Swire Pacific Limited (SWRAY) | Daily Alert July 20
Hong Kong is a story of progress and a symbol of how a combination of religious and social tolerance, together with economic freedom, built one of the most prosperous, cosmopolitan, and dynamic places in world history.
I first started visiting Hong Kong in the 1980s as a corporate banker and then later pitching U.S. stock research and ideas to Hong Kong institutional investors. Later, I followed the negotiations leading to the turnover to China in 1997 quite closely, and with a well-warranted skepticism.
Over the years, Hong Kong has established a well-earned tradition of being one of the most open, entrepreneurial, and international economies in the world. This is why 1,389 multinationals based their regional headquarters there in spite of the fact that rents were triple that of Shanghai. One reason is that it is home to 7.5 million industrious and talented Hong Kongers and has a very competitive tax system and light regulatory burden.
According to the closely followed 2020 Heritage/Wall Street Journal Index of Economic Freedom, Hong Kong ranked #2 just behind Singapore while America ranked #17 and China came in at #103.
The protests in Hong Kong over the last year have raised some important issues and, unfortunately, China has responded by imposing a new national security law and this will no doubt impact its future. The new Committee for Safeguarding National Security has broad new police powers, including the ability to conduct warrantless searches.
The bottom line is that Hong Kong has little leverage to fight back against these measures. While in the 1980s, Hong Kong represented about 30% of China’s GDP, it now accounts for only 3%.
As you might expect, some Hong Kong shares have pulled back over the last six months, presenting us with a great entry opportunity. There are two blue-chip conglomerates with a long history in Hong Kong that I have followed closely and have greatly admired over the years: Jardine Matheson (JMHLY) and Swire Pacific.
Founded in 1832, the Jardine Matheson is incorporated in Bermuda but headquartered in Hong Kong. A substantial amount of its profits are from greater China, with even more coming from Southeast Asia.
Here is just a sampling of its diversified businesses. It owns the region’s leading supermarket and health & beauty chain; the 7-Eleven convenience store chain; IKEA furniture stores; and operates the Starbucks franchise in Hong Kong. Jardine owns large amounts of prime commercial property in the heart of Central Hong Kong, where its buildings form an interlinked network of offices and retail space. The company also currently owns or has substantial interests in 15 hotels worldwide including the Mandarin Oriental as well as car dealerships in Hong Kong, Macau, China, and the U.K.
The other esteemed Hong Kong blue chip is Swire Pacific. Founded in 1816 and headquartered in Hong Kong, Swire is active in a wide range of commercial activities throughout Asia including aviation, property, and retailing. According to its website, Swire owns 23 million square feet of property, the premier airline Cathay Pacific, 18 Coca-Cola plants and distribution rights in Hong Kong and parts of China and Southeast Asia, plus extensive retail businesses in fashion, food and auto.
Both of these blue chips are way off their 52-week highs and substantially below their book (break-up) value.
It was a tough call, but I’m inclined to go with Swire Pacific because it has a much less complex corporate structure and is trading at only about 25% of its book value and therefore probably offers more upside potential. I’m sure there are some concerns about its flagship Cathay Pacific airline, but all indications are that its Asian operations will recover to profitability much more quickly than major U.S. and European carriers.
I recommend that we buy into old Hong Kong for some new growth and profits through Swire Pacific. BUY A FULL POSITION
Carl Delfeld, Cabot Global Stocks Explorer, cabotwealth.com, 978-745-5532, July 9, 2020
Philip Morris International (PM) | Daily Alert August 7
If a weak dollar props up U.S. multinationals, you have to love an American-headquartered company that reports its results in U.S. dollars but doesn’t generate a cent of revenue domestically.
NYC-based Philip Morris International, which was spun off from Altria Group (MO) in 2008, sells cigarettes and other products in more than 180 international markets, where it often holds either the No. 1 or No. 2 position. It boasts six of the top 15 international brands, including longtime leader Marlboro.
It has also invested heavily in heated tobacco, which is yet another cigarette alternative that’s picking up speed. Its IQOS brand boasted 15.4 million users as of the end of the second quarter, up from 14.6 million in Q1, its pace of growth slowed by COVID-19, but not squashed.
While Philip Morris is fighting many of the same anti-tobacco trends here in the U.S., it has been slowly but surely able to grow revenue for several years without interruption. While 2020 should end that streak, it still appears far better-positioned than its American counterparts.
No yield concerns here, either. PM shares are at the high end of what you can expect from traditional blue chips. Its dividend growth rate of 3.2% annually, while modest, outstrips current-day inflation; we’ll see if the Fed’s printing press changes that.
Just be realistic. Tobacco, at best, will provide merely glacial growth. The yield will be most of your returns, so ask yourself: Is 6%+ enough?
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, July 31, 2020
MetLife, Inc. (MET-PF) | Daily Alert August 21
MetLife, Inc.; 4.75% Fixed Rate, Perpetual Par $25.00; Annual Cash Dividend $1.1875 Current Price $25.70; Current Indicated Yield 4.62%; Call Date 03/15/25; Yield to Call 4.09%; Pay Cycle 3m; Exchange NYSE; Ratings, Moody’s Baa2, S&P BBB; CUSIP 59156R850; Symbol MET-F
MetLife, Inc. (MET) ranks among the largest global providers of insurance products and services, annuities, and employment benefit programs. The company has operations in nearly 50 countries, with over 900 investment professionals around the globe serving individual and institutional clients. MET offers life, accident, and health insurance, as well as retirement and savings products through various distribution channels. In March 2017 MET completed the spinoff of its U.S. Retail Business into a separate organization called Brighthouse Financial (BHF).
MET reported 1Q 2020 adjusted net income of $1.4 billion or $1.58 per share, up almost 7% from a year earlier. Results outpaced analysts’ $1.44 estimates. Operating revenue of $15.5 billion was flat from a year ago and missed estimates. With interest rates very low all along the Treasury yield curve, MET’s profitability measures may be challenged this year. However, MET’s low leverage and strong capital position, which enabled the company to navigate through the 2008-2010 financial crisis, will serve it well during this cycle. This preferred investment is suitable for low- to medium-risk taxable portfolios. Dividends are qualified and taxed at the 15%-20% rate. Buy up to $26.25 for a 4.52% annualized yield and a 3.58% yield to call.
Martin Fridson, CFA, Income Securities Investor, isinewsletter.com, 800-472-2680, August 2020