I originally bought UBS for a few reasons: I liked the global footprint, the lack of reliance on the US stock market compared to some other big banks and brokers, the exposure to the Swiss Franc, and their solid position in China. I also thought that they were coming out of a big period of investment in their expansion, and that they would be increasing their dividend in the near term.
So what has changed? Well, they had a slightly disappointing quarter last time around, missing analyst estimates by a bit on some poor trading results, which they blamed on the weak summer in the stock market. Perfectly reasonable, and though it didn't hit the big US brokers in the same way this same weakness was felt by nearly all the big European banks -- so that's more than forgivable.
And I'm not necessarily crazy about them jumping on the exchange bandwagon. They are building a new one at a time when existing exchanges are all looking pretty expensive, but it may well turn out to be a good idea. After all, even if they cause price wars or an aggressive level of competition in European listings and trading that hurt the results of this new exchange, that would likely still help UBS in the aggregate by reducing their own trading costs. So that's at least a wash.
It's also not their outlook, which is also pretty positive; they're shooting to become the third largest prime broker next year as they try to build their market share in services to hedge funds, and they continue to believe that their growth will be significant in global wealth management.
Really, the reason I'm selling is that it's becoming more and more clear that UBS is going to continue its acquisitions binge. The shares were undervalued last year, I'd argue, on the back of all the cost and hassle of integrating their myriad financial acquisitions -- but once that work was done, I think I and many other investors expected UBS to focus more on organic growth and returning cash to shareholders.
The CEO in August stated that they were likely to cut off their buyback early, and unlikely to raise the dividend as they focus on more acquisitions. At the time I let that roll off my back because I was so intrigued by the possibility that UBS might have a significant competitive advantage in building a Chinese brokerage business.
But with no more news on Chinese developments for UBS of any note, and with continuing developments from other companies (it looks like Citibank is going to be buying in to Guangdong Development Bank, among other moves by competitors), that's not enough of a reason to put aside my concerns.
So with the latest quarterly release and commentary not doing anything to reverse the likelihood that the company will continue burning through cash in their ambitious acquisition-fed growth, I think that UBS is faced with more acquisition and integration risk in the years to come than I originally figured.
Add that to the fact that within the wildly competitive world of financial services, I don't see UBS as having a particularly defensible niche or advantage -- it may be that all the companies will prosper, but with cutthroat competition in China, Japan and the US causing banks to throw tons of money at growth prospects, particularly in China, I'm no longer convinced that UBS is any better a choice than HSBC (HBC), or Credit Suisse (CS), or Citibank (C). I also don't think that the cutthroat competition among the big players will allow for great profitability for any of the major banks going forward.
And with that background, I don't see a reason to hold these shares when I have more conviction about other companies. I bought UBS for relatively slow long term growth and dividend growth, but with the increasing likelihood that they're not going to return additional cash to shareholders I'll sell now and be satisfied with my 20% return in less than a year. UBS is not a bad company, and it may not be a bad investment at these levels, but it's not the company I thought I was buying.
I'll take those profits, which were more than I was expecting from UBS on an annual basis, and consider redeploying those funds in the near future in one of my better ideas -- perhaps something else in the financial sector, since I've been thinking a lot about insurance lately with my recent opining on the next Berkshire Hathaway.
UBS 1-yr chart: