What are your Investment Rules?

[777]

If a company is paying a dividend then it must be making a profit. Not all profit is distributed thus leaving a varying % for further expansion.

[justakiwi]

Yes, but you said above, companies should not pay dividends until they are fully matured with no further room for expansion. My question is (as a beginner who is learning) do companies ever truly get to the point where no further expansion/growth is possible?

If a company is paying a dividend then it must be making a profit. Not all profit is distributed thus leaving a varying % for further expansion.

[777]

Yes, but you said above, companies should not pay dividends until they are fully matured with no further room for expansion. My question is (as a beginner who is learning) do companies ever truly get to the point where no further expansion/growth is possible?

Not my statement justakiwi. That was SBQ and I don't agree with him.

[justakiwi]

Oops! Sorry

Not my statement justakiwi.

[SBQ]

Yes, but you said above, companies should not pay dividends until they are fully matured with no further room for expansion. My question is (as a beginner who is learning) do companies ever truly get to the point where no further expansion/growth is possible?

Yes as I mentioned before, if the investor seeks dividends, they choose portfolios the consist of such companies. The likes of utilities, electricity companies where there's a finite limited market share and the companies have been in existence for many decades. This is not the case in NZ where the emphasis is expectation of dividends regardless of the 'type' of business they choose to invest in.

If a company is paying a dividend then it must be making a profit. Not all profit is distributed thus leaving a varying % for further expansion.

I used the example of The Warehoues Group in the past replies. In their early years on the NZX, they too had a 'dividend policy' which was basically a rout to strum up investors. The policy of paying a set dividend rate carried on throughout all the years when they needed capital to expand. It was inevitable that red sheds would open up in every decent size town throughout NZ but during those decades, they funded that expansion through bank loaning it to issuing more shares. Yes some years where they had a loss they still paid the dividend (done by borrowing additional funds and floating more shares to pay the out goings to shareholders).

If the board of directors don't seem to have the same alignment view with their shareholders, then I must say they're not worthy of a company to invest in.

[Snoopy]

Yes as I mentioned before, if the investor seeks dividends, they choose portfolios the consist of such companies. The likes of utilities, electricity companies where there's a finite limited market share and the companies have been in existence for many decades. This is not the case in NZ where the emphasis is expectation of dividends regardless of the 'type' of business they choose to invest in.

I would like to see these two lists of 'dividend companies' and 'growth companies'.

My investment in NZ's electricity gentailers has yielded very high growth over the last three years. I am talking a capital gain of 50% plus dividends. That sort of return would be very satisfactory for a growth company, but it has been achieved by investing in a boring no growth industry. Yes the electricity market in terms of MWh sold has barely grown in that time.

Contrast this to my investment in Sky City which is plugged into NZ's tourism growth boom. These have fallen in value by 20% over the same period, even though dividend payments have been maintained to keep me happy.

SNOOPY

[Lego_Man]

I would like to see these two lists of 'dividend companies' and 'growth companies'.

My investment in NZ's electricity gentailers has yielded very high growth over the last three years. I am talking a capital gain of 50% plus dividends. That sort of return would be very satisfactory for a growth company, but it has been achieved by investing in a boring no growth industry. Yes the electricity market in terms of MWh sold has barely grown in that time.

Contrast this to my investment in Sky City which is plugged into NZ's tourism growth boom. These have fallen in value by 20% over the same period, even though dividend payments have been maintained to keep me happy.

SNOOPY

What's been the EPS growth of the gentailers though? How much of the share price appreciation has been a P/E ratio expansion?

[SBQ]

What's been the EPS growth of the gentailers though? How much of the share price appreciation has been a P/E ratio expansion?

BINGO! Someone that knows the importance of shareholder value. I'll reiterate, when NZ listed companies start hiding figures that really matter (ie EPS) or making investors manually calculating such figures.. then that tells me they're selling something else. Over in N. America, EPS is a major metric # in quarterly reporting. P/E also matters in value investments, but in NZ, it's of little relevance due to NZ's small size (when the company is the ONLY company in the NZ industry, then you can't go by any other benchmark). I also wonder in NZ finance news, why they don't report the performance of the companies in terms of EPS? On the radio they're great at saying how much sales has been achieved or growth in some area, etc. but why not figures that really matter like EPS?

Trickery comes in all forms and the dividend policy is a good way to mask or exaggerate things for shareholders. I see directors of such companies stringing along or implementing the idea that as long as shareholders get the dividend, they can do other things that would be detrimental to the company, and when things get so bad that a dividend can't be paid, well then that's too late.

[Snoopy]

What's been the EPS growth of the gentailers though? How much of the share price appreciation has been a P/E ratio expansion?

For 'Contact Energy', it depends on which way you look at things:

eps Growth

I calculated 22.0c eps for FY2015 and 18.3c eps for FY2018. So all of the the share price gain has been in
PE expansion!

dps Growth

If you accept 'anticipated dividend yield' is the motivation for the dividend hound to chase a share, I observe something rather interesting. Note I have adjusted the dividends to the after tax money received because not all the dividends below were fully imputed

Dividends Paid over FY2016: 15c x (0.72) + 11c x (0.9237) = 21.0c

Dividends Paid over FY2019: 19c + 16c x (0.8239) = 32.3c

That means from an 'after tax dividend' point of view (+54%) the increase in dividend received is very closely associated with the 50% increase on share price. There was no contribution to the capital gain from PE expansion!

SNOOPY

[epower]

Hi OldTech,

My rules are similar to what the book "Warren Buffett and the Interpretation of Financial Statements" alludes to.

I’m looking for companies that show a consistent 5+ year trend of growth in revenue, earnings. They have low/no debt relative to profits and they have a ‘moat’ or at least be the/one of the preferred in its field (eg Auckland Airport has a big competitive advantage to say Wellington or Christchurch airport).

I use a discounted dividend/cashflow model in which I want to get a forecasted 10 year 14.4% minimum return (quadruple my money in 10 years).

My rules for my portfolio is that my stock picking capital is only 1% of my overall investment portfolio (we have a few hundred thousand in rental property and KiwiSaver index funds and another non KiwiSaver index fund) so portfolio gets topped up each Jan 1st or I take any cash in the portfolio and dump into mortgages or index funds. This equates to a few thousand of a portfolio in sharesies I’m currently running. This allows me to pursue my hobby of stock picking without putting the family financial plan at risk because of a conviction I have on a particular company.

Several years ago before meeting my wife or having children, I had a portfolio in the vicinity of $80k which was being used to accumulate as a house deposit. My rules weren’t very stringent and I was mainly focusing on the ASX. I had 60% from memory of my portfolio in Slater & Gordon and that completely tanked. I'd built it up from a few wins though which balanced out (Credit Corp, Supply Network) I learnt my lesson and am now sticking to the NZX which I know companies better (tax benefits too). I now cap my weighting of a particular stock to 30% on purchase and if it goes over 40% of portfolio (including cash on the side) I sell down to get back within 30-40% I've learnt no matter how convinced I am that I’m right, picking a company and betting big on it sometimes doesn’t work. I’m not bulletproof so a bit of a limit and diversification helps.

My wife is also a good sounding board, she knows little about stock picking, fundamental analysis etc. if I approach her and say oh by the way I’m just going to take a grand or two out of out mortgage and bet it on Oceania Healthcare or Mainfreight she certainly tells me where to stick it so my impetuous nature when I see a deal gets brought back into the wider context. Finding someone like this for all of us (whether your spouse, child, family friend who’s adept at business and is conservative) I recommend I’m a far better investor because of that outside influence.

My rules as far as companies go it’s a mix of a Buffett/Munger and Peter Lynch type approach. Find a business I understand (takes out banks, insurance, energy utilities, biotech, technology) take out businesses growing too slow (listed property, mature industries) and non profitable ones (hard to value) really only leaves me with a handful of NZX companies to choose from. Choose a management that’s got skin in the game and has shareholders as best interest (whittles it down even more).

Then just hold onto them for a long time until something catastrophic happens to the underlying business that makes it different from the initial reason to buy it, the management becomes people I don’t want to do business with or the growth grinds to a halt and better alternatives come along.

So those are my rules. All in a valuation/mental checklist I keep in my head (easy when there are less than 10 companies) and just loosely follow the business news but mainly read NZX announcements and annual reports.

Thought about venturing back into ASX for more opportunities and growth companies but figure it's 1% odd of investment net worth (excluding family home), it gives me pleasure following companies so scratched my itch without overtaking my life with a demanding career and family life.

Currently I’m holding Oceania, Summerset, Asset Plus, NZ Cash fund (thanks Snoopy! As was NZ Bond Fund). Everything else on my watchlist (Mainfreight, Auckland Airport, Ryman, Ebos, F&P Healthcare, Goodman Property) is a bit too expensive.