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Buying blue chips at a discount – are you game?

By October 15, 2018 October 29th, 2019 No Comments

Buying blue chips at a discount – are you game?

By Tan Teck Leng, Senior Fund Manager, Phillip Capital Management 

Buying an iPad; Buying a stock

Suppose you are looking at buying say, an iPad for yourself and you have checked out the price at the Apple store in town. Your mind is set and you are ready to buy it the next time you’re in town. But on your way back from your overseas business trip you spot the exact same model selling at the duty-free outlet selling for 7% less because of GST exemption. Would you buy at the duty-free outlet or would you skip? Remember, this is the exact same iPad model.

Translate that to a blue-chip stock you have always been eyeing. Would the answer be the same?

May we venture to suggest that the answer lies in a golden saying from Warren Buffett: “Price is what you pay, value is what you get”. If you get the same value (eg. the iPad is the same exact model, or the stock is the same one with no change in business fundamentals), then clearly the lower the price you pay the better (an airport outlet is definitely no fraud).

What is value?

The problem is that for stocks, even though price is clear (the price quoted on the exchange), the definition of “value” varies for different people. For somebody with limited holding power, perhaps the “value” of the stock is the possible price that he can sell, hopefully at a profit, back to the market in the short term (much like the flipper looking to quickly resell the iPad at a profit).

The investor who buys for income is more likely to be focused on the sustainability of the income stream of the stock, otherwise known as the dividends: whether it is sustainable, whether it could have growth potential over the long term. Since the dividends are typically directly linked to the operating cashflow of the business, the quality of the company behind the stock becomes important to him: a good company with strong competitiveness is more likely to generate a dependable and growing stream of dividend income. Short-term market price fluctuations are of relevance to him when he seeks to enter at an attractive (low) price.

And he would be right to focus on the dividends. Since the year 2000 till now, the total return (price gains plus dividend income) that major Singapore stocks have delivered to investors on average comprise about 2/3 dividends and only a minority 1/3 in price gains.

The quality of the company is important

The caveat is: the company that the investor is buying at a bargain into must be a quality company. Otherwise, even if the investor buys in at a low share price following a market retreat, it may not turn out well for him if the company’s business deteriorates due to weak competitiveness or worse, enters into financial distress due to weak financials. A declining stream of dividends would naturally follow.

It therefore helps if the company has a well-established track record of steady growth over the years.  These are generally what people call “blue chips”; in the Singapore context they would be stocks like the three banks (DBS, UOB, OCBC), Singtel, ST Engineering etc. Usually, buying them on dips has proven to be a good investment decision provided the investor has holding power, as evidenced by the long-term total return of a well-recognised Singapore index of blue-chips such as MSCI Singapore:

 

MSCI Singapore Jan 1988-Sep 2018: Delivering +636% total return (inclusive of dividends) over 31 years

Phillip SING Income ETF (the “Fund”)

An equity ETF, basically, is a collection of stocks. The Phillip SING Income ETF is designed as an income solution for long-term investors who are more concerned about dividends, and through its screening process it selects stocks with not just attractive dividend yield, but they must have quality along two facets: business quality and financial quality. For business quality, emphasis is placed on the competitive strengths of the company, or in Morningstar’s term in the Morningstar Singapore Yield Focus Index that the Fund benchmark against, “economic moat” that protects its profit margins from existing and new “invaders”.  For financial quality, emphasis is placed on the resilience of the company’s balance sheet and its ability to weather economic down-cycles.

We end up with a selection of 30 stocks inside this ETF, most of which are familiar to many: the likes of the three banks, Singtel, SGX, ST Engineering, major REITs like Capitaland Commercial and Capitaland Mall Trust, supermarket operators like Dairy Farm (owner of Cold Storage, 7-11, Giant) and Sheng Siong, are all among this list. More than half by index weightage are government/Temasek linked companies, with the other half controlled by equally credible owners such as the Wee (UOB), the Lee (OCBC) and the Jardine family.

Two things to note that are especially relevant in the current environment. Firstly, some point out that even blue chips can be vulnerable to new entrants in this age of disruption. We agree, hence diversification is important, and an ETF holding a diversified collection of securities provides this. Secondly, in an interest rate hike environment, bonds tend to weaken in value because bond market anticipates higher cost of using and maintaining the bonds to fund business operations and opportunities and factors such anticipated higher cost in the price of the bonds. However for stocks, companies have more flexibility to adjust their dividend yields with the support of their shareholders to take advantage of business opportunities in a rising interest rate environment. Hence over time, dividend yielding stocks with good fundamental value and growth track record tends to perform better than bonds in a rising interest rate environment.

Take advantage of lower prices to subscribe to the Phillip SING Income ETF

The Phillip SING Income ETF (the “ETF”) will start investing into its constituent stocks after the Initial Offer Period, which started on 1 October and ends on 19 October 2018.

Between end-September 2018 till today (11 October), the broad Singapore market has dropped nearly 7%, providing an opportunity for the ETF to buy the constituent stocks and their underlying business after the offer period at a 7% price discount! Have the fundamental value of the quality stocks changed in a matter of 2 weeks? Such stocks still have the same business fundamentals but now at a cheaper price.

Just like you should be glad to buy something like the iPad you would have bought anyway, but at 7% GST-exempted prices.

Important Information

This publication and the information herein is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in the exchange-traded fund (“ETF”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for important information of the ETF and obtain advice from a financial adviser (“FA”) before making a commitment to invest in the ETF. A copy of the Prospectus and PHS for the ETF are available from PCM or any of its Participating Dealers (“PDs”).

Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved. Any use of financial derivative instruments will be for hedging and/or for efficient portfolio management. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the ETF. The regular dividend distributions, either out of income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the ETF. Upon launch of the ETF, please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.

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Morningstar® Singapore Yield Focus IndexSM is a service mark of Morningstar Research Pte Ltd and its affiliated companies (collectively, “Morningstar”) and have been licensed for use for certain purposes by PCM. Phillip SING Income ETF is not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in Phillip SING Income ETF.

This publication has not been reviewed by the Monetary Authority of Singapore.

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With effect from 1st July 2014, this FATCA Notice (the “Notice”) forms part of the terms and conditions of our products and services (the “Terms and Conditions”) governing your relationship (“you”, “your”, “yours” referred to herein include joint-account holders and beneficiary holders of an entity who are a natural person) with Phillip Capital Management (S) Ltd and its related corporations (collectively referred to herein as “PCM”, “us”, “we” or “our”) and should be read in conjunction with those Terms and Conditions, including those under our Personal Data Protection Notice.The existing terms and conditions of any contractual agreement entered into between PCM a nd you (the “Existing Terms and Conditions”) remain in full force and effect. In the event of any conflict or inconsistency between the provisions of this Notice and those of the Existing Terms and Conditions, the provisions of this Notice shall prevail.

We may from time to time update the Terms and Conditions listed here to ensure their consistency with our future developments,industry trends and/or any changes in legal or regulatory requirements. Such updates will be published at https://www.phillipfunds.com/ .

On March 18, 2010, the United States of America’s (“U.S.”) Hiring Incentives to Restore Employment Act of 2010 (Pub.L.111-147H.R.2847)) (the “Act”) was enacted into law. Section 501(a) of the Act added a new chapter 4 (sections 1471-1474) to Subtitle A of the U.S.’s Internal Revenue Code (Code).Chapter 4 expands the information reporting requirements imposed on foreign financial institutions (as defined in section 1471(d)(4)) (FFIs) with respect to certain U.S. accounts (as defined in section 1471(d)(1)) of specified U.S. person, and imposes withholding, documentation, and reporting requirements with respect to certain payments made to certain foreign entities.

PCM will be obliged to comply with the provisions of FATCA under the terms of the inter-governmental agreement (“IGA”) Model I between the U.S. and Singapore and under the terms of Singapore’s subsidiary legislation which will be issued pursuant to Singapore's Income Tax Act (Cap. 134) to implement the IGA. “FATCA” or “Foreign Account Tax Compliance Act” means Chapter 4 (sections 1471 to 1474) to Subtitle A of the U.S. Internal Revenue Code.

“FATCA” or “Foreign Account Tax Compliance Act” means Chapter 4 (sections 1471 to 1474) to Subtitle A of the U.S.Internal Revenue Code.

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PDPA

PERSONAL DATA PROTECTION NOTICE

With effect from 1st July 2014, this Personal Data Protection Notice (the “Notice”) forms part of the terms and conditions of our products and services (the “Terms and Conditions”) governing your relationship (“you”, “your”, “yours” referred to herein include joint-account holders and beneficiary holders of an entity who are a natural person) with Phillip Capital Management (S) Ltd and its related corporations (collectively referred to herein as “PCM”, “us”, “we” or “our”). Without prejudice to the existing terms and conditions of any contractual agreement entered into between PCM and you (the “Existing Terms and Conditions”), which remain in full force and effect, this Notice shall be read in conjunction with the Existing Terms and Conditions. In the event of any conflict or inconsistency between the provisions of this Notice and those of the Existing Terms and Conditions, the provisions of this Notice shall prevail.

We are required under the Personal Data Protection Act (“PDPA”) to put in place the necessary arrangements to protect personal data and comply with the PDPA. Personal data includes any data and information, whether true or not, about an individual (a natural person) who can be identified from that data or information, such as your name, NRIC, passport or other identification number, telephone numbers, address, email address and any other information relating to individuals which you or your authorized representative have provided to us or we are likely to have access to (“Personal Data”).

This Notice outlines the purposes for the collection, use and/or disclosure of your Personal Data by PCM, how we protect your Personal Data and your rights with respect to the collection, use and/or disclosure of your Personal Data. This Notice supplements but does not supersede nor replace any other consents which you may have previously provided to us in respect of your Personal Data, and your consents herein are additional to any rights which we may have at law to collect, use and/or disclose your Personal Data. We may from time to time update the Terms and Conditions listed here to ensure their consistency with our future developments, industry trends and/or any changes in legal or regulatory requirements. Such updates will be published at https://www.phillipfunds.com/.

1. PCM may collect, use and/or disclose your personal data for any of the following purposes listed below (collectively “Permitted Purposes”):-

i) carrying out activities, duties and obligations in connection with our products and services which you have applied for, including evaluating your eligibility and credit profile, verifying the identity or authority of your representatives, administration of your account and/or managing our overall relationship with you (including but not limited to the outsourcing of any of our functions to service providers or vendors, due diligence checks, accounting and portfolio valuation, billing and collections, business continuity and print management);

(ii) developing new services and/or products;

(iii) providing you with marketing, advertising and promotional information, materials and/or documents related to financial products and/or services that we may be selling, marketing, offering or promoting, whether such financial products or services exist now or are created in the future;

(iv) marketing and promotional events, including but not limited to images, photographs or videos of you during the events;

(v) meeting or complying with PCM’s internal policies and procedures and any applicable rules, law, regulations, codes of practice or guidelines, orders or requests issued by any court, legal or regulatory bodies (both national and international) (including but not limited to disclosures to regulatory authorities or financial industry self-regulatory bodies; conducting audit checks (internal/external), surveillance and investigation; handling of customer feedback or complaint; dispute resolutions; recording of telephone conversations and/or electronic communications with you; conducting checks or investigations for prevention and/or detection of financial crimes such as money-laundering, financing of terrorism, fraud and/or bribery etc.);

(vi) legal purposes, including but not limited to obtaining legal advice and enforcing or defending our legal and/or contractual rights against you;

(vii) risk management, statistical and trend analysis;

(viii) processing and/or storing data and/or information related to your relationship with PCM.

2. PCM, in order to facilitate the discharge of its duties and obligations to you, may be required to disclose your Personal Data for the Permitted Purposes and/or for processing of the Permitted Purposes on a need-to-know basis, to any of the following entities and the directors, officers, staff, employees and agents of any such entities, whether located within or outside Singapore (“Relevant Persons”):-

(i) any associate or related company of PCM and the directors, officers, staff, employees and agents of any such person;

(ii) any actual or proposed assignee or transferee of any of PCM’s rights and obligations or any actual or proposed delegate of any of PCM’s functions and duties under its contractual relationship with you;

(iii) any relevant governmental, supervisory or regulatory authority or court of law, including the Monetary Authority of Singapore, to which PCM is or may be subject;

(ix) any person in order to give effect to any instruction from you or any person acting or purporting to be acting on behalf of you;

(x) any person as PCM may consider necessary in order to comply with any order, directive or policy of any court or governmental or regulatory authority in any jurisdiction;

(xi) any person when required to do so in accordance with the laws of any applicable jurisdiction or rules of any professional self-regulatory bodies or securities exchanges;

(xii) any agent, contractor or third party service provider who provides their services in connection with the operation of PCM’s fund management business, including but not limited to the custodians, trustees, fund administrators, registrars, banks, legal firms, accounting and auditing firms, printing firms, IT service providers, credit reference agencies, credit bureaus, data screening entities for the purpose of due diligence checks and the prevention and detection of financial crimes.

3. PCM’s related companies and third party service providers shall be bound by the same provisions as set out in this Notice and we will require them to ensure that your Personal Data are kept confidential and secure.

4. You represent and warrant that your Personal Data provided to us is accurate and complete for us to make a decision that affects you or to disclose your Personal Data to the above-mentioned Relevant Persons on a need-to-know basis. Where applicable, when you provided Personal Data relating to another individual (e.g. your dependent, spouse, children and/or parents) to us, you represent and warrant that such Personal Data is accurate and complete and the consent of that individual has been obtained for the collection, use and disclosure of his/her Personal Data in accordance with the provisions listed in this Notice.

5. We will retain your Personal Data to the extent that one or more of the Purposes for which your Personal Data was collected, used and/or disclosed is/are still valid and for legal, regulatory reporting or regulatory investigations purposes for which retention may be necessary.

6. PCM may terminate any contractual relationship which you may have with us, if any information provided to us is insufficient, misleading or erroneous or if any information that is required to be disclosed to any regulatory authority for compliance with any law or regulation is not provided by you.

7. You may request access to or make corrections to your Personal Data records. Depending on the information requested PCM may charge a small fee when you request access to your Personal Data. Upon your request and subject to the provisions under the PDPA, PCM will respond accordingly within reasonably possible time. Please submit your request to our Data Protection Officer via pcm@phillip.com.sg.

8. You may withdraw your consent to any use or disclosure of your Personal Data for any or all of the Purposes as set out in this Notice by giving written notice to us. If you withdraw your consent(s), depending on the nature of your request, we may not be in a position to continue to provide our products or services to you or administer any contractual relationship in place. Such withdrawal may be considered a termination by you of any agreement you may have with us. Where there is any breach of your contractual obligations or undertakings, PCM’s legal rights and remedies are expressly reserved in such event.