Tuesday, January 27, 2015

Initiated Positions in Two Swedish Companies-Bought: 50 Swedbank at $23.25 and 50 SCA at $22.27/Sold 54 LXP at $11.44 Vanguard Roth IRA-Transitioning Position to Fidelity Roth IRA

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha


Recent Developments: 

New orders for durable goods in December decreased by 3.4%. Excluding transportation, new orders decreased by .8%. census.gov.pdf

The stock market is having one of its bad days today, apparently surprised that the USD's strength was going to negatively impact U.S. multinational's earnings and revenues. That is hardly a news flash given that most major currencies have fallen close to 20% in value against the USD over the past 6 months or so.

The Shiller home price indexes for both the 10 and 20 cities continued to show slower growth.  In November 2014, the 20 city composite index was up 4.3% Y-O-Y, down from +4.5% in October Y-O-Y.


1. Sold 54+ LXP at $11.44 in the Vanguard Roth IRA-Transitioning Position to Fidelity Roth IRA (Gateway Post: Equity REIT Common and Preferred Stock Basket)(see Disclaimer):

Snapshot of Trade:

2015 Roth IRA Sold 54+ LXP at $11.44

Snapshot of Profit:

2015 Vanguard Roth IRA LXP 54+ Shares +$64.4

Item # 6 Added 50 LXP at $9.95- Vanguard ROTH IRA (1/13/14 Post)

Recent Reinvestment in Fidelity Roth IRA: 

I am transitioning my LXP position to the Fidelity Roth IRA, where I am currently receiving a 5% discount on the dividend reinvestment price through Fidelity's indirect participation in LXP's reinvestment plan.  By holding the LXP stock in a Roth IRA, I turn a non-qualified taxable dividend into a tax free one, and I avoid the taxation of the discount as explained in this SA Instablog: Lexington REIT (LXP) - South Gent | Seeking Alpha

The reinvestment price was $10.65+ which includes a 5% discount.

In a family's members account at another brokerage company, the reinvestment price was $11.263 per share. Those shares were bought in the market, probably on 1/15/15 at the opening when  the price was $11.26. By buying the shares in the market rather than through LXP's dividend reinvestment plan, the family member did not receive the discount. The timing of the share purchase would also be different.

Security Description: The Lexington Realty Trust (LXP) is a self-administered equity REIT that "owns a diversified portfolio of equity and debt interests in single-tenant commercial properties and land". All of the land leases and a majority of its properties are subject to net leases, where the "tenant bears all or substantially all of the operating costs".

LXP Website: LXP

Lexington Realty Profile Page at Reuters

Lexington Realty Key Developments Page at Reuters

Lexington Realty Trust Dividend History

Prior Trades: I currently own 205+ shares in the Roth IRA: Added 100 LXP At $10.43 - South Gent | Seeking Alpha (10/23/14 Post); Item # 3 Bought Roth IRA 100 LXP at $10.64 (8/23/14 Post)

I sold the LXP position in a taxable account as part of the transitioning to the Fidelity Roth IRA: Sold 101+ LXP at $10.65 (10/28/14 Post)-Item # 1 Bought: 100 LXP at $10.32 (12/3/13 Post)

When transitioning a position, I want to sell the shares being transitioned for a profit and to buy the shares the other account at a lower price.

I have also bought and sold LXP preferred stocks: Stocks, Bonds & Politics: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages

Rationale: In my Vanguard Roth IRA, I do not receive a 5% discount on the reinvestment price.  A 5% differential on $11 is after all $.55 and that will add up over time, both in terms of the shares bought with the dividend and the shares bought with the dividends paid by shares bought with the dividends.

In a comment to a recent Seeking Alpha article, I noted that LXP was expected to show negative Y-O-Y FFO between 2014-2015, and that the Funds Available for Distribution (FAD) were well below the FFO and AFFO per share numbers. Until LXP can consistently grow FFO in the low single digits, at a minimum, the P/FFO will remain significantly below other REITs in LXP's sector.

Future Buys in Fidelity Roth IRA: When and if I can lower my average cost per share, I will buy another 50 shares in the Fidelity Roth IRA. Currently, the average cost per share is $10.58.

There have been several recent time periods when the market offered a lower price: LXP Interactive Stock Chart

2. Bought 50 Swedbank ADR (SWDBY) at $23.25 (see Disclaimer):

Snapshot of Trade:

2015 Bought 50 SWDBY at $23.25
The ordinary shares are traded in Stockholm and priced in Swedish Krona (hereinafter SEK).

1 ADR=1 Ordinary Share

On the day of my trade, the ordinary shares closed at SEK192.9: Swedbank AB Series A (SWEDA:STO)

I did a currency conversion of that ordinary share price into USDs:

Company Description: Swedbank AB ADR (SWDBY) is the largest bank in Sweden and has an extensive presence in the three Baltic countries of Estonia, Latvia, Lithuania. This bank has 318 branches in Sweden and 170 in the Baltic countries.

The bank has 4.1M retail and 268,000 corporate customers in Sweden, and another 4M retail and 302,000 corporate customers in the Baltic states. Quick facts - Swedbank

Swedbank has a long term debt rating of A+ from S & P and A1 from Moody's: Rating

Company Website: Swedbank

Dividends: Swedbank pays an annual dividend in SEKs that will be converted into USDs for the owners of the ADR SWDBY. The amount of the dividend will consequently depend on the exchange rate at the time of conversion.

The dividend was eliminated in 2008 and 2009 after growing nicely up to 2007. The bank paid out SEK9.9 per share for its last annual dividend, up from SEK 5.3.

The company has not yet declared the dividend rate for 2014 that will go ex dividend later this year.

Given the uncertainty on the amount and the currency conversion rate, I can not estimate a dividend yield.

If I assumed the SEK9.9 rate, converted that amount as of 1/23/15 into USDs, then the yield would be about 5.16% at a total cost of $23.25.

I have my doubts that the bank will continue at a historically high payout ratio.

Foreign Withholding Taxes: I will use the Deloitte website to determine the tax treaty dividend withholding rates.  Treaty Rates | Deloitte I simply check "United States" in the left hand side box, click "active" in step 2, and "dividends" in step 3. I then look for the applicable foreign country. I see that Sweden will withhold 15%.

I can find the tax treaties at the IRS website: United States Income Tax Treaties - A to Z

For the U.S. tax treaty with Sweden, I noted that Article 10 did provide for a 15% rate.

I will not buy a foreign dividend paying security in an IRA when there is a withholding tax. I will buy a foreign dividend paying stock in an IRA where no tax is withheld.  No recovery of the foreign tax is permitted when the dividend is paid into an IRA. A foreign tax credit can be claimed only when the dividend is paid into a taxable account.

The rules governing foreign tax credits are explained in a Schwab publication: Claiming Foreign Taxes: Credit or Deduction? I am certainly no expert on the subject.

Comparison Chart: Due to the weakness in the SEK versus the USD, the ADR share price has underperformed the ordinary shares priced in SEK, particularly over the past 6 months. I took a snapshot of a six month chart comparing the USD priced ADR with the equivalent ordinary share priced in SEK:

Prior Trades: None

Recent Earnings Report: I just took a snapshot of the relevant details:

The return on equity was reported at 16.6 for the third quarter, much higher than the 9.02% average for U.S banks. Return on Average Equity for all U.S. Banks-St. Louis Fed

The Tier 1 capital ratio is excellent:

Large U.S. banks are mostly in the in the 10% to 11% range. Forbes J.P. Morgan had a tier 1 common equity ratio of 10.1% under fully phased in Basel III rules.  Bloomberg

Rationale: Swedbank appears to be a prudently managed bank whose share price has some dividend support. The capital ratios are excellent.

The P/E is reasonable. For the ordinary shares, Bloomberg shows a 12.5 P/E based on estimated 2014 earnings of SEK15.433 and a SEK price of 192.9. Swedbank AB - Bloomberg

The ADR price has already been smashed a lot due to the weakness in the SEK vs. the USD. While that downslide may continue, the SEK's value is already near a 10 year low, so a lot of the currency risk in existence as of last May has been drained out of the risk equation, thereby increasing the potential long term currency exchange benefit.

Risks: An important risk after purchase involves currency exchange rates. A continued decline in the SEK's value versus the USD will have a negative impact on the pricing of the ADR.

I am not concerned about the bank's capital ratios. However, a recession can eat into that capital and cause a bank to cut the dividend.  While this bank did eliminate its payout for two consecutive years, it has recovered back to the pre-2008 dividend level much quicker than large U.S. banks. Still, I always view dividend cuts and eliminations with significant negativity. The fact that Swedbank has eliminated the dividend for two years place a dark cloud over its willingness to continue paying dividends when the going gets rough.  

I am also concerned about the stagnation in Europe generally and less so in the Nordic countries. Net interest margin compression is also a negative item for the foreseeable future.

While it may be remote, a Russian military incursion into the Baltic states is a possibility, as Putin seeks to further expand Russia's border through military aggression.

Future Buys/Sells: I will consider averaging down with another 50 lot purchase. I first want to read the earnings report for the last quarter. I would also want a $1 per share lower price.

I have no target price for selling the shares. If I average down with another 50 share purchase at less than $22.25, preferably closer to $22, then I would be more inclined to sell the highest cost lot on a pop in price and then hopefully buy the shares back when and if the purchase would lower my average cost per share.

3. Bought 50 of Svenska Cellulosa Aktiebolaget ADR (SVCBY) at $22.27 (see Disclaimer):

Snapshot of Trade:

I bought the ADR traded on the U.S. pink sheet exchange and priced in USDs. Svenska Cellulosa AB (SVCBY) A pink sheet exchange symbol ending in a "Y" denotes an ADR.

1 ADR=1 Ordinary Shares

The ordinary shares are priced in Swedish Krona (hereinafter SEK)and trade on the Stockholm exchange. SCA-B.ST

Prior to entering a limit order, I converted the then existing ordinary share price into USDs which is standard operating procedure:

Company Description: Svenska Cellulosa AB ADS (SVCBY) is one of the world's largest personal care and hygiene companies. SCA is the largest private owner of forests in Europe, with approximately 2.6 million hectares of forest land (6.4M acres), and has a variety of forest products.

Personal care and tissue products include diapers, toilet paper, wet wipes, soap, lotion and feminine care products. SCA is the second largest tissue producer in the world with about a 10% share of the consumer tissue market.

SCA's brands and products in the whole world

SVENSKA CELLULOSA Profile at Businessweek (includes detailed description of products)

Company Website: SCA - Svenska Cellulosa Aktiebolaget

The Bloomberg page for the ordinary shares shows an estimate E.P.S. of SEK10.633 in 2014, up from SEK 9.95 in 2013. The five year dividend growth is shown as 6.3%. SCAB:Stockholm-Bloomberg

In 2014, SCA transferred its hygiene business in China to Vinda International Holdings, a company listed on the Hong Kong exchange. SCA’s transfer of Chinese hygiene business to Vinda approved - SCA Corporate The purchase price was SEK 1,000M or HKD1,144M.

3331:Hong Kong Stock Quote - Vinda International Holdings Ltd - Bloomberg

SCA owns about 51.4% of Vinda's shares based on information in SCA's 2013 annual report. SCA China | Vinda

Vinda's market capitalization is about HKD11.681B based on last Friday's closing price of HKD11.7. That translates into roughly USD1.5068B. Assuming no change in the 51.4% stake, the value of SCA's Vinda stake is about USD$774.5M.

Website: Vinda Paper Group (last earnings report: vindapaper.pdf)

During 2014, SCA floated its Australian joint venture, Asaleo Care Ltd, and currently owns 32.5% after the IPO. Based on Asaleo's closing price from last Friday, that stake is worth about 330M Australian Dollars.

In 2012, SCA acquired Georgia Pacific's European tissue business for €1.32B. SCA's acquisition

Based on last Friday's closing price of SEK180, SCA's market capitalization is approximately SEK127.625B or USD$15.244B.

Dividends: Dividends are paid annually in Swedish Krone and then converted into USDs for the owners of the ADR. The dividend yield will fluctuate based on the conversion rate. If the SEK continues to decline in value after my purchase, then the annual dividend will buy fewer USDs, and my dividend yield will consequently be negatively impacted by the SEK's weakness. The converse is also true. My dividend yield, based on my constant total cost number, will go up with a rise in the SEK after my purchase and with any dividend increases.

SCA has a policy of generally paying out 1/3rd of its cash flow in dividends. Dividend for the SCA share - SCA

Annual Dividend Rates in SEK:
2013: 4.75
2012: 4.5
2011: 4.2
2010: 4
2009: 3.7
2008: 3.5

The annual rate was SEK 4.4 in 2007, which was slashed to 3.5 in 2008.

Comparison Chart: The following 6 month chart highlights the potent negative impact of currency exchange on the ADR share price. I am simply comparing the USD priced ADR with the ordinary share SEK price:

That is a profound differential, almost 18%, due solely to currency conversion from SEKs into USDs.

While I will not hazard a guess when the USD will lose its current gusto, experience has taught me that the USD is far from a perpetually strong currency and other developed foreign currencies, including the SEK, will have their day in the sun when the darkness and clouds envelope the USD once again as in the past. I can wait for the worm to turn and for those blue and red lines to converge which recently happened with the USD priced Swiss ADRs. Hopefully the ordinary shares priced in SEKs will have gained in price when the USD falls in value back to buying around 6 SEKs (or thereabouts) rather than 8.34 or so now.

10 Year USD/SEK Chart:

As shown in this chart, the SEK is currently near a ten year low against the USD:

While the USD may continue its parabolic moon shot against other developed country currencies, those type of events have a tendency to collapse upon themselves and are eventually self-correcting. The U.S. economy slows due in part to a strong currency while weaker currency nations enjoy an acceleration in growth. Inflationary pressures decrease for the stronger currency nation and increase for the weaker currency ones who later abandon abnormally low interest rates as inflation turns up with GDP growth and lower unemployment.

A long term Dollar Index chart shows the ups and downs of the USDs value against a basket of six foreign currencies weighted in the Euro: DXY Index Chart The latest rise looks and smells like a typical parabola that will collapse.

The same kind of parabola can be seen in the WSJ Dollar Index and the Bloomberg Spot Dollar chart that include more foreign currencies in the basket: BBDXY Chart -Bloomberg Dollar Spot Index

Prior Trades: None

Recent Earnings Report: For the 2014 third quarter, SCA reported a net profit of SEK 2,106M or SEK2.68 per share, up from SEK 2.06 per share in the year ago third quarter.

Organic sales growth was 3% in the January-September 2014 period compared to 2013 (4% when including Vinda's organic growth)

I took a snapshot of material operating items that are self-explanatory:

The 2014 E.P.S. for the nine month period was SEK 7.35, up from SEK 5.28 in the comparable nine month period in 2013.

Interim Report Q3 2014 - SCA Corporate
More Detailed Report: PDF

Rationale: Earnings and the dividend are both accelerating, and the valuation is reasonable for a consumer products company.

The foothold in China through Vinda is another reason for this purchase. While that stake is currently worth about 5% of SCA's market capitalization, there is certainly growth potential in China and the Vinda investment could become far more valuable in the years to come.

Other than dividend hiccup during the Near Depression, SCA is growing its dividend in the mid-single digits.

Given the huge decline in the SEK's value vs. the USD, I have a long term potential for a currency gain in the ADR when the worm turns against the USD and it will sooner or later. I can afford to wait for that happen.

Risks: As shown in the preceding chart comparing the ordinary and ADR share prices, currency risk is material.

SCA faces formidable competitors including Proctor & Gamble and Kimberly Clark in its personal care and tissue product lines. The quality of those two competitors is a major headwind for SCA in my opinion.

The publication paper business sector is in a long term secular decline.  Some of the other forest products sold by the company are cyclical and more dependent on an economic recovery than the personal care and tissue products with relatively stable inelastic demand.

Future Buys and Sells: I do not have a target price. When buying first a 50 share lot, I am anticipating the possibility of buying another 50 shares at a lower price. I will want a $1 per share lower price than my first purchase at $22.27 or a 4.5% to 5.5% share price decline.