Thursday, July 24, 2014

How to Hedge Your Bills

While there are many schools of thoughts when it comes to investing, a common one is "Invest in what you know". The rationale behind this is that if you use products or services from a company regularly or see them doing business in your neighborhood, you can understand how the business works. While this should not be the only approach for investing, as I have discussed earlier in the importance of diversification, investors should also invest keeping geographical allocation in mind. Staying invested in companies only local will cause you to take on risk that could otherwise be mitigated. However, this does not rationalize investing in companies that you do not understand. Whenever I'm asked for investment my advise, I always have the following to say: Every investment should be well understood. If you do not understand how a company generates revenue and don't understand its business model, then you shouldn't be investing in it.

With that established, lets look at how investing in companies that you are intimately familiar with. What better way to understand a company's business model but the ones you are a customer of, and contributing to its revenue regularly. When you are a customer of a company, you have probably done your research on the products or services offered and compared with their direct competitors. For whatever reason you chose the company for your business, every other customer goes through the same process. This can be a powerful thought process when it comes to investing.

I am not dropping any revolutionary new knowledge or viewpoint here. There have been various other bloggers and investing professionals that have explored this idea. What I like to explore here is how you can use the investment in a company as a hedge those very bills.

Always do your research before investing in companies. You may be a customer simply because they have the best rates in the market, but it could well be that the business isn't being run well. 

In my case, I am a customer at BCE Inc (BCE) and Bank of Nova Scotia (BNS), both very strong dividend growing companies with a spectacular track record. As a customer, I chose them because they provide good service (albeit at a premium) and think the prices charged are fair and on par with market value. As an investor, I have researched enough to come to a conclusion that they are reliable businesses and have a bright future and great long term prospects. These companies are the type of companies that people may grumble about, day-in-day-out, but are great companies to invest in. People may hate them, but cannot live without them and the competition space is limited. Customers are provided with good service, but they are also charged a hefty sum of money unless well negotiated.

BCE Inc

Bell Canada, as it is commonly known, is the lifeline of millions of Canadians. The company owns a major stake in supported land lines across the country. In addition to cell phone service, Bell is also our internet service provider (ISP). Not only do we fork over $100 per month in cellphone and ISP bills, but Bell also charges us something called a dry-loop rate for our internet connection which is a very convenient $10 a month. The dry-loop is simply Bell activating our phone line port at home without a real phone line and charges customers for it. This is the kind of move that I hate Bell as a customer, but love it as an investor. Customers can grumble and whine about it all they want, but will eventually simply pay up - as it is non-negotiable.

BCE Inc is the largest Canadian telecom service provider including landlines, wireless services, and internet services. BCE is a dividend challenger, having raised dividends consecutively for 5 years and has a 5-yr DGR of 25.6%. In 2008, BCE suspended its dividend growth in 2008 when it was a target of a leveraged buyout offer. That deal fell through and BCE and continued raising its dividends aggressively since.

Bank of Nova Scotia

Scotiabank, as it is commonly known, is one of the Big Five banks. In addition to our bank accounts, we ended up with our mortgage at Scotiabank as well, simply because they had a great product that fit our needs. We used a mortgage broker while purchasing our home and we ended up picking Scotiabank which had the best product offering. I have had a couple of friends who work for some of the other big banks in Canada but end up getting mortgages at Scotiabank simply because they offer the best products (even after getting an employee pricing discount on their own bank products). Stories such as these can be incidental, but cements my faith in Scotiabank as being  very competitive.

The Bank of Nova Scotia is the third largest of the Canadian banks by deposits and market cap. BNS is also the most international of the Canadian banks with exposure in 55 countries outside Canada. BNS has been paying dividends since 1832 - the second longest streak of paying dividends in Canada (first place goes to BMO which started in 1829). BNS saw a pause in its dividend growth during the financial crisis. However, BNS has started raising dividends after the crisis with a 5-yr DGR of 5.15%.

Full Disclosure: Long BCE, BNS. My full list of holdings are available here.


Monday, July 21, 2014

Valuation in the Aerospace and Defense Sector

The Aerospace & Defense sector makes for some great investments. The stocks discussed here are United Technologies Corp (UTX), The Boeing Company (BA), Lockheed Martin Corp (LMT), General Dynamics Corp (GD), Raytheon Company (RTN), Northrop Grumman Corp (NOC) and L-3 Communications Holdings Inc (LLL). All the stocks except BA are Dividend Contenders in David Fish's CCC list; companies that have raised dividends consecutively for 10-24 years. BA saw a freeze in dividend raises from 2009 to 2011.

Each company discussed here has its own specialty and is the leader in manufacturing defense related products and services. I have not read enough about the sector to comment or recommend one stock or another based on the technology and business-outlook side of things. For now, I will simply be looking at the valuations and the financials/dividend history to compare the stocks. I recommended readers to do their own research before investing in any of the stocks discussed.

The US spends a massive 3.8% of its GDP (numbers as of 2013) on military and defense budget. That amounts to about $640B - a number much larger than any other country on this planet. To put things into perspective, the military/defense budget of the next 10 highest spending countries need to be put together to get close to that number. Suffice it to say, that the defense contractors discussed here make for some juicy returns for your investment money.

Saturday, July 19, 2014

Chatter Around the World - 53

Chatter Around the World is a weekly link update of economics, investing, dividends and personal finance articles that have caught my eye. In these weekly updates, I also capture my blog updates and news related to my holdings.

Sector quilt updated Jun 30, 2014

New Blog Posts

Let's dive into the links that caught my attention this week.

Friday, July 18, 2014

Recent Buy - Qualcomm Inc (QCOM)

I added to my position in Qualcomm Inc (QCOM). Qualcomm designs, develops, manufacturers and markets digital communication products. Qualcomm's business segments include mobile device chipset manufacturing, mobile device royalties and strategic investments. Qualcomm is the leader in ARM-based chipset processors which can be found in the bulk of Android (GOOG), BlackBerry (BBRY) and Windows (MSFT) mobile devices. The licensing segment is used by almost all mobile device manufacturers including Apple (AAPL). The real winner from the smartphone/tablet/connected-cars wars really is Qualcomm. Qualcomm charges royalties on each handset sold based on its technology and one time licensing fees from handset vendors to use its proprietary technology.

Financials

Qualcomm's revenue per share, earnings per share (EPS) and free cash flow (FCF) per share are extremely healthy. In addition, Qualcomm has no debt and holds $16.63B in cash.



Qualcomm's industry leading processors are not only found in the latest Android, BlackBerry and Windows phones, but Qualcomm commands a formidable patent portfolio. Qualcomm currently generates 2/3 of its revenue from sales of mobile device chipsets and 1/3 of its revenue from royalties by licensing the technology. On  the earnings side, the numbers flip around - 2/3 from licensing and 1/3 from chip sales.

Thursday, July 17, 2014

Recent Sell - CHSCP, Mutual Fund

Some more 'Recent Sells' in the portfolio last/this week. 

Partially Closed: Scotia Canadian Balanced Fund (mutual fund)
This holding was part of my wife's portfolio and being an expensive fund (with an MER close to 2%), we sold this position, but only partially for now. The funds will not be invested elsewhere as we need the cash for our home downpayment.

Closed: CHS Inc (CHSCP)
CHS Inc was a high yielding, low-beta stock that I had used over the year to park my cash. I initiated this position in mid 2013 as I was unsure of where to invest. While I was going to make up my mind, I decided to get some juicy yields on the cash. That trade did not turn out that great as the stock price has remained fairly flat while the rest of the index has run off skyward. However, I can't really complain with the yield close to 6% I was receiving on a quarterly basis. Going forward, I will be investing the cash from this sale into dividend growing companies which will result in a drop in my passive income initially, but should see a better total return over the long term. 

Full Disclosure: My full list of holdings is available here.