This is the editorial of our monthly Shareholder Yield Letter published on 13.08.2024. Sign up here to get it in your inbox on the second Tuesday of every month.
More information about the newsletter can be found here: The best large cap investment strategy ever
This month you can read why we don’t use a quality filter or show valuation ratios in the newsletter.
But first the portfolio changes.
Portfolio Changes
Buy Four – Hold Three – Sell Five
Four new recommendations this month as the MSCI World index is above its 200-day simple moving average.
The first is a fast-growing HKD 66.2 billion (USD 8.5 billion) Hong Kong-based luxury jeweller with a shareholder yield of 8.4%.
The second is a big JPY 1.3 trillion (USD 8.9 billion) Japanese shipping company with a shareholder yield of 12.4%.
The third is a global CHF 211.7 billion (USD 243.8 billion) Swiss pharmaceutical company with a shareholder yield of 6.4%.
The fourth and last recommendation is a big USD 179.6 billion US bank with a shareholder yield of 9.8%.
Hold Three
Continue to hold:
- American International Group, Inc. +21.2%,
- Imperial Brands PLC +24.9% and
- Shell plc +20.7%
(all recommended in August 2023) as they still meet the newsletter’s selection criteria.
Sell Five
Sell Kingfisher plc at a profit of +17.5% as the company no longer meet the portfolio’s selection criteria.
Stop Loss
- Sell Bayerische Motoren Werke at a loss of -20.7%
- Sell Mitsubishi Corporation at a profit of +17.1%
- Sell Honda Motor Co., Ltd. at a loss of -17.9%
- Sell Stellantis N.V. at a loss of -30.7%
Why No Quality Filter and No Valuation Ratios?
The following are two great questions received from a subscriber last month.
Question 1 – Why No Quality Filter?
Why does the strategy, for example, not additionally use the "F-Score" parameter when selecting market leaders in the first stage ("Fish in the right Pond") to improve the selection results (or later in the selection process, if applicable)?
Are there also criteria in the selection process that focus on the undervaluation of the idea/share? I mean focus on:
- market leaders with
- highest shareholder yield that
- are also undervalued.
Answer:
The Piotroski F-Score was developed to improve the quality of small low price-to-book companies. These are not the types of companies that the shareholder yield strategy looks for.
Market Leader companies are already high-quality companies, so there's no need to improve the quality selection through the F-Score.
Also, the more screening criteria you apply to an investment universe, the smaller your possible pool of investments becomes. Thus, if these are already high-quality companies, there's no need to try to improve the quality any further; it will not add any value to the strategy.
Also, Shareholder Yield is not a value investment strategy. Its aim is to select high-quality companies that are giving shareholders the highest possible cash return in the form of dividends and share buybacks.
High dividend yield companies may be undervalued, but in all the research I have seen high dividend yield is a weak identifier of undervalued companies. In other words, there are much better ratios (EBIT/EV for example) to find undervalued companies.
Also, companies generally buy back a lot of stock if management thinks the company is undervalued. This may mean that the shareholder yield companies are undervalued, but this is not the main criterion for this investment strategy.
Question 2 – Why No Valuation Ratios?
In the brief descriptions of the four ideas/companies in the tables with the relevant data, could you not also provide the relevant actual values for the criteria:
- "Price to book",
- "Price to earnings",
- "Price to free cash flow",
- "EV to EBIT" and
- "EV to free cash flow"
at the time the newsletter was prepared, analogous to the Quant Value Newsletter?
Or is there a substantive reason why this is not done?
Answer:
As mentioned, the strategy this newsletter follows is not a value strategy; it's a high shareholder yield strategy.
We thought long and hard about including other valuation ratios, but in the end, we decided it was better not to mix strategies by including valuation ratios as this is not the main selection criteria for ideas.
It is a high-quality strategy that selects companies returning the largest amount of cash to shareholders.
That is why we only include the ratios making up the shareholder yield.
Your analyst wishing you profitable investing!
