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  • Investment Rationale For Banco Santander [View article]
    Dear Warren,

    Dividends are in scrip form, so no cash drain. Only 20% of the people take the cash conversion, because you get marginally penalized if you opt for the bank buying your rights or sell them in the market.

    Since net income has reduced so much because of provisions that will someday end (in my view 2013 is the inflection year) the pay-out ratio seems very high, but, again, if it was cash.

    The bank chose to adapt and, keeping the message for the retail investor that dividend wasn't cut, converted the dividend payment into a free capital increase.

    The corporate finance has a theory for dividends called "signaling theory". Since the dividend is in fact not relevant in a company's value, why it is so important in practice?

    The theory says that perception is perception and the fact that you pay a dividend, sends the signal (hence the name of the theory) that you can pay it, When a dividend is cut an opposite negative signal is sent. Therefore, companies tend to resist cutting dividends and try to set a dividend which they can pay in good and bad times. This of course, reinforces the message that dividends are only cut when problems are foreseen or even worse, when problems are already in-house.

    Well I would have liked SAN (and many other banks in Spain) to say to the market: "look I am in rough waters so I will cut dividend and make my ratios improve as fast as possible so I am strong as possible and as soon as possible".

    They are very retail-oriented, and understand mass consumers, as well as M&A on top of it, and that is what I like of them when dealing with the asset side of the bank. When dealing with shareholders I think they preferred to play on the safe side, trying to sell their shareholders' retail base that cash dividend was not cut, when it was.

    Once the bank has to some extent recognized that they cannot pay cash dividend, they have found a way to pretend they pay a dividend.

    Dividend is remuneration plus a signal of strength, as I have tried to explain. On the remuneration component, to me it makes no difference compared to any other kind of remuneration or no remuneration at all, it does not affect the value of the company how the company pays or not its shareholders.

    For me they already sent the signal, the key question is that for me the bad signal would have been that they had kept their original dividend policy. SAN stuck to the signal theory and preferred not to send the say that dividend was cut when it was.

    For me, setting aside the tax and cost penalties of converting the scrip dividend into a cash one, it makes absolutely no difference. I will be remunerated depending on the net income of SAN in the coming years. If it goes to historical average levels, I expect to be very well remunerated, in fact.

    If net income does not grow, nothing of that will happen, no matter how many shares of SAN I end up owning or how much cash I converted from it. If you get the cash, costs and taxes apart, and things at the income level go wrong, you will take the same burden as I with the scrip dividend, because you will end up with a much more diluted share of the future capital and the cash collected will diminish as share price also comes down. You could be marginally better in some scenarios, but in those scenarios you simply are better off not buying the stock.

    As of today I look at the company as if there was no dividend, period. I am glad they pay no cash dividend because the bank is better off growing its capital core ratios, so in 2 or 3 years time is better capitalized than most banks in Europe. Right now this is the game to play and I'm glad they're doing it. but not so glad they weren't confident enough to tell the truth.

    This applies in all fronts. Analysts should not complain on pay-outs nor lack of measures to capitalize the bank nor try to scare people with scarcity of cash for remuneration.

    Jul 15, 2013. 05:03 PM | Likes Like |Link to Comment
  • Investment Rationale For Banco Santander [View article]
    Dear all,

    In my view the DTA element was much more crucial on medium sized banks with big DTAs relative to total equity, like Banco Popular, than in SAN.

    For SAN the issue has been in last weeks, again in my view, the social deterioration in Brazil that happens to be 12% of its credit portfolio but a much higher chunk of the net income and net income growth, given the low income in Spain in last years.

    I don't know how things are seen from Brazil? I am a bit scared, to tell you the truth, but it is difficult to see reality through the Europeans' paper's eyes.
    Coming back to DTA, I think it is bit of putting pressure on Spanish banks, since the competition (on bank and on country level) is realizing that problems might begin to be solved.

    If advancing the DTA deduction from the Core ratios calculation, instead of applying Basel III, hurts most to Spanish banks, why shouldn't they do it. Why we had to publish stress tests for all main banks in the system while other countries with significant problems have not done so?

    I'd like to see a banking union and have all banks measured by the same rules and subject to same regulation. In my view the Spanish banking sector is stronger than it seems. Savings banks where 50% of the system and had 80% of the problem but the banks where not so bad and in fact have survived, with lots of problems, yes, but without bailout, that was confined to savings banks.

    I am very critic with the banks and how they not only did not see, but encouraged, the real estate bubble, but at the same time it is fair to say that they are much stronger than what the critics think they are or wish them to be.

    The DTA is another chapter in this cold war, but it'll pass, in my view.

    Jul 15, 2013. 03:43 PM | Likes Like |Link to Comment
  • Apollo Group - 20% Undervalued [View article]
    Hi Bram,

    Don't worry I don't feel you are talking me into it. My only purpose is to exchange points of views as we're doing. It is much better to contrast ideas with others and I read your articles because I like them.

    The investment in the company, based on past performance, looks awesome. Low capital requirements and high returns. My only worry is that the majority of the company's customers only can afford the price of the "product" with government's aid.

    The company seems to have focused and become, to some extent, dependent on that business model, up to a point that it comes very close to the limits currently set by the Government that tries to avoid this subsidy concentration effect.

    I think that in order to preserve the value of the company there should be a more diversified kind of student attending the Apollo universities.
    I don't know if the stock will go up or down. I'm just saying I have my reserves to hold the stock as an investment.

    Jul 2, 2013. 08:12 AM | Likes Like |Link to Comment
  • Apollo Group - 20% Undervalued [View article]
    Sorry, all of this is in 2012 annual report.
    Jun 18, 2013. 02:40 PM | Likes Like |Link to Comment
  • Apollo Group - 20% Undervalued [View article]
    I quote:

    "If an institution’s three-year cohort default rate equals or exceeds 30% for any given year, it must establish a default prevention
    task force and develop a default prevention plan with measurable objectives for improving the cohort default rate".

    The 2012-3 years cohort default rate (2009 cohort) was 26%.

    As said, I am learning about this company, but seems scary.

    Jun 18, 2013. 02:40 PM | Likes Like |Link to Comment
  • Apollo Group - 20% Undervalued [View article]
    Thanks for your article.

    I am looking into the company now. Financial performance looks good in the past, awesome in fact, and begins to be in a very interesting valuation territory.

    When reading through the risks part of their 10-K report I don't think I am so optimistic on their future as you seem to be.
    They have $4bn in revenues (rough figures) and almost 90% of that comes from government aid or government loans. I don't think you can consider a value investment any company where 90% of their revenues is subject to the Congress changing the rules.

    On top of that, their students have lost the option to call for Pell Grant programs (20% of their government related revenues) because default rate of their prior students have been above 15,5%.

    Their students default rates are very close to the limit of putting in risk the right to apply for government financial aid, and according to what they report, they don't have a direct control on their students default rates.

    Too risky in my opinion. I am not criticizing your article. I am trying to create debate, since I might be wrong and I might be loosing what seems to be a good buying opportunity. If my understanding is correct I don't think this would be a valuable investment.
    Jun 16, 2013. 04:29 PM | Likes Like |Link to Comment
  • 6 Reasons Why You Should Consider Royal Dutch Shell With A 5.5% Yield [View article]
    Yes, been thinking about it. At the end if you know your reserves, run dry in 11 years you've got to compensate that in terms of return.

    With a 44% reserves coverage, that gives me 20 years till the end of reserves at current rhythm of production and recovery.

    That is a 5% return that should be deducted from current ROE, to make things more comparable versus a normal business.

    Does that make sense?
    May 28, 2013. 12:38 PM | Likes Like |Link to Comment
  • 6 Reasons Why You Should Consider Royal Dutch Shell With A 5.5% Yield [View article]
    Thanks for the article. Concise, but helpful. I am shareholder in Total and I begin to be a bit tired of their complexity. In RDS things seem more clearly focused.

    On general I don't really understand, and that's what bothers me, why oil companies are relatively cheap and at attractive multiples, when they are such profitable businesses. Is the market right, and I still have to learn why? Or, alternatively, the market is not right and they could be an excellent investment opportunity.
    This doubt concerns all the sector including RDS, Total or Exxon which are the ones I am either investor (Total) or analyzing as an investment, like the other ones.

    Any thoughts on the topic are welcome.

    May 27, 2013. 07:21 PM | Likes Like |Link to Comment
  • Investment Rationale For Banco Santander [View article]
    Many thanks. Seem promising.

    There have been recent declarations by diverse top executives in the bank, trying to heat up a bit the temperature in the stock. Some of them gave some references regarding 2013 net profit, but they are not clear enough to extract any conclusion.
    Let's see what happens this Thursday with the first quarter results.
    Apr 23, 2013. 12:46 PM | Likes Like |Link to Comment
  • Investment Rationale For Banco Santander [View article]
    Hi Vincent,

    What do you think about the accounts restatement the bank did publish a few days ago?
    I went through it and was pretty upset with the way SAN has managed/covered this.
    I added an instablog on the subject.

    Maybe this was fully discounted by the market or by investors specialized on the sector. I am not specialized, just look at it as any other company.
    Apr 12, 2013. 09:17 AM | Likes Like |Link to Comment
  • Too Much Unproductive Capital Makes Royal Dutch Shell A Sell [View article]
    Thanks for the article even it is hard for me to get some conclusions, specially regarding dividend measurements against bond yields or in absolute return levels.
    An interesting dividend return can be made of sound return on assets, conservative leverage and moderate pay-out ratios or can be made out of low return on assets compensated by high leverage and average to high pay-out ratios.
    I am not discussing any of your conclusions on that aspect; I am just saying I cannot come to any conclusion from the information you show.

    Not sure that the dividend yield in Total (company I am invested in) is correct. I think it is above 6% and made of 8% ROA, 2,5 leverage and 42% pay-out ratio.
    On the future growth chart that you show, from Goldman Sachs source, Total seems to have the lowest estimated cash flow growth, even it is a nice 15-17% growth.

    I wonder if you could mix the info of that chart to the PER, as a measure of the price of that growth.
    If TOT is having the lowest estimated cash flow growth, but its price is proportionally discounted relative to other stocks I shouldn't worry, should I?
    I don't see a PER reference for TOT in your table, but in 2012 it was 6.7, that seems to be below the average. Maybe, since you have the data already on your side, you can make that calculation and check if the lower PER is in a higher, lower or similar proportion to the lower growth perspectives.
    Apr 11, 2013. 06:15 AM | Likes Like |Link to Comment
  • Investment Rationale For Banco Santander [View article]
    Thanks Vincent,

    NPL rates are indeed high for an economy like Brazil so probably reflects a consumer loan profile of the credit portfolio with shorter maturities, high rates of default but high interest rates earned which match with the picture you describe.

    Going through year end 2012 balance sheet they seem to have R$220Bn in Loans, against R$188Bn in deposits which is a 117% ratio, not high, which is a good signal.

    By nature they have two big groups: Commercial/ industrial with R$103Bn and installment loans to individuals R$83Bn. Both of them make for almost 90% of the credit portfolio. Other loan types like real estate for construction/retail mortgages are much smaller which is a good sign in my view, but maybe you know better the reality of the country (not sure if you are from Brazil or Spain, or maybe somewhere else; I'm from Spain).

    NPL rates seem to be very high in consumer loans when compared to normal loans and are the ones that really push up the NPL rates for the bank in Brazil.

    A 10%, or more as in this case, is not sustainable in the medium term, no matter the will of the bank to gain market share. Not only the provisions grow, but they grow faster than loans. In 2011 loans increased by R$16Bn and write-offs remained stable but in 2012 write-offs increased R$3Bn and consumer loans only increased by R$6Bn (in rounded figures).

    I'll go on with additional review, but I am a bit more relaxed after this initial dive in Brazil because I was beginning to imagine a more difficult scenario.

    Let's see the evolution of the statistics you mention too.

    Apr 10, 2013. 09:02 PM | Likes Like |Link to Comment
  • Investment Rationale For Banco Santander [View article]
    Correct, published at 34, that is 3 shares for each 102 old shares.

    Vincent was right on the net vs. gross dividend equivalent. Sorry about that.

    Apr 10, 2013. 07:54 PM | Likes Like |Link to Comment
  • Investment Rationale For Banco Santander [View article]
    The Bank will communicate today what is the number of rights you need for each new share. This is fixed in relation to the average share price in previous days and in principle, it should be around 40-42 rights for a new share.

    For each 100 shares you would entitled to 2 new shares and the value coming from the sale of 16-20 rights.

    If you want to see it as a ratio, then it would be circa 2.5 new shares out of a 100.

    Today I expect them to release the final figures.

    Apr 10, 2013. 11:31 AM | Likes Like |Link to Comment
  • Investment Rationale For Banco Santander [View article]
    Please review my Instablog on SAN recent presentation release on business cycle.

    Apr 8, 2013. 10:49 AM | Likes Like |Link to Comment