My portfolio has seen a couple of changes this month, here’s an update about some of my new additions with some random thoughts mixed in.
Back into YUM + YUM China after the spin-off
As I discussed in my September dividend income post, spin-offs of foreign companies are almost always taxed at the same rate as dividends here in Belgium thanks to our inane (discovered the word “inane” some time ago and I love it!) tax laws. This is why I temporarily exited my YUM! Brands position. After the distribution date, I bought back my YUM shares and added YUMC shares. In fact, I used some fresh capital to slightly increase my position in the new YUM China as a way of giving China some extra weight (but still very small) in my portfolio.
YUM announced a hefty dividend increase right before the YUMC spin-off but at the moment it’s unknown whether the combined payout of the two entities will be the same or lower than before.
Novo Nordisk becomes a value play
Shares of diabetes leader Novo Nordisk have seemingly fallen off a cliff this year, despite the company being on track to deliver its best year ever. While the company’s financials are still going strong, investors are put off by the firm’s drastically reduced long-term outlook. In February, Novo Nordisk reduced its long-term target for operating profit growth from 15 percent to 10 percent, and last month the target got reduced to 5 percent.
While demand for the company’s products is still growing rapidly, the drug-pricing war has dimmed future prospects. Payers are no longer willing to pay up for convenience, which probably also resulted in Novo Nordisk’s decision to cancel further development of its innovative oral insuline treatment. We may never know if this insulin tablet effort would have been a viable alternative for insulin injections, but it’s sad for the millions and millions of diabetics who now no longer have a prospect of being able to abandon needles sometime in the future.
As a result of the big share price drop, Novo Nordisk is no longer trading at a premium versus the market but at a nice discount. While it’s a bummer for investors who recently bought shares, it does make Novo Nordisk’s buyback program more effective. The dividend yield is currently a hefty 2.8 percent but unfortunately Danish withholding tax is 27 percent.
One thing is for sure: the diabetes and obesity epidemic isn’t going anywhere. Versus a lot of the no-growth or low-growth blue chips I see potential for more than satisfactory long-term returns at Novo Nordisk’s current valuation so I bought 45 more shares this week.
NVIDIA: A stock for the future?
The sector breakdown of my portfolio looks very different from what you see with a broad index like the S&P500. I own no financials, have no exposure to the traditional utilities nor do I have any telecoms sending me regular dividend checks. Since the financial crisis I never felt the need to get into banks, they’re boring, hard to analyze and I see no need to diversify just for the sake of diversification. With high dividend taxes in Belgium I also no longer feel the need to own telecoms with high dividend yields and in case of power utilities I have some doubts about how some trends like renewables and energy storage will impact their long-term performance.
Another segment I didn’t have exposure to was IT/technology, but that changed this week with the purchase of NVIDIA shares! There are several interesting names in this space that I would like to own, even non-dividend paying stocks like Google, but so far nothing really popped up on my radar.
I know Apple is one of the most-owned technology stocks by dividend growth investors, the valuation looks attractive but I must admit I never really liked the company. Against my expectations, they’ve had a very good run the past decade but I have doubts about what they’re going to achieve in the future. Apple does have lots of cash but they lost their visionary leader and I do not think they have a sufficient moat in the smartphone market, which is the company’s biggest profit driver. Of course, even companies with declining sales can wildly outperform the S&P500, but at the moment I feel no need to own Apple.
My ten-bagger that wasn’t…
This post is getting longer than I intended it to be so let’s cut straight to the chase. One stock that’s been on my radar for some time is NVIDIA. I think I once read a quote about how it’s not the stocks you buy but the stocks you sell that you’ll regret. In case of NVIDIA this is totally true. It’s hard to believe right now but last decade I was sitting on top of over 600 shares of NVIDIA.
I was still quite young at the time and because I wanted to save money for a house I sold these shares less than a year later. At the time I predicted strong growth for PC gaming, a continued market dominance for NVIDIA and the potential for strong growth in non-gaming segments. The road was bumpy but over the years it played out exactly as I expected. Had I held these shares it would have been a ten-bagger (partly helped by the stronger dollar) and the shares of this one company alone would be worth more than the entirety of the stock portfolio I own today.
It’s a good illustration of how the outperformance of a couple of stocks has the potential to transform a portfolio. A lot of the sentiments I had about NVIDIA last decade still ring true and I still follow the company closely — even though I’m no longer a gamer. They’re as strong as ever in PC gaming, I have a lot of confidence in the CEO and the company is seeing massive growth in non-gaming segments.
When I look at the future, I can see several trends playing out right now that I think are going to be very disruptive for the economy and the world in general. One one hand I see a very bright future for solar and wind energy, both are getting closer every year to the point it will be a no-brainer in a lot of parts of the world to deploy them en masse. Next there’s electric cars, they’re still quite expensive but in a not-too-far-away future new car buyers will look at the total cost of ownership and most people will decide to go electric because it won’t make sense to pay more for an old-fashioned gasoline or diesel car.
Another disruptive field that’s a bit harder to grasp is artificial intelligence. It’s a term that’s been around for ages but the last couple of years a lot of the pieces of the puzzle are starting to fall together. It’s easy to see how self-driving cars will revolutionize the world, and have a huge impact on the job market — and that’s just one of the many applications of this new wave of innovation. NVIDIA’s GPU-based platforms are well-positioned to ride this wave and the company is seeing massive growth in not only its datacenter and automotive segments, but also in its traditional gaming segment.
A total of 19 NVDA shares landed in my portfolio. While NVIDIA does look expensive when you simply check the current P/E, this week’s earnings report suggests that on a forward basis, it doesn’t look expensive at all. This quarter NVIDIA beat it out of the park by growing its earnings per share by a huge 104 percent versus 2015.
It’s also nice to see the company has no net debt on its balance sheet, and a rather strong cash position. The company doesn’t have a long tradition of paying a dividend, they introduced one in 2012 and over the last four years it has nearly doubled, to a level of 14 cents per share.
The dividend yield is really low but the firm has a low payout ratio. This doesn’t really bother me anymore, after the Belgian government decided to hike dividend taxes for the second time in two years I decided to put less emphasis on current yield and a higher priority on growing capital to be able to buy the income I need in the future.
Dividend income projection for 2017
My last calculation says I’m on track to receive 1323.29EUR of dividend income in 2017. I just updated my spreadsheet to account for the increase in Belgian dividend tax (from 27% to 30%) and it’s pretty sour to see this tax increase is going to cost me an estimated 53.14EUR. At this rate, all my dividend growth is going to the tax man.
The US election
As someone from Belgium looking at the US elections, what surprised me most about this run was how confident the media and pollsters were about Clinton ending up in the White House. Not just in the US but especially here in my own country, where a very large percentage of the population couldn’t imagine Trump winning.
I think a lot of people look at the world as they want it to be rather than how it really is. This isn’t always easy but I try my best. Ever since Trump started working his magic during the primaries I thought he had a pretty good chance of winning. There were some times when things took a turn for the worse for his campaign but somehow Teflon Donald always managed to prevail.
While I don’t agree with all of Trump’s views, specifically several economic issues and some views on scientific matters, I think that on aggregate he’s not going to be as bad as a lot of people expect. My guess is there will be a big difference between the street-fighting candidate and president Trump.
Another surprise is how the market responded to Trump winning the election. All markets went deep into the red when it became clear that this was the Brexit scenario all over again, but then things started recovering and Trump’s victory speech calmed everyone’s nerves. The European stock market opening wasn’t that bad and by the end of the day the US stock market was on its way to a new all-time record.
While the US stock indexes are trading at or near all-time highs, there is quite a bit of difference between various segments of the market. For example, a lot of dividend stocks got punished quite severely this week, presumably due to the increase in bond yields.
We’ll see how it goes.
Which stocks did you buy recently?