Dividend growth investing

[Mr.G]

A Primer On - Value Vs. Growth Vs. Income Investing

As an analyst I am deeply intrigued by the investing philosophies of many great investors. In my detailed studies I have noticed the powers of growth and value investors.

Growth investors are always on the hunt for a multi-bagger, An investment that will grow more than 10 times the initial investment. They are always looking towards fast moving and latest hot shots of dalal street. It is easy to find a growing business, But it needs a brilliant analyst in evaluating business prospects and justifying a good buy at current valuations. A well noted Investor and Father of this style is Peter Lynch

Value investors are looking for companies that are selling bellow the value that a private owner would pay for it. They can find the value of a companies by a deep analysis of their balance sheets. They are patient investors and buy during times of uncertainty and depression. They are the first to sell during the bull market euphoria. Legendary investor Benjamin Graham is the father of this style.

Income investors are on the slow but assured path to creating wealth. They focus on high yield companies and investment securities. They are not concerned with the capital gains they make in shares. They want consistent dividend payout and inherent stability is the businesses they buy. Most times investments they make are held for life or sold on first news of a dividend cut. John Burr Williams is regarded as the father of Modern Fundamental Analysis, He relied heavily on dividends.

The market is mainly dividend between the Growth and Value investing schools. Income investing being only a small niche. But many economists have pointed out that Growth and Value investing are not all different from each other. It is said that unknown companies trading at low valuations are value buys, But after they start to gain heat and shoot up, They are regarded as Growth buys.

Warren Buffet is seen as the best value investor of our generation. But we should also notice that he was a value investor in his early days. He later evolved his investment style into something can be seen as first true example of Dividend-Growth Investing. He buys great quality companies at reasonable valuations. Great companies fundamentally have the potential to grow their dividends on a consistent basis. His most notable investment was Coke. In his recent letter to shareholders he has mentioned that “The investment will soon be paying him annual dividends that will equal the total amount of his initial investment”



Examples of stocks in the Indian market:

Wipro Ltd. Is a great example of a growth stock. An investment of Rs 10,000 would turn into Rs 3,69,00,00,000 (Rs 369 Crores) in 32 years! But what are the chances that you will find another Wipro again?


Rakesh Jhunjhunwala started his career with a great value buy of Tata Tea (Now Tata Global Beverage), He bought the company at Rs.43 and sold it three months later at Rs.143 after the market realized its true value.



Balmer Lawrie & Company Ltd. is one of the best dividend paying stock in the Indian Market. With consistent pay outs since 2002.

http://ghanishtnagpal.com/value-vs-growth-vs-income-investing-style-best/

 

[Big Short]

yo Mr. G!
check out my blog

marketsandm.blogspot.com

let me know what you think

 

[Mr.G]

The random walk theory – It’s implications on short-term and long-term investing

The random walk theory gained popularity in 1973 when Burton Malkiel wrote the book “A Random Walk Down Wall street”. It states that stock movement is completely random and cannot be predicted in the short-term. But in the long-term they follow their fundamental trend.

Legendary Investor Benjamin Graham rightly stated that “The stock market is a voting machine in short-term, And a weighing machine in long-term.” This being said we can see that the market’s short-term movements are dictated by emotions. And in long-term they are dictated by fundamental valuations.
For short-term investor- News can cause shifts in investor emotions, of course news is not entirely lacking in influence on stock prices. It is the emotional reaction to news events that is the driver, however, not the news events themselves.

It is emotions that matter in the short term rather than news, the effect of news events on emotion is highly unpredictable. Good news can cause bad emotional reactions. Unimportant news can cause big swings in emotion. Emotions are irrational and result in irrational behavior in the price action of stock prices.



There is no way to predict the arrival of any news or other events that may influence the stock price and cause an emotional reaction in the market. It is thus concluded that short-term prices are completely random and cannot be predicted by any investing analysis.
For long-term investor- Stock prices in the long term have shown strong correlation to their fundamental valuations. This is due to the lessening of the emotional effect on stock prices. This smoothing causes the prices to reflect their long-term fundamental trend. Which in case of good companies will be upward and in bad companies it will be downward.

A Value investor specifically believes in the random walk theory because he can use the random and irrational shifts in the market to buy companies below their intrinsic value and sell them in the long-term after the market has realized their fundamental valuations. As we move into a longer timeframe the market becomes more efficient and is less likely to be influenced by short-term factors such as emotion.

We believe that investing with a long-term view is the best method to bring down unpredictability and risk of short-term movements and give consistent returns. We should ignore all short-term movements and news that do not change the fundamentals and focus on our investing goals.

http://ghanishtnagpal.com/random-walk-theory-short-term-long-term-investing/

 

[Mr.G]

The biggest enemy of value investors is a value trap. These are companies that have fallen to low level. And look like false value buys. There are usually weak fundamentals, the stock trades at low prices because there is no underlying value. These stocks go further down to become penny stocks or never recover at all.

Investors buy these stocks in hope that they will rise back to their insintric value, doing this they risk.

If there are stocks have fallen to give double digit dividend yields, They you should ask yourself if they are too good to be true. A company with weak fundamentals may stop paying a dividend altogether or cut their dividend amount.

With intensive fundamental analysis we sift through the markets looking at 1000s of companies to find a handful that are truly great investments. An example of a value trap is SRF ltd which has been in a downtrend owing to weak fundamentals. It fell from a high of Rs.444 to a current low of Rs.125. Investors are still attracted to its double digit dividend and ignore the overall weakness of the cos.

The next cheap blue-chip you would buy might be a value traps. These companies are only window dressed and masquerading to be value buys.

Value trap companies have hidden problems that are sometimes not shared with the public. They are addicted to debt and management is not competent. The company is from a very cyclic industry or going obsolete (like print media).

http://ghanishtnagpal.com/beware-value-traps/

 

[Mr.G]

The GARP strategy is a hybrid of both value and growth investing, It looked for companies that were somewhat undervalued and had high potential for growth. This system takes the middle ground between the two extremes of Value and Growth Investing.


One of the biggest users of GARP is Peter Lynch, Many consider Lynch the world's best fund manager. He is also one of the pioneers of Growth investing.

Current Earnings
GARP investors are concerned with the growth prospects of a company: they like to see positive earnings numbers for the past few years

Earnings Growth
GARP investors also stay away from extremely high growth rates such 30-50, Companies within this range are usually near a flattening in their growth curve and are highly unpredictable, Growth Should be average in 10-15% range.

P/E Ratio
In matters of P/E ratio GARP investors look for lower P/E than growth investors but it is higher than that used by value investors.

PEG Ratio
Price to earnings growth ratio. Is an important metric used by GARP investors. They look for a PEG of under 1 and near 0.05, If the ratio is under that amount then it is classified as a undervalued stock. Which requires deeper analysis and is beyond the scope of GARP.


Conclusion
GARP might sound like the perfect strategy, but it will give different returns that either growth or value investing. If you are not a master of both then, you have risk of buying average companies.

http://ghanishtnagpal.com/dont-like-either-growth-value-use-garp/

 

[Mr.G]

CAN SLIM was developed by William O'Neil, the co-founder of Investor's Business Daily, it is describe in his highly suggested book "How to Make Money in Stocks".

It is an easy to follow but comprehensive method of selecting stocks. It provides the retail investor with some tools and knowledge about fundamental analysis. This is not comparable to professional analysis of the stock.

C = Current Earnings
It puts emphasize on the present as it tells that there should be some amount of positive growth in the recent quarterly earnings as well.

A = Annual Earnings
CANSLIM indicates that a company should have shown positive above-average annual growth (annual EPS) in each of the last 5 years.

N = New
A superior company is that it offers something new and different in comparison to others. Whether it is a new administration team, a new invention, a new marketplace, or a new high in stock price.

S = Supply and Demand
The S in CAN SLIM stands for supply and demand, which refers to the laws that govern all market activities. We should always look for stocks that are high in demand but less in supply i.e. look for stocks with low outstanding float.

L = Leader or Laggard
In each industry, there are forever those that lead, providing immense gains to shareholders. We stick to the leaders only.

I = Institutional holding
CAN SLIM recognizes the importance of companies having some institutional holding.
A stock should have at least three to 10 institutional holders.

M = Market Direction
The last criteria is market direction. It is important to recognize what kind of a market you are in, whether it is a bear or a bull. That we should always invest with the trend and not against it.


Conclusion
Here's to summarize the seven CAN SLIM criteria:

1. C = Current quarterly earnings per share
2. A = Annual earnings per share
3. N = New things
4. S = Shares outstanding
5. L = Leaders
6. I = Institutional holding
7. M = General market


http://ghanishtnagpal.com/canslim-easy-analysis-average-investor/

 

[Mr.G]

National Pension Scheme (NPS) – How You Can Save Money Like Government Employees

Pension Fund Regulatory and Development Authority (PFRDA) is the prudential regulator for the NPS. PFRDA was established by the Government of India on 23 August 2003 to encourage old age income protection by establishing, developing and supervising pension funds. The NPS Trust is composed of members of many different fields and who have professional capability to manage the funds.
Coverage and eligibility:

NPS can be joined by call citizens on India on a voluntary basis and is mandatory for employees of central government appointed on or after 1 January 2004. All Indian citizens between the age of 18 and 55 can join the NPS.
There are two tiers of accounts:

Tier I- The contributions will be deposited in a non-withdraw able pension account. And will be managed by fund managers and regulated by the NPS trust’s framework.
Tier II- The second is a withdraw able account. The money will be managed in the same way as Tier I.
Contribution Amount:

Under guidelines set by the PFRDA:
Minimum amount will be: Rs. 500/month
Minimum number of contributions: 1/ year
Minimum annual contribution: Rs 6,000/ year

Investment System:

The subscriber can decide among which classes his wealth is to be diversified and invested:
E Class: Investment in Equity Index Fund. Either following the BSE Sensex or NSE Nifty50.
G Class: Investment would be in Government Bonds
C Class: Investment in Fixed Income securities other than GOI bonds. Such as AMC funds, Bank F.D.s etc.

In case the subscriber does not opt for personal allocation of funds. He can opt for “Auto Cycle” option. Where Fund managers will investing and disinvest the funds according to the life cycles of the subscriber.

Investment charges

NPS has the lowest management charge of 0.00010% on net AUM (Asset Under Management). This is the lowest fee in the world.
Initial charge of opening the account would be Rs. 470. From second year onwards the minimum charge would be Rs. 350 a year.

Withdrawal norms
If exit at 60: Then 80% of money will be used to buy life annuity from IRDA regulate life insurer and 20% fund will be returned as lump sum.
If exit after age 60: 60% money will be used to buy annuity and rest will be returned in lump sum.
If we exit at or after 70: We will get the entire amount as lump sum in our monetary account. In case of death of subscriber the nominee will get entire amount.

Tax treatment

If the NPS subscriber is already having other eligible deductions such as LIC premium, PPF, bank or NSC deposits, ELSS etc., under Section 80C, 80CCC and Section 80CCD., deduction allowed under Section 80CCD as aggregated of total contribution under said sections is limited to 1lakh per year.

Past investment returns

The performance of the pension fund managers for the central government employees indicate that the returns on subscribers’ contributions under NPS ranged between 8% and 16% during 2008-09 and 2010-11.

http://ghanishtnagpal.com/national-pension-scheme-nps-can-save-money-like-government-employees/

 

[Mr.G]

Average 5 Year Earnings 681cr
Interest paid in FY13' 869cr
Insterest on issue of NCD 131.25cr

Total Interest to be paid in FY14 1000cr

Interest coverage ratio 0.681 Times
Required Coverage Ratio 2 Times

Interest Coverage Ratio Current Earnings 1.3 Times

The company does not earn it’s interest obligations in historical Avg. Earnings. This suggests that it is expanding at a faster rate than is historically justified. Earnings/Total Interest Ratio @ 0.681

The company already has a extremely high Debt amount in relation to Equity with Ratio @ 4.15

There is an uptrend in Earnings, which is a positive points. But this is nullified due to the very short duration for the issue. In my opinion the company is not able to cover the Issue interest in case of severe depression in near-term.

The cos is barely Earning Interest in current earnings with an Interest Coverage Ratio @1.3 times.

The issue is junior in status as it is an NCD, In case of default Bond holders will be obligated to first payment.

In my opinion, on a conservative analysis of the said Issue, We do not recommend Investment. As company is very over capitalized. It is not in position to pay its obligations in case of depression of earnings.

For speculative basis.

We observe that earnings in is an uptrend, and will cover earnings with a passing margin YoY.

Working capital covers interest requirement 8.5 times. Which provides exceptional cushion of interest payments.

In my opinion, Investment in said issue is not recommended for the conservative investor. One might take a speculative position and take benefit of high coupon rate of the issue.

NOTE: Above analysis is done from very conservative view. Please do you own analysis according to your risk before investing.

http://ghanishtnagpal.com/analysis-iifl-ncds-issue-sep-2013-yielding-12-68-p/

 

[Mr.G]

National Saving Certificate is a fixed-income security offer by the Government of India, through the Indian Postal system. They are one of the best small saving schemes available in India.

Time Duration:

They are available at 5Years @ interest rate of 8.5%p.a. and 10Years @8.8%.

Premature widrawal is not permitted.

Minimum Investment:

Minimum investment is rs.500 and is available in multiples of Rs.500/Rs.1000/Rs.5000/Rs.10000.

Tax Treatment:

NSC is exempted upto Rs.1 Lakh under section 80C. If you have already exhausted Rs.1 Lakh limit under aggregate of investment under Section 80C then NSC is taxable.

Interest is taxable at maturity no TDS is to be paid on interest income as it will be declared as individual income after maturity.

Benefits of NSC:

Rs.10,000 invested for 10Y will be compounded bi-annually and will turn into Rs.23,435 at maturity.
It can be used as collateral for bank loan.
Joint holder and minor holder can invest in NSC.
Nominee facility is available.

http://ghanishtnagpal.com/primer-national-saving-certificates-nsc/

 

[Mr.G]

A Bond ladder is a system of investing in a fixed-income securities portfolio that gives regular income after a fixed period and minimizes interest rate risk.

Instead of buying one income security with a lump sum amount we can buy smaller investments at regular evenly spaced intervals. This gives us a constant income stream as each bond matures with passing time. This is the perfect strategy for people getting close to retirement and who need regular income after retirement.

Year Amount Invested Maturity Date Maturity Amount
2013 Rs.1,00,000 2023 2,29,890
2014 Rs.1,00,000 2024 2,29,890
2015 Rs.1,00,000 2025 2,29,890
2016 Rs.1,00,000 2026 2,29,890
2017 Rs.1,00,000 2027 2,29,890
2018 Rs.1,00,000 2028 2,29,890
2019 Rs.1,00,000 2029 2,29,890
2020 Rs.1,00,000 2030 2,29,890
2021 Rs.1,00,000 2031 2,29,890
2022 Rs.1,00,000 2032 2,29,890
2023 Rs.1,00,000 2033 2,29,890
A Bond Ladder Using 10Y GOI Bonds Yielding 8.5%p.a.



This system can be used with any fixed-income security. The more liquidity an investor need the closer the space between investments should be.

One can use a mixture of both short-term and long-term bonds to minimize re-investment risk aswell. The short-term bonds can be re-invested if rates are low, so that over all impact of low rate is limited to short-term portfolio. Long-term bonds can be re-invested during high rate environments.

This system places focus on capital protection and regular income over capital growth.

http://ghanishtnagpal.com/bond-ladder-regular-income-reduced-risk/