$15,000 passive income. To pursue or be pursued?

Regular readers know that I would never tell people what to do. I am not qualified to and neither am I allowed to. Partly for the same reasons, I have declined invitations by a few readers to conduct talks for private groups or to have courses for the public.

Of course, we know that there are many investment courses out there and, recently, there has been discussion as to whether the authorities should step in to regulate these.

R Sivanithy says it well in a column in The Business Times recently that we "should always be leery of claims of fantastic performance that come with profit guarantees and no risk. After all, there are no free lunches in the cut throat world of finance - unless of course, one happens to be in the business of conducting "get rich quick" seminars."

So, when someone who is receiving about $15,000 in annual passive income from his investments in stocks and REITs asked me what he should buy next, I was ready to side step the question in my usual style but I decided to ask what percentage of his portfolio was in cash. He said about 3%.

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The pause should be longer but I think you get the idea.

There is nothing wrong with keeping more cash even though cash is an asset that earns practically nothing in a savings account. Well, some banks offer 0.4% to 0.88% per annum now and although Garfield would say, "big, fat, hairy deal", having cash provides us with a peace of mind. The low returns for holding cash is the price we must pay for now. It is like having insurance and insurance cost money or don't we believe in insurance?

In an article I read some time ago, it was revealed that the UHNW rich in America (those with investable assets of $15m) would only feel rich if they had at least a million dollars or two in cash. That means a minimum cash position equivalent of 6.6% to 13.3% of their total wealth.

Remember, however, we could do quite a lot with a million dollars or two. If our 6.6% to 13.3% is ten or twenty thousand dollars, can it make a big difference?

In the pursuit of passive income, it makes sense to do a bit less pursuing and, instead, be pursued.

Related posts:
1. If we want peace, be prepared for war.
2. Be a real estate owner the easy way (4).
3. STE's story: The Millionaire Next Door.
... it is revealed that most high income earners are not wealthy. They make a lot of money but they don't keep much of it.

Tea with Mike: UOB KayHian Holdings.

Getting a sense of a fair price to pay: UOB KayHian Holdings as a case study.

I was screening for companies with decent yield and growth for the past 5 to 10 years, using a Google screener, and I decided to do some in depth study of UOB KayHian.

UOB KayHian pays out about 50% of earnings as dividends for almost a decade. In the earlier years, the payout was more than 50%. So there is certainty of payment, and it has been profitable for the past 12 years, and last year was actually the weakest year in a decade.

I use the spreadsheet to churn out important numbers such as revenue, NP, margins etc for the various markets, such as Singapore, Hong Kong, Thailand. I wanted sustainability of dividend income. So, I want to know what income I can expect going forward and I gave myself a few scenarios:

Click to enlarge.

At its peak, net profits is almost 3 times of what it is in 2012, if you take the average of $100 million over 12 years, it is still higher than 2012.

1H2013 results has already recovered, its 1H EPS of about 8 cents, is already almost as high as full year EPS of about 9 cents in 2012. Assume full year EPS to be 16 cents, they will pay out about 8 cents, giving a yield of 4.8%. That is my best case scenario.

If you take the average of 12 years, EPS is about 13 cents, so payout will 6.5 cents, giving a yield of 3.9%. This is my conservative scenario.

Although Singapore contribution is in decline, it is generally in line with SGX trading income revenue, which reflect the prevailing market conditions and not loss of competiveness. The “other” and Thailand operations have been bucking the trend and is contributing more despite market weakness, this could be due to its expansion bearing fruits.

Next,

Click to enlarge.

I want to get a sense of market valuation of the counter throughout the years, so I use the highest price, lowest price and average price of each year to calculate the corresponding yield and PE.

If I take away the super exceptional year of 2007, the average lowest yield is 5% and average highest yield is 9%, and the average lowest and highest PE is 10 and 17 respectively.

If I take conservative EPS of 13 cents, and DPS of 6.5 cents. I would like a yield of 6% and a PE as close to 10 as possible, and what would that price be?

To give a yield of 6% based on EPS 13 cents, price will be about $1.09 and PE 8.4.

If I am content with PE 10, I need the price to be $1.3.

To give a yield of 6% based on EPS 16 cents, $1.33. And a PE of 10 at EPS 16 cents will be $1.6.

Now, I know I will not touch this company at price above $1.6, unless I believe the next few years will see EPS growing to its peak soon. But there were not many years in which the company had above average results. So, most probably I will only start buying at $1.6 and below.

Other considerations like market share, gearing level and positive average FCF are also looked at, they are not significant enough to offer a further discount or premium.

I do like its profit resilience and rather undemanding valuation as compared to SGX and GK Goh, but given the amount of competition and my estimated calculation of only 10% Singapore Market share, I would not allow myself to pay a premium above $1.6.
 

Related posts:
1. Tea with Solace: Valuation, PER and value traps.
2. STE's story: Investment strategy.
3. When to BUY, HOLD or SELL?
4. Interview with Matthew Seah: Value Investing.