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Back to basics
Written by: Petr Vykoukal (www.penize.cz)
Photo by: Vladimír Weiss
The stock market boom is ancient history,
and many investors have been left with killer hangovers and, above
all, an unwillingness to make further direct investments in companies.
Rather than shun shares, change the way you choose them - focus
on actual results instead of anticipated profits or revenues.
Historically, all stock market bubbles were caused by excessive
expectations relating either to a sector or a geographic region.
So in the second half of the '90s everything related to the internet
or new technologies "flew" on stock markets. Or, for example,
a few years ago there was great interest in central and eastern
Europe, so even the Prague Stock Exchange experienced a little bubble.
Following a sharp rise in share prices, investors took their money
elsewhere, and share prices started falling precipitously, since
there were no domestic buyers, so in time Czech shares found their
true value. The recent technology boom progressed similarly.
"In the aftermath of the technology bubble burst, analysts
are returning to the fundamentals, searching for an investment rationality
- the true inner value of firms,"says Pavel Tichý of ČSOB Asset
Manage-ment. "While in the '90s, anticipated future growth
in profits and market shares was inflated, and the market ignored
some basic economic principles, today information on P/E (Price/Earnings
ratio of market price to a firm's profit per share) and dividend
yields have taken priority," he adds. A reasonable P/E ratio
(how many dollars it costs to buy one dollar of profit annually)
and regularly paid dividends are indicators of a company's true
value. A firm's ability to create profit - real money - is a characteristic
that most technology companies lacked, and at a time of a market
decline is probably the only thing that can induce investors to
buy shares.
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Kateřina Dalecká |
Funds for declining markets
The problem of declining markets bothers not only the buyers of
particular shares, it also bothers funds. Stock markets are still
seeking their bottoms, and equity mutual funds, including those
not focused on technology, are still declining. This is another
reason for going back to basics. While an aggressive strategy is
appropriate during times of growth, with shares with expected growth
being sought out (with funds, this mainly involved funds focused
on growth fields - technology, the net, telecommunications), at
times when stock markets are in decline, it is better to buy into
funds with defensive strategies, funds that buy shares of well established
companies with decades of history. This mainly brings the certainty
that development will remain stable in the future, which cannot
be currently said of the Internet or new technology companies. These
strategies are generally built on the selection of firms according
to fixed parameters linked to the firms' value or results - e.g.,
dividends paid out or the P/E ratio.
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Pavel Tichý |
ING Global High Dividend, of the investment company ING, is an
example of funds focusing directly on shares of companies that regularly
pay dividends. A firm's stable dividend policy is the key criterion
for choosing which shares to buy. This fund's portfolio contains
food producers, energy, and banking firms. By choosing these defensive
sectors, the fund is recording good results on a declining market.
While during the last two years global stock markets declined by
45% (as measured by the MSCI World index), this fund rose in value
by nearly 2% during the same time. The ABN AMRO Global Leaders fund
has a slightly different strategy, but it also places great emphasis
on dividend-yielding shares. "The fund focuses on leaders in
certain fields. The first selection criterion is good fundamental
indicators, and the second is a stable dividend policy," explains
Jan Žák of ABN AMRO. Porsche, Deutsche Bank, Wallmart, AXA, and
Dell account for the greatest share of the fund's holdings. All
of these companies are high-profile, they report good long-term
results, and they pay dividends regularly. This also applies to
Dell, which, although it is a technology firm, has a history of
nearly twenty years.
These two funds are certainly not the only ones with defensive investment
strategies. Such strategies can also be expected from funds that
invest in stable sectors - food producers, distributors, real estate
companies. However, these sectors' current advantage - smaller share
price fluctuations - can become disadvantages on growth markets.
The business sector that is "in" at a given time, as was
the case with the internet a few years ago, will record high share
price growth, while your defensive shares will noticeably grow more
slowly. But here too there is the question of how long this difference
will last. Three years ago, at the height of internet fever, it
would have been hard to find an advocate of conservative investment
- as the yields on his investments were substantially lower than
those of others, who are doing much better today than those who
put their money into the internet (or some other fashionable sector).
| The state
wants a piece
CHOOSING DIVIDEND shares (or funds that pay dividends)
as an investment can have one unpleasant consequence - tax
liability. Czech joint-stock companies deduct taxes from dividends
for individuals and legal entities, which thus receive their
net dividends - without tax. "When investing in specific
shares the most important thing is to look at overall profitability,
in which tax is only one of many factors," says Pavel
Tichý of ČSOB Asset Management.
But if you invest in funds it is certainly a good idea to
consider taxation. There is generally a possibility of choice,
as many funds exist as dividend funds (yields are paid out
as dividends) or as growth funds (yields are not paid out
but are rather "added" to the shareholder's account),
and some funds even exist in both forms. For individuals growth
funds are better, because their yields are not taxed (if they
don't leave the fund in six months), but for legal entities
the dividend form is most suitable. This is because dividends
are taxed by means of withholding, at a lower rate (by 15%)
than the income tax on legal entities (31%), which are applied
to yields from growth funds.
ING's crown funds are an example of the two classes of funds.
It is always just one fund, but some of its shareholders get
dividends (mainly legal entities) while for the others the
yields appear as additions to the value of their holdings
(suitable for individuals). "Mainly institutional investors
seek out dividend funds," notes Kateřina Dalecká, marketing
manager for ING Investment Management.
Dividend shares the Czech
way
EVEN AMONG the few shares that are actually traded
on the Prague Stock Exchange it is possible to find a really
good dividend share. The former Tabák, a.s., now Philip Morris,
has a very long, good dividend history in Czech terms. It
has been paying excellent dividends every year since 1993.
As of 1994 its dividend yield (the ratio of paid dividends
to the share's market price) has been steady at 10%. Some
analysts even compare it to bonds, but that is far from the
truth. However, several years ago it became popular among
pension fund portfolio managers due to its regular dividends.
A legal amendment that ordered them to include only stocks
traded on the main Prague Stock Exchange in their portfolios
put a halt to their interest in these shares, since Philip
Morris shares are not traded on this market. This is probably
because the company doesn't want to publish information that
is required by the exchange if a share is to be traded on
the main market. In this case, the firm's consistent dividend
policy serves not so much as an attraction for investors,
but rather as a means for the majority stake-holder to pocket
its profits each year. Czech shareholders go along for the
ride.
Philip Morris, the American company that owns Tabák, has also
been paying dividends regularly for many years. However, its
results last year were not as good as were those of its Czech
subsidiary. A dividend of 2.56 dollars per share means a dividend
yield of only 7.08%, while Tabák paid a gross dividend of
CZK 1,240, so its dividend yield was 11.13%.
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