The Concept of Buyback Yield

You would have heard of dividend yield, which measures how much a company pays out in dividend compared to the share price. However, not many would have heard about the term “buyback yield”. Buyback yield is the dollar amount of buyback done by the company compared to the existing market capitalization of the company. Buyback yield can serve as hidden dividends – not obvious to the market but can create huge catalyst for a rise in stock price. Both the dividend yield and buyback yield can be added up to give a “cumulative yield”.

High buyback yield is usually a result of high free cash flow (which is the operating cash flow minus the capital expenditure) in a company. A company can do a few things when it has free cash flow. It can reinvest back into its business, it can pare down debt, it can pay dividends or it can buy back its own shares. When a company buys back its shares at, say 2%, while keeping profits and price-to-earnings ratio steady, the share price should increase by 2%. A company usually buys back shares if it thinks that the stock is undervalued. Charlie Munger dubs such companies which repurchase a significant amount of stock over time as “cannibals”.

A company with a cumulative yield of over 5% is a good candidate to purchase. The company should also have lots of free cash flow yearly so that it can continue its share buyback into the future and not have it be a one-off occurrence. A company with lots of free cash flow with negligible debt is a cash cow that can dish out dividends and buys back its shares freely.

In the U.S., companies like Pfizer, Corning, Campbell Soup, Coca-Cola have high cumulative yield of above 5%. In Singapore, I have not come across companies that have a yearly consistent share buyback programme. I have only seen companies doing buybacks sparsely without any regularity. Anyway, in Singapore, there are many high dividend yielding companies with good free cash flow and low debt. Such companies have a dividend yield of 4%-6%. Comparing that with the U.S., the average dividend yields are not high, at around 2%-3% only. Thus, looking at cumulative yield in when buying U.S. companies will prove to be more futile than in Singapore companies.

In conclusion, share buyback is a powerful concept that can serve as hidden dividends. On top of dividend yield, it will be good to look out for buyback yield to give the cumulative yield. Companies with a cumulative yield of above 5% might be something to look into.

Advertisements

Coffee With FFN and Wei Lin

WL

Wei Lin is a simple guy who is happy with the little joys in life. He focuses on deriving long term, sustainable happiness and he thinks there is no better way to live than to devote his life to the service of others. In his opinion, investing is more of an intellectual pursuit rather than a financial one. He says that if there is any reason to invest at all, it is to amass wealth that can be re-distributed to help those who are dealt the short straws in life.

FFN: At what age did you get started in investing? 

Wei Lin (WL): I got started on my 21st birthday by opening my first discretionary stock management account with Philip Securities Pte Ltd

FFN: What/Who inspired you to get started?

WL: My first book on money is “Secrets of a Millionaire Mind” by T Harv Eker. The book inspired me to look for the differences between rich and poor in terms of the way they think and act.

As I had some spare cash then and I did not have the necessary skillsets to start investing, I decided to leave it to the “professionals”

Also, I did the math using some simple financial formulae and realize that it will really pay off in the long run if I got started early.

FFN: What was your life like before investing and how is it now?

WL: Before I started investing, I basically saved with a local bank. Well, looking back, it wasn’t exactly a bad thing since it gave me a cash pile to begin my investing journey.

After I started investing, the way I viewed money went through a major change. I cherished it more because I saw the opportunity cost of a dollar spent today versus a dollar invested. Now, I feel in greater control of my life because of the way I plan my budget and my 10 year financial plan.

More importantly, I saw the true power of money. Money, like power, if used appropriately, can be used to improve the lives of countless individuals. On one of my service learning trips to the Philippines, I learnt that it costs around USD120,000 to build a community of houses which can be used to provide shelter and electricity for the homeless. In Singapore, that amount is barely enough to pay for a sports car. I never really understood how some people valued their egoistic pursuit of material gains more than the well-being of others, who might not even have access to basic necessities like food, clean drinking water and shelter. I think there are essentially two types of happiness, the instant but temporary type which we derive from the purchase of goods and services and the more lasting type which can only be derived from our involvement in activities that helps a third-party. Consumerism and materialism might be very helpful in the progress of a nation’s economy, but it does have its repercussions on our values as a society.

In terms of the way I spend, I don’t think it changed much. I think I’ve always been frugal, I don’t really buy clothes or gadgets unless I absolutely require them (or if my Mum nags at me). My previous watch which my Dad bought for me as a gift lasted me 14 years. It got quite badly scratched over the years and the strap broke a few times (I got it fixed thanks to a local watch shop). Eventually it got really worn out and I bought a new one recently at a night market in Taiwan which costs around S$20. I really hope this one lasts longer.

I do enjoy travelling the world with friends so I guess investing just gave me more freedom in terms of my travel choices. Sometimes the air fares can be really expensive so I’d wait for special promotions before booking my flight tickets.

FFN: What are some of your strategies when it comes to investing in stocks?

WL: I take a bottom up approach when looking for businesses to invest in, my philosophy ties closely with that of value investing

I believe Buffett’s quote pretty much summarizes my strategy: “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now”

I don’t speculate as it is mathematically unsound. I never really figured out why people are perfectly fine with gambling with small money but felt risky to do so with larger amounts. Isn’t the odds the same? If so, isn’t the expectation still negative? I don’t think trading based on hearsay is any much different from buying 4D and TOTO.

Neither do I attempt any form of forecasting or use any economic or finance models because the underlying assumptions are theoretically sound but practically useless. If these models really work, my professors would be secret millionaires who are keeping some key information to themselves.

FFN: What are some of the stocks in your portfolio currently?

WL: I own Cambridge Industrial REIT, Second Chance, Chip Eng Seng and a few others.

FFN: Where and how do you look for companies to invest in?

WL: Scuttlebutt!

There is nothing more fun than a gathering of close friends from different industries, discussing what we have been doing and how busy we’ve been. Their stories never fail to impress and interest me. Also, some friends will discuss about the latest products that they bought and I’d ask which companies were producing these products.

Another great way to look for ideas is from our shopping receipts! Let me share with you a story. About a year ago, my gas cooker broke down and I followed my Mum to the Ubi Industrial Park to shop for a new one. The supplier’s shop was located deep within the industrial park and I was shocked by the sheer amount of inventory they had. So I thought to myself, if the landlord increased their rent by a small percentage from time to time, the gas cooker supplier probably wouldn’t shift since the cost and inconvenience of shifting would be quite high. As we walked around the industrial park, I realized that most of the tenants had pretty heavy inventory, similar to that of the gas cooker supplier. I got really interested to become a landlord in the Ubi area, so I researched and found that Cambridge Industrial REIT owned many of the properties in that area. On top of that, it was selling at a huge discount to Net Asset Value (NAV) and giving me a dividend yield of more than 8% based on my buy in price. Pretty ridiculous eh?

FFN: You are someone who has planned for his finances quite well. Please take us step-by-step on how to plan our own personal finance.

WL: The clarity of our financial plan depends on how well we know what we want in life. The key issue with many of us (who are still unsure with what we want) is that we have not gone through enough in life. This is especially so in Singapore since most of us live pretty sheltered lives. I believe that the onset of crisis triggers the hibernal part of us. When we go about our daily activities, we tend to forget who we are and what our purpose of life is. Upon a significant and impactful event, we rediscover ourselves and we stop living from day-to-day (though some people have a unique ability to place themselves in higher orders of thinking despite their current state of comfort, Ghandi is a great example)

So why did I put forth these ideas? Well, as they say, for those who know not where they are going, it doesn’t matter where they go. Hence, the focus should be on discovering our purpose and direction in life.

After which that is done, financial planning is easy. You basically just draw a timeline and list down your major financial goals, attaching a dollar value to each of them. Google helps!

For an idiot proof way of planning your retirement, please refer to CPF’s retirement calculator
http://www.cpf.gov.sg/multimedia/retirement/retirement.html

FFN: Please tell us a thing or two about saving.

WL: I think in general, people in Asia are net savers, which is wonderful! The first step to investing, other than acquiring the necessary skillsets and mind set, is building up a cash pile.

However, with increasing globalisation and influence from the mass media, this wave of consumerism is hitting Asia like a tropical storm. I see many of my peers spending nearly every dollar they earn once they start work. I can understand how difficult it is to go against the crowd, especially when you see your colleagues start buying branded products and going on luxurious tours.

Consider this true story. At the age of 25, Sir John Templeton married his wife Judith Folk and they made it a goal to save 50% of their income. Being awfully frugal, Sir John Templeton managed to open his own firm and invest their hard-earned money.

FFN: So, how then should we save?

WL: I am against the typical savings plan offered by banks and insurance companies in Singapore. Firstly, the commissions paid to the agents are too high.

Secondly, I feel like there should be an optimum amount to keep in cash at any given point in time.

For example, a young couple saving up for marriage or their first house should have sufficient savings to pay for their honeymoon, downpayment for house, renovation etc. On the other hand, a married couple whose children are financially independent and debts almost fully paid for do not need as much liquidity. It all depends on which stage of life they are currently at and of course, their financial situation.

The financial planning rule of thumb is to keep around 3 to 6 months’ worth of your current monthly expenses as an emergency fund. This pool of money will be helpful to the individual should he get retrenched or decide to make a career switch etc.

Lastly, the key issue with a savings plan is that over time, we tend to save “too much”. The excess cash should be put into long-term investments, else the opportunity costs are simply too high. I think holding too much cash is risky.

I would strongly recommend that we save our cash in a Money Market Fund (MMF), for example, there’s one by Phillip Securities Pte Ltd, which can be automatically activated by using their trading account, POEMS. I use this fund. MMF provides the individual with a higher interest rate as compared to most savings accounts offered by banks. On top of that, there is no lock in period.

(FFN: Do note that Wei Lin does not receive any commission from Phillip Securities Pte Ltd for talking about MMF. He is just sharing his personal experience.)

FFN: How much of his monthly income should a person save?

WL: Now, this really depends on the comfort level of the individual and his current financial obligations. Obviously, singles are able to save more than say, a couple with young children and elderly parents to take care of.

We need to think in terms of income allocation and discipline of saving. I suggest that individuals have an automated function in their bank account which channels a portion of their income into a separate account. This will force them to set aside savings every month (for salaried employees). As for self-employed individuals or business owners, they need to plan their cash flows in advance, preferably at the start of each year.

We have to be prudent in our spending and build healthy financial habits over time. Like in the story of the grasshopper and the ant, the grasshopper might have had a lot of fun in summer but eventually, winter will come and it is the ant that has been piling up the grains, who will survive the cold.

FFN: What are some of your financial goals and how are you going to achieve them?

WL: I’ve bought my first property, saved up enough for marriage and I don’t intend to buy a car, so my next financial goal will be to achieve financial freedom.

I intend to achieve this through my investments. If my calculations are approximately correct, I should be done by age 35.

FFN: What are the mistakes you have done pertaining to investing and what are the lessons learnt?

WL: I’ve made plenty of mistakes and I don’t suppose you have enough time and energy to read through it if I made a whole list, so I’d probably share my biggest mistake

My biggest mistake is placing too much trust in “professionals”. I thought that since they were so “in touch” with the market, they got to know best. Besides, what can go wrong? They have an entire team of analysts from the top universities in the world. On top of that, they have access to the most updated information and can make instant decisions based on that.

Big, big mistake. I believe Peter Lynch has explained the conflicts of interest and other issues in the fund management industry very well in his book “One Up on Wall Street”. Just to summarize, fund managers pretty much have their hands tied due to regulations. Also, depending on their commission structure, their interests might not be aligned with that of their clients. Last but not least, fund managers might not be value oriented. As they say, it’s hard to get fired buying IBM.

FFN: What psychology do people need to succeed in investing?

WL: Ask Ser Jing :P

FFN: How has the investor in you evolved over the years?

WL: I don’t think I ever swayed from my value oriented philosophy. The key evolution is probably the choice of industries or types of businesses I’d rather deal with.

Basically, I’d much rather stick to businesses with not too many business segments or subsidiaries. The more complex a business is, the tougher and more time-consuming for the investor to follow-up with its story.

I continue to hold dear to the following principles for retail investing:

We do not need to understand or follow macroeconomic predictions, neither do we need a formal degree in business or finance (in fact, we might be better off without one)

If we wish to beat the market consistently and want to do so with relative ease, we should own a concentrated portfolio of stocks rather than a diversified one. That being said, the level of concentration should depend on the investor’s personal appetite for risk (or in layman terms, his ability to sleep soundly at night)

Start as young as possible. Just by starting earlier than others, you give yourself a lot more room for error and learning. Also, you allow more time for the powers of compounding to work in your favour.

FFN: What advice would you give for beginners who want to start investing?

WL: Read widely and think critically about what you’re reading

Then act upon your thinking, don’t just keep talking the walk. Do it.

FFN: What do you thing is the biggest misconception people have about money?

WL: Most people think having more money is the key to riches. I think better money management should be the focus.

I get very confused when people tell me things like “I’ll learn how to manage money when I have more money.” Shouldn’t we learn how to manage in the first place so we have more?

Consider an overweight man saying, “I’ll learn how to stick to a diet when I’ve slimmed down.”
Sounds pretty ridiculous right?

FFN: What is the one thing, in your opinion, do people need to succeed in investing?

WL: The ability to be contrarian.

FFN: What are the habits one must follow to have a sound financial life? 

WL: Spend less than what you earn, invest for the long-term and do not leverage (at least for stocks)

FFN: A parting shot for the readers?

WL: “You need to balance arrogance and humility…when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it. I am going to pay an 1/8th more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything” – Seth Klarman

Super Group Featured in Straits Times

On 8th January 2013, Straits Times ran an article on Super Group, entitled “Right ingredients for a successful brew” and on 4th February 2013, it featured another article, entitled “‘Regional wings’ strategy helps Super Group grow”. I will summarise the salient points covered in those two articles in this blog post.

“Right ingredients for a successful brew” article

  • Chairman of the firm, Mr David Teo, believes two factors have driven the company so far: becoming focused on its core products and having a strong regional strategy (incidentally the next article is about this). Back in 2008, the company sold off its non-core businesses, like the vending machines enterprise, and concentrated its energy and talent in the coffee business. At the same time, the company decided to sell the ingredients it was producing for its instant coffee mixes.
  • The firm produces its own ingredients to ensure product quality and make to make sure they are integrated from start to finish, unlike other instant coffee makers. Having started off to ensure consistency in its coffee products, the ingredients unit has since morphed into an immense source of revenue for the firm.
  • Super Group sells ingredients like creamers to ice cream makers and bottled drink companies.
  • The ingredients part of the business accounts for 31% of the revenue while the other 69% is accounted for by the consumer segment.
  • The company will continue focusing on its regional strategy in Asia.
  • Super is in the top three in several instant coffee markets, including Myanmar, Thailand and Singapore.
  • The company has been in Myanmar for over 15 years and has built a strong distribution network there with a partner. Most of the shops there are mom-and-pop shops so Super took a long time build their presence and sell directly to them.
  • Super is confident that its first-mover advantage and strong network will be enough to fend off competitors who are also eyeing the market in Myanmar.
  • The company is now focusing on increasing its presence in the region, including China. There is immense potential in the low- to middle-income group which sees coffee as a luxury item.

“‘Regional wings’ strategy helps Super Group grow” article

  • Super Group has three ingredients manufacturing facilities and six packaging plants in the region, including one of each in Singapore.
  • On top of rising costs in Singapore, the reason to move overseas was to localise itself in the various markets. This means making different blends of its instant coffee mixes for different markets and packaging them differently. For example, the Thais prefer their coffee sweeter so Super produces sweeter coffee there. While in Singapore, Singaporeans prefer lesser sugar. In Myanmar, Super recently came up with a sachet that has sugar on one side, separated from the coffee and creamer on the other side, so drinkers choose their own sweetness level.
  • Super Group continues to invent new products and packaging designs and it can do so efficiently due to its regionalisation strategy. For example, recently in Malaysia, the company took just six to eight months to roll out a new product – the “Super Power” range of five-in-one coffees, which are a blend of its white coffee mix with added ingredients like tongat ali, collagen and ginseng.
  • Since the company manufactures in Malaysia itself, it did not have to deal with import procedures, which are quite strict. The company could also get halal certification and other certificates all in the country itself, making things easier.
  • Even as it spreads its wings across the region, the company will keep its home base and some high-end manufacturing activities in Singapore. The local plant now makes high-end creamer and can create foam out of instant creamer and creamer that can dissolve in cold water to make instant iced-coffee.