Rolls Royce: A Poor Performer in the Aerospace and Defense Industry

Posted by on

UK-based Aerospace & Defense giant Rolls Royce Holdings plc (RYCEY) has been a poor performer in terms of share price returns. In the past 2 years, the total return (TR) which includes dividends was a loss 50%. relative to the FTSE 100’s flat TR (based on the London-listed domestic stock in British Pounds). But Paul Mumford, manager of Cavendish Opportunities fund thinks the stock is a value play now for investors with a five-year view.

The company has announced five profit warnings in less than two years and the new management structure may help turn around the firm.

The following chart shows the 5-year price return of the OTC traded ADR :

Click to enlarge

Rolls Royce Stock 5 Year Return

 

RYCEY – Ten year returns:

Rolls Royce Stock 10 Year Return

In 5 years the stock is down 12%. In 10 years the stock is up by just over 8% in terms of price appreciation alone.

The 5-year and 10-year return may seem average but actually they are worse because other defense stocks have been great performers in the past decade due to higher defense spending especially after 9/11.

The following chart shows the 5-year return of Boeing(BA) and Rolls Royce:

Rolls Royce vs Boeing 5 Years

While Boeing share price has more than doubled Rolls is down by over 12%.

After a 5:1 split in August, RYCEY currently trades at around $8.50 a share. Currently the dividend yield is 4.19% and the company has a market cap of over $15 billion.

One of the takeaways to remember is that not all defense & aerospace stocks are bullet-proof. Or to put it another way – a rising tide will not lift all the boats. Poor management and other issues will adversely impact the stock returns.

Competitors of Rolls include: BAE Systems(BAESY), EADS (EADSY), Cobham plc(CBHMY), Meggitt plc(MEGGY), QinetiQ(QNTQY), United Technologies Corp(UTX)

Disclosure; No Positions

Petrobras and Ecopetrol: Latin America’s Fallen Oil Giants

Posted by on

Brazilian oil giant Petrobas(PBR) and Ecopetrol (EC) of Colombia were some of the largest oil companies in the world based on market capitalization until a few years ago. However both have declined dramatically in recent years with billions in market value wiped out.

The following chart shows the 5-year price returns of Petrobras and Ecopetrol:

Click to enlarge

PBS vs EC 5-year returns

Source: Yahoo Finance

In 5 years, PBR has plunged by over 87% while Ecopetrol has declined by about 84%. Unlike PBR, Ecopetrol’s fall is due to company specific issues and declining oil prices. Petrobras was the crown jewel of the Brazilian growth story. Its disastrous collapse was triggered by a variety of factors in recent years including corruption in the management of the firm. The fall in crude oil prices simply added more misery to the company.

In 10 years, PBR declined by over 81%.

Click to enlarge

PBR 10 Year Return

Source: Yahoo Finance

In late May of 2008, PBR traded at over $72 after a 2:1 split earlier that month. Since then it has been mostly a downward slope down year after year. PBR’s $28 .0 billion market cap today is a fraction of what it was once at the peak of the stock price.

Similarly Ecopetrol’s market cap also was cut over $100 billion from the peak. In 2012, it was the fifth most valuable with a market cap over $136.0 billion. At that it was more valuable than BP plc(BP) according to a recent Bloomberg article. Now the market cap is about $14,0 billion.Recently Ecopetrol announced lower production volume for 2016.

Petrobras is mired in corruption probes and it may take a few years before the oil major gains its mojo back.

From an investment perspective, both these Latin American firms can be avoided at this time. For those wiling to make a bet, Ecopetrol has brighter prospects than PBR. Ecopetrol also has a higher dividend yield.

Disclosure: Long PBR and EC

Why USA Stands For Unequal States of America

Posted by on

Inequality in the United States of America(USA), as measured by the Gini Coefficient, is the highest among developed countries. Inequality has always been high in the US. However in the years since 2000, it has increased sharply to much higher levels. Since the US follows the capitalist system of government, inequality will always be high when compared to other developed countries which follow socialism. However what is concerning is that the sharp increase in the rate of inequality in recent years.

The Gini Coefficient is measure of inequality of income or wealth of a country’s residents. In simple terms, the higher the measure the worse the inequality is. From Wikipedia:

The Gini coefficient (also known as the Gini index or Gini ratio) (/dʒini/ jee-nee) is a measure of statistical dispersion intended to represent the income distribution of a nation’s residents, and is the most commonly used measure of inequality. It was developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper “Variability and Mutability” (Italian: Variabilità e mutabilità).[1][2]

The Gini coefficient measures the inequality among values of a frequency distribution (for example, levels of income). A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income). A Gini coefficient of one (or 100%) expresses maximal inequality among values (for example, where only one person has all the income or consumption, and all others have none).[3][4] However, a value greater than one may occur if some persons represent negative contribution to the total (for example, having negative income or wealth). For larger groups, values close to or above 1 are very unlikely in practice.

Source: Gini coefficient, Wikipedia

The following chart shows the Gini coefficient of wealth distribution (in %), 2014 and change since 2000 (in percentage points) among select developed countries:

Click to enlarge

Gini Coefficient of Rich Countries

Only Sweden, Belgium and Norway do not fit the pattern in the above chart. In all the other countries, the Gini remains high and the change since 200 also increased. Inequality in Sweden is the highest among rich countries next only to the US. However since 2000,  the rate has not increased greatly. Comparing the US to other developed countries, the authors of the report note the following:

Unequal States of America

The same cannot be said for the US, where the crisis and the sluggish economic recovery that followed have caused a dramatic deterioration in wealth distribution. The increase in inequality, i.e. the rise in the Gini coefficient, is more pronounced here than in any other country during the period analyzed. The result: the USA (which, the way things are going, could well be taken to stand for the ”Unequal States of America”) has the highest Gini coefficient in our analysis. It is, unfortunately, impossible to tell at this stage whether this is largely the result of asset accumulation setbacks brought on by the crisis, which hit smaller and medium-sized assets particularly hard, or whether the developments are already the result of the digital revolution which, at least for the main protagonists, is increasingly turning out to be a ”wealth catalyst”.

Source: Allianz Global Wealth Report 2015, Allianz

Knowledge is Power: Stock Picks for 2016, Emerging Markets, Canada Charts Edition

Posted by on

Dinasours in Oxford Museum, UK

 Dinasours in Oxford University Museum, UK

Dividend Yield Comparison: India vs. Other Markets

Posted by on

India has been a low-yielding country in terms of dividends historically. So global investors looking for income are better avoiding Indian equities. As an emerging market, India is well-suited for finding growth-oriented stocks as opposed to dividend stocks.

The chart below shows the historical yield comparison of India and other indices:

Click to enlarge

Dividend Yield-India vs Other Markets

Source: The Tale of Dividend in India, Utkarsh Agrawal, S&P Indexology

The difference between S&P India BMI Index and S&P Developed BMI Index was almost 88bps (basis point) as on April 30 2015  according to S&P. In addition to lagging the yield of developed markets, India also lags the yield rates of other emerging markets as shown in the green line above. As a result investors hunting for dividend stocks can focus on other emerging markets.

Four reasons for the low dividend yield rates of Indian stocks are:

  1. Historically many Indian firms were not shareholder friendly.
  2. Many of the family-owned firms do not like to share the company’s profits with shareholders.
  3. The corporate debt market is immature and tiny compared to developed countries. Hence most Indian firms cannot depend on the debt market to raise capital. This drawback forces them to withhold profits as retained earnings to plow back into future capital investments.
  4. The dividend culture is still in development phase as most investors tend to invest in equities for price appreciation as opposed to steady income quarter after quarter.

Among the Indian ADRs trading in the US markets, ICICI Bank Ltd(IBN) and HDFC Bank Ltd (HDB) have dividend yields of 2.17% and 0.64% respectively.These two large private sector banks paying such low yields is one example of low dividends. In the IT services sectors, Wipro Ltd(WIT) and Infosys Ltd (INFY) have yields of 1.58% and 2.29% respectively.

Relative to the low yields offered by Indian companies, other merging companies have better yields. For instance, at the end of September the dividend yields(based on MSCI Indices) of select countries are noted below:

  • Brazil: 5.10%,
  • Taiwan: 4.33%
  • South Africa: 3.77%
  • China: 3.72%

Source; Thornburg

In summary, it is wise to invest in Indian equities for growth and not for yield.

Disclosure: No Positions