Grindrod for growth

I’ve been asked if I would buy more of the shares we now hold in the High Yield Portfolio. The short answer is yes with two caveats.

The first is not necessarily now. And the second, of course, depending if the cash resources are available.

Interestingly, not too long ago we invested more in AVI shares by reinvesting dividend income from our overall portfolio. A significant part of this income came from our holding of Sasol, not a counter in the High Yield portfolio.

We added those shares at a gross share price of R57,31. The shares are now trading around R54 and this means that our return to date on this tranche is negative to date. However, this is probably the effect of Murphy’s Law. You can more or less count that the price falls after we buy.

It would be interesting, I feel, to look at each of the counters in the High Yield portfolio and ask if would buy them now – or defer.

Grindrod was the first counter invested in the portfolio. We bought the shares at a gross share price of R17,48 in November 2009. Not a brilliant buy at all. At the end of July 2012, its shares were traded down to less than R13. The company was not performing and, in particular, it had been affected by its shipping division. Several times we asked ourselves if we should sell.

However, we held because it seemed to us that management was a strong investment fundamental and we should be patient while management sweated the assets, especially the new ones. The market would tell us when the market recognised the company’s performance was on track.
Over 2013, Grindrod’s share price moved up R28. Consequently, as I wrote, in my last blog, the cash-out to cash-in internal annualised rate of return of the portfolio’s Grindrod’s holding at the end of 2013 was 13,6%. This is a bountiful return.

But I’m forced to ask if the market is expected too much for forward earnings growth. After all, the JSE database tells me that at a share price of R28, the historic price-earnings (based on a 12-month period) ratio was 21,46 and the dividend yield was a paltry 1,1%. Not Jean and I would buy share for dividend income.

Yes, I know the dividend was covered by more than four times earnings and the directors expect future earnings growth. Strong growth in return on assets managed seems highly probable.

Okay. So assume that in the financial year ended December 31 2013, earnings are reported at a very challenging 25% higher year-on-year from 141c a share to 176c. Dividends should then be about 41c. The forward price-earnings ratio, on these assumptions, is 16 and the projected dividend yield is 1,5%.

At the invested share price of R17,48, the portfolio’s projected dividend yield is 2,24%, far lower than the portfolio’s yield criterion.

Have to accept, therefore, that the share is a ‘growth’ share. That, I guess is why Remgro holds about 25% of the shares. Grindrod may, therefore, be a poor fit in a high-income portfolio. However, shares are attractive for long-term growth investors. And we’re not selling our holding.

Ben Temkin


Who’s afraid of the share market? Not I.

Back in 2012, they possibly laughed at me when I projected that the rand would fall to R10,768 against the dollar, R13.92 against the Euro and R17,68 against the pound. In the last few days, the rand has hit R10,82 against the dollar, after pausing at R10,78; R14,76 against the Euro after pausing for a while in November at R13,72, and R17,66 against the pound. By ‘They’ I may be talking about Business Day which, a year before, had dropped my column and Moneyweb which had previously published some of my projections but wanted no more. However, the warnings did appear on the Temkinbooks website (still vibrant) and RASKI (Retired And Spending the Kid’s Inheritance). (RASKI’s website is, unfortunately, deceased).

It was also about that time that a highly qualified ‘Financial Adviser’ about whom I was writing a profile for Women in Business, raised her hands in horror when I said that Ben and my investments were in the share market rather than in one of the insurances she marketed. “Such a risk”, she shrieked, “what about the 2008 crash”. I admitted that market crashes were a pitfall, but only if you sold your shares before the market had had time to recover. In the case of the JSE, that took less than 1 000 working days or a bit over two years, and then only if you had invested in the less-solid end of the market. Even if you had, you’d still have collected your dividend income.

The portfolios of those of us who did not sell in panic are now enjoying 43% gain above their May 2008 high. Better still, rather than watching the rand’s devaluation eating 37% of the value of insurance or similar investment products, we share investors have not only beaten the devaluation but also gained an extra 6%, and some handy dividend income.

As a chartist, I’m bound to prefer visuals to figures, and I am sure that the few readers I have left agree with me, hence today’s comparison chart that I’ve plotted monthly.

The red bar plotting shows how many rands you need to buy one dollar, hence its steep rise from $1/R6,4 in July 2011 to $1/10,8 on 14 January. I have overlaid this plotting with a standard error channel showing by breaks through the upper edge that, on two occasions, late 2012 and mid-2013, the rand’s losses were so great that time-wise they were unsustainable. The centre-line of the channel is the equilibrium, the level to which the plotting returns. Currently the plotting is slightly above the equilibrium making me expect a slight correction. Should this trend continue, my next count (my projection calculated using point-and-figure charting) is that the rand will probably fall to $1/R12,90 before a major correction takes place.

The black candle plotting is the JSE Overall index, which I used for my earlier calculations. It too is moving steeply upwards along with world markets, but at a more rapid rate perhaps because of the rand’s loss. The vertical line in the center of the chart shows that the JSE Overall had reached its pre-crash level in early 2012, but the Dow Jones industrial index reached its pre-crash level only in March 2013. From the 2009 market bottom, the JSE Overall has gained 141,06% while the Dow has put on 143,72%.

The projections are probabilities not predictions. Our equities in the stock market have been doing pretty well - on probabilities.

Jean Temkin


High Yield Portfolio is on target

At the end of July in 2011 Jean and I ceased writing our columns for Business Day. In my last column I reviewed the history of the High Yield Portfolio.

From time to time readers of Business Day ask me how the High Yield portfolio is progressing. As you probably realise, I have had something of a sabbatical and have written very little on our own website. So, as something of a change, I’ve decided to write a little more about the progress of the portfolio.

The High Yield portfolio is an important part of Jean’s and my investments. The assets have been acquired since November 2009 invested from cash received from dividend income from the rest of our assets. Two of the counters, Imperial and Pick ‘n Pay, were made by a book-over at market value at the time and the price was added to the transaction cost.

We relied on technical buy signals in buying each counter.

The portfolio has no inception date. Its return is gauged entirely on a cash-flow basis. Each purchase is a cash-outflow. Each dividend or sale of shares is a cash-inflow. The realisable value of the investments (less transaction costs) – the actual market value to date – is the latest cash-inflow.

The objective of the portfolio is to earn a growing dividend return higher than the after-tax income available from cash investments. We aimed to invest in companies whose historic dividend yields were higher than 4% and, on fundamentals, would, we hope, over two to three years, rise to over 5% or better. We were flexible on historic dividend yield in some cases. The argument in these cases was that investment fundamentals supported the belief that their earnings growth were accelerating. Consequently, the dividend yield criterion would be achieved over a short time-span.

The measure of the performance of the portfolio is the- cash-out to cash-in, the internal annualised compound annual return of the portfolio. (I use the Excel formula, XIRR).

Studiously since then, I have updated the cash-flows for each of the counters, the portfolio as a whole and also, those for the most of the equity investments that we hold but are not in the portfolio.

Clearly, the internal rate of return changes from day to day as the time-span increases, dividends are received and the realisable market value changes.

When I last wrote in Business Day at the end of July 2011 the annualised compound annual return of the portfolio was 9%. I observed that at various times the return had been close to 12%.

The internal rate of return of the portfolio has improved significantly since column was published and at the end of 2013, its return was 19,4%. Over 2013 it has been higher than 20% and has edged down to 18%.

Interestingly the actual dividend after-tax income has been a compound annualised return of 5,4%.

The internal rate of return of each the counters since acquisition until the end of 2013 were: AVI 22%, Pick ‘n Pay 9,4%, Spar 26%, Grindrod 13,6%, Imperial 27%, Hudaco 17,4%, MMI 25%, Fambrands 45% and Reunert 10,8%.

Of course, this is all past performance but it gives us a sense of comfort.

Ben Temkin

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