Against the backdrop of heightened volatility, it is understandable that investors will seek lower-risk stocks for safe haven. Typically, these would be companies with stable businesses, pay consistent dividends (that will at least give investors a dependable stream of income in the absence of capital gains) and have strong balance sheets.
Last week, I noted an interesting divergence in market valuations for companies in net cash positions and those with net borrowings. I have reproduced the table here (see Table 1), which shows net cash companies trading at steep discounts, on average, compared to those with net borrowings.
Table 1: Valuation comparisons for Bursa-listed companies
Notably, this phenomenon is not specific to Malaysian stocks. We see the same difference for valuations in Singapore-listed companies (see Table 2).
Such valuations, on their own, suggest that management can maximise shareholder value by paying out excess cash and if need be, take on some borrowings. It will have minimal impact on profits but yields will boost investor interest and share prices (through higher valuations).
The hypothesis is intriguing enough that this week I decided to take a closer look at select individual companies. Does their share price performance, for the year-to-date and over time, support the above theory?
Table 3: 10 companies with highest net cash on Bursa
Table 4: Select Bursa companies with high dividend payout ratios
Table 3 shows the 10 companies listed on Bursa Malaysia with the highest net cash in hand, their current valuations and share price performances. For comparison, I selected six companies that are well known for high dividend payout and/or actively manage their capital structures (see Table 4). I performed the same analysis for select Singapore stocks (see Tables 5 and 6).
Table 5: 10 companies with highest net cash on SGX
Table 6: Select SGX companies with high dividend payout ratios
To be sure, certain companies underperform due to their unique industry landscapes and there is a risk of over-generalising. But, on average, the numbers do support the proposition that companies paying high and sustained payout ratios are being accorded higher valuations by the market and their share prices performed better, both in the short and longer-term.
For instance, Petronas Chemicals is sitting on net cash of nearly RM9.4 billion, by far the highest of any company listed on the Bursa. The stock has done well, as a big cap component of the FBM KLCI, gaining 21% in the year-to-date and 43% and 76% over the past 3 and 6 years, respectively.
I guess the question is, could it have done even better? The company pays just about half of its profits as dividends annually, giving a yield of roughly 3.2% at the prevailing share price. The stock is priced at little over 9 times EV/Ebitda and less than 16 times earnings – well below the valuations for companies in Table 3.
Companies have their own reasons for keeping high levels of cash on their balance sheets. In most cases, it is because they believe they are best-positioned to make the decision on how much to distribute as dividends and how much to retain for the rainy days as well as building the war chest for future investment opportunities.
Warren Buffett, for instance, famously eschews paying dividends on the premise that his company, Berkshire Hathaway can create greater long-term wealth for shareholders through reinvestment in existing businesses and acquisitions.
The market, on the other hand, appears to be telling us quite the opposite – that investors do not trust management to make that decision. In fact, they are willing to pay premium valuations to companies that pay out all of their earnings. If and when companies do require funds for major investments, they could easily make a cash call (rights issue).
It is worth noting that whilst Berkshire does not pay dividends, Buffett himself loves companies that do. The biggest of his portfolio investments are companies that give dependable income streams, which can then be redeployed as the company sees fit.
This is consistent with finance theory where shareholder are the best able to assess and determine their individual risk-return appetite based on the many choices of investments available.
Berkshire’s case is an exception to the norm. The market gives it a premium over net assets because Buffett’s investors believe he can do better than them with the funds. This is partly due to his long and successful track record as well as reputation. And as we know, reputation and integrity are huge assets in investing. In such a situation, it makes sense to keep the funds within the company for reinvestment.
This is not the case generally, as much as many want to believe they too can be Warren Buffet. And if the companies are valued at steep discounts to net assets, it makes little sense to hold on to the excess cash.
The Global Portfolio ended flattish for the past one week, but fared better than the benchmark index. Total portfolio returns now stand at -11.6% since inception. The portfolio is under-performing the benchmark index, which is down by a lesser 4.3% over the same period.
The Malaysian Portfolio finished lower for the week ended Thursday, falling 1.6%. This is slightly worse than the 0.4% drop for the FBM KLCI.
Trading volume for the broader market has noticeably contracted in recent days as global market volatility has many investors sidelined, particularly as the year draws to an end.
Total Malaysian Portfolio returns dropped to 49% since inception. Nevertheless, this portfolio continues to outperform the benchmark index, FBM KLCI, which is down 8.4%, by a long way.
Performance Comparison Since Inception (%)
- Tong's Value Investing Portfolio
- FBM KLCI
|SHARES HELD||QUANTITY||AVERAGE COST||COST OF
|AJINOMOTO (M) BHD||11.813||17,720.0||17.980||26,970.0||9,250.0||52.2%|
|PANASONIC MANUFACTURING MSIA||26.307||17,182.0||37.900||22,740.0||5,558.0||32.3%|
|Y.S.P.SOUTHEAST ASIA HOLDING||2.413||25,340.0||2.640||27,720.0||2,380.0||9.4%|
|FORMOSA PROSONIC INDUSTRIES||1.540||27,720.0||1.670||30,060.0||2,340.0||8.4%|
|HONG LEONG INDUSTRIES BHD||9.126||18,251.0||8.670||17,340.0||(911.0)||(5.0%)|
|WILLOWGLEN MSC BHD||0.500||9,950.0||0.450||8,955.0||(995.0)||(10.0%)|
|MALAYAN BANKING BHD||10.250||30,750.0||9.440||28,320.0||(2,430.0)||(7.9%)|
|MAH SING GROUP BHD||1.010||19,190.0||0.990||18,810.0||(380.0)||(2.0%)|
|ECO WORLD DEVELOPMENT GROUP BERHAD||1.235||18,772.0||0.990||15,048.0||(3,724.0)||(19.8%)|
|DIALOG GROUP BHD||3.452||19,676.4||3.140||17,898.0||(1,778.4)||(9.0%)|
|Total shares held||223,769.8||227,914.8||4,145.0||1.9%|
|Realised Profits / (Losses)||93,776.3|
|Change since last update Dec 6, 2018|
|Portfolio Returns Since Inception||200,000.00||297,921.3||97,921.3||49.0%|
|Portfolio Returns (Annualised)||11.7%|
|Risk Adjusted Returns Since Inception||73.2%|
|Performance Comparison||At Portfolio Start||Current||Change||Relative Portfolio Outperformance|
*Current price is as at December 13, 2018.
*Portfolio started on Oct 10, 2014 with MYR200,000.
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.
|SHARES SOLD||DATE BOUGHT||DATE SOLD||QUANTITY||AVERAGE
|MIKRO MSC BERHAD||01-Dec-16||27-Jul-17||42,000||0.331||13,920.0||0.545||22,890.0||8,970.0||64.4%|
|CLASSIC SCENIC BHD||01-Dec-16||27-Jul-17||4,000||1.413||5,651.3||1.790||7,160.0||1,508.8||26.7%|
|PANASONIC MANUFACTURING MSIA||21-Jan-16||27-Jul-17||400||26.125||10,450.0||37.100||14,840.0||4,390.0||42.0%|
|ELSOFT RESEARCH BHD||30-Mar-17||24-Aug-17||8,000||1.844||14,750.0||2.650||21,200.0||6,450.0||43.7%|
|JOHORE TIN BERHAD - WA 12/17||04-May-17||24-Aug-17||17,000||0.655||11,135.0||0.680||11,560.0||425.0||3.8%|
|FOCUS LUMBER BERHAD||03-May-17||30-Aug-17||6,000||1.660||9,960.0||1.530||9,180.0||(780.0)||(7.8%)|
|WILLOWGLEN MSC BHD||23-Nov-16||30-Aug-17||7,000||0.768||5,377.0||1.430||10,010.0||4,633.0||86.2%|
|WILLOWGLEN MSC BHD||23-Nov-16||28-Sep-17||7,000||0.770||5,377.0||1.180||8,260.0||2,883.0||53.6%|
|LII HEN INDUSTRIES BHD||14-Dec-16||28-Sep-17||5,000||2.820||14,100.0||3.720||18,600.0||4,500.0||31.9%|
|COMFORT GLOVES BERHAD||28-Aug-17||08-Dec-17||25,000||0.960||24,000.0||0.930||23,250.0||(750.0)||(3.1%)|
|JOHORE TIN BHD||08-May-17||08-Dec-17||9,000||1.600||14,400.0||1.180||10,620.0||(3,780.0)||(26.3%)|
|THONG GUAN INDUSTRIES BHD||12-Dec-16||08-Dec-17||5,000||4.243||21,215.0||4.100||20,500.0||(715.0)||(3.4%)|
|KERJAYA PROSPEK GROUP BERHAD||12-Jan-17||15-Mar-18||11,000||1.025||11,280.0||1.540||16,940.0||5,660.0||50.2%|
|KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/2023||08-Mar-18||15-Mar-18||3,000||0.000||0.0||0.330||990.0||990.0||-|
|LUXCHEM CORPORATION BHD||30-Aug-17||15-Mar-18||16,500||0.732||12,072.5||0.720||11,880.0||(192.5)||(1.6%)|
|WILLOWGLEN MSC BHD||14-Dec-17||22-Mar-18||20,000||1.010||20,200.0||1.260||25,200.0||5,000.0||24.8%|
|MUAR BAN LEE GROUP BERHAD||26-Oct-17||22-Mar-18||13,500||1.240||16,740.0||1.170||15,795.0||(945.0)||(5.6%)|
|CHOO BEE METAL INDUSTRIES BHD||07-Sep-17||16-May-18||8,000||2.190||17,520.0||2.440||19,520.0||2,000.0||11.4%|
|CHOO BEE METAL INDUSTRIES BHD||07-Sep-17||21-May-18||8,000||2.190||17,520.0||2.300||18,400.0||880.0||5.0%|
|SUPERLON HOLDINGS BHD||01-Dec-17||21-May-18||6,000||1.175||7,050.0||1.550||9,300.0||2,250.0||31.9%|
|OKA CORPORATION BHD||14-Dec-17||28-Jun-18||12,000||1.541||18,488.0||1.270||15,240.0||(3,248.0)||(17.6%)|
|SUPERLON HOLDINGS BHD||01-Dec-17||28-Jun-18||6,000||1.175||7,050.0||1.210||7,260.0||210.0||3.0%|
|WILLOWGLEN MSC BHD||14-Dec-17||28-Jun-18||100||0.500||50.0||0.540||54.0||4.0||8.0%|
|PANTECH GROUP HOLDINGS BHD||17-May-18||02-Aug-18||43,000||0.580||24,940.0||0.560||24,080.0||(860.0)||(3.4%)|
|KERJAYA PROSPEK GROUP BERHAD||10-Jan-17||06-Sep-18||11,000||1.020||11,225.0||1.400||15,400.0||4,175.0||37.2%|
|LUXCHEM CORPORATION BHD||25-Aug-17||06-Sep-18||16,500||0.717||11,825.0||0.655||10,807.5||(1,017.5)||(8.6%)|
|HOCK SENG LEE BHD||19-Apr-18||06-Sep-18||14,500||1.520||22,033.0||1.370||19,865.0||(2,168.0)||(9.8%)|
|GENTING MALAYSIA BERHAD||06-Sep-18||28-Nov-18||3,800||5.070||19,266.0||3.060||11,628.0||(7,638.0)||(39.6%)|
|TOP GLOVE CORPORATION BHD||06-Sep-18||06-Dec-18||3,600||5.500||19,800.0||6.030||21,708.0||1,908.0||9.6%|
A Note to Readers
It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.
Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.
Tong Kooi Ong