Should You Invest in National Bank of Greece ADR After 2nd Reverse Split ?

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National Bank of Greece (NBG) has implemented a reverse split for the 2nd time in less than two years. In November, 2011 when the reverse split went into effect in the ratio 1:5 I noted that investors may want to avoid the stock. On May 30th, the bank reverse split the ADR again. This time they seem to be trying to keep the share price above $1.00 for some time and gave shareholders 1 ADR for each 10 held. After closing at $1.22 on May 29th, the stock opened at $5.70 yesterday and end the day at $7.07. From the reverse split made in November, 2011 to the current split, the stock fell by over 50%.

The long-term performance chart of the bank is shown below:

Click to enlarge

NBG-10-years

Source: Google Finance

In the past 10 years the stock price has plunged by over 75.0% as shown in the chart above.

The Athens Composite Index is up 5.50% year-to-date as investors are betting that the worst is behind the country. Based on this belief,  investors have picked up debt recently from companies such as oil refiner Hellenic Petroleum and dairy producer Fage according to a report in The Journal.

Foreign investors pumped money into Greek stocks lifting the composite index by 33.4% which made Greece the best-performing market in the European Union per another article in The Journal in February.

From the article:

To be sure, it could all go sour again, should social or political tensions erupt anew and derail the fragile three-party governing coalition’s reform program.

Indeed, the economy is expected to contract by 4.5% this year and unemployment is already a staggering 27%. More than nine in 10 households have seen a significant drop in disposable income since the start of the crisis in 2010, while tens of thousands of business are expected to shut down this year, according to traders.

Another risk is trouble in another euro-zone country that could send investors scurrying for safety. A simmering political scandal in Spain and the outlook for reform in Italy following elections that wrap up on Monday are among the bigger worries; both countries have their own financial problems.

And there are also broader concerns about the economic health of the 17-nation block. When February’s preliminary reading of purchasing managers indexes for euro-zone countries slumped to a two-month low, major European stock markets skidded. Greek stocks fell more than 4%.

Source:  Foreign Money Is Revisiting Greece, Feb 24, 2013, The Wall Street Journal

Since Greece has not solved many of the structural economic problems I would stay away from Greek stocks particularly financials. Investors can wait a few more years before jumping into Greek equities.

Related ETF:

Global X FTSE Greece 20 ETF (GREK)

Disclosure: No Positions

Reinvesting Dividends Can Yield Excellent Returns

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One of the dilemmas often faced by investors in dividend-paying stocks is if they should reinvest the dividends or not. Reinvesting dividends received from equity investments on a periodic basis such as monthly, quarterly, bi-annually or even annually can substantially boost the total returns earned, especially in the long-term due to the effect of compounding.

The following chart shows the performance of the FTSE All Index of UK with and without dividend reinvested over the past 10 years:

Click to enlarge

Reinvesting-Dividends-Return

Source:  Reinvesting dividends key for growth, says Franklin Templeton’s Morton. FE Trustnet

Note: The blue line shows the Total Return (TR). The returns shown are in British currency terms.

From the article:

Investors who had simply put their money in the FTSE All Share would have seen their money grow by 81 per cent over the last decade, according to data from FE Analytics, but those who had reinvested their dividends over that period would have made 156.15 per cent.

Reinvesting dividends in the FTSE All Share index almost doubled the return for the period noted.

The decision to reinvest dividends depends on many factors like the goal of investment, type of investor, market conditions and so forth. Like any other investment concept, dividend reinvestment also has both advantages and disadvantages.

Some of the pros of dividend reinvesting include:

  • Dividend reinvesting takes the worry of trying to figure out where to invest the dividend amounts received every time.
  • The automatic reinvestment of dividends option offered by most brokers can make the reinvestment process easy and systematic.
  • Most brokers reinvest the dividends for free without any commissions thus helping an investor acquire new shares without costs.
  • In declining and volatile markets, an investor can pick more shares cheaper by reinvesting dividends.
  • Dividend-payers that consistently increase dividends can help to accumulate additional shares when held over many years thereby increasing the total returns.

Some of the cons of dividend reinvesting include:

  • This strategy deprives an investor of the ability to invest in some other stock or asset which may higher potential for growth.
  • Reinvesting dividends in low quality companies or some sectors may not yield the best result. For example, it is not a wise idea to reinvest dividends in tech stocks since not only are the yields low but companies in the sector can go out of favor or even out of business almost overnight due to changes in the unpredictable industry.
  • Taxes have to be paid in the years when dividends are earned from stocks held in taxable accounts. If a crisis such as the global financial crisis erupts and the company’s stock becomes worthless, an investor not only lose the original investment but also all the dividends earned and the taxes paid.
  • Dividend payments are discretionary and can be cut for any or no reason by a company. When this happens, investors are likely to dump the stock wiping out years of price growth. An investor who was loyal to the company and reinvested every cent of dividend for years will lose out on gains.Hence selecting high-quality well established companies is important.
  • If a broker charges a commission to reinvest dividends then reinvesting dividends will not be highly beneficial.

Despite the cons noted above, dividend reinvestment can be an excellent tool to build long-term wealth. However instead of blindly plowing back the dividends into their current holdings, investors have to be selective in picking companies for dividend reinvestment.

Ten British stocks that investors can consider for long-term investment are listed below with their current dividend yields:

1.Company: Unilever PLC (UL)
Current Dividend Yield: 2.97%
Sector: Food Products

2.Company: British American Tobacco PLC (BTI)
Current Dividend Yield: 3.78%
Sector:Tobacco

3.Company: Vodafone Group PLC (VOD)
Current Dividend Yield: 5.19%
Sector: Telecom

4.Company: HSBC Holdings PLC (HBC)
Current Dividend Yield: 4.16%
Sector: Banking

5..Company: Imperial Tobacco Group PLC (ITYBY)
Current Dividend Yield: 4.60%
Sector: Tobacco

6.Company: AstraZeneca PLC (AZN)
Current Dividend Yield: 5.37%
Sector: Pharmaceuticals

7.Company: Legal & General Group PLC (LGGNY)
Current Dividend Yield: 3.80%
Sector: Financial Services

8.Company: Reed Elsevier PLC (RUK)
Current Dividend Yield: 2.08%
Sector: Media

9.Company: GlaxoSmithKline PLC (GSK)
Current Dividend Yield: 4.51%
Sector: Pharmaceuticals

10.Company: Diageo PLC (DEO)
Current Dividend Yield: 2.31%
Sector: Beverages

Note: Dividend yields noted are as of May 30, 2013. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long LGGNY

The Spectacular Run of Philippine Stocks Continues

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The stock market of Philippines was one of the best performing stock markets last year. It has continued that upward trend and has shot up by another 24% so far this year according to an article in the FT beyondbrics blog.

An article on Frontier Markets in Bloomberg BusinessWeek earlier this year had an interesting take on Philippines. From the article:

Witness the Philippine stock market, which is by far the best-performing in the world since the crash of ’08, according to Bloomberg data. Compare this state of affairs with how that economy was devastated in the Asian economic crisis of 1998, when it was so broke that a pair of its national airline’s planes were seized in Los Angeles to satisfy the demands of the U.S. Export-Import Bank. Today, for all its resurgence, Manila’s entire bourse is worth as much as Microsoft (MSFT). It’s not even represented in the top 10 of the iShares or Guggenheim fund; the former is dominated by Kuwait and Qatar, the latter by Chile and Colombia, all of which are arguably more developed than frontier.

From an investment standpoint, the Philippine economy has many positive factors that makes it attractive to overseas investors. For example, the vast pool of skilled and low-cost labor with fluent English language skills are coveted by call center operators.

Most of the Philippine companies trade on the OTC market. Only one of firms is listed on the NYSE. Telcom services provider Philippine Long Distance Telephone (PHI) has a 2.75% dividend yield and currently has a market capitalization of about $16.0 billion.

The simplest way for US investors to access the Philippine market, is to invest via the iShares MSCI Philippines Investable ETF (EPHE).

1-Year performance of the iShares Philippines ETF:

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EPHE-1-Yr

Source: Yahoo Finance

The fund’s holdings is made up of 42 firms and the asset size is over $487 million. The ETF is highly concentrated with finance alone accounting for about 44% of the portfolio holdings. Year-to-date the ETF is up by over 17%.

Disclosure: No Positions

Investors Should Use Charts With Caution

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Charts are great way to visually represent data. The widely popular phrase “A picture is worth a thousand words” is indeed true, in most scenarios. However sometimes one has to dig deeper into the data shown in the chart in order to get a better understanding the information being displayed.

From an article titled Real Estate: More Than Just a Home by David Lee, fund manager at T.Rowe Price:

Mention real estate, and many people think of the place they call home. In the investment world, however, the sector encompasses a broad array of commercial opportunities spanning the globe. And, as a sector, U.S. real estate has been among the top performers of the past decade.

The Wilshire U.S. Real Estate Securities Index outperformed the S&P 500 Index by a wide margin over the 10 years ended December 31, 2012, and turned in a stellar 17.55% return through the turmoil and uncertainties of the past year (see chart below). Global real estate did even better with the FTSE EPRA/NAREIT Developed Real Estate Index, returning 28.65% in 2012.

Click to enlarge

SP500-vs-Real-Estate-Returns

Source: Real Estate: More Than Just a Home, T.Rowe Price

Though the chart looks pretty and shows real estate assets outperforming stocks, one can argue whether the actual return earned by an investor is higher with REITs as opposed to stocks, if the investor held these assets in a taxable account.

U.S. stocks as shown by the dark blue bar had a total return of 16.0% in 2012 and REITs as yielded a 17.6% total return. REITs therefore outperformed stocks by 1.6%. This can hardly be called “stellar” because dividends paid out REITs are taxed as ordinary income for tax purposes whereas dividends earned from stocks can be “Qualified Dividends” subject to a lower tax rate of just 15% even for investors in the top tax bracket. Though REITs may assign a portion of the dividends paid as qualified at the end of the year the majority of the dividends will still be “Unqualified Dividends”  that will incur a higher tax rate. Generally the ordinary income tax rate for most people will be around 28% to 33%. Hence though REITs had a slightly higher return than stocks last year, when taxes are considered the total return for stocks will be higher. So in reality an investor would have been better off investing in stocks in a taxable account instead of real estate securities. The same logic can be applied for the 10-year period as well.

For an investor with a tax-deferred account such as Traditional IRA, REITs would have been a better option since they had a higher return both in the 1-year and 10-year periods. A  Roth IRA would be even better since the original investment and earnings can be withdrawn without any tax consequences during retirement.

Investors should definitely allocate some of the assets in their portfolios to REITs for diversification purposes. However it is highly important to determine in which type of account one has to hold REITs in due to the tax issue discussed above.

Related ETFs:

  • iShares Dow Jones U.S. Real Estate Index Fund (IYR)
  • Vanguard REIT ETF (VNQ)
  • SPDR Dow Jones International Real Estate Fund (RWX)
  • SPDR S&P 500 ETF (SPY)

Disclosure: Long RWX

The U.S. Pharmaceutical Industry Map

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Here is a chart that shows the various players in the pharmaceutical industry in the U.S.:

Click to enlarge

US-Pharma-Industry-Map

One of the fast-growing sectors within the healthcare industry is the pharmacy benefit management(PBM) business. The companies in this space provide administration services to control drug cots to patients and other clients. Express Scripts Holding Company(ESRX) is of the top firms in the PBM sector.

Another type of player operating in this industry is the pharma distributors. These companies are the wholesalers of drugs. They buy drugs in bulk from manufacturers and supply hospitals and pharmacies after jacking up the prices by several percentage points for acting as the middle men. These companies do not contribute anything productive other than to buy in bulk and sell after a markup. These companies are analogous to auto dealers. One does not need to be a genius to figure out that auto dealers do not contribute nothing to the society other than to make high profits from unsuspecting car buyers. Some of the major firms in this sector include  AmerisourceBergen Corporation (ABC), Cardinal Health (CAH) and McKesson Corporation (MCK).

Other players in the industry include the insurers, pharmacy companies, hospital companies and so forth. One of the reasons for the atrocious prices of drugs can be attributed to so many players involved in the pharmaceutical industry.

Source: Angles and Perspectives, Q2, 2013,  the Quarterly Newsletter of PSG Asset Management