changing industry run a greater risk of seeing their business models lose strength, because off the speed in which fundamentals change. The IT industri is a good example of a dynamic industri were competitive advantages can become obsolete because of new technologies.

- What financial resources do the companies in your portfolio have? Do the companies you own have financial muscles and strong owners behind them or is the level of debt high and the financial backing week or nonexistent? When it the storms companies with strong owners and balance sheets are less likely to sink.

Conclusion

The more qualities that companies in your stock portfolio posses, the greater the likelihood is that they can withstand market downturns. Does this mean, that as long as I only invest in high quality companies with a long and stable history, that I don't need to monitor my portfolio? No, of course not, but the workload will be considerably less than if one's portfolio only consist of smaller and less established companies.

What is your limit regarding the number of stocks you feel comfortable owning and why?

Additional Data About The Companies On My Watch List

When looking at the Watch List, every now and then, I found my self missing information such as current dividend yield and P/E-ratio. Instead of looking elsewhere, I have expanded the information about the companies on my Watch List. More specifically I added an additional table on the same page as the Watch List.

The new tabel, that contains valuation data about all the companies on my watch list, consists of the following columns:

• Company
• Ticker (symbol)
• Market (Marketplace: STO = Stockholm, STLO = Oslo, NYSE = New York, NASDAQ, HEL = Helsinki)
• Price (Current)
• Yield (Current yield)
• Payout Ratio (Payout ratio based on EPS (last four quarters) and the current dividend)
• P/E-Ratio TMM (based on EPS for the last four quarters)
• EPS TTM (Earnings per share for the last four quarters)
• Dividend (dividend on an annual basis)

You can find the table under the menu item: Watch List in the upper right side of the blog. I hope that the table will be beneficial for not only me, but anybody who reads the blog. 

Have a nice day!

A Factor Every Dividend Investor Should Take Into Account

My self and many others focus on portfolio allocation to reduce risk. For us that dividend plays an important role in our investment strategy, there is another diversification aspect to take into account, namely how big part of the passive income each holding in the portfolio accounts for.

Why then is it important to keep track of how much each company contributes to the dividend income? The short answer is to reduce risk.
Whether one, like most of us, reinvest acquired dividends or rely on them cover living cost, the size of passive dividend income is key. If a company that accounts for a large portion of the passive income gets into trouble and reduces the dividends this has an impact on our ability to reinvest in new companies or to cover our daily expenses.

Below, I have compiled by how many percentages each stock contributes to our total passive dividend income.

When looking at the picture, it becomes clear that there are mainly five companies that stand out - Bonheur, Industrivärden, Mekonomen, BHP Billiton and Fortum. Together they represent about 63% of my total passive income from dividends on a annual basis. A dividend cut from any of these four companies would have a pretty big impact on the size of the passive income.

One of my goals is to diversify the dividend stream so that I'm not as reliant on individual stocks and I'm confident that as time passes the dividend stream will become more diversified.
For those who are interested, you can find my passive income distribution as well as the size of our passive income from dividends in the main menu item: Passive Income.

Have a nice day!

Is this Gas and Oil Gaint Fairly Valued?

This is my second of, hopefully, many stock analysis on here. Nobody interested in investment in gerneral and stock investment in particular can have missed that, the oil sector has taken quite the blow lately as, oil prices have fallen to the lowest levels in 4 years.  

I want to examine if there is value inte sector and what better candidate to start with than the shareholder friendly oil and gas gaint - Chevron. In the following post I will examine the company against my investment criteria and determine the company's valuation. 

Distinct Competitive Advantage (Moat)?

Bigger is better (economies of scale). Chevron is one of the world's largest energy companies with operations worldwide. The company produces about 2.6 million barrels of oil per day, about 1.7 million barrels of gas and has more than 60 000 employees.

Chevron is involved in virtually every facet of the energy industry. The company explores, produces and transports crude oil and natural gas as well as refines, markets and distribute these products. The company manufactures and sells petrochemical products, generates power and produces geothermal energy and supplies renewable energy. Chevron has a strong balance sheet and the industry's largest and high-yielding project portfolios. Morningstar has awarded the company AA credit rating which only Exxon Mobile surpases.

Know how. For more than 130 years, Chevron has explored some of the world's most complex oil fields. Chevron has one of the highest profit margins in the industry and the second-highest ROE after Exxon Mobile, suggesting that Cheveron are specialists in what they do.

Low production costs. Chevron has for many years been the company that has the lowest cost per produced barrel of crude oil.

Chevron has historically proven, with high profit margins and high ROE, that the company possesses competitive advantages. However, there are at least four companies that are in the same league as Chevron and can take market share, namely ExxonMobil, BP, Shell and Total. 

Morningstar believes that Chevron has a narrow moat and I have to agree with the experts on this one. ExxonMobil is the only oil company that by Morningstar considered to have a wide moat. Chevron gets a pass on this criterion.

A Truly Global business?

The US accounts for about 21% and the rest of the world for 79% of the revenues.
Chevron passes this criterion. 

Strong Owners?

I'd like to se a business that I own to have strong owner behind it with financial muscle. I usually prefer a company that is family owned, since you tend to take better care of things close to home.

The bigest shareholders are: Vanguard Group, State Street Corporation and BlackRock Institutional Trust Company. Chevron passes this criterion. 

A Business That is Easy to Understand?

Chevron's business is fairly easy to understand and get a grip on.
There are predominantly two segments that are crucial for revenue and profit:

• Upstream - exploration and production of oil and natural gas.
• Downstream - refining, production and distribution of petroleum and petroleum-based products.

The upstream segment accounts for 90% of the profits. About one-fifth of Chevrons revenues come from gas. That number will increase as Chevron is investing more on gas by including two large projects in Australia. Until then, however, Chevron is dependent on the price of oil. Chevron passes this criterion. 

Rising Earnings Per Share (EPS), That Have Grown on Average at Least in Line with the Dividend for 10 Years?
On average EPS has increased in excess of 10% per year during the period. The main reason for the EPS growth is the fact that the profit margin increased from about 6% to almost 11% during the period. Chevron has had the best margins in the oil industry for a while now.

Sales growth has also contributed to the growth of VPA and averaging approximately 6% per year over the same period.

Both sales and profit margins fell sharply after the last crisis in 2009 resulting in low EPS. Chevron has a relatively large share buyback program. The number of shares has decreased by almost 8% during the period. The share repurchases have contributed an average VPA increase per year of 1% over the period. Chevron does get a pass on this criterion. 

A Dividend that has on Average Risen over the Period of 10 Years?
Chevron has increased its dividend every year since 1987. This is how the dividend has developed over the past 10 years.

The average dividend growth per year has been about 10%. I can't see Chevrons dividend streak coming to an end anytime soon, although the dividend growth has slowed down considerably in recent years. The payout ratio has risen during the period and in 2013 the payout ratio stod at 30% and is about 35% right now. Chevron passes this criterion.

 
A Company with Financial Strength?
Chevron's balance sheet is strong compared to it's peers, although there is some leverage there. The equity ratio (shareholders' equity) is about 60%. The interest coverage ratio is over 100 which means that they can cover their interest costs more 100 times over. Free cash flow has been stable during the period and has covered the dividend for the most part. Chevron has like other companies in the same industry large investment needs. From 2011 onwards, the investment costs increased significantly. Chevron passes this criterion. 

Risks and Uncertainties That May Affect Future Earnings?
I want to assure myself that political, regulatory, business and other specific risks that may affect a company's future earnings are as few as possible and preferably manageable.

There are many risks that could threaten an oil company's earnings and in worst case its existence. An oil spill with associated cost of billions of dollars is one risk. Commodity dependence represents another, as the price and availability of oil and gas affect Chevron's profit margin significantly. 

There is also though competition for these oil and gas resources, that are increasingly difficult and expansive to extract. ExxonMobil, BP, Shell and Total are the toughest competitors can compete on the same terms as Chevron. 
There is also political risk in the form of regulations and state-owned energy company that can get the idea to change the rules of the game on the market.

Even though oil prices are the lowest they have been for years, I think the company's size, balance sheet and gas projects will allow Chevron to weather most storms. Chevron passes this criterion. 

Summary and Valuation
Chevron meets all of investment criterion. In my eyes, Chevron as a company may not have the widest moat, but has proven competitive advantages as evidenced by the highest profit margins in the industry. The industry that Chevron operates in is however amongst the most risky, something that should weigh heavily in any purchasing decision.

The question is what the future looks like. Chevron's profits are depended on of the price of oil that accounts for the biggest part of the profit, even if the gas production is constantly expanding. How sales and the profit will develop in the future therefore depends mainly on the price of oil and to a lesser extent on the price of gas. In 2013, margins have been squeezed by high investment costs and the price of oil. EPS and dividend growth have slowed down. This trend continued all through last year and will persist for a time to come.

Even so Chevron has a strong balance sheet to fall back on if the negative price trend continues and the cash flow is strained further. I think we will start to see better numbers forward in 2015 when large investments which impacted cash flow in 2013 and 2014 start producing. Chevron is investing heavily to increase production of oil and gas in the upstream segment and has one of the world's most aggressive project portfolios for the purpose. A project portfolio that has historically delivered a nice return.

The question is what I am willing to pay for a high quality company that is so dependent on the price of oil and gas?

Valuation
My Price Cap is equivalent to 102 dollars. The Price Cap constitutes the price I'm willing to pay at the most for a given stock. The Price Cap is the average value obtained when Fair Price 1 (based on dividend growth and dividend yield) and Fair Price 2 (based on sustainable EPS and Sustainable P/E ratio) are compared. My Price Cap for Chevron is based on the following assumptions:

• I estimate that Chevron will have an average dividend growth rate going equivalent to about 9% going forward.
• I estimate sustainable EPS to be roughly 10 dollars and sustainable P/E-Ratio, based on the company's qualities and the dependents on commodities to be 11.

This concludes my stock analysis on Chevron. You can find all of the companies that I'm currently following under the meny item: Watch List in the main menu.

Until next time, good luck with your investments! 

Recent Buy

During last month, I bought shares in TGS-NOPEC Geophysical Company (TGS). I recently published an analysis about the company on my Swedish blog and couldn't resist initiating a position, when the price was around 150 NOK and the Norwegian krone was cheaper than the Swedish one.

For those of you that are not familiar with the stock, TGS is a Norwegian company operating in the oil and gas industry. The company is a market leader when it comes to providing seismic data (maps of the seafloor and land mass) that oil and gas companies use to determine where to drill. 

The main reason for the low valuation is that the company's earnings have and will be affected by low oil prices. I don't think the company will suffer to the same extent as other companies in the sector, since the cost of drilling by far exceeds what TGS customers pay for the company's mapping services. A deepwater well costs millions of dollars to drill, therefore oil and gas companies tend to want as accurate geological data as they can get before they make the decision to drill.

TGS business model, where the customer together with the company finance the costs connected the collecting of data, keeps TGS operating cost down and gives the company room to invest large sums in developing its core business - managing and providing geological data. The business model is also one of the cheapest from the customers point of view, and therefore better suited in a scenario where oil companies need to reduce their costs. 

Here Is a Number Of More Reasons Why I Like The Company

• The balance sheet is rock solid with no interest baring debt. 
• EPS has grown by over 600% in total over the last teen years.
• Revenue has grown over 400% in total over the last teen years
• The company has had a profit margin of about 30%.
• TGS is a market leader in it's segment with ROE of 25% on average since 2004.
• Dividends have in turn grown about 30% per year since 2009.
• TGS valuation is attractive with a P/E-ratio of below 8 and a dividend yield of about 5.3%.

I think in summary that TGS is well equipped to handle a much lower oil price by virtue of the companies margins, business model, comprehensive map library and strong balance sheet.

Valuation
The price I paid is below my Price Cap of 155 NOK. My Price Cap is based on the following assumptions:

• I estimate that TGS will have an average dividend growth rate equivalent to about 3% going forward.
• I deem sustainable EPS to be roughly 17 NOK and sustainable P/E-Ratio to be 12.

I choose to have a greater margin of safety in my assumptions than normally, since I do not know the industry well enough and can not estimate the impact of falling oil prices will have on earnings - but also since the dividend history is so short.

After the purchase our passive income is approximately 2 550 dollars on a annual basis. You can find my latest portfolio allocation in the main menu.

Another Year has Passed - Annual Summary 2014

The fireworks have gone silent, the champagne glas is empty and the new year is upon us. Overall, I'm satisfied with last year and what I have accomplished as an investor and finical blogger. Writing has really helped me to be more disciplined in my approach as well as provided me with valuable insights that have helped me make more informed investment decisions.

The Blogs 
In December, the Swedish blog had about 28,000 page views and a total of about 205 000 page views since its launch in February 2014. It's great that so many have found the blog after less than a year. 

One of my regrets last year was that I didn't have the time to write as much as I would have liked to in english. This blog has had 4 000 page views since its inception in november, not bad though considering my lack of activity. 

The market 2014
For those who like seeing their portfolios grow, 2014 has been a good year and my portfolio increased by 34% (including dividends and excluding new savings). 
It may sound strange, but for us who constantly want to increase our passive income through dividends, the year could have been better. However, I have managed to find buying opportunities during the year and most recently in December.

Purchases during December
During the month I made three purchases.
The first two purchases were of shares in the commodities giant BHP Billiton. The company is traded roughly 8.40 times earnings based on the last four quarters (TTM). Part of the reason for the low valuation is that the company is cyclical and dependent on the price of raw materials, mainly iron ore. I believe the company, even if commodity prices will take a beating even further, has a bright future as iron ore will be in demand year to come.

The fact that the iron ore price is at a 5-year low will cause less profitable mines forced to close down, which in turn will reduce supply and stabilize prices. BHP Billiton is well equipped to handle significantly lower iron ore prices by virtue of its cost efficient mines and its strong balance sheet.

I also made another share purchase in a new company that I will disclose during this month.

Passive income growth during the year
For me and my family time the most precious thing we have. Our goal is that the passive income will give us control over this important resource.

The passive income from dividends increased by 80% during the year. As I'm writing this is the passive income from dividends is equivalent to 2615 dollars and covers approximately 5.67% of our annual cost of living.

This is how far we have come in relation to the first 10 years of our long-term savings goal;

 The chart above shows that we have passed the target for 2014. In other words things are looking good as we face next years challenges.

This is in turn how the passive income has developed month by month during the year.

Thoughts About the Future
I'm not going to try to make any macroeconomic predictions about how the stock market will develop over the course of the year. In that department your guess is as good as mine. I will instead focus on what I can influence - my actions as an investor.

The main goal for 2015 is to achieve a passive income from dividends equivalent to about 3100 dollars.

I will aim to complete the following activities to met the main objective:

• Monthly purchases of dividend stocks at a price below my set price cap.
• Increase the number of companies in the portfolio and further diversify my dividend income.
• Analyze additional companies.
• Review existing stock analyzes and associated valuations.
• Develop the blog further in order to make it more accessible and informative.

I'm keeping my fingers crossed, as most value and dividend investors, that we will have a downturn in the market this year, so I can buy quality dividend stocks at affordable prices. Here's to a great 2015!

/Regards Long-Term Investment