By The Gold Report
Money manager Adrian Day reviews some of the companies in his portfolio, including some global companies with yields up to 7.5%.
Loews Corp. (L:NYSE, 46.09) has finally made a long-awaited new acquisition, spending $1.2 billion of its $5 billion cash hoard to buy Consolidated Container Company, a plastic packaging manufacturer. If not exactly exciting, the company meets Loews’ acquisition criteria as set out by CEO James Tisch: it is in a fragmented industry offering opportunities for further acquisitions, it has strong cash flows and is unlikely to be subject to major technological disruption. The acquisition also diversifies Loews’ portfolio into a relatively stable area to help offset the volatile oil and gas sectors.
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Loews, trading at a 14% discount to its Net Asset Value, with upside potential from its oil and gas as well as more steady cash flows from its hotels and insurance units, and a still rock-solid balance sheet, remains a long-term holding. Given the discount is well below historical average, we would look for a wider NAV discount to step up buying.
High yields from around the world
Hutchison Port Holdings Trust (HPHT:Singapore), US$0.40) reported a 15% decline in profits on a 6% decline in throughput for 2016, in line with expectations. But the company lowered dividend guidance for this year, for an implied yield of 7.5%.
The trust is under pressure from macro issues, including shipping alliance rationalization leading to pricing pressures, sluggish global trade and pressures on the Hong Kong port, as well as the trust’s debt repayment plans.
However, given the outlook for steady revenues and dividends over the next few years as well as upside potential if global trade recovers, we are holding for a likely bottom-of-the-cycle 7.5% yield. We would add on improved prospects or lower stock price.
Disappointing earnings, but perhaps a turn ahead
Kingsmen Creatives Ltd. (5MZ:SI), 0.595) had a difficult 40th year in the face of a soft retail environment and much lower revenue from the volatile exhibitions and museums sector. Overall, though revenues were up slightly, profits fell 9% in 2016, with depreciation (on its office building purchase) up significantly. The dividend was reduced from last year, to a current 4.2%.
Kingsmen is a well-run, growing company with a strong balance sheet. The market is turning, we believe, so we may see the dividend start to grow again this year. We are holding, and buying on stock price weakness.
Moderate growth, but solid dividend
Nestle SA (NESN:VX; NSRGY:OTC), 75.90) reported disappointing 2016 results, with organic growth of 3.2%, well below the company’s own target of 5–6% annual growth. Low global growth, low inflation, strong competition and volatile currencies were all cited as headwinds on results. It is now abandoning that target, which it has missed for the last four years. It is worth noting, however, that the growth Nestle has achieved is meaningfully above that of comparables, such as Unilever, Kraft, and Proctor and Gamble.
A new CEO, Mark Schneider, appointed in January, is the first CEO from outside the company in nearly 100 years. He formerly headed a German healthcare company. In addition to abandoning the organic growth target, Schneider said his emphasis in the period ahead would be on cost savings, and that the company was not looking for any major acquisitions, this despite a strong balance sheet (including a $25 billion sake in L’Oreal which could be sold).
We are holding, partly for the good dividend, a tad over 3% currently. Nestle has increased its annual dividend every year since the mid-1990s, and hasn’t cut the dividends all the way back to the 1950s. We’ll be buyers again on a pullback.
When it rains, it pours for Freeport
Freeport-McMoRan Inc. (FCX:NYSE), 12.48) has had a tumultuous period since our last review. Having finally got the balance sheet under control—with a further $5.2 billion in sales in the 4th quarter—along come a strike at Peru’s largest copper mine (now settled), plus another strike and labor protests at Grasberg in Indonesia, as well as a dispute with the government. The government is attempting to renege on the long-term contract it has with Freeport, forcing it to sell a majority stake to locals; requiring it to build an uneconomic smelter; and changing other terms of the contract. The dispute led to the suspension of sales and then of mining for a period.
Grasberg was the foundation of the company and remains a major asset, representing about 25% of the company’s copper revenue (and another 10% of revenue in gold sales). However, in a long-standing agreement with Rio, that company receives 40% of all revenue starting in 2021. (Currently, it receives 40% above certain benchmarks.) Rio has already said publicly that it is reconsidering whether it wants to remain in the joint venture; “There is a difference between a world-class resource and a world-class business,” the CEO said.
Of course, both companies have already spent the many billions of capital to develop the mine, which it did on the basis of a contract with the government. For the government to arbitrarily change this and take a larger amount would push Freeport to seek arbitration and compensation in an international arena. Freeport estimates it has contributed around $60 billion to the country’s GDP since the early 1990s; it is the largest private employer in Papua New Guinea, and one of the country’s largest taxpayers.
It’s been an ever-developing saga, well covered in the financial press. Freeport has been extremely patient with the government, negotiating to meet half way, agreeing to build the (unnecessary and expensive) smelter and so forth. When it went public, it was clearly exasperated.
Given the uncertainty in Indonesia, we will look for sell-offs to add to positions, but are holding now, close to the low since last October.
More drilling…and more shares
Cartier Resources Inc. (ECR:TSX.V), 0.255) is drilling on four properties following a strategic investment in the company by Agnico Eagle Mines Ltd., which holds 19.75% of the shares. Despite the injection of funds from Agnico (in December), however, the company has undertaken yet another financing amounting to another 10% dilution. Hold.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Nestle. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Loews, Hutchison Port Holdings Trust, Kingsmen Creatives, Nestle, Freeport-McMoRan and Cartier Resources. I determined which companies would be included in this article based on my research and understanding of the sector.
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