Knowledge is Power: German Trade Surplus, Global Diversification, Buybacks Edition

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UK Farm

At a farm in UK

A Note on the Dividend Payments of South Korean Firms

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Korean companies were not known for their dividend payouts until recently. Korea had one of the lowest dividend yields when compared to other developed countries as shown in the chart below. Though the country is a developed country technically it is considered as an emerging market by MSCI.

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Dividend-Yields-Korea-vs-Other-Countries-New

Source: When Looking For Emerging Market Dividend Stocks Avoid Korea, TFS

However a while ago Korea passed tax reforms encouraging firms to share more of their earnings with shareholders particularly in the form of dividends.

Currently the Korean dividend withholding tax rate for foreigners is 20% according to Deloitte.

A February article in The Financial Times discussed about the potential for a re-rating for Korean stocks as a result of the dividend tax policy change. From the article:

Cash balances at leading Korean companies have swelled in recent years — Samsung’s net cash has reached nearly $50bn — given limited investment opportunities as the economy has slowed.

However, their miserly dividends have been behind the market’s depressed valuations, with the payout ratios of the country’s listed companies by far the lowest of any big Asian market.

The South Korean stock market is trading at about 10 times last year’s earnings, far below Hong Kong and Japan’s multiple of about 15 times. According to CLSA, Korean companies will pay out just 15.7 per cent of last year’s profits to shareholders, compared with 46.2 per cent by Hong Kong companies and 28.5 per cent by Japanese groups.

Optimists hope the recent dividend increases will help foreign investors regain their confidence in corporate Korea, after Hyundai’s $10bn purchase of land for new headquarters raised questions about corporate governance and capital management of the country’s big family-run business groups, known as chaebol.

Source: Higher South Korea dividends fuel hopes for Kospi re-rating, Feb 11, 2015, FT

The dividend withholding tax rate for South Korea goes from 0% to 22% according to Citi Depository Receipt Services. It seems that if one can qualify for the Certificate of Residence a favorable tax rate is applied. From a Citi note:

A unique feature of the Korean Dividend payments is the multiple foreign withholding tax rates that are applied to nonresidents. We are required to supply a Certificate of Residence for holders that are entitled to a favorable tax rate. If such a certification is not provided, the Korean unfavorable rate of (22%) will be applied. Tax Relief at Source Processing Fee was applied for those electing the Favorable Tax Rates.

 

Here is how the ADR dividend for Hyundai Motor Co gets taxed at various levels:

Hyundai ADR Dividend-New

Source: Citi

The dividend policy change is a big positive development for Korea in the eyes of foreign investors. However investors looking to gain exposure to the Korean market can wait and watch the payout ratios of firms before committing any capital for investment.

Disclosure: No Positions

Annual Turnover of U.S. Stocks Remains High

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In 2010 I wrote an article on the continued decline in holding periods of stocks globally. In that article I included the following chart that shows the average holding period for a given stock on the NYSE:

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Avergae-Stock-Holding-Period

Source: Stock Holding Periods Growing Shorter

On this week’s The Intelligent Investor column, Jason Zweig penned an excellent piece on a related topic. According to the article, the annual turnover rate of U.S. stocks is 307% so far this year. This implies an average holding period of just 17 weeks.

Have investors finally started to get their hyperactivity under control?

According to the New York Stock Exchange, annualized turnover—the rate at which stocks are bought and sold—is down to 63% from a high of 110% in 2010. With a 100% annual turnover rate equal to a holding period of one year, a 63% rate implies that investors are holding the average NYSE stock for 19 months at a time, up from an average of 11 months five years ago. Meanwhile, the investment-research firm Morningstar calculates that portfolio turnover at U.S. stock mutual funds is down to 66% from 75% in 2010.

But these numbers don’t tell the full story. Far from growing more patient, investors appear to be getting twitchier. And now more than ever, trying to outrace Wall Street at its game of trading ever faster is folly.

Consider the NYSE turnover figures, which cover only those stocks listed and traded there. Many of the same stocks are also traded elsewhere; about three-quarters of their total volume occurs on other exchanges and trading platforms.

Including trades on all marketplaces, the annual turnover rate in U.S. stocks is running at 307% so far this year, up from 303% in 2014, reckons Ana Avramovic, a director of trading strategy at Credit Suisse in New York. That is down from the peak turnover rate of 481% in 2009, but it amounts to an average holding period of only 17 weeks.

And that figure doesn’t include exchange-traded funds, which get flung around like hot potatoes. According to John Bogle, founder of the Vanguard Group, the 20 largest ETFs were traded last year at an average turnover rate of 1,244%. That includes activity by individual and institutional investors as well as high-frequency traders who rapidly buy and sell by computer. A 1,244% turnover rate implies a holding period of 29 days.

Source: Why Hair-Trigger Traders Lose the Race by  Jason Zweig,  The Wall Street Journal, April 10, 2015

Individual investors have an edge over Wall Street when it comes to investing in stocks. Unlike mutual funds, hedge funds, etc. retail investors need not continuously churn their holdings frequently. They can build a portfolio of high-quality stocks or invest in an index fund and sit on it for years. Fund companies have to do churning on a frequent basis because of many reasons. For example, they may have some agreement with brokerages that they would send so many trades per month or per quarter. Another reason is the peer pressure of fund managers. We can imagine most fund managers like sheep. Most just follow the herd. So when other managers or selling or buying stocks they are also forced to do the same thing.

The key point to remember is while hedge fund and mutual fund managers have to trade to make a living using opium   OPM (Other People’s Money) individual investors do not have to fall for this temptation since they are managing their own hard-earned money. So even though it is easier to trade due to the advancement in technology most investors are better-off being a tortoise and achieve their long-term goals.

Related: Duration of Stock Holding Periods Continue to Fall Globally, TFS

On the Renaissance of Rail Travel Globally

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The passenger rail industry is a major industry in many countries of the world. For example, in countries such as China, India, Russia, Japan etc. millions of people travel by trains. Similarly European countries are also connected by a wonderful network of railways. In addition to tradition railways, high-speed rail travel is also growing in Europe and other countries. While China, Western Europe and Japan have embraced high-speed railways, the U.S. lags awfully behind as this chart from one of earlier posts shows:

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High-Speed-rail-Countries-Select-Countries

I came across the following cool graphic from Euromonitor showing the current resurgence of rail travel across the world:

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Global Rail Travel Resurgence

Source: Euromonitor

In terms of passenger traffic the U.S. does not even appear in the top 25 countries. The U.S. ranks 9th, behind Turkey in the list of the top 12 countries with high-speed rail networks. China leads the world beating Europe and Japan as it continues to expand its high-speed rail network at a rapid pace. This aspect of China’s growth has to be appreciated since China is a developing country.