Tag Archives: alternative

DHS: Strong Dividend, Intelligent Holdings, Solid Sector Allocations

Summary The dividend yield is a strong 3.41%. The holdings include several established dividend champions which gives the portfolio a more durable feel. The sector allocations look respectably defensive which is a positive when I would consider the market to still be moderately expensive. The Federal Reserve pushing short rates higher could help the financial sector generate more interest income. The WisdomTree Equity Income ETF (NYSEARCA: DHS ) hits very well on 3 of 4 categories. The only weakness in this fund is the expense ratio. The dividend yield, holdings, and sector allocations create a very compelling trio of factors in favor of the ETF. Expenses The expense ratio is a .38%, which is fairly standard for several of the WisdomTree (NASDAQ: WETF ) funds I’ve looked into. Dividend Yield The dividend yield is currently running 3.41%. This is simply excellent, no complaints there. Holdings I grabbed the following chart to demonstrate the weight of the top 18 holdings: (click to enlarge) General Electric (NYSE: GE ) has had a disappointing several years as their strong dividend has not been matched with solid share price growth. However the company has been very active in looking for solutions and even took measures as extreme as turning one of their departments into Synchrony Financial (NYSE: SYF ). To be fair, it is unclear to me why the finance division that turned into Synchrony Financial was supposed to fit with the rest of the company at GE. Exxon Mobil (NYSE: XOM ) and Chevron Corp (NYSE: CVX ) both get heavy allocations and have huge dividends. Oil is extremely “out of favor” right now, but I expect an eventual comeback. If it never comes, at least the oil for my truck will be fairly cheap. Two of the highest holdings go to the telecommunications sector with AT&T (NYSE: T ) and Verizon (NYSE: VZ ). I’ve found those allocations to be fairly risky given the aggressive competition in the telecommunications industry, but there are some positive aspects to doing a heavy allocation here as it aligns part of the risk with the investor’s expenses. If T and VZ are having a hard time covering their dividend, it would indicate that the profits within the telecommunications industry had dried up and would suggest that the investor is probably saving a chunk of money on their cell phone bill each month. McDonald’s (NYSE: MCD ) is another holding that I think should be represented in most dividend growth portfolios in one way or another. While their burgers have left a great deal to be desired over the last few years, they have still been able to remain relevant because they collected a large amount of high quality real estate. Over the last earnings report things began to look materially better for this real estate giant disguised as a seller of cheap burgers. Phillip Morris (NYSE: PM ), Altria Group (NYSE: MO ), and Coke (NYSE: KO ) all sell products that kill people, but they continue to deliver sales and earnings and the earnings are used to pay some fairly attractive dividends. I know some investors might think I’m crazy for tossing Coke in there with the tobacco companies, but high fructose corn syrup has quite a few very damaging health effects and heart failure is a major source of death in the United States. You won’t see me protesting the stable dividend though. Sectors Financials get a heavy weight which might be a good thing with the Federal Reserve working so hard to raise rates and justify paying interest on excess reserves when the rest of the world is shifting towards further rounds of quantitative easing or NIRP (negative interest rate policy). We have learned over the last few years that negative nominal returns and negative real returns are very possible because simply holding onto cash creates other problems. It turns out that protecting cash is not free and that banks can be pushed to accept negative interest rate policies. That’s interesting and it suggests there will be quite a few books on macroeconomics that need to have chapters replaced. The heavy allocations to consumer staples and energy look good in my opinion since I like the defensive nature of the consumer staples sector and appreciate the energy exposure as demonstrated in my comments on XOM and CVX. The three defensive sectors are consumer staples, utilities, and health care. Those three are all present in the top 6 allocations, so this looks like a respectably defensive fund. Since P/E ratios are fairly across most of the market, I prefer a defensive portfolio to an aggressive portfolio. Conclusion Great dividend, mediocre expense ratio, great holdings, and great sector weightings make a fairly attractive portfolio. If the expense ratio were lower it would get some very serious consideration from me. This fund simply performs great on several metrics.

Invest In The Philippines – Buy The IShares MSCI Philippines ETF

Summary High growth English speaking economy entering the demographic window and with great jobs growth. Very low household debt at 6% of GDP and a strong property market. The PSEi has moved sideways in 2015 providing a nice entry point now. The Philippines has been undergoing rapid change in the past decade and is set to continue as they enter the “demographic window.” It is one of very few countries in the world that speaks perfect English and still has cheap labor. But first some key reasons to invest in the Philippines stock market; GDP growth at 5.6% pa – the third fastest in Asia. Strong domestic driven economy not very affected by the China slowdown, with resilient overseas remittances. Rising middle class, and very strong demographics. The stock market has recently retreated and valuations are now better or fair. The Philippines GDP growth target set by the Government is for 7-8%pa growth. Other countries once they have entered the demographic window have posted an average growth of 7.3% during the first 10 years. According to the IMF the Philippines is currently growing at 6.0% in 2015, and forecast for 6.3% in 2016. The two main drivers of the Philippines economy are Overseas Foreign Workers (OFWs) remittances, and Business Process Outsourcing (BPO), which mostly covers call and data/back office processing centers. OFW remittances are growing around 6%pa , contributing $25b in 2014. The BPO sector is growing rapidly around 15%pa, contributing $18.9b in 2014, and employing over 1m people. It is expected that BPO revenues will overtake OFW remittances by around 2017 . Add to this a growing tourism and manufacturing sector (mostly electronics) and some agricultural exports and the economy is very resilient. With strong money inflows into the Philippines and rising jobs the property sector is also booming. There is a massive pent up demand for housing, and household debt is extremely low at a mere 6% to GDP. As a result the property developers (Ayala ( OTC:AYAAY ), Robinsons, SM) and the major banks (BPI, BDO, and Metrobank) are also booming. The banks are making good net interest margins around 3.02% , and growing their loan books 20% pa, with non-performing loans at a very low 1.8% and double digit profits. Total Philippines debt is relatively good. According to McKinsey research : The Philippines is one of the few countries in the world that has seen deleveraging. The ratio of total debt-to-GDP has been flat since 2008. In fact, it has declined if we look as far back as 2000. Corporates have the highest share of debt as a percentage of the economy at 71%, followed by the government at 40% and households at 6%. The current Government seems to have reduced corruption, and has brought the Government debt down and increased infrastructure spending. Source The Demographic Window In 2015, the median age in the Philippines is only 23.4 yo. The “demographic window”, is loosely defined as a period when a great majority of the population are of working age. The Philippines working-age population (between 15 and 64 years old) this year (2015) accounts for 66.6 percent of the total population of 101.6 million. By 2020 this will have reached 68% and by 2030 70.6%. Source Living here in metro Manila, I can certainly testify that the growth is real. Everyday I see Filipinos rising into new employment (maybe a call centre, or property agent), buying a smartphone, and buying condos. Jobs ads are often for 500 workers at a time. Manila skyline is changing rapidly under a construction boom. New cities within Manila have been growing and continue to be planned such as the Mall of Asia Entertainment (Casino) City , the Las Vegas of Philippines. Currently being built it will provide 4 new casinos, 6,000 hotel rooms, and 1.8m new jobs for the whole of Entertainment City. Global City (within Manila) is a whole new international business district that has grown from nothing in a mere decade. Global City Skyline Source The Philippines Stock Exchange (PSE) Index (PSEi) The best way, in my opinion, to invest in the Philippines stock market is to buy the index. The PSEi is currently at 6,932 down 2.93% for the past year, and the index has a year low of 6,603 and a high of 8,136 (see graph below). (click to enlarge) Source The PSEi trades on a current PE of 19.88. iShares MSCI Philippines My recommendation for Americans and most international investors would be to simply buy the index using the iShares MSCI Philippines ETF (NYSEARCA: EPHE ). The index is well diversified with the largest sectors being property developers and banks. The top 5 holdings are Ayala Land, Philippines Long Distance Telecommunications (NYSE: PHI ), Universal Robina Corp. ( OTCPK:UVRBY ), JG Summit ( OTCPK:JGSMY ), and SM Prime ( OTC:SPHXY ). If you want exposure to one of the fastest growing economies in Asia and the World, with brilliant demographics and a rising middle class, with strong jobs growth, at a reasonable valuation then EPHE is a great long term investment. Risks The usual risks apply to emerging markets. Currency risk would be the main one to consider. Also there will be an election in 2016 and a new Government. Geo-political risk is another with recent South China Sea issues with China.

Consider Midwest Utility ITC Holdings For Your DGI Portfolio

Summary Following my analysis of Wisconsin Energy, Southern Company and Avista, I decided to look at another possible growth prospect in the utilities sector. ITC offer superb growth opportunities together with great fundamentals and fair valuation. However, there are still several risk factors that must be taken into consideration, especially when we know it is a utility company. If you follow my last two articles, you will see that lately I am writing and debating with the readers about utility companies. I also wrote two articles about utilities back in March. The debate is whether one should look for a classic utility with high yield and low growth such as Southern Company (NYSE: SO ) or medium yield and medium growth like Wisconsin Energy (NYSE: WEC ). I must also note that I invest in Avista (NYSE: AVA ) as well, which also has medium yield and growth. I mentioned two out of the three types of dividend growth stocks. The third one is low yield and high growth. ITC Holdings (NYSE: ITC ) is a great example of such a company. I am going to analyze this company in this article, as I try to look for new investment opportunities. I found this stock while doing one of my routine screening, and I found out that it isn’t well known among dividend growth investors. ITC Holdings is a holding company. Through its regulated operating subsidiaries, International Transmission Company, Michigan Electric Transmission Company, ITC Midwest LLC and ITC Great Plains. It is engaged in the transmission of electricity in the U.S. It operates high-voltage systems in Michigan Lower Peninsula and portions of Iowa, Minnesota, Illinois, Missouri and Kansas that transmit electricity from generating stations to local distribution facilities connected to its systems. Fundamentals The fundamentals shown by ITC are really remarkable. They are remarkable for any company, and especially for a utility company. The revenue rose steadily over the past decade. Ten years passed since the initial IPO of the company, and in these ten years the revenue grew from $200 million in 2005 to $1020 million in 2014. This is CAGR of 17.69%. This rate will not be sustained, but the revenue will keep growing in the next years to come at high single digits according to the management. ITC Revenue (Annual) data by YCharts EPS also grew in a very impressive manner, and it is going to grow quickly in the next years to come. Issuance of new shares slowed the EPS growth, but as you will see, it had very little effect. The EPS grew from $0.353 in 2005 to $1.54 in 2014. This is CAGR of 15.87%. This is again an amazing number especially for a utility. The company is forecasted to show EPS of over $2 in 2015. The company reiterates its five year plan, and is going to show double digits EPS growth until 2018. ITC EPS Diluted (Annual) data by YCharts The dividend also grew quickly over that decade. It grew at a slower pace than the EPS, so the payout ratio actually declined to around 36%. In addition, the company told investors in November that it might expand the payout up to 40% in the future. The dividend grew from $0.175 in 2005 to $0.61 in 2014. This is CAGR of 13.3% which is great. In 2015 the dividend was raised by additional 15%, and the management is willing to raise the annual payment by 10%-15% annually. The drawback is that the current yield is very low for a utility company at just 2.2%. ITC Dividend data by YCharts Over the past decade the amount of shares outstanding increased by around 50%. This is typical for companies that are growing, issuing equity is a common way to raise capital. However, in the last two years, 2014 and 2015, the board authorized a buyback plan of $250 million. The board is positive about the strength of the balance sheet and the cash from operations, and I believe it will issue another similar plan in 2016. $250 million is around 5% of the shares outstanding, pretty impressive. Valuation ITC is really fairly valued. The forward P/E is around 16. When taking into consideration the double digits growth rate, some might say that the valuation is low. The high growth rate is lowering the P/E for 2016 and 2017 significantly. If I have to determine, I find it valued fairly to slightly undervalued. ITC PE Ratio (NYSE: TTM ) data by YCharts The reasons for the lower valuation are the fact that ITC is a less known company with no buzz at all, and the fact that the dividend yield is extremely low for a utility company. If the company can achieve its dividend growth goals, it will be a great opportunity for long term investors. Opportunities ITC enjoys a high rate of revenue, EPS and dividend growth. This growth is achieved while the company is practically a monopoly in several states, as it possesses a very wide moat due to its massive infrastructure. If the company can grow that quickly while being a supervised monopoly, it has a pretty bright future. ITC will also enjoy the transformation on the American energy market. As power plants using coal are closed, and plants using naturals gas and renewable energy are opened, they will all need to transmit the electricity from the plants to their customers. The massive infrastructure owned by ITC will be ready to join forces with the power plants. In my previous article about Southern Company and Wisconsin Energy, I was told by several readers, that SO has an advantage over WEC, and it is the fact that it operates in the growing south and not in the Rust Belt. I am not sure that this is an advantage for the long term, as the economy is cyclical, but ITC for sure has nothing to worry about it. The company is well diversified, and it operates and in the Rust Belt as well as in the south. Geographical diversification is always a plus for a utility company which is usually locked in a certain area. Another advantage is the regulation. While the typical utility company is regulated by the states and the federal government, and therefore in a position where it can suffer from multiple state jurisdiction, ITC is solely regulated by the federal government, because it is an electric transmission company. In addition, the allowed return on equity is higher, which allows the company to charge more money for its service. According to S&P, the allowed ROE by the federal government is between 12.16%- 13.88%. Risks The first risk is competition. The competition can come from two places, other transmission companies especially from the west, and electric companies that can build their own infrastructure. The advantage of ITC is the fact that infrastructure requires a lot of capital. This is the wide moat that the company has, and the reason for this risk to be less relevant at current prices. The federal regulator received in 2013, a complaint asking for the reduction of the allowed ROE. A similar case in New England back in 2011 resulted in reduction of the allowed ROE two years later. This might harm the profitability. However, the request wasn’t fully granted, and I believe that the same will happen here as well. The low dividend is another downside. Yes, it can and should grow in the near future. The company believes that it can sustain substantial growth for the long run here. However, the profits depend on the regulators, and a change in the regulation might slow down the dividend growth, and we will have a utility stock that yields less than 2.5%, not something to brag about. The debt load is high, and is getting even higher. With the interest rates raising, it will be even more expensive. The company is using at the moment debt to finance its operation. The expects annual cash from operations to be around $650 million, while the annual capital investment is $800 million. Now, add the dividend and the buyback, and this small company must have access to credit at all time. The management is aware of that, and they know that their goal is to maintain the current credit rating- A. Conclusion Well, I can’t see myself buy ITC now, I prefer WEC and AVA over it. The growth is important and unique for a utility, but it will take years for it to reach a “utility yield”. It will need 5 years of superb growth to reach the yield of WEC, and 8 years of superb growth to reach the yield of SO. My preferred utility companies are the medium growth and medium yield like WEC and AVA. Therefore, I prefer these two over both SO and ITC. If you have several utilities and a very long investment horizon, you should consider adding ITC to your dividend growth portfolio. If you are a value investor, you might be buying it as well, as the growth prospects are here and valuation is fair. You can initiate a small position and enjoy the growth, it is an odd utility by yield and payout ratios as well as by growth, but it is also a great company, that isn’t necessarily right for my portfolio.