Dividend Tycoon has not packed it in..I am in fact more committed than ever to becoming a Dividend Tycoon. So what is this talk about becoming a property developer?
Since selling my hotels became a distinct possibility, I stepped up my search for great companies in which to invest. I needed to reinvest the capital from my hotels being sold. As I have said before, the hotels were not a great business, but the assets were exceptionally cheap, and I made a healthy profit. However, this is no longer the type of business I am looking for. I am now focused on finding companies which are focused, extremely profitable, have some barriers to entry, and preferably are led by an intelligent fanatic.
All the above has led me to become a property developer, because I have invested a significant amount into a company called Balwin Properties. They are the largest developer of sectional title property in South Africa (basically they build apartments). However, they do not build run of the mill apartment complexes, they build huge 600 unit + schemes, some well over a thousand units. They focus on these, and the large size of the schemes leads to excellent economies of scale, which translates to gross margins of over 40%. In simple language, an apartment they sell for $100000 only costs them $60000 to build.
Why I am positive
They operate in the lower to middle residential market, where the demand exceeds supply. The apartments are affordable and are built with excellent security in mind, as well as features such as a clubhouse, which is only really possible when you build with this scale, as such a feature would not be economical on a scheme with say a hundred apartments. The company has a good name with regards quality and after sales service. You can see their website here should you be interested, www.balwin.co.za as I do not want to sound like a salesperson for their apartments.
Why a good fit for a Dividend Tycoon?
- Well most importantly and obviously, they pay a dividend! They have agreed to pay 30% of profit out as dividends, the remaining 70% will be retained to use as capital for expansion.
- The word Tycoon is important. I like to see my companies as an extension of myself. I like to understand what it is I am doing. It is easy here, every year we (the whole company) are building around 3000 apartments. As a co-owner of the company I have worked out that I personally, by default, am building and selling one apartment every 15 months or so. Now I do not know about you, but building an apartment sounds like hard work! I know I do not have the technical skills to do it either. So I am partnering with the best property developer in the business, and letting them use some of my capital, and letting them get on with the job. It would be silly for me to try and compete with them, I doubt I would do a good job painting the inside walls, never mind the rest of it!
- I like companies where I can see a business that will be durable. I have not invested in technology shares for this reason. I cannot tell how these companies will look 5 or 10 years from now. I do however see a good future for companies building affordable and quality apartments in a country with a growing population and a housing shortage. I also try and keep Amazon in mind when investing these days, and I am confident they will not be dispatching whole apartment blocks anytime soon..I hope.
- The stock is cheap. I am looking for an edge in order to become a Dividend Tycoon, so I want as much stock for my money as possible. This stock was priced around R7 when I bought and will earn between R1 and R1.50 per year, which equates to a yield of between 14% to 21%, which is very good. The dividend yield is between 4% to 6%. Note that these figures are my own estimates and should not be relied on.
- Management are significant shareholders. I like the fact that the CEO owns 35% of the stock. Clearly he has the most to lose should things go wrong. As part of my research I watch and read interviews given by the CEO. My impression is that this company has been his life for the last 20 years, and he does not want to let the shareholders down. I sense he has pride in the product and will continue to drive growth in this company for many years.
Things are never so easy. There are always risks. Property developers go bust all the time. They use debt, and interest rates can rise, the economy can slump.
However, I have committed my capital to this company as I believe they are good operators, have experienced many economic cycles, and have built a business model that is very resilient. They sell their developments in phases, so cannot get stuck with a mass of unsold property, they pre-sell much of their stock, and ring fence each development.
In addition they have a product that has a definite utility. Should the economy take a serious dip and people do not buy the apartments, they have the ability to rent the apartments out at good yields until better times come around. It is not like they build smartphones or forklifts, which will sit unused until such time they are sold. They will also not become obsolete.
I am excited about this new addition to my portfolio. I did the research on the company first, and then went to see one of their developments as a prospective buyer. Seeing the quality of the apartments and the size and scale of the scheme convinced me this was a good buy.
I am increasingly interested in property investments, and am currently researching a few other opportunities in the property sector, but for now I will be monitoring this investment and any dividends received will be reinvested back into the company should the price remain reasonable.
Now where is my hard hat…I have work to do!
Disclaimer: As usual, this is a small cap stock, so it is risky. Do your own research before deciding to buy or sell.