Portfolio Update October 2021

During October we have seen a substantial amount of companies report their Q3 earning, some have reported record profits while other have disappointed all expectations. A normal quarterly flow of reports, some good, some bad and others do not move the markets. As stocks have their own rhythm there are new investment channels such as crypto currencies, NFTs (non-fungible token) and most likely something I haven't even heard about yet. The new channels have taken people with storm, increasing in value beyond my understanding.  

As my portfolio swing month to month it is interesting to follow-up which are the biggest holdings based on market value.

 Currently my largest portfolio holdings are 

1. Nordea Bank 9,03%
2. Telia Company 8,65%
3. GlaxoSmithKline ADR 6,52%
4. BASF 6,05%
5. 3M Co. 5,72%
   

 The five biggest holdings represent almost 36% of my portfolio while top 10 largest holdings represent over 60% of my portfolio. Many might say it is a risky portfolio and poorly diversified, these people usually interpret volatility as risk while for me volatility is only opportunity. Risk is the probability of losing the investment in any form, meaning either the company files for bankruptcy without any recovery possibilities or the risk that the company loses its competitive edge and therefore sees a significant reduction in its value. There are many other views on risk as many would just use the theoretical systemic and firm specific risk and justify that volatility reflects both. 

During October a few minor changes in Top 5 largest holdings was that BASF dropped from 3rd largest holding to forth, overtaken by GlaxoSmithKline. 3M Co rose to fifth place while The Kraft Heinz Company dropped to sixth place. As I have been increasing my position in Telia it has remained one of the largest holdings in market value even as its market value has dropped.

 More details and current market value can be found on the Portfolio page.

Portfolio changes

 A few changes made during October, as usual just increased positions. Mainly looking at companies that underdelivered to market expectations and are undervalued in cash flow and which most likely could be sold at a premium to current value.

Telia

 Bought 110 shares to decrease the purchase price and to increase the coming dividend. Have a total of 1 440 shares now at a weighted average purchase price of 3,75€ compared to 3,77€ before. 

Telia announced their Q3 earnings which did not surprise me, yet the market was expecting better results based on reactions. 

Kone

Kones share dropped after Q3 publication as investors worried about Chinas impact on future profits. This gave me the opportunity to increase my position to 7 shares at a price of 57,24€, had 3 shares before at 57,25€. 

China is a large and important market for Kone, but I expect Kone to adjust fast to market changes and keep their competitive edge to competitors. A quarter here and there has hardly had a long-term impact on a company, except when they have used fraudulent accounting or deceived the public for a long time. 

Handelsbanken Latin Amerika mutual fund

Bought 30€ worth in Handelsbanken Latin Amerika fund partially driven by the decreased value, also as my long-term view remains the same. Latin Amerika has not recovered from COVID-19 caused issues and there are signals of unrest in some countries. 

Citating Baron Rothschild (not 100% sure he actually said it)

"the time to buy is when there's blood in the streets"

Dividends

October was a good month as Nordea Bank paid out their dividends for year 2019 and 2020 (note 2019 dividend should have been paid in Spring 2020, yet corona interrupted it). Old Republics extra dividend and GlaxoSmithKlines dividend helped reduce the gap to short-term goal yet not able to achieve it this year.

YTD dividends are about 1 600€ which is 600€ from the short-term target. Since December 2020 portfolio has received 1 740€ in dividends and all has been reinvested. The investments made in Bayer AG will hopefully give a return two years from now. Expecting Telia to pay the same dividend of 2 SEK per share next year which will increase my dividends unless SEK falls in value to EUR next year. 

Sampo has gathered some funds from the sale of its Nordea Bank shares and they announced at least a dividend of 2€ per share in 2022 which will help narrowing the gap. 

Bayer AG an undervalued company or still high risk

 Is Bayer AG an undervalued company or still high risk due to RoundUp! court cases?

Will shortly review Bayer from my perspective and apply similar principles as with my Alibaba review, first financials, dividends and then the political or in Bayer's case the damage lawsuits impact on shareholder value. One important question be answered, is Bayer AG undervalued excluding RoundUp! and what is the case when we add RoundUp!? This will be mainly a summary of historical number and not speculation around Bayer's future profits.

Let's jump straight into the numbers.

 

4x Daily Market Reports With Hammerstone Markets!

 

Bayer AG Financials

Starting with Bayer's income statement since 2004 we see good revenue growth, stable gross margin while operating and net profit swings a bit. The biggest swings are due to one-off items, yet the goodwill write down made 2020 had a huge negative impact. Here we clearly see the importance of due diligence in big mergers and acquisitions as the Goodwill can eat up most of a company's equity in a very short period.

Income Statement

Revenue and gross profit including the gross margin in percentage has been very good and what we should expect from a pharma company. Even after Monsanto acquisition gross margin in percentage has stayed on the better side of 50 %. Since 2004 Bayer AGs revenue has grown by 2,35% per year which is a bit modest comparing to smaller companies, however for a big company like Bayer it is a proper result. 

The positive part is the gross margin and that we see a small growth in revenue. Even if there was years with almost no growth or declining revenue it still is normal for every company and I do not worry that much about it.

Next up is Operating profit, an operating margin %. As the graph displays the margin and profit has been growing with the business from 2004 until 2018 when Monsanto acquisition was finalized. Operating margin in % dropped from a healthy 16% to under 10% (around 9,6-9,9%) which clearly reflects the negative impact from Monsanto. Only in 2004, 2009 and 2010 did Bayer have a operating margin in % below 10%, if this is the new standard then one question I ask is, what shareholder value was created with Monsanto acquisition?

Net profit is what many look at and also EPS (earnings per share), as this is the result the company makes and could distribute to owners in many forms. Bayer AGs net profit has been developing well since 2004, a few highs in 2007, 2016 and 2017 mainly driven by non-reoccurring payments. In 2020 we see a big drop caused by goodwill write-down of around 2,2 billion euros and significant legal risk of 13 billion euros all related to the Monsanto acquisition (available in Bayer AGs 2020 annual report notes on page 189, other operating expenses). Without these two items we would have seen a good result from the company, however the legal claims and goodwill value of Monsanto is still a big question. We will see the impact on Bayer's balance sheet of the legal claim and goodwill write-down.

 

 Bayer's pay-out ratio has been moving a bit, yet dividends have risen since 2004 by 364% or equivalent to 8,4% on an annual basis. Note that Bayer decreased their dividend in 2020 from 2,80 euros to 2,00 euros reflecting the bad result in 2020. We also see that in 2018 Bayer paid out more than their result was for the year, looking a bit back that has a minor impact due to earlier years good results and lower pay-outs. If Bayer's EPS stabilizes to the average from 2004 to 2020 we would talk about an EPS of around 2,51 euros which sounds a bit low considering Bayer's normal business and operations. However, do understand why the stock is moving in the range of 46 to 49 euros.

Balance Sheet

Bayer's balance sheet will be discussed only briefly, will mainly focus on equity and goodwill per share as in 2020 their balance sheet ha more in goodwill then equity alone. 

Equity per share has grown well an equity ratio has displayed the same patter until 2014 were we see equity ratio drop from 40% to 29%. The reason behind the drop comes from 13,5 billion euros in acquisitions mainly funded by long-term debt. Bayer acquired Argentinian crops science company Biagro Group, Merck & Co Inc's consumer care business (largest acquisition that year) and Chinese Dihon Pharmaceutical Group. The graph clearly displays how equity ratio drops in 2014 while goodwill jumps to new highs. Still in 2014 Bayer had more in equity per share than goodwill per share which changed in 2020 due to the legal risk associated with RoundUp! legal claims mainly in USA. Note that the write-off of goodwill in 2020 has an impact both on equity as well as goodwill (a net zero game).

As 2018 shows we see the Monsanto goodwill impact with an all-time high in 2018.

I usually get worried if a company has more in goodwill than equity, goodwill if not real value is a risk factor for owners. It can be easily written down causing huge negative impact to shareholders and increasing the firm specific risk. I still see some risk of goodwill write-owns coming in Bayer's case yet limited in the long run.

Summary of Bayer AG

Removing the legal reservation and goodwill write-own in 2020, Bayer would have made a more normal net profit of around 4,5 billion euros and an EPS of around 4,59 euros per share. This is however just a simple calculation yet does not display the possible future cost from Monsanto. 

To summarize Bayer, I would not say it is under current circumstances a undervalued company. There are many risk factors associate with Monsanto that can have negative impacts in the future. Once these risk factors are taken care of then Bayer can proceed to making more normal results I would expect the net profit to land around 4 euros per share. Considering this if a bit in the future the current market price is fair.

Portfolio update September 2021, when there is not enough cash

 In September the market did move up and down as if there is a storm coming and some analyst, influencers and other do think so. They might be right, and they might be wrong, it might be the coming interest rate increases or it might have been Chinese Evergrande crisis causing the fear to rise once more. 

If we look at stock market history, we see a lot of fears and "happy joy joy" moments, some crashes and fast rises. This is normal and nothing to be afraid of, that is my opinion, I sleep like a kitten during turbulent times and dream of buying even more shares as the market crash. That's just me. 

The drop in value did create opportunities for me to increase my positions in companies mentioned below. I did invest more than the two scenarios I created to see if possible to reach the goal of 1 million euro portfolio (link to post here), the yield will be the challenging part, however we shall see what the outcome will be. 

Veolia has a rights issue ongoing to purchase the remaining 70% of Suez in which I will participate, yet only 2 shares will be bought (short post about the acquisition).

The graph below displays portfolio development to long-term goal of 100 000 euro, still a way to go as the market value on September 30 was 55 584,23 euro. During September my portfolio fell below the short-term goal of 55 000 euro market value, yet increased above mainly due to my additional purchases. I did want to buy even more shares in all the below companies and some other yet run out of cash. Will have to wait for the coming dividends as well as next paycheck.

Portfolio Changes September

Alibaba (ticker BABA)

Increased my position by 2 shares at $148,90 as the market value dropped, weighted average purchase price decreased from $212,98 to $205,61. I still find Alibaba a good investment in the long run even thought I have heard some negative comments about Alibaba mainly relating to it being under Chinese regulation. The important question to me is, will Alibaba still exist 20 years from now and will they have grown even more and profitable? My opinion is yes, the political risk will not ruin Alibaba so I will hold my position.

Bayer AG (ticker BAYN)

 Increased by 1 share to a total of 38 shares, weighted average purchase price decreased from 61,12€ to 60,76€. Still buying Bayer even if some might have lost hope with all the problems they manage to run into. Bayer has good products that help people and do see a future with Bayer still as a significant player with proper dividends and good growth. 

Telia (ticker TELIA1)

 Bought 30 shares in Telia in the price range of 3,53€ to 3,61€, weighted average purchase price did not move and remained the same at 3,77€ a share. Telias dividend is expected to be paid in beginning of November, will be 1 330 SEK gross and around 1 130,50 SEK net of withholding tax, around 111€. A good contribution and improved reinvestment opportunities.

Telias stock has taken a beating for some years, corruption scandals have hurt Telias reputation. The divestments made might have a positive impact and hope Telias current management is able to improve their reputation and get it on a small growth path.

Dividends

Received a total of 97,83€ in dividends during September, a little more than in June. my position in Pfizer received a full dividend for all 12 share and Wells-Fargo increases their dividend from $0,10 to $0,20. As the graph below displays the biggest dividend months have been April and May, when European companies pay their annual dividends. 

In October there will be a small dividend party as Nordea pays a dividend for 2019 and 2020 as well as Old Republics on-time cash dividend.

Below graph shows the monthly net dividends as well as cumulative net dividends, year to date I have received 1 184,42 euro which is 54% of my short-term goal. The gap will be reduced a bit however not enough to reach the full short-term goal, hopefully next year.