This is an exhilarating experience, my first contribution to Jean’s and my newsletter on our own new website. Accepted the circulation is small but …
The focus today is on Sasol, in my view, one of the best shares in which to invest and the heaviest weight in our portfolio.
The company featured regularly in the columns I used to write in Business Day and previously in the Financial Mail, as the focus of those columns was to share readers our view of equity investments – opportunities, dead ducks and how our own holdings were experiencing.
Despite our personal rising costs, we’re still re-investing our dividend income. We recently received dividends from Sasol, and are seriously thinking of accumulating some more although this investment will make it even heavier relative to the other counters we hold.
In a broad sense, Sasol’s share price is an oil-price/dollar-rand hedge. Thus its share price will tend to correlate with the rand price of oil. Sasol is, however, a power base of more than just oil and the company is continuously building its asset base exploiting its leading edge international technology.
We have been buying Sasol shares over the past ten years at prices between around R100 and close to R240 a share. While the value of the shares we hold are currently more than double the cost, the return we measure is the internal rate of return. This is the cash-out to cash-in compound annual rate of return on the investments realised and realisable over the period. Investments made are cash outflows and dividends received are cash inflows. The current market value of the shares now, less transaction costs, is the latest cash outflow. I use a Microsoft Excel formula – XIRR – to calculate the return. This return is a moving target as the share price moves every day and the period of investment increases daily.
Over the period we have invested in Sasol shares, we have enjoyed an annual compound return of 18,3%. It has been a good investment by any standards.
In considering some more Sasol shares, one of the most important investment fundamentals is the potential dividend yield. Making this guesstimate requires a fair amount of analysis. I begin this exercising by modelling with using the company’s return on assets managed. This model tells us how well the assets have been employed and provides a future perspective of bottom-line earnings growth.
If earnings growth is probable over the long term, the dividend yield should correspondingly grow. Of course, I accept that year-to-year, earnings could be volatile.
Let’s short-cut the exercise today.
Sasol’s financial year ends on June 30. In the 2011 financial year bottom-line diluted earnings per share were R32,85. Over most of the financial year so far the oil price has been strong and the rand versus the dollar far from strong. In the first half of the financial year bottom-line diluted earnings per share were R22,91. But this was an exceptional financial period. Suppose that earnings are only R18 a share in this current half, a total of about R41 for the whole year.
On this cautious view, the final dividend would be around R6,60 a share, a total of R16 for the whole year and at a share price of R370, a forward dividend yield of 4,3%. This yield is more than acceptable – would make the share fit in well with our own High Income Yield portfolio.
The technical factors (see chart) are positive in a buying trend.
(Click on the chart to see it more clearly)
Chart Comment: Sasol gave a buy signal on April 18 when the moving average convergence/divergence (MACD) plotting (red solid line) pushed upwards through its signal line (dashed plotting). The signal is particularly strong in as it came at -6 pm the MACD scale, (the left axis). As the chart shown, this was the lowest level reached during the period of the chart.
Sasol, the candlestick plotting, moved sideways for most of April in a particularly non-volatile manner. This lack of volatility is shown by the shortness of the candlesticks. Compare these with the highly volatile plottings experienced in November and December last year. The upward movement in the last candlesticks on the right, illustrates how Sasol is moving up from an oversold position.