Wednesday, February 25, 2015

Bought 100 Holcim (HCMLY) at $15.41/Bought 50 ANZBY at $27.24/Sold 100 ARCC Roth IRA at $17.05

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:

According to data compiled by Wells Capital, the median P/E for NYSE listed stocks with positive earnings was substantially higher in 2014 than in 2000. The excessive valuations for large capitalization stocks caused the overall P/E numbers to be higher in 2000.

I left a comment to a SA article that referenced that report: Don't Kid Yourself: Stocks Are Just As Overvalued Today As They Were In 2000 | Seeking Alpha


1. Bought 50 ANZBY at $27.24 (see Disclaimer):

Snapshot of Trade:

Ordinary Shares/ADR: I bought the ADR that trades on the U.S. pink sheet exchange. Australia & New Zealand Banking Group Ltd. (ANZBY)

1 ADR = 1 Ordinary Share

The Australian stock market had closed when I placed my order. I converted the AUD$35.04 closing price in Australia to arrive at the USD equivalent ADR price:

Ordinary Shares Quote:  Australia & New Zealand Banking Group Ltd. (ANZ:ASX)

AUD=Australian Dollar

AUD/USD Interactive Chart

Five Year Chart-Ordinary Share: ANZ:AU Stock Chart

Company Description: The Australia & New Zealand Banking Group Ltd.  (ANZBY) is one of the top four banks based in Australia and is within the top 25 banks globally based on market capitalization.

ANZ is expanding its presence in Asian markets. The compounded annual earnings growth rate in Asia was 37% over the six year period ending 9/30/14: Media Release.pdf The goal is to have Asian sourced revenue to generate 25% to 30% of the group's profit by 2017 (page 22 of Annual Report)

I took a snapshot of the annual reported financial information starting in 2010 through 2014 that shows improving results.

All amounts are expressed in Australian Dollars:

Sourced: Page 196 from the 2014 ANZ Annual Report.pdf

Basic earnings per share increased from $1.789 to $2.671. The dividend increased from $1.26 to $1.78. Tangible book value per share increased by 41.13%. The 2014 tangible book value per share was reported at $14.65. At at AUD$35.05 price, the shares were selling at 2.39 times tangible book.

2014 ROE: 15.8%
2014 ROA:   1%

Net Interest Margin: 2.13% Down 9bps from 2013 (page 16)
2014 Operating Expenses to Operating Income: 44.7% (page 18)
Basel III Common Equity TIER 1: 12.7% (page 20)

ANZ's senior debt is rated AA- by S & P and Aa2 by Moody's. Corporate Overview

Comparison Chart ANZBY vs. ANZ:AU: The following chart highlights both the currency risk and opportunity inherent whenever an investor buys a USD priced ADR. The price of the ADR will reflect the ordinary share price in its local currency converted into USDs.

Over the past year, the AUD has fallen significantly in value against the USD and that decline will flow through into the performance of the USD priced ANZBY causing the ADR to underperform the ordinary shares priced in AUDs.

The AUD/USD hit a high around 1.1035 on 7/28/11. If the ordinary shares had closed at AUD$35.04 that day, the closing price from 2/23/15, the equivalent USD price for the ADR would be $38.6665, or a 42.54% gain in the ADR price just from that increase in the AUD's conversion value into USDs.

By buying the ADR on 2/23/15, I can only say with certainty that the currency risk between 1.1035 and .7846 has been removed from the ADR purchase. I now have the downside risk below .7846 and the upside potential above that number.

Dividends: The dividend growth history is good for a bank, except for the Near Depression period when the dividend was cut. Dividends are paid semi-annually with the first payment made in July with a May record date and the larger amount paid in December.

The dividend growth rate is shown in the following table.

The 2003 annual rate was AUD$.98 which had grown to AUD$1.78 in 2014.

The dividend was cut in the Near Depression period, going from AUD$1.36 in 2007-2008 to AUD$1.02 in 2009. The bank then started to raise the rates in 2010 to the present. The 2011 rate of AUD$1.4 surpassed the annual rate in existence before the slash.

A dividend cut within the past 25 years automatically disqualifies a stock for purchase under my dividend growth strategy. Under the circumstances, the dividend cut was understandable and the dividend rate remained relatively high and considerably better than the 1 cent quarterly rate paid by Citigroup and Bank of America between 2009-2011:

Citigroup Inc. (C): $.01
Bank of America Corporation (BAC): $.01

The annual rate was AUD$.21 in 1994. Using an online calculator, I computed the percentage growth from that annual rate to the 2014 rate as 747.62%. Dividends | ANZ Shareholder Centre

If I assumed a AUD$1.78 dividend rate, with no dividend raises or cuts, and used the conversion value as of 2/15/15, the USD equivalent would be $1.4048 per ADR share or 5.15% based on a total cost per share  $27.24. If I assumed a conversion rate of 1.1035, the average for 7/28/11, the USD equivalent would be $1.9642 or 7.21% based on the same assumption except for the currency exchange rate.  I do not anticipate a return to a 1 for 1 parity anytime soon. The AUD is viewed by many as a commodity currency, and commodity prices are depressed now. Iron ore, one of Australia's major exports to China, has been smashed in price due to lower demand and more supply. Iron Ore - Monthly Price

The actual amount per ADR share will vary based on the dividend paid in AUDs and the conversion rate from AUDs into USDs. The foregoing just gives me a ballpark kind of guess. The dividend yield would be higher based on the AUD/USD gaining in value above .7892 used for purposes of the preceding hypothetical and will also change based on an increase in the dividend rate above what was paid in 2014.

Foreign Withholding Tax-None As Long as Dividend is "Fully Franked": The snapshot also shows that the dividend payments since 1993 have been "fully franked" which simply means that Australia will not withhold a tax on the dividend payment. Once an Australian corporation pays 30% at the corporate level, there is no tax on the dividend distribution. Australian Taxation OfficeAustralian taxation of dividends

Recent Earnings Report: Australian banks provide detailed earnings information twice per year. The last detailed report was for the F/Y ending September 30, 2014. The interim report for the Q/E 12/31/14, which is simply called a "trading update", was released in February 2015 and caused a 2% price decline in the shares. Reuters

For the first quarter of the 2015 F/Y, the bank reported an unaudited cash profit of AUD$1.79B,  up slightly from AUD$1.73B in the 2014 F/Y first quarter.

Comparison 2014 4th Quarter with 2013 4th Quarter:

More detail is provided in the Investor Presentation. The internationally comparable Tier 1 and total capital ratio were 13.8% and 16.1% as of 12/31/14 (page 4)

The Australian Prudential Regulation Authority apparently has a different formula than Basel III for calculating capital ratios. The following snapshot discloses the differences:

Rationale: I am treading cautiously given the risks discussed below.

The core reasons for this purchase are simply stated as follows:

1. The current dividend yield is close to 5.15%, based on the assumptions outlined in the dividend section above, and ANZ has a long history of dividend raises and one modern era dividend cut.

2. A lot of the currency risk has been eliminated with the AUD/USD at .78. While the AUD could continue to decline, I simply view the balance of the currency risk/reward to tilt in favor of reward at that level. A substantial price gain could be realized by a return to parity assuming no change in the AUD priced ordinary shares.

3. The expansion outside of Australia and New Zealand gives the bank exposure to Asia's growth markets.

4. The bank appears to be adequately capitalized and prudently managed as shown by its performance in the Near Depression period compared to similar sized institutions in the U.S. and Europe. The 2011 Annual-Report shows a decline in profitability from AUD$ 4.18B (2007) to AUD$2.943B (2009) but the profit then accelerated back to AUD$4.401B in 2010 (page 84). Overall, I view that decline and rebound positively under the circumstances and particularly compared to other large banking institutions in developed markets outside of Canada and Australia.

Risks: I would classify the currency risk and a possible meltdown in Australian property values to be among the primary risks. The currency risk is highlighted by the one year comparison chart shown above.

The concerns about Australian and Canadian banks are similar. The concern involves a potentially dangerous mix of rapidly increasing home prices outpacing growth in real disposable incomes in the context of abnormally high consumer debt levels to disposable income. In Australia, the problem is being aggravated now by banks increasing the number of interest only loans that are more susceptible to defaults. I suspect that is being done to make the payments affordable to some families but that practice needs to stop altogether. It helps to catapult prices higher in an unsustainable manner.

I am not going to summarize those risks in detail and will simply point anyone interested to some recent data:

A number of important charts about household income, debt and net worth can be found in the 2014 Trends in Household Debt published by the Australian Bureau of Statistics. Australian Social Trends, 2014

I took a snapshot of two charts:

That last chart is not similar to the FED's DSR ratio which includes all debt service payments (principal and interest). Household Debt Service Payments as a Percent of Disposable Personal Income -St. Louis Fed

Real household wealth hit $323,000 at the end of 2013.  The average real price of residential dwellings was reported at $539,400 as of 12/31/13, up from $500,700 in September 2012.

The biggest increase Y-O-Y  in residential home prices was a 12.2% rise in Sydney's. 6416.0 - Residential Property Price Indexes: Eight Capital Cities, Dec 2014

The 2014 household savings rate in Australia was reported at 9.5965%, almost twice as high as the 4.65% for Canadian households, which is one mitigating factor in favor of Australia compared to both Canada and the U.S. Economic Outlook No 96 - November 2014 - OECD Annual Projections : Household saving rates - forecasts

"Australian Bank Risks Have Risen with House Prices" – Fitch 

"Don’t lose sleep over mortgage debts" - QV Equities Ltd.

Charts on Australia's Economy Presented by Australia's Central Bank February 2015  (see page 6)

A recent stress test conducted by the Australian regulatory authority highlighted the ability of the Australian banks to weather a significant downturn.

Link to APRA's Stress Test Article: Seeking strength in adversity: Lessons from APRA's 2014 stress test on Australia's largest banks

An ongoing regulatory review may require Australian banks to increase their capital. Bloomberg BusinessMurray Financial System Inquiry recommends raising capital requirements for Australian ADIs There are securities other than common stock that meet the equity capital qualifications.

ANZ recently floated a hybrid security that qualifies as Additional Tier 1 capital: ANZ Capital Notes 3 Prospectus.pdfANZ-first hybrid of 2015

The company describes risks incident to its operations starting at page 197 of its 2014 Annual Report.pdf.

I do not have a target price. I may average down, but not up. Given my assessment of the risks, I doubt that I will accumulate more than 100 shares. I also currently own National Bank of Australia. If I see more prudent home lending practices, and a much needed slowdown in the currently hot property markets, I will consider buying more than that current limit. I also currently own National Bank of Australia, and have traded that stock in the past successfully so far.

2. Bought 100 Holcim (HCMLY) at $15.41 (see Disclaimer):

Snapshot of Trade: I bought the ADR using USDs on the U.S. pink sheet exchange: Holcim Ltd. (HCMLY)

Ordinary Shares/ADR: 1 ADR= .2 Ordinary Shares

HOLN:SIX Swiss Stock Quote-Holcim Ltd

$77.2639 ÷ 5= $15.45 equivalent ADR price

1 Year Chart Ordinary Share vs. ADR
The ADR has gone nowhere over the past five years: HCMLY Interactive Stock Chart The current price is about where the stock was trading back in April 2010. Since that time, the shares have traded down to near $10 and as high as $18.50+ last year.

The shares certainly do not qualify as a momentum play. The stock does not qualify under my dividend growth strategy or my large cap valuation strategy. This stock is basically an outlier to all strategies except the one based on feel. The OG feels that the next five years will be better than the last five for this company. The last five years has not been an optimal period for cement and aggregate companies, particularly one with significant operations in Europe.

Company Description:  Holcim Ltd. ADS  (HCMLY) is one of the world's largest suppliers of cement and aggregates (crushed stone, gravel and sand.). The company is based in Switzerland and the primary market for the ordinary shares is the Swiss Stock Exchange.

On April 7, 2014, Holcim and Lafarge announced an agreement to merge. The terms of the agreement is for Lafarge shareholders to receive 1 Holcim share for each Lafarge share. Both parties are still working on acquiring all necessary government approvals. Some operations will need to be sold in order to satisfy regulators. ReutersWSJ,European Commission Press release: Commission approves acquisition of Lafarge by Holcim, subject to conditions

The following snapshots summarize Holcim's worldwide operations:

Holcim does have a significant presence in several emerging markets including significant operations in both China and India.

Page 78: Map of Plants in India and, Asia-Pacific
Page 82: Map of Plants in Mexico, Central and South America
Page 86: Map of European Plant Locations
Page 90: Map of U.S. and Canada Plant Locations

The ownership interests in foreign subsidiaries is detailed starting at page 219 of the Annual Report.

2014 Annual Report.pdf

Dividends: Holcim's policy is to distribute one third of consolidated profit attributable to its shareholders as an annual dividend. Given the uneven profit amounts since 2007, the dividend rate was reduced three out of four years before bottoming at CHF 1 per ordinary share or CHF .2 for the ADR.  

Holcim Ltd - Dividend policy

Recent Earnings Report: For the Q/E 12/31/14, Holcim reported a net profit of 355 million francs, significantly better than the consensus estimate of 324M, and up from 233M during the 2013 4th quarter.  Net sales increased to 4.87 million francs from 4.78M in the year ago quarter. Cost cutting contributed 748M francs to the 2014 operating profit.

2014 Annual Report .pdf

Holcim Earnings Press Release

Rationale: I can not justify this purchase using my standard criteria. The erratic dividend, the dividend cuts, and the low dividend yield obviously disqualify this purchase under a dividend growth strategy.

The TTM P/E and estimated P/E based on 2015 E.P.S. estimates are too high for the large cap valuation strategy. Bloomberg has the TTM P/E for the ordinary shares at 18.65 and 17.86 based on the estimated 2015 E.P.S. of CHF4.123, both based on a closing stock price of CHF 73.65.

Instead, besides increasing my exposure to assets priced in Swiss Francs, which I generally view as desirable long term, I am playing mostly my relatively upbeat opinions about worldwide demand for this company's products over the next decade. It either happens or it falls flat. The shares have certainly been a disappointment to someone purchasing a position five years ago.

Risks: With worldwide operations, including plants in several developing countries, the company is exposed to a variety of currency and country risks.

It is hard to say when there will be a worldwide, sustained pick up in demand for cement and aggregates.

For 2015, Holcim sees flat demand in Europe. The U.S., India, Indonesia, Mexico, Colombia, the U.K. are expected to be the "main growth drivers". The company expects Asia-Pacific to grow but continuing at a "modest" pace. Excluding merger costs and without including Lafarge, the company expects operating profit to be in the CHF 2.7B to 2.9B range in 2015.  If achieved, that range would be an improvement over the 2014 adjusted operating profit of 2.466B francs. The company will need to string together several years of profit growth for the shares to significantly rise in value, in my opinion. By significant, I would mean a $20+ ADR price that is solely due to a rise in the CHF priced shares (i.e. excluding currency impact on the ADR price)

The company has a lot of debt with the amounts and maturity schedules shown starting at page 199 of its 2014 Annual Report.pdf

The company discusses risks incident to its operations starting at page 167 of the 2014 Annual Report.

There is also currency risks, and potential currency benefits, to the owner of the USD priced ADR. Generally speaking, a rise in the CHF's value against the USD after my purchase will cause the USD priced ADR to outperform the ordinary shares traded in Switzerland and priced in CHFs. The converse is also true. A decline in the CHF flows through into the price of the ADR.

The worst scenario is for both the ordinary shares and the CHF to decline after purchase-the Double Whammy. The best scenario is for the ordinary shares and the CHF to rise after purchase-the Twofer.

Future Buys and Sells: I am not likely to buy more. I do not have a target price. I am hoping for a gradual and persistent improvement in worldwide demand for concrete and aggregates that will lead to consistently higher profits and dividends and consequently a much higher share price. That hope is based in large part on my relatively upbeat views about world GDP growth over the next decade. Demand conditions are been poor for cement companies starting with the Near Depression and continuing with its aftershocks that have restrained government spending for infrastructure projects (outside of China) and new residential construction.

New residential construction in the U.S. remains near the low points in prior recessions, which is not surprising given the role of that sector in the near collapse of the world's financial system: New One Family Houses Sold: United States-St. Louis Fed

3. Sold 100 ARCC at $17.05 (see Disclaimer):

Snapshot of Trade:

2015 Sold 100 ARCC at $17.05

Roth IRA History:

Dividends: $157


2015 Roth IRA ARCC 100 Shares +$19.97
Total Return: $176.97

Remaining ARCC Position-Taxable Account Only:

The 50 share lot purchase discussed in an  October 2014 SA Instablog is included in the remaining 100 shares. Bought 50 ARCC At $15.41-A Typical Small Lot Purchase Of An Externally Managed BDC Stock - South Gent | Seeking Alpha The other 50 share lot was purchased in 2011: Bought: 50 of the BDC ARCC at $16.17 (1/21/11 Post)

Rationale: I have decided to gradually eliminate BDCs from my IRAs, now viewing their many disadvantages to be inconsistent with the capital preservation emphasis in those accounts.

My tipping point was reached when both FSC and PSEC slashed their dividends and continued to report significant declines in their respective net asset value per share as the external managers feasted on more income for themselves. These two BDCs and several others exist to enrich the external managers. Their relatively high dividend yields are the honey to attract individual investors, desperate for yield, to buy shares, a necessary precondition to the wealth generation for the external managers. Many of those mom and pop investors fail to notice that assets are being incinerated over time that results in a lower share price gradually working its way to zero.

I previously sold a 70 ARCC share lot in another ROTH IRA account. Sold Roth IRA: 100 PNNT at $9.53 and 70 ARCC at $16.87-Balancing Risks and Rewards (2/17/15 Post)

I have no ARCC position in an IRA account now and will not initiate one again.

I realized my general goal for a BDC stock. I harvested several dividends and exited the position at a profit.

While I view ARCC to be the best externally managed BDC, that is faint praise. I have been very critical of externally managed BDCs in this blog, and I am now just fed up with them.

I will be looking to sell the few remaining BDC positions held in IRAs when I can do so at a profit. Once a position is eliminated, I will not buy the shares back.  

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