July 2016 – Dividend Tycoon

My obsession with Coca-Cola, especially its stock

If I had to admit to an obsession in the world of investing and stocks, it would be to one day be the part owner of The Coca-Cola Company, with the stock symbol I know better than any other, KO.

coke1

I have often talked on this site about what it means to be a Dividend Tycoon, and in the plainest language possible it is about being a tycoon, through ownership of amazing businesses, that pay dividends. Ownership of Coca-Cola stock is therefore a definite goal of this Dividend Tycoon, the sooner the better.

This article is not going to be an analysis of The Coca-Cola Company or the current valuation of the stock, because I think that information is easy to find and has been written about extensively elsewhere. I do not think it would serve a great purpose to regurgitate facts and figures about the company. All I will say is that it is the largest global non-alcoholic beverages company, operating in every country of the world bar North Korea and Cuba, has over 3500 brands (not just the traditional coke) of which 20 have annual revenues exceeding a billion dollars.

So what am I going to write about? I am going to write about why I have developed this obsession, how it came about, and how it sometimes makes even me think I am a bit strange..

It is tangible: When it comes to stocks I really think it helps as an investor if the stock is tangible to you. With Coca-Cola it is difficult to escape. It is in every grocery store, gas station, cinema, bar, even your own fridge sometimes. To me that makes it easier to stay invested in a stock.

Now the obsession bit. When I take a walk or a drive or whatever, I always notice people carrying their coke cans or bottles, sometimes even the bottles or cans lying discarded on the side of the road.. The Dividend Tycoon part of my brain cannot help thinking something along the lines of “Warren Buffett owns almost 10% of Coca-Cola, so he made a profit on that bottle lying there.” Sad, I know. I do though want this site to be honest and transparent, even if I end up looking strange.

The history: The Coca-Cola story is amazing. Again, the history has been written about extensively, but it amazes me that a small company based in Georgia, USA could grow first in the USA, then slowly making it’s way around the world, till practically the entire world is blanketed in the red and white logo.

Now the obsession bit. I love it when I watch an old movie, say from the 60’s or 70’s and you see the Coca-Cola logo displayed at some gas station or someplace in the middle of nowhere. I love the idea of thinking that it had already spread so far, yet in fact had so far still to go, and is still growing.

Also, I have read three books about the Coca-Cola company.

–For God, Country, and Coca-Cola (Mark Pendergrast)

–The Real Thing: Truth and Power at The Coca-Cola Company (Constance L. Hays)

–Inside Coca-Cola: A CEO’s Life Story of Building The World’s Most Popular Brand (Neville Isdell)

I do not tire reading stories about the growth and the early small investors, the big investors, the challenges overcome.

The investment legends: I cannot write an article about Coca-Cola without mentioning the purchase in 1988 of a big chunk of Coca-Cola by Berkshire Hathaway, headed by Warren Buffett. To me this purchase defines Berkshire and Buffett. I know much is made of the insurance operations and other operating businesses owned by Berkshire Hathaway, but I truly believe that this purchase was the one that gave Warren Buffett the most joy. By all accounts he steeped himself in all things Coca-Cola shortly after this purchase, filling his office with Coca-Cola memento’s for example, and then joining the board of directors. When I read the biographies of Warren Buffett I pick up his joy in secretly acquiring his initial stake, buying huge chunks of KO stock before the market knew it was him buying.

Now the obsession bit. Warren Buffett is an example of a big investor, who understood the opportunity Coca-Cola presented, when the company was coming out of a rough patch, and against conventional wisdom heavily concentrated his investments in Coca-Cola. It is today a fairly small portion of Berkshire Hathaway’s assets, but in 1988 was substantial. However, it is with the smaller investors that my obsession takes root again. Here are a few examples I have read about:

–The small town of Quincy: This town in Florida had a banker named Pat Munroe. When Coca-Cola had been around for decades already, around 1920, Pat Munroe could see the vast potential for expansion of the drink. He thus encouraged the residents of this small town to buy stock in Coca-Cola. Many took his advice, and despite the town suffering some severe economic downturns, many residents become millionaires on the back of their Coca-Cola stock. Apparently you can still see the Coca-Cola mansions dotted around the town.

–See my post on Ann Scheiber, Coca-Cola was one of the stocks boosting her wealth to $22 million from an initial $5000 stake.

I love these stories, because they give me hope. Hope to find my own Coca-Cola. I believe I may have a few in my South African portfolio. I have written about a few of these hopefuls, and will write more in future. None have been life changing yet, but it is still my hope that some of these, or stocks still to be invested in, will in due course give me a story like these Coca-Cola investment legends.

The amazing figures:

Warren Buffett in fact gave a speech some time back where he said that had you invested $40 on one share of Coca-Cola when the stock went public in 1919, and reinvested the dividends it would be worth $5 million. It is now probably closer to $10 million, but I think you probably see the point..

Conclusion:

The Coca-Cola Company is perhaps going through a tough time at the moment. There are concerns about sugar and concerns about where it will still find growth. However, I took a walk around my local CBD yesterday, and in every fast food outlet I could see people sitting with their Coke or Fanta, and every corner store had the trademark Coke fridge in it. This business is not going away anytime soon, it will continue to pound out profit and dividends for decades. In fact it may just be the Coca-Cola story stock I am looking for..

Why it has never been more important to be a Dividend Tycoon

This week I have been doing a bit more stock research than normal because I will have some fresh funds in the not too distant future, thanks to the proposed sale of my hotels.

Reading various pieces of business news, you realize the world is not an easy place, business is tough, things are changing so quickly. When I think of stocks, I am always trying to project 5, 10, 15, even 20 years out, and how the business will look then.

It is not as easy as it used to be. The pace of change seems to be accelerating. This was really brought home to me when I read an article in the New York Post (see article here). The article is about Nino Hervias, who used his life savings to purchase a yellow taxi medallion in New York City in 1991. I am sure that like me you have seen thousands of these yellow cabs while watching movies set in New York. This medallion was a license to riches as the number of taxis in New York was restricted to those holding the medallion. The value of the medallion increased every year, peaking at $1.3m in 2014. He thought he was rich. Hell, he was rich!

However, it has all gone wrong for him since then, the value of the medallion has plummeted, thanks to apps like Uber. He is now struggling to get passengers. His exact words in the article were “We are waking up in the middle of the night not knowing what our future is going to be.” Not a good place to be. I feel for him as who could have predicted the rise of Uber?

So how does this relate to the topic at hand. Well I think the one thing that does give me some comfort in this fast changing world is dividends. I would not get the same level of comfort from a salary (job), from sales commissions, from social security, from blogging income (if I had any) or any of the new or traditional ways we make our money.

I can think of several ways any of the above income sources may disappear. Robotics and outsourcing may steal your job, excessive government debt may put your social security in jeopardy, changing technology or fashions may threaten your blogging income, apps might threaten..anything. This is why I believe it has never been a better time to see yourself as a Dividend Tycoon.

Think of yourself as a business and stocks as being on your payroll, some of which have been paying ever increasing dividends for over 50 years. These employees will pitch up for work , despite what may be happening to you. Their only job is to send their dividends to your bank account every quarter, or a couple of times a year at least. The good ones are remarkably loyal, shrugging off political problems and recessions.

Being a Dividend Tycoon is perhaps the most diversified business possible. A portfolio of 12 stocks could cover several industries in several countries. I believe this is far safer than a job. Even a rental property may suddenly find itself in the wrong part of town, or a tenant who does not pay for 6 months.

Had Nino Hervias rather taken a job driving for someone else and simply invested his $118000 in Johnson & Johnson stock, he would not be in his current predicament. No, he would now have Johnson & Johnson stock worth over $1.8m, and a dividend stream of close to $50000 a year. I am using Johnson & Johnson as an example because it was hardly a yet to be discovered microcap. It had almost 50 years of dividend history and was a household name, you can read an article I wrote about Johnson & Johnson here. He would also not have to go out hustling for passengers on the streets of New York. He would be a free man.

So make it a priority to set some capital aside. If you have none, make some. Find some expenses to cut if necessary, read my article The Millionaire Minute, do surveys for extra income, drive an Uber cab on weekends (please just dont tell Nino Hervias I told you that!), but just get yourself some capital and get yourself some stocks, and then get yourself some dividends.

Alternatively, you may believe yourself immune from these changes, and perhaps you are. The bonus though is that if you become a Dividend Tycoon, your life will get better anyway. There will be more income for unexpected expenses, to pay for a child’s education, to buy some new clothes, to visit New York.. and should you take an Uber cab, and the driver is rude as some are made out to be, smile and ask them what they think of driverless cars..and then suggest they visit ww.dividendtycoon.com..

My hotels are (almost) sold – a lucky escape for this Dividend Tycoon

Some of you may remember my post from a few weeks back which was Reflections on buying a ‘cheap’ hotel. I was feeling rather down at the time because I had invested in a company that was trading well under the value of the real estate it held, was profitable, and paid a dividend. The first two conditions still existed, but profits were down and the dividend was cut. This stock was illiquid to begin with, but since the dividend was cut it had been all but impossible to sell at a reasonable price. This had a negative effect on my cash flows, as I admit I had bought some stock with the intention of trading it after the results came out, which I thought would be better than they were. I was looking at having to sit at least a couple of years before the stock re-rated and I could sell some.

Then, Wednesday happened, and there was a loud cheer at Dividend Tycoon HQ. The majority shareholder (no doubt equally frustrated at the depressed price) announced a proposed buy out of minority shareholders, whereupon the company will be delisted. Below is the effect on the price.

IntradayPriceGraphImage

The stock was trading at 39c, the offer they have announced is 65c. It is not final, but as the controlling family own close to 80% of the stock it is almost a done deal. While I have not exactly made a killing (I will be about 18% up on my average cost price and 30% up on recent purchases), it does mean that I will have liquidity again and will be out of a stock that was starting to cause me some discomfort.

This was a microcap in the true sense of the word. In my previous article I wrote that I would just have to be patient, as the business was profitable and had good assets. This was all true, and has been confirmed by the price of the buyout, but the one thing that was starting to frustrate me was the opportunity cost of not being able to invest in other stocks, while all my funds were tied up here.

So what have I learnt from this episode?

Patience: I may sound like a stuck record, but I keep coming back to the importance of this in investing. Do not let boredom force you out of stocks with value. Believe me I was tempted to take 39c for this stock, because I have been itching to buy stocks like Starbucks and Coca-Cola, thinking surely they would be better than some tiny stock holding a few hotels in Africa, a stock which never seems to increase in price? But this leads me to my second lesson.
Value still counts: Of course Starbucks is an infinitely better stock than Gooderson! But at what price? Howard Marks said in his book that any stock can be a bad investment at a certain price, and vice versa. This stock was deeply undervalued and hence had the possibility of a 60% gain, Starbucks may still have room to appreciate, but is a long way off gaining another 60%.
Strategy: While I will continue to look for under priced bargains, I will not commit such a large percentage of my portfolio to them. As an aspiring Dividend Tycoon, I still want to trade in such stocks in order to create capital, capital that can be used for investing in world class dividend paying stocks. However, I admit that I bought too much of this stock out of a need to be doing something and should have rather left some of those funds as cash. They would have been incredibly useful when there were market panics, such as the Brexit fallout.
Blogging is good for your investment returns: This is perhaps worthy of an article of its own, but has been a positive yet unintended consequence of starting this blog. While I have been blogging for only 4 months or so, and make no money out of it, this has been a nice side effect for me. I enjoy writing it (and hopefully you enjoy reading it..), but it is fairly hard work coming up with ideas for new articles, and the actual writing of the articles is fairly time consuming itself. The two greatest benefits I can see are the following:
1. Eases the need to do something: Like my previous article on How surfing improved my investing, I could write something similar about the effects of blogging. While writing I am not busy checking stock quotes etc. Boredom is dangerous to any aspiring Dividend Tycoon.
2. Allows me to put my thoughts into perspective: The article I wrote, Reflections on buying a ‘cheap’ hotel, literally saved me thousands of dollars. By the time I had written the article, I could see my reasoning for not selling out cheaply in frustration, it was there in black and white. It helps to put ones thoughts into perspective, and writing them down really helps.

So If any of you have been reading this, and have thought about starting a blog of your own, I would encourage you for this reason alone. Whether you ever make money out of your blog or not I would not be able to tell you, but I can say it will make you a better investor, and could at least help you avoid making costly mistakes.

Where to from here?

I am quite excited. While it may take some months for this deal to happen, perhaps up to 6 months, I am confident I will have funds to invest fairly soon. I can now go back to doing what I love with more determination. That is looking for some of the best dividend paying stocks the world has to offer. Let me know if you have any investment ideas of your own, I am open for business, as soon as my hotels finally close their doors..

Dividend Update – June 2016

June 2016 Dividend Income: Nil

Please see what I wrote in May for further explanation, but basically I have been finding better value in my local market than in the UK/USA where I am wanting to invest for the purposes of this site.

This has been fortunate to some extent, especially the fact that I have avoided investing in the UK, following Brexit.

Brexit has though created some possible opportunities. I wrote about one, Intu Properties PLC, in my last post, which is the owner of 9 of the 20 largest shopping malls in the UK. I am keeping an eye on this and other opportunities which I may be able to take advantage of when I have the funds.

I did buy 4620 shares (cost of roughly $1600) for my local South African portfolio in a stock called Choppies (stock code: CHP), which is a food retailer based in Botswana, but rapidly becoming a pan-African retailer with operations in Botswana, South Africa, Zambia, Zimbabwe and Kenya. They target the smaller towns, overlooked by the larger retailers, much like Walmart did in the United States. I have been accumulating small amounts of this stock for a year and plan to continue to do so.

Stock market competition part 2 and a Brexit opportunity

I thought it would be useful to look at what I wrote in part 1 (http://www.dividendtycoon.com/blog/2016/06/22/lessons-i-have-learnt-so-far-playing-a-stock-market-competition/), and how that relates to a post-Brexit world.

Firstly, my position in the competition for June ended up as 104th (out of 1380). The good news though is that I am top of the overall leaderboard! (http://www.sharenet.co.za/v3/stockpicks/index.php?id=3&facebook=)If I could maintain this position till the end of the competition I will win a motor vehicle worth about $25000. I hope you will stick around for the ride (excuse the pun), although this will be my last post for a while on the actual competition. I am not off to a good start for July, but a lot can happen in a month.

The main point of this post was to look at how what I wrote in part 1 really played out. I wrote how I had been crushed by the rise of the gold price, only to delight in it’s subsequent decline. Then Brexit happened. Gold stocks rose 20% in a day and I slipped very far back. However this only reinforces my view that the best stocks to own are businesses that you understand, that pay you a dividend. Sure some people got lucky with gold for the month, but where will those stocks be in five years, how much money will those gold mines make? As it happens gold still slipped back quite a bit after the initial Brexit panic and my stocks did fairly well still. As a Dividend Tycoon I want to be the part owner of good businesses and real estate, that pay me a portion of their profit every year without fail. I do not want to have bad years because the gold price is down.

Making the most of Brexit

Whatever your view on Brexit is, the only certain thing for now seems to be uncertainty. I am not going to get into the nitty gritty of Brexit, mainly because it has been extensively covered already, but perhaps more importantly because I have no idea what the consequences will be a few years down the line.

However, as a Dividend Tycoon, or aspiring Dividend Tycoon, such points in history always throw up opportunities. The 2007/2008 financial crisis was not good, but if you had been searching for future dividend income at that time and had pounced on the opportunities, you would be smiling now.

So many British stocks have experienced substantial declines that I think if you are looking for bargains, now is a good a time as any. You need to do your own research though. I will share though one stock which I have been looking at as I have owned it before and know fairly well, Intu Properties PLC. It is also a stock I picked for the stock market competition (stock code: ITU), although it is down quite a bit since friday when I picked it.

Intu Properties PLC

Being based in South Africa this is a stock I have known for some time as it was founded by a South African businessman, Donald Gordon, in the 1980’s and was one of the few stocks available on the Johannesburg Stock Exchange with which you were able to get exposure to a foreign currency without taking money out of the country, as all the assets at the time were shopping malls in the UK.

Today they own 9 out of the top 20 shopping malls in the UK. This is quite impressive because the UK, due to the relatively small amount of land available for building, has incredibly strict planning conditions, and to build a major development can take many years, if it is even possible. This creates a strong moat around the existing malls as it is so hard for another mall to be built. These shopping malls are income machines that are protected by long leases and thus have stable income. They did go through a hard time during the financial crisis of 2oo7/2008, but got through and seem to have learnt their lessons, having subsequently reduced gearing levels.

They have also bought some distressed prime shopping malls in Spain, and with the devaluation of the pound to the Euro should be a positive.

I like the fact that they stick to their core business of owning, developing and managing shopping malls, and do that well. They have moved with the times and have taken on the threat of online shopping. Being prime malls they could even benefit from the trend toward click and collect.

I think the most important thing when evaluating stocks in the post-Brexit world, is will there be much change as a result of Brexit? Now if you ask me about the big UK bank stocks and central London office property stocks, I am not sure. However, people will still be going to the mall to do their shopping, to meet friends or enjoy a meal. Coincidentally I read an interview with the CEO of Intu Properties this morning, which has reinforced my view on this stock, you can read it here http://www.biznews.com/global-investing/2016/07/04/brexit-induced-bargain-intu-properties-shares-appeal-unwarranted-smack/ As the CEO stated. they have 400 million people visiting their malls per year.

Unfortunately I am not able to purchase this stock at the moment due to a lack of funds, but if I had, I would certainly be interested in becoming a part owner of 9 of the top 20 shopping malls in the UK, at a price that is 15% cheaper in pounds (much more if you use other currencies due to the large depreciation in the pound) than it was 10 days ago. Then I would let the dividends compound and use them to increase my stake in this dividend machine through the dividend reinvestment plans they have.

This investment might pay for your own shopping one day. For now, unfortunately, I am just hoping it contributes to me winning that vehicle!