Credit deflation and the reflation cycle to come (part 2)

[MrXxxx]

5 hours ago, Harley said:

I've been hoping we've just had a tradeable bounce as liquidity turns to insolvency.  I'm seeding new diversified portfolios with small holdings in what I want and am hoping to ladder in, although some like RDSB look too tempting.  I have no doubt they'll be a ton more liquidity to come and expect a rotation to our beloveds so the prospect of further falls in those we care about is uncertain, but IMO there is still plenty of upside for me to have a partial gamble.  I would love nothing more than to be fully loaded and out in the rain(!) but unfortunately I was MIA in March!

PS:  Come on DRAX, come to daddy!

I know what you mean about RDSB, just when you think you have enough the little minx tempts you by lowering just that little bit further :-)

[Democorruptcy]

16 minutes ago, DurhamBorn said:

I agree they should of cut exec salary and bonus as well,that would of been much better,but the telco sector has a small window here to get a few things they have wanted for decades.BT need an inflation deal on returns.The rest of the sector needs the incumbents to get inflation+ deals from government.They also need to be allowed to merge etc.Governments have just had a massive lesson on how vital telcos are now.They have all performed superbly during the crisis and nearly all of the main telcos now have superb management who understand government.Vodafone is making it known that if governments want those strong networks and 5G then a return on equity of 6% isnt enough,and that investors will instead lower capex,lower opex and have bigger divis.We are at a key inflection point in the sector.The market etc is too busy looking backwards and also knows there will be a short term hit as telcos suffer in past recessions.If they can lock in inflation+ increases in a rising inflation cycle,lock in low rates ,structure debt well,then slowly lower opex as they move more and more digital,and lastly then lower capex mid cycle free cash will explode.I think VOD will get to £10billion free cash by the end of the cycle.Telefonica the same.

 

 

Yes, if those BT execs can get away with thieving from their customers as much as they have from their shareholders, eventually everything will be OK. (I'm still a tad annoyed about no divi at all, don't know if it shows).

[MrXxxx]

20 minutes ago, Democorruptcy said:

. (I'm still a tad annoyed about no divi at all, don't know if it shows).

Just a bit...but that's because I am a very sensitive/attuned person :-) :-) :-)

[DurhamBorn]

1 hour ago, Democorruptcy said:

Yes, if those BT execs can get away with thieving from their customers as much as they have from their shareholders, eventually everything will be OK. (I'm still a tad annoyed about no divi at all, don't know if it shows).

Its been very worrying the way companies seem to think they can simply stop divis.BT know full well a lot of shareholders rely on them,so as you say they could of cut to the 7.7p rather than miss a year.I think a lot of the blame rests with the market structure now.Passive money etc chasing momentum and "growth" means companies havent been rewarded for paying slowly growing divis.Many execs will be thinking if we arent rewarded for that we might as well go after more growth etc.I think BT fancied the cash flow this year and took the chance,and i do think there was a big political element.Lot less for bad publicity for the regulator etc if they give them a good deal when no divis getting handed out.

[Harley]

3 hours ago, DurhamBorn said:

DRAX went xd today.They were one that got hugely over sold in March and were a complete gift under £1.50.Iv sold a few given they doubled,but holding the rest for the cycle,or a takeover.

Will be interesting to see where its price goes given its current key level.  Sadly I bought mine in Dec 19 and Feb 20 so am currently about 9% down.  Now had I bought some in March or so, I may be evens or so by now.  Maybe I just lack conviction generally so fail to jump on such (to the convinced) opportunities.

[Harley]

Any views on whether the UK (aka "Rip off Britain") has been more keen on cutting divs than say the US?  Another good reason to move on?

[JMD]

2 hours ago, DurhamBorn said:

Its been very worrying the way companies seem to think they can simply stop divis.BT know full well a lot of shareholders rely on them,so as you say they could of cut to the 7.7p rather than miss a year.I think a lot of the blame rests with the market structure now.Passive money etc chasing momentum and "growth" means companies havent been rewarded for paying slowly growing divis.Many execs will be thinking if we arent rewarded for that we might as well go after more growth etc.I think BT fancied the cash flow this year and took the chance,and i do think there was a big political element.Lot less for bad publicity for the regulator etc if they give them a good deal when no divis getting handed out.

DB, do you think a corporate 'growth strategy switch', at the expense of paying dividends (like in US) will become the trend here in the UK/Europe? I ask because I would like to really focus more on getting reflation-type stocks that also pay (or restart paying) decent/sustainable dividends for this coming decade. What constitutes a 'decent' dividend is I guess debatable, and much depends on what price is paid for the share in the first place. But is it the oil and telecoms sectors that look most promising from here? They are certainly currently cheap, so perhaps they are a no brainer? Or are there perhaps other (smaller) sectors that maybe offer even better (total return) potential, eg the cigarette companies, or perhaps some overlooked emerging market sectors? 

[JMD]

52 minutes ago, Harley said:

Any views on whether the UK (aka "Rip off Britain") has been more keen on cutting divs than say the US?  Another good reason to move on?

Harley, I have just posted a question for DB re. dividends. But I recall you mentioning your own dividend portfolio. I wonder, what dividend stocks would you be looking to add to your portfolio now, or if/when they got cheaper (after a market corrections say), in terms of a total-return strategy? I remember you also mentioning the 'dividend aristocrat funds', are you still a fan of those funds?

[wherebee]

23 minutes ago, JMD said:

DB, do you think a corporate 'growth strategy switch', at the expense of paying dividends (like in US) will become the trend here in the UK/Europe? I ask because I would like to really focus more on getting reflation-type stocks that also pay (or restart paying) decent/sustainable dividends for this coming decade. What constitutes a 'decent' dividend is I guess debatable, and much depends on what price is paid for the share in the first place. But is it the oil and telecoms sectors that look most promising from here? They are certainly currently cheap, so perhaps they are a no brainer? Or are there perhaps other (smaller) sectors that maybe offer even better (total return) potential, eg the cigarette companies, or perhaps some overlooked emerging market sectors? 

The cigarette companies always interest me but scare me - all if would take would be a major health drive against smoking in somewhere like china (make smokers have a negative social score, for example) and they'd be fucked.

[DurhamBorn]

4 hours ago, wherebee said:

The cigarette companies always interest me but scare me - all if would take would be a major health drive against smoking in somewhere like china (make smokers have a negative social score, for example) and they'd be fucked.

You mean like there has been for the last 60 years?.All that has done is stop new entrants into the market over the decades and allowed the sector to increase prices and cut costs.

The best contrarian investments over the long term tend to be sectors that everyone thinks has no future and nobody invests fresh capital into new projects.Oil is a prime example at the moment.

 

[MrXxxx]

8 hours ago, Harley said:

Now had I bought some in March or so, I may be evens or so by now.  Maybe I just lack conviction generally so fail to jump on such (to the convinced) opportunities.

Know the feeling but I had only just started buying so didn't appreciate what was in front of me...i think such bargains will appear again in the near future, just not in such an avalanche though.

[MrXxxx]

8 hours ago, Harley said:

Any views on whether the UK (aka "Rip off Britain") has been more keen on cutting divs than say the US?  Another good reason to move on?

From my understanding a lot of the US stocks don't offer regular divis relying more on growth.

[Don Coglione]

1 hour ago, MrXxxx said:

From my understanding a lot of the US stocks don't offer regular divis relying more on growth.

Yes, they tend to use profits to buy back shares to drive up the stock price, rather than distributing to shareholders via dividends.

Guess how executives are targetted and rewarded in the US???

[NogintheNog]

9 hours ago, JMD said:

DB, do you think a corporate 'growth strategy switch', at the expense of paying dividends (like in US) will become the trend here in the UK/Europe? I ask because I would like to really focus more on getting reflation-type stocks that also pay (or restart paying) decent/sustainable dividends for this coming decade.

Interesting points raised on dividends, or share buy backs. One thing is for sure if we start going down the share buy back route is that'll I'll have to move everything I own in stocks and share ISA's to a no fee platform like Trading212. I don't want to be paying selling fees every time I need to pull some cash out!

Don't mind losing the spread, which you always do anyway!

[Democorruptcy]

37 minutes ago, Knickerless Turgid said:

Yes, they tend to use profits to buy back shares to drive up the stock price, rather than distributing to shareholders via dividends.

Guess how executives are targetted and rewarded in the US???

In the UK crash Gordon tried to limit executive pay in the UK but that only applied to base salary. Since then their bonuses (outside the limit) have become multiples of their base salary based on the performance of their shares. Each firm allocates a share comparator group of about 20 firms in the same industry or similar market cap. A lot are dodgy selections known to be in decline. Bonuses can paid to execs even if their firm's shares have dropped, as long as they have outperformed their share comparator group. The system rewards picking dogs in your share comparator group, not actual company performance. It also encourages share buybacks to boost share prices better than your rival comparator firms.

Edit to add as I was moaning about BT let's look at their share comparator group for their exec bonuses:
 

Quote

 

Centrica Orange Telecom Italia Deutsche Telekom Proximus Telefónica KPN SSE Telenor Liberty Global Swisscom Telia Company National Grid TalkTalk Vodafone

https://www.bt.com/bt-plc/assets/documents/investors/financial-reporting-and-news/annual-reports/2020/2020-bt-annual-report.pdf

 

There is obviously a lot of competition in telecoms in Europe to they can pick lots of firms in that sector but it's nice to see old favourite CNA slipped in

 

[wherebee]

1 hour ago, Democorruptcy said:

In the UK crash Gordon tried to limit executive pay in the UK but that only applied to base salary. Since then their bonuses (outside the limit) have become multiples of their base salary based on the performance of their shares. Each firm allocates a share comparator group of about 20 firms in the same industry or similar market cap. A lot are dodgy selections known to be in decline. Bonuses can paid to execs even if their firm's shares have dropped, as long as they have outperformed their share comparator group. The system rewards picking dogs in your share comparator group, not actual company performance. It also encourages share buybacks to boost share prices better than your rival comparator firms.

Edit to add as I was moaning about BT let's look at their share comparator group for their exec bonuses:
 

There is obviously a lot of competition in telecoms in Europe to they can pick lots of firms in that sector but it's nice to see old favourite CNA slipped in

 

Any government schemes to limit exec pay are going to fail.  On one side civil servants, who if they were any good would be working in the private sector.  And on the other side, people who stand to lose a lot of money if they don't work out the loopholes.

 

Where government can make a difference is by making directors liable for failures of companies.  Then you would see directors ruling the exec like an iron fist (as used to happen pre limited liability days, when directors could lose everything).  However, politicians will never push for that, as most of them want to end up as Directors...

[Harley]

12 hours ago, JMD said:

Harley, I have just posted a question for DB re. dividends. But I recall you mentioning your own dividend portfolio. I wonder, what dividend stocks would you be looking to add to your portfolio now, or if/when they got cheaper (after a market corrections say), in terms of a total-return strategy? I remember you also mentioning the 'dividend aristocrat funds', are you still a fan of those funds?

I wrote a long post, highlighted the key bits, and then decided to delete the rest!  You're welcome!

Only information about me, not advice, my words hide some shite performances, DYOR, etc, etc.

I have an income portfolio which is FTSE based.  I started a major restructure in late 2018, moving from ETFs and investment trusts to individual shares.  I was, and still am, very happy with the move.  However, I should have moved beyond the FTSE as I ended up buying some marginal stocks.  I will in future be adding from overseas markets (where there are still some good div players), where withholding taxes make sense.  I am also looking to rebalance the portfolio, but am having a hard time deciding which stocks to rebalance to (i.e. which are down versus which are out!).

But my main attention (apart from building walls!) is drawn to creating a total return portfolio as I think for me this is more the way ahead.  I have defined a fundamental (more value) based approach I like for this portfolio which focuses on the better debt, div, solvency, etc plays in my chosen industries.  Overall, I like the industries you typically see discussed here (e.g. telecoms) and stick to the major companies.  That said, the fundamentals of some of the particular stocks discussed are not ideal if you're debt adverse and/or more 5 year data backwards looking.  I'm currently taking initial stakes in my chosen ones.  However, will we see an Autumn crash?  Personally, I expect a big fight between a market wanting to go down (increasing insolvencies, lack of an early effective virus, Robin Hood being caught by the Sheriff, scandals, US elections, geo-politics, emergence of whatever is now really behind CV, etc) and the governments printing lots of money.  Reality versus liquidity. 

Everything above says I'm not a fan of funds (collective instruments) of any type.  Personally, I'm not but each to their own.  The only area I might consider ETFs is in my pension where I'm going for a balanced Permanent Portfolio of 25% each of equity, bonds, PMs, and cash.  ETFs, etc are really needed for PMs and bonds so that just leaves equity and using ETFs here may mean I could let it run with less attention.

Long post over and edited down, rain has stopped, coffee been drunk, back to work, DYOR!!!!

[Harley]

5 hours ago, MrXxxx said:

Know the feeling but I had only just started buying so didn't appreciate what was in front of me...i think such bargains will appear again in the near future, just not in such an avalanche though.

Me too as I restructured my portfolio in 2018/19 so bought my current battered holdings then.  But then some like ADM.L act like nothing has happened.  And who could have accounted for the CV black swan?  CCL (boomers wanting cheap safe hols) and TUI (post acquisition sector mop up) made sense to me back then.  I need to rebalance my portfolio now to reallocate gains from the likes of ADM.L but to where?  Is CCL dead or got some life?  Will it's div return?  What about TUI?  It still pays a bit of a div.  Will it pull through?  It is the sector player but is the sector really dead?  And CARD (OK, that was stupid!)?  Can ADM.L still go up or is it lower risk to put it into the beaten up ones (better relative upside chance)?  Or maybe just freeze FTSE purchases and go overseas?  The FTSE has been a relative dog, but then does that mean it will outperform?  Or does any of it matter if they'll take all your money anyway?  Oh poo!

[Harley]

4 hours ago, Knickerless Turgid said:

Yes, they tend to use profits to buy back shares to drive up the stock price, rather than distributing to shareholders via dividends.

Capital gains tax less than dividend income tax for shareholders?

[Harley]

5 hours ago, MrXxxx said:

From my understanding a lot of the US stocks don't offer regular divis relying more on growth.

Fortunately there are a lot of US stocks!  Some reasonable payers in the beaten up sectors right now and plenty of market liquidity to make a difference in prices in any sector rotation.  Plus a weaker USD atm.  I really must take a look!

Edit:  Just did a quick screen.  Out of 8,145 ordinary stocks on the US markets, there are 290 companies over $1bn market cap yielding over 4.5%, although presumably this may not allow for any cancelled divs going forward.  Many are in potentially macro attractive industries such as oil and gas.  Warning, 56 are OTC market stocks!  374 (73 OTC) stock if you're happy with a 4% yield.  459 (85 OTC) if you're also happy with a market cap of $500m up. 

Edit:  Or getting tough, only 34 (16 OTC) if you want over 4% yield, min $1bn cap, a Quick Ratio over 1 and a Debt to Equity ratio of less than 100% (!, but most are well below).  The OTCs  like Equinor can often be bought elsewhere.  Reduce that down to a 3% yield you get 69 stocks (26 OTC) and things start getting really interesting macro industry wise.

[MrXxxx]

51 minutes ago, Harley said:

Me too as I restructured my portfolio in 2018/19 so bought my current battered holdings then.  But then some like ADM.L act like nothing has happened.  And who could have accounted for the CV black swan?  CCL (boomers wanting cheap safe hols) and TUI (post acquisition sector mop up) made sense to me back then.  I need to rebalance my portfolio now to reallocate gains from the likes of ADM.L but to where?  Is CCL dead or got some life?  Will it's div return?  What about TUI?  It still pays a bit of a div.  Will it pull through?  It is the sector player but is the sector really dead?  And CARD (OK, that was stupid!)?  Can ADM.L still go up or is it lower risk to put it into the beaten up ones (better relative upside chance)?  Or maybe just freeze FTSE purchases and go overseas?  The FTSE has been a relative dog, but then does that mean it will outperform?  Or does any of it matter if they'll take all your money anyway?  Oh poo!

I think in March you were (and still are) way ahead of me in the learning curve Harley....as for accounting for the CV Black swan event, ok we didn't know the specics of the event but we knew such an even was likely, the economy wasin the `shitter`, and defensive buys are a safer option BUT not one that gives a greater return IF you pick the right cyclicals.

[MrXxxx]

53 minutes ago, Harley said:

ortunately there are a lot of US stocks!  Some reasonable payers in the beaten up sectors right now and plenty of market liquidity to make a difference in prices in any sector rotation.  Plus a weaker USD atm.  I really must take a look

Ditto, but need to do a little more research before I do I.e implications of currency fluctuations and hedging before I do.

[MrXxxx]

13 hours ago, JMD said:

DB, do you think a corporate 'growth strategy switch', at the expense of paying dividends (like in US) will become the trend here in the UK/Europe? I ask because I would like to really focus more on getting reflation-type stocks that also pay (or restart paying) decent/sustainable dividends for this coming decade. What constitutes a 'decent' dividend is I guess debatable, and much depends on what price is paid for the share in the first place. But is it the oil and telecoms sectors that look most promising from here? They are certainly currently cheap, so perhaps they are a no brainer? Or are there perhaps other (smaller) sectors that maybe offer even better (total return) potential, eg the cigarette companies, or perhaps some overlooked emerging market sectors? 

If they do their debt/equity ratio will change as older investors focus more on bonds..as a result if interest rates were to go against companies they may find they are paying more for their expansion via credit than they need to and/or that competitors with the divi approach are paying...this may then have a downward impact on earnings and so share price.

[janch]

1 hour ago, Harley said:

Me too as I restructured my portfolio in 2018/19 so bought my current battered holdings then.

Being new to investing I also bought most of my current holdings last year.  I took the plunge to start in January 19 and the first share I bought was CNA.  (What a baptism of fire)

I was unprepared for the rout in March and have vowed to keep some cash sitting on the sidelines in my dealing a/c ready to pounce if we get the chance again.  Actually I would have been nervous to buy then but having seen many stocks recover I can see what an opportunity I missed.  This is all part of the learning curve for me.

I daresay many on here have been at it for far longer than I have so would have seen it as an amazing buying opportunity.  I should have started all this years ago rather than waiting until I retired! 

The divis I get just get put into the cash in the dealing account ready for any new purchases so I'm not taking the income out.  I'm treating it as a hobby but it would be nice to make some money to pass on to my kids.  This is not to say I have a good pension...I don't, but have become so accustomed to living frugally over the years it's now second nature.  Hopefully I won't need to draw on any income although if inflation takes off in a major way I may need to.

When @sancho panza showed us what has happened in BAT over the years I can see the old adage of time in the market being crucial and as you say Harley total return is the important part.  I tend to forget the divis as so far I can't say they add up to much (I haven't got much invested so far).

As for what to invest in I agree regarding having some of it overseas but I can also see maybe @DurhamBorn's approach of slicing profits and putting them into the underperformers could be a good idea.  In which case I should be putting more into the likes of RDSB.

[ThoughtCriminal]

9 hours ago, DurhamBorn said:

You mean like there has been for the last 60 years?.All that has done is stop new entrants into the market over the decades and allowed the sector to increase prices and cut costs.

The best contrarian investments over the long term tend to be sectors that everyone thinks has no future and nobody invests fresh capital into new projects.Oil is a prime example at the moment.

 

DB

 

Do I recall correctly that you said BAT were the best positioned in the sector in terms of exposure to vapes etc? 
 

Just thinking in terms of a hedge in case vaping grew at expense of tobacco