September Monthly Stock Purchase – Emerging Market Contagion

High yielding British blue chip companies were on sale during the month of September. This was particularly true for companies with deep entrenched roots in emerging markets. Emerging markets have faced a torrid time of late with countries such as Turkey, India, Brazil, Indonesia, Argentina and South Africa seeing their currencies drop more than 10% against the dollar. The expectations are that further currency falls are expected in these nations as the US Dollar continues its powerful surge upwards – investors are flocking to the US Dollar and pulling out of assets denominated in emerging market currencies.

So what does a drop in emerging market currencies have to do with the FTSE 100? In a word, everything. The FTSE 100 is overweight on emerging markets – many companies in this index derive a huge proportion of their revenues from the emerging world. And when currencies in the emerging world drop, so do the revenues and profits achieved by these companies in USD and Pound terms.

Let’s look at a quick example to see how this would work in the real world. Say a company had profits in Turkey of 1,000,000 Turkish Lira. Last year when the rate was 1TRY : £0.22, this would equate to a profit of £220,000. if this year, that company makes the same 1,000,000 in Turkish Lira profit, the company would only have £127,375 – a close to 50% drop in profits!

As the company is based in the UK and has UK shareholders, this reduction in profits is real. As the stock market is forward looking, investors would see this profit reduction and sell of a stock in anticipation of this profit drop. That is why many stocks with large emerging market exposures fell in price during the month of September.

As an individual investor, it is you job to assess whether the sell-off of a stock is warranted or whether it has gone too far. You need to be able to forecast what a company’s profits would look like 5 years from now and discount it to present day. You need to make a decision on how far the emerging market panic will go.

In the month of September, I bought stocks in four companies that have huge emerging market exposure, particularly in the worse hit countries such as Turkey, India and South Africa. Even so, I believe these stocks to be oversold and have provided a good entry point for a long term investor. The four stocks are:

  • ABF – Bought 8 Shares at £22.25 each. Dividend = £2.88
  • BAT – Bought 10 shares at £37 each. Dividend = £19.80
  • SGE – Bought 27 Shares at £5.82 each. Dividend = £4.05
  • VOD – Bought 636 Shares at £1.65 each. Dividend = £84

All in all, I increased my dividend income by £110.73 last month. My portfolio as a whole now is expected to generate £2,680 in dividends over the coming year. That dividend snowball is starting to take shape.

Looking at the shares bought, Vodafone is one that is particularly interesting at the moment. The share price has fallen off a cliff due to its heavy emerging market exposure , its plans to buy assets from Liberty Global and the impending departure of its CEO.

This has left Vodafone stock spotting a dividend yield of 8%. The dividend is currently well covered in terms of free cash flow so this should give a good idea on the safety of that chunky dividend. With this high yield, the dividend provides a huge safety net. Just look at the post I did on Vodafone in June of this year. Since that post, the yield has gotten even better and that is why I pounced on the stock this past month.

Take Vodafone at current price offering a dividend yield of 8% and lets assume no dividend growth going forward. Let’s say there is another company offering a 2% yield and growing that payout by 10% a year. How long would it take would it take for the dividends from the low yield, high dividend growth stock to exceed those of the high yielder? 15 years! Sometimes it is best to take the easy route. There have been many studies conducted showing that high yielding stocks with reinvested dividends have beaten the market. I expect Vodafone to do the same over the medium to long term.

On a side note, it is interesting to see the acquisition of Costa Coffee by coca cola. I have been trumpeting the hidden value in UK conglomerates for a while now. It seems that investors are finally beginning to take notice. There is still much value to be unlocked from the many UK listed conglomerates and I am sure in time this hidden value will be showered on to investors.

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