Capital Loss of 50% in REIT Investment is Possible

Imagine you invest in Sabana REIT at SGD0.95 in November 2012 and hold your position until today. With closing price of SGD0.46 as at 26 October 2017, we can kiss our capital goodbye unless there is strong rebound in share price and significant increase in dividends to offset the loss.
 

Otherwise, to recover from 50% capital loss, we need to earn 100% return on our investment, just to breakeven. Even if we can earn 100% return, the key question to ask is, over how long? 

Hence, taking care of downside risk is critical as losses drag the portfolio return.
 

Sabana REIT is the first Shariah-compliant REIT listed in Singapore back in 2010, it owns and invests in income-producing real estate used for industrial purposes. Sabana REIT's portfolio comprised 20 industrial properties such as chemical warehouse which are located near to expressways and public transportation across Singapore.

What went wrong over the years?
 

1)      Net Property Income declined since 2013 to 2016.

 

2)      Income available for distribution declined from SGD60 mil in 2013 to SGD37 mil in 2016, yes that was like reduction of 38%! Needless to say, distribution per unit has also declined over time, it is like receiving lower amount of passive income or dividend every year which is not fun.

 

3)      Total debt over asset (leverage ratio) which measures level of indebtedness of the REIT, increased from 34% in 2012 to 43% in 2016, approaching regulatory limit of 45%.  Rising leverage ratio is also due to the fact that the property valuation has decreased over time with the REIT registering negative changes in fair value of properties. As the fair value drops, the debt ratio will increase even if the debt amount remains unchanged.

 

4)    Poor outlook for industrial properties generally, might have weighed on Sabana REIT too. That said, Mapletree industrial REIT seems to be performing well, both appear to be operating in same industry, but a stark contrast in terms of fortune.
 

5)      Rising fees paid to the REIT manager despite poor performance.
 

Lesson to Learn from this Case:

1)      Beware of REIT that experience consistent negative valuation on underlying properties, falling net property income, rising debt to asset ratio. Do compare the REIT performance against peers, the better performing ones tend to be better managed.

 

2)      Stick with REIT with good fundamentals to optimise chances of earning positive total returns.

 

3)      Lastly, do not invest into REIT purely based on highest dividend yield, Sabana REIT has 9% dividend yield in 2014, looks tasty, but comes with high risk. Always go for dividends that are Safe.

Reflection on Bird in the Hand Theory

When I was in college, I remember my finance professor talked about bird in the hand theory in the classroom, I paused for a while as I was wondering what is the relationship between a bird and finance theory.

 

He went on to explain that the theory postulates investors prefer dividends compared to capital gains as capital gains can be highly uncertain.

Hence, bird in the hand (dividend) is worth two in the bush! (referring to capital gains).

What the theory miss out is that the bird in the bush may fly higher, giving investor good capital gains!

There is also dividend irrelevance theory where it postulates that investor could sell shares and realise the capital gain and treat it as a dividend, hence dividend policy should have little or no impact to share price.

What the theory miss out is that dividend does have an impact on a company’s share price, imagine if a company keeps increasing or cuts its dividend, there is a high probability that the share price of the firm might react positively or negatively.

As an income investor, we should value the stream of sustainable dividends paid by the companies, but it doesn’t mean we will neglect the potential capital gain over the long run.

We want BOTH.

Dividend + Capital Gains = Total Return

By investing into quality companies that pay sustainable and rising dividends, its share prices are likely to increase over the long run, giving a BOOST to investor’s total return in holding the specific stock.

No matter where the bird is, either in the hand or in the bush, it will be great to capture BOTH.

Magic Formula to Double Our Investment Portfolio

Fancy a formula that will tell you how many years will it take to double your dividend income? Or double your investment position?

 

Say hello to rule of 72. This is a powerful rule! Let’s find out why..

 If your invested company paid RM0.50 dividend per share this year and based on your purchase cost of RM10 per share, your passive income or dividend yield will be 5%.

 

Dividend Yield on Cost= Dividend per Share / Purchase Cost

The company has a track record of increasing its dividend payout in the past in line with higher profitability and free cash flow. Assuming 5% dividend growth per year, the dividend per share will double to RM1 per share in around 14 years time. What does it mean to us then?

1) Dividend per share doubled in 14 years time. Even if number of shares that you hold remains constant, higher dividend per share means higher amount of dividend received.

 

2) If you have accumulated more shares along the way, the amount of passive income received would have increased tremendously.

 

3) When a company pays higher dividends, most often that not, the share price is likely to have upward pressure too.

 

4)  Peace of mind because not many companies can consistently increase its dividend, you would have likely found a company with solid fundamentals.

 

14 years for dividend per share to double may seem like a long long wait. Assuming a company dividend yield based on your purchase cost is 4% and dividend paid per share remains UNCHANGED, if you could earn another 4% return from capital appreciation on yearly basis over the long term. Your total return average to be 8%, so how many years will it take to double your investment position?

 

Yes, 9 years.

 

If we invest RM100k at the age of 30 and do not bother to invest fresh capital anymore and the portfolio generates long term average return of a conservative 8%.

At the age of 39- portfolio double to RM200k

At the age of 48- portfolio double to RM400k

At the age of 57- portfolio double to RM800k

So on and so forth, that’s the power of RM100k in present value terms that could potentially yield much much more in the future.

What if you top up your investment consistently along the way?

What if the company increase its dividend payout? Since we assume dividend paid per share remains unchanged in the above scenario which is a highly conservative assumption.

What if the company share price gain more than 4% on a yearly basis?

Dividend Investing  + Rule of 72 are definitely a powerful combination we should keep in mind.

Beware of Dividend Cut- It Hurts!

Much has been talked about investing in companies that pay higher dividends year after year, so that we could receive larger amount of passive income year after year.

Dividend growth is SWEET to hear, what about the company that you invest into CUT its dividend payment?

Dividend cut is surely the two unpleasant words a dividend investor would like to hear generally speaking.  A company may cut its dividend if its profitability position declines i.e. falling profits, this may lead to decline in share price and could hit investor twice in terms of lower dividend received and potential capital loss or reduction in unrealised gains.
 

If a company cuts dividend due to the need to conserve more cash for near term project expenditure which may contribute to better profit in the future, this situation does not warrant caution still. But if the dividend cut is due to decline in profits and investors do not expect near term significant recovery in the company’s profitability, the investor better adopt a cautious hat.

One example is Lafarge Malaysia Bhd which involves in the cement industry, that has been hit hard in recent years due to fierce competition in cement industry, rendering depressed cement selling price, and it was loss-making in 1Q 2017.
 

If you look at the dividend payment trend below, its historical dividend has been healthy and investor should not assume the dividend payment trend to repeat as it very much depends on the profitability of the company or industry.

Lafarge cut its dividend in 2016 in view of the challenging operating environment.  Needless to say, share price has also plunged from around RM9 in early 2016 to current share price of RM5.7,  it translates into 37% loss in share price.

Hence, when we invest into cyclical companies that pay stable dividend in the past, we should always be cautious on the possibility of dividend cut due to fundamentals of the company or industry turning bad.

 

Dividend cut and share price decline are definitely, a blow to an investor portfolio.

What does Dividend Payment Signal to an Investor?

I guess most investors will generally focus on earning announcement of a company i.e. how much profit its makes this quarter, how much is the revenue or profit growth etc, 

There is nothing wrong to focus on quarterly earning announcement, earnings are important but it has to be a quality earning, not some accounting earnings that may not translate into real strength of a company. But I opined that more focus could also be devoted to 'follow' a listed company's dividend announcement, especially cash dividends. 

Why so?

At the end of the day, cash dividend payment represent one of the methods for a company to reward its shareholders. Wouldn't it be nice to manage and keep on receiving steady and growing stream of dividend from our invested companies?

When a company pays a dividend, it is not just handing out cash to shareholders. There are other signals from a dividend payment that an income investor could identify:

1) Shareholders' Interest In Mind

Dividend payment implies that the company has shareholders' interest in mind.

2) Evidence of Financial Strength

A company need to pay dividend via cash, it can't pay dividend using profits per se. Financially troubled companies rarely have the sustainable resources to pay dividend. Although a corporate can borrow money to pay dividend, this is not a sustainable method or desirable way to finance the dividends. 

3) Foundation for Stock Valuation

A company that pays consistent dividend, provide investors a mean to calculate the stock value as stock value need to be formed upon a basis.

4) Better Group of Investors

Dividend paying companies may attract better shareholders. Income investors are less likely to overreact to any single movement in the share price unless there is fundamental deterioration in the company. If the share price declines not due to structural or fundamental issue, income investors may scoop up the shares to improve the dividend yield, providing some support to the share prices.

5) Sticky Dividends

Corporate will not simply cut dividends. A company that pays consistent dividends may create expectation among investors to continue to receive the dividends, hence this situation may result in corporate managers to be more discipline in managing the company resources as dividend cut should be the last thing in their mind.

I firmly believe income investors who invest into good quality stocks that pay consistent and growing dividends, would also likely reap the reward of investment success. 

Lastly, a stock that pays constant and growing dividends, likely to experience increase in share price over the long term. 

Just look at Colgate Palmolive, Johnson & Johnson (J&J), Nestle Malaysia share price chart as an example, it is a nice long term uptrend, This  uptrend in share price, couple with rising dividends, would definitely enhance quality of living to income investors!

How to Avoid this Behavioral Pitfall- Confirmation Bias

Have you ever made an equity investment with the belief that you have researched all the information that supports your investment decision, while neglecting information that could contradict your investment decision?

 

Yes, you may have cherry pick to read info that make you comfortable with the said investment, while play down the opposing views or information.

If yes, you might have succumbed to ‘confirmation bias’, which is one of the behavioural pitfalls in investment.

When I invested into Masterskill years ago, I read all the fantastic story of investing into Masterskill of which it enjoys the best of both world, the resiliency of education and healthcare sector. I bought into the share and yes, lost money.
 

I read info that supported my investment decision, and neglected information that could weaken my investment decision such as heavy reliance of Masterskill on PTPTN to fund the students’ course fee and rising number of nurses and inadequate training or work placement. All these are opposing information that will weaken my decision.

After I realised my losses, then only I noticed the reported profit per student of Masterskill is so high compared to other learning institutions, which should raise a yellow flag for a rational investor to analyse further.

I should have researched all of the above before investment but I played it down.

Subsequent to this painful experience, before I make any equity investment. I will always ask the following questions and these questions will be asked on continuous basis so long I hold the shares.
 

1)      What could go wrong?

2)      Have I considered opposing views?

3)      Have I sought out disconfirming evidence that may suggest my investment thesis is flawed?

4)      Talk to fellow investor who avoided the stock?

Before you make any equity investment in the future, do assess if you have fallen into confirmation bias, if yes, hopefully the above questions could minimise this behavioural trap!

Seven Investing Tips from Dr.Neoh Soon Kean

Dr.Neoh Soon Kean is considered to be one of the successful stock investors in Malaysia. He is a founder of Dynaquest, a Penang-based investment and consulting firm.

He strongly believes that equity investment is the best way for an average person to accumulate wealth.

In the 29^th May 2017 edition of The Edge Weekly, he shared 7 investing tips to the general public. I would like to summarise the key points below:

1)    Best time to buy is when market is depressed and best time to sell is when it is the most optimistic (Be a contrarian).

2)  Buy progressively over a period of time as few people are good in market timing (Buy progressively).

3)      Do not concentrate into just few stocks unless you have very good stock picking skill. With a diversified portfolio, if 70% of the shares make good money, Dr.Neoh cited he will be very happy although he could possibly lose the remaining 30% (Diversify).

4)      Do not be frightened by market decline

5)      Do not be afraid to take profit if one or more of your stocks that have made substantial gains.

6)    Choose stocks with good dividend yields, low price-earning ratio and high cash flow. Few speculative stocks have produced profit in the long run (Buy on fundamentals).

7)    Nobody is perfect, even Warren Buffet makes mistakes (Do not expect to be right every time).

Overall, the investing tips shared by Dr.Neoh resonate well with me and it serves as a constant reminder. Nevertheless, investing process may not be as simple as the above unless we assume all investors are rational being, sometimes emotional aspect could cloud an investor’s investment decision, hence the investment result.

That’s why some investors sell winners in the equity portfolio, and hold on the losers because realising losses can be emotionally painful.

Some investors own 10 stocks but fail to view the 10 stocks from portfolio perspective. Even though 8 stocks make money, if the losses from the 2 stock are huge, we will still be suffering loss from total return perspective.

I will shed more light on emotional aspect of investing in the future J

How to Tap into Indonesia Healthcare Potential via REIT

Fancy a REIT that allows you to earn rental income from Indonesian hospitals?

A fellow friend of mine who is an astute investor, shared with me recently on this REIT that is listed in Singapore stock exchange, but owns healthcare assets across Indonesia, Singapore and South Korea. It has 18 hospital assets with 11 of them located in Indonesia.

The aim of this REIT is to acquire profitable hospitals across Asia and it is committed to distribute 100% of its taxable income. Hence, primary reason buying into REIT should always be earning the stable and rising stream of passive income, any capital gains are BONUS.

 

This healthcare REIT is ultimately owned by Lippo Karawaci, a well-established property player in Indonesia that is listed in Indonesia stock exchange. There is a strong pipeline of  hospitals under Siloam Hospitals ( part of Lippo Group) that can be injected into the REIT over time.

Since it has large exposure to Indonesia hospitals, investors don’t have to worry much on Indonesian Rupiah fluctuation as rental income earned from the Indonesian hospitals are denominated in SGD, whereas rental income from South Korea is denominated in USD.

For Indonesian hospital rental calculation, it is subject to formula of 2 x percentage increase of Singapore inflation, capped at 2% when it comes to yearly rental adjustment. Hence, if Singapore experiences higher inflation, it will have a positive effect on rental adjustment.

The REIT’s asset under management has increased by compounded growth of 16% since 2007 to 2016. It has also declared and paid out stable and rising dividends over time, which is good news for existing shareholders!

The REIT’s debt to equity ratio stood at healthy 30% region in 2016 with more than 90% of its debt priced in fixed rate; hence interest rate fluctuation is likely to have mitigated impact on this REIT.

Overall, I believe Indonesian growing population is a plus point to the healthcare sector.  This is a REIT that could be analysed further.

This REIT is listed in Singapore; hence dividend payment will be in SGD.

Successful Dividend Investor - Grace Groner?

Dividend or income investors may not be well publicized and we hardly read about them in media.

However, one of the real life stories that caught my attention is the story of Grace Groner, a secretary who worked at Abbott Laboratories since 1931.  

She bought 3 Abbott  shares in 1935 and never sold her employer's shares. When she passed away at age 100 in 2010, her estate was worth USD7 million. She left Lake Forest College (her alma mater) a gift of USD 7 million, to be used for students' scholarships. What a legacy!

Imagine a USD7 million placed in an instrument that generate 5% income return, we are talking about USD350k of portfolio income that could be channeled to serve more students in terms of scholarship. 

What she basically did was to reinvest all dividends received into her employer's shares and given long enough time, the power of compounding set in and her investment snowballed subsequently.

She taught us the importance of dividend reinvestment to grow one's wealth and invest for the long term. She also happened to hold a winner in her investment holding. Abbott Laboratories is also known for its track record in rewarding shareholders with rising dividend in the past decades.

However, not all investors are lucky, ask those who lost their retirement or investment funds when their employers went bankrupt i.e. Enron and Bear Sterns. They got burnt and if their holdings in employers' shares were the only investment they had, their golden years could have turned into a nightmare.

It took 75 years for Grace Groner to grow her small investment of USD180 into USD7 million. How is it possible for such a small amount of money to grow into millions?

The answer lies in the power of  dividend reinvestment, long term investment horizon and holdings of a successful company's shares. Not forgetting that the share price of Abbott has also increased over time.

Ultimately, she enjoyed the best of both worlds.

She enjoyed earning more dividends and share price appreciation over time by holding to a winner and showed that an average Joe could also amass a sizable amount of wealth!

Japan's Ageing Population and Healthcare REIT

It is no secret that Japan is facing a demographic time bomb with shrinking birth rate and rising proportion of ageing population. To put things into perspective, 1 in 3 Japanese will be over 65 by 2050.

Ageing population translates into sustainable or higher demand for healthcare related services such as hospital and nursing care homes or facilities. When I think of Japan's ageing population, one of the healthcare REIT that could stand to benefit from this demographic is Parkway Life REIT, a healthcare REIT listed in Singapore Stock Exchange.

Parkway Life REIT derives 62% o its rental income from Singapore hospitals i.e. Mount Elizabeth Hospital and Gleneagles Singapore etc. 37% of its rental income is derived from its 40 high quality healthcare related facilities such as nursing homes in Japan while the remaining 1% is derived from Gleneagle Intan medical centre along in KL.

Parkway Life REIT ventured into Japan in 2008 during Global Financial Crisis, has since accumulated around 40 properties in Japan. Rental income from its Japan portfolio is denominated JPY and the Japan properties are covered by earthquake insurance policy on a nationwide basis.

In addition, its nursing homes are located across various cities such as Hokkaido, Osaka, Fukuoka and more. 

In the long term, demand for healthcare services and nursing home is likely to be on the rise, placing Parkway Life REIT in the sweet spot, hence anchoring its ability to generate sustainable cash flow to shareholders.

While this is not the next killer stock that will give extremely high returns, but it could be suitable for income investors who wants to build SGD income stream.

Since IPO in 2007, its distribution per unit has grown by average 10% from 2007 to 2016 which is not an easy feet. Higher distribution per unit implies a sound fundamental REIT.

Hence, this is one of the REITs that I believe will be the direct beneficiary of Japan's ageing demographic situation. 

Note: I do not own shares in this REIT, the above sharing is merely for education purposes.

11 Interesting Points from Get Rich with Dividends Book by Marc Lichtenfeld

I recently came across this book and the title sounds catchy, hence the impulse purchase! I would like to share 11 interesting points from this book with my readers.



 Interesting Points:

1) If you are looking for growth, invest in dividend stocks. If you are looking for income, invest in dividend stocks. If you are looking for safety, invest in dividend stocks.

2) To grow the stream of dividend passive income, have a diversified income portfolio, select stocks with prospect of rising dividend payout, then reinvest the dividend to turbocharge the income portfolio.

3) Ideally, invest in dividend stock with dividend growth exceeding inflation rate to enjoy inflation adjusted stream of income.

4) Most people may not find company like Genuine Parts (NYSE: GPC), which makes auto replacement parts to be terribly interesting. Perhaps the CEO might think the business is boring too. But it makes ton of money and it has increased its dividend every year since 1956. That is exciting! 

Boring stock could be a treasure for income investor.

Boring stock such as Procter & Gamble , Colgate Palmolive may not be exciting,  but its dividend growth track record is.

5) Dividend stock idea particularly in US can be found from dividend champions list maintained by DRiP resource center.

6) From empirical research cited in the book, dividend payers in S&P 500 generated better returns compared to S&P 500 index.

7) Share buyback is also a way for company to return cash to shareholder, but dividend signals a stronger commitment although dividend and buyback are both discretionary. Imagine a company that has been paying dividend consistently and dividend needs to be paid from operating cash flow, any cut in dividend may result in negative reaction in share price. Management will usually try its best to maintain its dividend or increase its dividend if the capacity to pay is intact.

8) Empirical research by Miller and Modigliani (M&M) found out that dividend payers are less likely to report losses.  I firmly believe that this statement is applicable to Bursa Malaysia or any part of the global stock market as well.

9) Although dividend yield is important, serious income investor will also consider the safety of the dividend i.e. the likelihood we will get paid.

10) Always compare the company dividend payout against its free cash flow ( operating cash flow adjusted for capex or investing outflows). If a company pays more that its free cash flow, it may need to resort to borrowing to pay dividends which is not a good sign.

11) Dividend reinvestment plan (DRP) offered by some listed companies can be a cheaper way to reinvest the dividends.

Overall, this book is a good read and packed with actionable ideas.

4 Criterion of Good Dividend Stocks

In the past couple of months, there were many economic events that have dominated various headlines, probably those economic news would have clouded an investor's judgment.

We have US stock market scaling new high on the optimism brought by Trump's administration, noises in Europe election, foreign selling in our domestic government bond space, albeit foreign inflows into domestic equity market seems to have intensified in recent weeks. You see, market or economic events will always be in the system that we are living in. 

These events might be relevant to an income investor if these events impact the listed companies that we are investing in, for better or worse.

In times of market noises or euphoria, the following are the criterion that I will always hunt for in a listed company because these are the companies' characteristic that would deliver long term and growing shareholder returns.

The non-negotiable criterion are:

a) Proven companies with plenty of cash on their balance sheet, low debt, growing sales, good cost management and decent profitability track record.  The companies must be able to generate healthy operating cash flow, not some companies that rely on asset sales or one-off gains to ensure its survival (operating cash flow is king)

b) Companies that are defensive plus healthy growth prospect. Regardless of the state of the economy, there will always be demand for the company's products or services. I could think of healthcare business and some quality companies in the consumer sector.

c) Proven track record of its management and no prior poor treatment of minority shareholders. I will usually check Minority Shareholder Watchdog Group (MSWG) website if the companies I invest into or planning to invest into run into any issue with MSWG.

d) The services or products must carry STRONG brand name or brand equity. When people want to have happy hour, perhaps Tiger or Carlsberg may appear in their mind. 

The next time you are hunting for a dividend stock, the above criterion could offer a quick idea on the filtering process, before we look into its valuation.

Happy hunting for your dividend paying companies!

Economy Downturn and Heineken Malaysia

I read some news recently that highlighted the solid profit performance registered by Heineken Malaysia (formerly known as Guinness Anchor Berhad) in the 4Q 2016 and its 18-month performance from July 2015 to end-December 2016.

I am always amazed by the decent performance posted by the company despite endless reporting on economic downturn, rising cost of living, weak Ringgit  and many more. But people still keep calm and drink, hence contributing to rising sales of Heineken Malaysia.

For the 18-month ended December 2016, Heineken Malaysia chalked up a revenue of RM2.8 bil, up 5% from RM2.67 bil over the corresponding period. In terms of profit before tax, it was up by 11% from RM495 mil to RM549 mil. 

.

The solid performance could be due to early timing of CNY, better efficiency and strong sales in its distribution channel. 

From my observation when I visited Penang recently, I also noticed that tourist from Japan and China drink Heineken too, they would have contributed to the stronger sales.

Heineken Malaysia proposed 60 sen dividend per share to be paid out in May 2017 subject to approval, translating into 3.6% yield based on latest share price of RM16.8. For the full 18-month ending December 2016, total payout would have been around 145 sen if the 60 sen is approved, translate into good dividend yield of 8.6% based on latest share price.

Investor who bought into Heineken Malaysia at much earlier time frame would have locked in higher dividend yield.

Despite the good performance, we still need to watch out for  the potential impact of RM56 mil in excise & sales tax claim by Custom Malaysia back in 2015, of which Heineken Malaysia is still engaging with the authority.

With Dato Sri Idris Jala assuming the post of chairman, it will be interesting to monitor the development of this cash cow moving forward.

For now, the party appears to be still on for the brewer.

Can We Follow Analyst's Recommendation Blindly?

One of the greatest mistakes I made when I embarked on equity investment some years ago is basically lack of independent thinking.

I used to read analyst's stock recommendation report and bought the shares accordingly without further due diligence. The end result?

 I lost money in Masterskill shares when I blindly follow the analyst's BUY recommendation. 

Lesson learnt!

Nevertheless, do you like to drink Starbucks or dine at Kenny Rogers Roasters?

Starbucks and Kenny Rogers are some of the businesses owned by Berjaya Food Berhad. Share price was performing well from 2012 to 2014, brought cheers to many shareholders.

Following the surge in share price in second half 2014 due to acquisition of remaining stake in Starbuck Malaysia to make it a wholly-owned subsidiary, investors who were excited and follow stock recommendation of certain bank-backed research house, would have realised close to 50% in capital loss.

During the share price downtrend from early 2015 onwards, the analyst maintained BUY recommendation on Berjaya Food despite poor business performance at Kenny Rogers segment which dragged the Group's consolidated financial performance. Subsequently, the recommendation was changed to HOLD.

Those who bought and follow blindly (like I used to), would have sufferred losses. Hence, always train to think independently, always question the recommendation and question our thinking process to minimize mistake and optimize returns.

Analyst reports are useful to some extents, but do not follow the recommendation blindly!

Applying BCG Matrix into our Dividend Portfolio

I learnt a management concept called Boston Consulting Group (BCG) Matrix when I was in College. BCG Matrix was created in 1970s to help corporation analyse its business unit.

While this sharing is not meant to dwell into details of BCG Matrix. The Matrix is simple to understand, but does have its limitations as the Matrix is only based on 2 dimensional perspective i.e growth rate and market share. 

Simplistically, a company which is categorized as cash cow is a company which has high market share in a slow-growing industry or matured industry, Cash cow generates plenty of cash flow in excess of the cash that is needed to maintain the business. Hence, cash cow business division is highly valuable to a corporation.

Similarly, cash cow is valuable to a dividend investor due to the ability of the company to earn a sustainable earnings and operating cashflow. Higher operating cashflow and lesser capital expenditure translates into healthy free cash flow which could be used to pare down debts or reward the shareholders via cash dividends.

Cash cow with stable or low business growth can also complement an equity investor's portfolio. We  can mix cash cow and other companies which are in growing industry.

'Star' companies can also be a good choice for investment. 'Star' companies may eventually become  cash cow when the industry growth slows.

The company to avoid is basically the 'Dogs', of which BCG Matrix defines as business that has low growth rate and low market share, and this business might barely produce enough cash flow to sustain its market share. 

Company that falls under 'Question Marks' consumes more cash that the amount it generates, has low market share in fast growing industry, it may evolve into a 'Star' performer but how long will it takes to be a performer, remains uncertain. Investor with higher risk appetite might invest into this type of companies.

It is simplistic to categorize companies based on the 4 quadrants as the 2 dimensions mentioned above are not sufficient to identify a good company.

I would prefer companies that fall between categories of 'cash cow' and 'star'.

The combined factors are:

1) Improving market share or market leader

2) Reasonable business growth of at least matching our economic growth or more in the long run.

Hopefully, these companies will be able to add value to our equity portfolio in our quest to build sustainable wealth via its rising earnings and rising dividend payout.

Happy hunting for your 'cash star' (cash cow +  star)

Financial Ratio that a Dividend Investor Should Not Neglect!

Would you invest into companies which are profitable, but without the corresponding operating cash flow?

Cash is king for a company. If a company does not generate sufficient cash flow despite beautiful profit, the company may have challenges in sustaining its operations or even pay salaries to employees. 

Dividend investors will need to be mindful of the above scenario. Before we invest our hard earned money, do assess if the company's profit is eventually backed by operating cash flow.

If a company makes RM100 million profit, how much of this profit translate into operating cash flow at the end of the day?

	2011	2012	2013	2014	2015
Operating cash flow (CFO) (RM mil)	195.3	180.2	225.6	236.2	295.1
Net Profit (RM mil)	181.3	207.3	217.6	198.2	214.1
CFO/Net Profit	107%	87%	104%	119%	137%

Source: Heineken Malaysia’s Annual Report

The example above depicts Heineken Malaysia's historical net profit and its operating cash flow (CFO) trend.

What can we dissect from the table above?

By looking at CFO / Net Profit metric, we can conclude that Heineken Malaysia's historical profit is backed by operating cash flow which is a positive sign. 

This CFO / Net Profit would have validated our assessment of a company's quality of earnings because there is no point to be profitable, but cash flow poor.

Hence, before we shoot our bullet, do assess the above metric in order to minimize our downside risk.

CFO/ Net Profit is surely one of the key ratios that a dividend investor should not miss!

Will elaborate more on other ratios in the future post:)