When a Dividend Increase Really Isn’t

As a kid I enjoyed a good riddle every now and again but as the years went by thought I’d outgrown them to a large degree.  Until now.  One of the companies in my portfolio announced a dividend.  In reviewing the announcement (specifically the SEC 6-K filing), I noticed the dividend amounted to an increase of 13.16%.  Not shabby – in fact it exceeds the average of my portfolio (12.08% current).  So imagine my surprise to find the amount to be credited resulted in a 15.23% reduction!  Hmm … kind of blows away the increase, doesn’t it?   Of course I had to investigate – it appears like that’s what I seem to do.

I’ll divert a little before we cross that bridge – besides, that will provide a little time to form your own answers.

I’ve been engaged in a discussion with Warriortan regarding US interest rates and whether US treasuries are a deal at these levels.  My concern being they can rise further depending on the economic stimulus resulting from policies under the current administration.  I have previously held bonds (including treasuries) but always in a declining -not rising – interest rate environment.  My opinion has always been that a measure of success is to have issues called.  Current rates are too low for that scenario to occur therefore I remain fully in equities and cash (with a dash of CDs).

I don’t pretend to be an expert on Singapore and there may be local issues that could be applicable to Warriortan,  but it is considered a developed economy, their interest rates (SIBOR) tends to move in tandem with ours and the inflation rate is lower.  On the currency side the USD has appreciated 2.68% this past year over the SGD basically retracing its’ gains since the election.  As most analysts are assessing current overall US dollar strength as a one-off event with weakness continuing this fall, perhaps he has a sense this USD comparative strength will continue beyond against the SGD?

My limited direct exposure to the country is through Singapore Telecom which recently announced a dividend freeze for the next two years.  This was not unexpected as their stated dividend policy is a payout of between 60% and 75% of underlying net profit.  This was exceeded (81%) as a result of the government mandated divestment of NetLink Trust (for which a special dividend was received in January).  This action is fiscally prudent and thus warrants a continued hold in my portfolio.

Moving on to the Land Down Under, Fully Franked Finance recently had a piece on dividends.  Great analysis however, to this week’s point,  represented only the Aussie view – which in the case of Janus-Henderson (dual listed) was flawed.  In the notes he presents the exception to be used, “In some cases the dividend data is presented in the company’s financial reporting currency (e.g. USD for CSL)” .  Pre-merger Janus reported in USD, Henderson reported in GBP.  The post-merger reporting currency is GBP while the declaration currency is USD.  The ASX data is AUD which in this case is an apples to oranges comparison as the AUD has only been a translation currency (both pre and post merger).

Some Canadian companies, such as Nutrien, declare dividends in USD which doesn’t protect from CAD withholding tax unless held in an IRA.

Coming back full circle to answer the riddle – foreign exchange.  The specific company being Embotelladora Andina SA, the Chile based Coca-Cola bottler which markets its products in Brazil, Argentina, Paraguay as well as Chile.  Argentina in particular has been hurt by the recent strength in the USD as it has a significant amount of dollar denominated debt.  On May 8th they called in the IMF subsequent to a three week currency crisis resulting in a 20% drop in the USD/ARS spread.  During Andina’s first quarter, thy reported: “The Argentine Peso, the Brazilian Real and the Paraguayan Guaraní depreciated against the Chilean Peso by 36.9%, 12.4% and 7.4% respectively.”   To put it a little differently, during the time I’ve owned this stock, I’ve experienced a 19.72% USD/CLP currency swing – some up, currently down.  This experience highlights the volatility prevalent in investing in emerging markets.

So it’s kind of like one of those asterisks in the baseball record books.  Yes it is a dividend increase so I’ll count it as such.  Yet I do reserve the right to grouse a little about the payout being less than last quarter.  Perhaps the USD will continue its downward trajectory!

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4 thoughts on “When a Dividend Increase Really Isn’t

  1. You bring up an interesting point SR. I used to buy and hold more non US based dividend stocks. Over the years I have reduced them for a couple reasons. I don’t make nearly as much as I used to so I can’t fully take advantage of the US tax credit on foreign dividend tax withholdings. And secondly, I Iike as much certainty around the passive income stream as possible. Like you, when currency would move the wrong way and my US dollar based receipts would get reduced it just felt like I was peeing into the wind. Of course, I now pass on some very good foreign companies for these reasons, but that’s a price I’m willing to pay. Have a nice weekend. Tom

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    • It generally tends to be a few cents here and there with my other foreign holdings, especially Canada and Australia – the UK tends to be a little more volatile. I have to say this the first time I ever experienced a nice dividend increase blown away by currency swings. (Blame it on Argentina? 🙂 ) But that’s why it’s held in the speculative side of the portfolio.

      Have a good holiday!

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  2. Hi Charlie,

    Thanks for the mention on the dividend analysis – as well as the perspective on foreign currency issues. My analysis is certainly focused on the Aussie investor!

    I generally like to keep things simple and avoid the complications of foreign currency that international investing brings, as well as the tax disadvantages that come with it.

    Of course, my buddy Global Gary has a slightly different perspective, and is happy to have some international foreign exchange exposure – bit of a diversification element to the strategy I think. Never a nice result to see a good investment ruined by adverse currency movements though!

    Cheers, Frankie

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    • Your piece melded nicely into my experience – which probably raises an interesting perspective on home-country bias. Likewise it could be a microcosm of events facing multi-nationals (ex., Venezuela, Turkey).

      Now ‘ruined’ may be a little harsh. Since our election, my strategy (being about 15% non-US) has overall been boosted by the government’s anti-global policies resulting (until now) in ongoing USD weakness. Argentina was hit primarily due to debt denominated in USD, Brazil with a trucker strike. If the USD continues its downward slide later in the year (as many analysts expect) I may yet enjoy a real dividend increase with this one. As Chile only accounts for 0.34% of my dividends I doubt I’ll feel any impact (an argument for portfolio diversification).

      Thanks for the visit (and the inspiration!).

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