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.

A review of Alibaba Group

 Since the market value of Alibaba has fallen and I have a decent amount invested in the company, I decided to make a quick review of Alibaba. How does Alibabas financials look like? What is Alibabas political risk? These questions will be answered.

Alibabas Group (ticker BABA) has fallen and shows a decent minus in my portfolio, even though only 14 shares at $216 the unrealized loss would be painful with -21% of invested amount. Link to portfolio page from where you can see the latest market price of Alibaba, its return and weight of my portfolio. 

I do not see any operational changes and I am left pondering is it something wrong with the financials or is it political. There was the sexual assault scandal at Alibaba but would not be surprised if many other big companies have the same issue however are covering it up or handling it better. Sexual harassment or assault in any way or form is not acceptable and do expect Alibaba to take required actions. 

Back to numbers.

Alibabas financials

The numbers are from Alibabas 20-F filings and are all in USD, EPS (earnings per share) are for ADS which is equivalent to 8 ordinary shares. I will quickly start with the balance sheet and then proceed to the income statement and end with some key ratios.  

Balance sheet

Alibabas balance sheet is displayed in the below graph where we see that total assets have grown every year since 2015 while the equity ratio has remained stable. Alibabas equity ratio was at lowest 51% in 2018 and 2019 only to increase to 55% in 2021. This means Alibaba is profitable and reinvesting its earning into the company. It is exceptional that a company growing at this paste would be able to remain the high equity ratio unless it does what Alibaba is doing, reinvesting earnings. In the long run if Alibaba can remain on the same path the company can grow significantly and at some point might be able to declare dividends. 

 

 Alibabas current ratio has remained good, mostly around 1,90 except 2019 when it temporarily dropped to 1,30. Still good and means the company can handle its short-term obligation without any major problems. A ratio I use to see how fast a company can be debt free is cash to liabilities ratio, basically based on 31 March 2015 annual report Alibaba could have paid all their debt with the cash at hand, making the company debt free. 

Alibabas ROE (return on equity) has been outstanding, even though the company has a high P/B-ratio. The ability to return a high return on equity is important for any company as it states is the management can utilize the assets and cash at hand. Alibabas ROE has been very good.

Income statement

The following two graphs show Alibabas revenue development and net profit development since 2015. We can see that revenue has grown at a huge rate of almost 44% per year until 2021. The graph clearly shows that the growth rate has been above 40% from 2018 meaning Alibaba has been able to grow its revenue over 40% per year for 4 years. This is a huge achievement for any company, as we look further down the net profit has not followed the same growth patter as revenue. As Alibaba develops its operations and invests back in the business, while getting fined by Chinese government we can expect the profitability to rise at a slower paste than revenue.

In the above graph is Alibaba Groups revenue in million USD per year displayed in blue columns and scale on the left axis while annual compounded revenue growth is the red line and scale on right axis.

The graph below shows how Alibabas net profit has developed since 2015 until 2021. We see a strong growth rate and spike in profitability in 2016 while returning to a more modest growth rate of 28% to 40% between 2017 and 2021. The net profit margin of Alibaba has remained strong of a minimum of 20 % of revenue (2020). A net profit margin of over 20% is very strong for any company, many times banks and financial institutions have a similar strong net profit margin.

Above graph displays Alibaba Groups net profit in million USD per year in blue columns and scale on the left axis while red line shows the compounded annual growth rate of net profit. 

Alibabas segments

Now Alibaba has four operating segments, core commerce, cloud computing, digital media and entertainment and innovation initiatives. Of the four core commerce is the biggest with almost 87% of the total revenue and the only segment with a positive operating profit and EBITA. Of all the segments Alibaba has I find cloud computing the most interesting one and the one with a huge future potential. Cloud computing covers areas like big data analytics, machine learning, storage and elastic computing. If we look at Alibabas competitors like Amazon and Microsoft, they also have recognized the value of clouds and storage of data which is a big revenue stream for them with a tasty margin. Media and entertainment look interesting and do see it as a challenger to Western as well as locally in Asia as a possible profitable business, it will just take time and a few big hits.

P/E-ratio

Alibabas has a high P/E-ratio of 20,13 given the stock price of $168,10 and the last earnings per share of $8,35. Considering a tech-company and the growth opportunity the ratio is modest yet reflects the political risk associated with Alibaba.

Alibabas financials discussed

 Based on normal financial KPI’s (key performance indicators) Alibaba can be considered a bit expensive. At least P/B- ratio is very high at current market value. However, P/E-ratio is on a more moderate level for a company growing in the same speed. A fact that must be faced is that no company can grow forever and that needs to be considered in Alibabas case. To sum it up I still see Alibaba from a financial perspective a valuable company which will contribute with growth to my portfolio in the long run.

Political risk

Currently the biggest risk with Alibaba would be political or Chinese government in my opinion. The Chinese government has hit hard on different tech companies by adding legislation and forcing reduction of dominant position. This risk is reflected in market value and seems like many are expecting future fines and less profitable business. My opinion is that the market reaction is short sighted, and that Alibaba will recover just like rest of Chinese tech companies. Reason lies in Chinese government not wanting to scare businesses away as it employees and ensures discipline among citizen. If people have a job, they are less eager to rise against authority and governments limiting business loose tax revenue. I see the Chinese government regulation tech companies to ensure nobody gets a monopoly, which is good. Some companies do start with predatory pricing to remove competition only to raise prices afterwards. 

Let us see what the actual outcome of government actions will be and how hard it will hit Alibaba.

Conclusion

My conclusion is that I will not sell my Alibaba shares as I see a good future. There will most likely be days when the market value is below current value of $168,10 and days it is above. The business will continue and they will come up with good future solutions and value generating services for customers. I will continue to hold my shares in Alibaba if the business changes I will have to review it and my position.

Portfolio Update July 2021

 During July I increased my positions a bit as all dividends were reinvested. Bought shares in AT&T, Bayer and Alibaba while wondering if any position should be decreased or liquidated. Companies or mutual funds on reduction or liquidation list is Handelsbanken Latin Amerika, DigitalBridge Group and Ventas. Made net investments, meaning I bought more than my portfolio received in cash inflow (dividends and cash from sales). Haven't been that lazy investor lately even though mainly bought companies I already have and which market value is below purchase price. For me the laziness comes from not buying and selling all the time, instead as many times mentioned, looking for value now and not worrying to much about the future.

July was interesting as on Monday 19th global stock markets dropped around 2%. Which is a big movement, I was on the buying side that day covering the pessimistic market. Bought AT&T and Bayer AG however not at their bottom. Afterwards I was disappointed of only being able to invest a small amount. Would like to have at least ten times the money to invest every month.

My Summer holiday started in July with two weeks off, will continue with two weeks end of August. Sunshine and increasing covid-19 cases was the topic of my holiday. Have people not learned anything in the last 12 months? If they just could use a mask and take care of their hygiene, we would be in a better situation today. It did not ruin my holiday or hotel stay but has made me a bit frustrated as every day you see people neglect any form of common sense.

Holiday also started with some additions to my wardrobe, did spend a lot on clothes, almost 500€ in total on a pair of shoes, pants, shirts and jackets. Lloyd shoes and Oscar Jacobsen jackets do have a fat normal price so did what I usually do, buy at discounts and off-season. 

Also spotted that I had forgotten to update my Kone Oyj position, bough one additional share back in May for 65,75€ including transaction costs. Small change yet does impact how much I have left to reach my goals. 

The portfolio return was a bit of due to the swings in currencies, have made some adjustments that will correct for the currency swings to show a more accurate and realistic return. It also corrects the currency impact in invested capital. Return is calculated on EUR basis which is impacted by current market exchange rates as well as market prices in all portfolio currencies. 

Portfolio value at end of July was 55 492,08€ or $58 513,84, have reached my short-term goal in market value however in dividends I am still behind. A short celebration of achieving one of the short-term goals this fast (mainly driven by investments). Now just focus on the dividend part as well as the long-term goal and eventually the 1-million-euro goal (once 1 million is achieve the next step might be a 5-million-euro portfolio). 

 

Portfolio Changes

Alibaba (ticker BABA)

 Increased my position in Alibaba as the price has been lower than my weighted average. Bought 5 shares and have now 14 shares in Alibaba for an price of $216,68 per share. The 5 shares were bought at $200,99 (weighted average), ranging from $209 to $191 per share. 

Main reason for the volatility is the tension between China and USA, Chinese Governments need to show its power over tech companies and US authorities demanding Chinese companies listed on their exchange to follow rules. There is nothing wrong with Alibaba, instead it is the political risk reflected in the price. Compared to Amazon which has less political risk now while higher legal risk. For me the swings are more of a opportunity to add to my position, do not see a huge risk here. Did quickly read Alibaba's annual report and did not see any big surprises or anything that worried.

 AT&T (ticker T)

Bought 4 AT&T shares in July, increasing my position from 117 to 121 shares. Weighted paid price per share decreased a bit from $30,87 to $30,79 as the four shares were bought at a price below $29 a share.

The stock price did fall below $28 after mid-July, however only bought one share… It seemed like the stock dropped after the Q2 earnings report was released and disappointments were revealed from subscription services. Apparently, Netflix lost a lot of subscribers as well. Should be logical if people only used it during lockdown and now are partially returning to their daily life or just want to do something else.

Bayer AG (ticker BAYN)

Increased my holding in Bayer by 13% or 4 shares from 30 to 34 shares. Price paid decreased a bit from 63,69€ to 62,14€. The increase was made before the latest announcement of an additional reserve impacting the result due to legal matter in US (Monsanto acquisition and Roundup products).

Did read Bayers 2020 annual report and it was represented by acquisition failure. I am thinking about Monsanto which Bayer acquired in 2018. Both the Bayer Board and Management Group has most likely lost more of shareholders money than any other legal entity (without going bankrupt). A loss of over 10€ per share, dragging down the profitable segments of Bayer. 

It seems like Roundup has become a chronic migraine for Bayer shareholders. $63 billion is what Bayer shareholders paid for Monsanto and in addition received legal costs and settlements to come and a write down of $10,9 billion. at least $73 billion has the Bayer Management team and Board of Directors caused in cost for Bayer shareholders so far, assume the payback time is more than their combined life expectancy. Let's hope they do not repeat a similar failure in the future unless they do a similar write off their salary and bonus. Yes, I am frustrated about the whole case and would fire the whole management team and ensure the board members are never again re-elected. These kinds of mistakes are hardly treated as they should be, financial damage caused due to neglect and sloppy work usually end in unemployment. Apparently once you get to the management team your failures result in reduction of normal staff while you get a bonus for bad performance. Does sound like the incentive system and responsibilities are far from aligned...

Dividends

In July I got 128,39 euros in gross dividends and net 118,12 euros. From a dividend perspective July was an uneventful month while waiting for beginning of August when AT&T dividend will be booked. Biggest single dividend came from GlaxoSmithKline with net 50,90€ or 43 % of total dividends. Kimberly-Clark was the second biggest payer with 17,06€ or 14,44% and third came iShares Asia Pacific Dividend ETF with 16,41€ or 13,89% of total dividends. Still small amounts coming in every month.

 

 

Struggling to see the possibility of dividends reaching 2 200€ this year, Telias second dividend at the end of October will be 1 300 SEK or around 128€ gross and around 109€ net of withholding tax. That will be one of the single biggest dividends coming in. To reach the 2 200€ dividend goal this year I should invest more heavily in companies that will pay the second half of their dividend this Fall or has at least one dividend payments left. This way I could maximize dividend return, problem is that companies tend to see their price increase before the ex-dividend date meaning the return drops. Lower return means you must buy more to get a significant amount in dividends. I have a tight budget, long-term goal and might therefore do more investments based on longer perspective and not the short-term 1 additional percent gain here or there with a 30% risk (poor risk adjusted return). It does explain my increased AT&T and Bayer position.

Just to make my point, I would need to have a portfolio value of around 61 000 euro with a 3,6% net dividend return to achieve the goal of 2 200€ in net dividends. Notably Alibaba and DigitalBrigde does not pay a dividend which raises the total required invested amount. Looking forward to a cooler August month and hopefully some good discounts in the market.

First company review will be published soon. Just need to finalize a few calculations.