China Baby Boom or Bust?

After 35 years China ended its one-child policy. Companies with exposure to China’s baby market like Mead Johnson (MJN) and Procter & Gamble (PG) jumped in price on the news. A Chinese baby boom is around the corner. Or is it?

China already had special districts that were not a part of the one-child policy. They were small experiments set-up at the start of the one-child policy. The birthrates within these zones were as low as other zones that were subject to the one-child policy. However, these special zones did not experience the large gender imbalance nor the high infanticide and gendercide rates.

In 2006, families in the town of Jiangsu were permitted to have 2 children if one parent was a Dandu (an only child). How many signed up? One-tenth of those eligible did.

In 2013, the Dandu policy was applied across all of China. Only 35% of eligible couples signed up. Way below Chinese government expectations. The reason often cited for not participating was the high cost of raising a child.

As a country becomes wealthier, more educated, and less agrarian the average birthrate drifts lower. Pre-Cultural Revolution China had an average birth rate of 6 per family. Right before the one-child policy was enacted China’s birthrate dropped to 3. Then in part to boost per capita GDP Chinese officials wanted to slow population growth even further and the humanitarian crisis known as the one-child policy was born.

The irony is the one-child policy was designed to boost the Chinese economy but it may be its undoing as China’s population ages. Policy-makers finally realized this threat and the one-child policy was scrapped. China needs population growth. But now China and its citizens are much wealthier as a whole and the need and desire to have multiple kids has declined. The Chinese baby boom some investors are expecting may be a bust.

Information on China obtained from the book One Child: The Story of China’s Most Radical Experiment by Mei Fong


What I Wish I Wrote ~ Mar. 4, 2016

We’re in a world of abundance. Is it leading to too many malinvestments? (The Reformed Broker)

A good breakdown of Berkshire-Hathway’s 2015 from Warren Buffett’s latest annual letter to shareholders. (The Aleph Blog)

Speaking of Berkshire-Hathaway, in 1999 Yahoo! was worth more and 19 other things that actually happened in 1999. (Dividend Reference)

The three paths to outperformance. (Morningstar)

“The most important financial services company you’ve never heard of”. (Intrinsic Investing)

Investing professionals should meditate. (Jason Voss on LinkedIn)

“It’s hard to believe that $65.7 billion of Warren Buffett’s $66 billion net worth came after his 50th birthday”. And other hard truths investors have a hard time wrapping their heads around. (Morgan Housel @ The Motley Fool)

Investing in you self. The 100 things list. (Budgets are Sexy)

How to be frugal and still enjoy life. (Dividend Mantra)

How safe is Chevron’s (CVX) dividend? (The Div-Net)

A bunch of links all focused on Warren Buffett and his recent comments on Berkshire-Hathaway and its portfolio of companies. (Value Investing World)

Lesson learned from Richard Thaler on behavioral economics. (25iq)

Radical investment advice. Do nothing. (Jason Zweig @ WSJ)

Software is the new oil. (AVC)

Book review on Quality Investing: Owning the Best Companies for the Long Term. (Value and Opportunity)

What makes life worth living in the face of death? Try and not to shed a tear after reading the 2nd to last paragraph. (Farnam Street)

HSN, Inc. (HSNI) a New Dividend Payer with Attractive Returns, a Built-In Price Catalysts, and a Valuation Estimate

HSN, Inc. (HSNI) falls under our new dividend payer category. HSNI initiated a dividend in 2011. We also think it can turn into a dividend stalwart, a company with a long track record of paying and increasing its dividend every year. But we also need to make sure we are not overpaying for HSNI and its future dividend growth.

In 2011, HSNI started paying a quarterly dividend of $0.13 per share. It now pays $0.35 per share a compound annual growth rate of 24.62%. This doesn’t include the special one-time dividend of $10.00 per share paid in February 2015.

From S&P Capital IQ. Click image to enlarge.
From S&P Capital IQ. Click image to enlarge.


HSNI has also reduced its shares outstanding by 10.32% over the last 5 years.

From S&P Capital IQ. Click image to enlarge.
From S&P Capital IQ. Click image to enlarge.


Returns on equity, capital, and assets have been consistently high.

From S&P Capital IQ. Click image to enlarge.
From S&P Capital IQ. Click image to enlarge.

HSNI also generates returns on tangible capital (Joel Greenblatt’s metric) over 50% and cash returns on invested capital over 24%.

Less Exposed to Recessions Versus Other Retailers?

HSNI is obviously very dependent on the discretionary spending of the U.S. consumer. But how they sell to consumers is a master class in how to use psychology (link is for QVC but they use the same tactics) to get us to buy even when we probably shouldn’t be spending money. This is what is attractive about HSNI’s business model. During the 2008 financial crisis when discretionary spending was drastically cut,  HSNI only experienced a 5.45% decline in revenue from 2007 to 2009.

From S&P Capital IQ. Click image to enlarge.
From S&P Capital IQ. Click image to enlarge.

However, HSNI’s operating income declined 60% during the financial crisis so it is not completely immune.

From S&P Capital IQ. Click image to enlarge.
From S&P Capital IQ. Click image to enlarge.

Liberty Interactive Ownership Stake

Another attractive aspect of HSNI is Liberty interactive (QVCA) owns 38% of HSNI. QVCA owns and runs HSNI’s direct competitor QVC.

Liberty Interactive's HSNI ownership Stake. From Liberty Interactive's asset list.
Liberty Interactive’s HSNI ownership Stake. From Liberty Interactive’s asset list.

This creates the potential catalyst of Liberty Interactive (QVCA) buying the rest of HSNI. QVCA’s management said in the past that they are interested in buying the rest of HSNI at the right price. HSNI isn’t trading at that price.

Barton E. Crockett
FBR Capital Markets & Co., Research Division

Okay. And then just one final thing here. Relative to HSN, you guys have in the past expressed, I think, limited interest in buying in the stake in HSN that you don’t own at these valuations. That seems to stock up some capacity. Should we assume that your stance towards HSN is similar to what it’s been the past?

Gregory B. Maffei
Chief Executive Officer, President, Director and Member of Executive Committee

Well, I think you should first start with the proposition that we look to reinvest our free cash flow in the most attractive place. And you’ve seen us do that over the last few years on our own stock. Just as a matter of math, that has gotten by most measure to get less attractive. We’re at a higher multiple than we were in 2009 — than we were in 2010. We have the luxury of continuing that. Even though it’s less attractive, we still consider it attractive and investing here in something that we think will generate higher rates of return for the benefit of our shareholders and be strategic. So all attractive on all measures. HSN is a great company. We’re proud to have them in the Liberty family. But when we look at the profile of its growth rate, which looks more similar to our own, versus the multiple not only of EBITDA but even more of free cash that it’s trading at, we don’t consider that attractive versus our own stock and certainly not versus the opportunity to join with zulily.
From 8K Released August 19, 2015

Until recently HSNI was trading at a premium multiple of EV/EBITDA when compared to QVCA. Even though QVC is the larger of the two and has international exposure. HSNI’s premium multiple was in part due to the potential of QVCA buying them.

HSNI recent price decline has brought its multiple more in line with QVCA’s. However, this is still too high a price Liberty Interactive wants to pay for the rest of HSNI.


Liberty Interactive thinks they can grow at 5% top line and they think HSNI will do the same. Looking 5 years out, using a 5% growth rate, HSNI’s current operating margins, and discount rates of 12-15%,  we get to fair value around $56 per share.

HSNI margins are much lower than QVCA’s. HSNI’s EBITDA margin is 9.69% and its EBIT margin is 7.7% compared to QVCA’s EBITDA margin of 20% and EBIT margin of 13%. If HSNI can improve its margins and/or increase revenue faster than it is worth more. This is just a starting estimate of what HSNI is worth. We’ll need to do more work to see if management can improve margins or grow revenue faster than 4-5%. Maybe even divest its lower margin Cornerstone Brand?

HSNI is currently trading around $54 per share. HSNI is trading around our estimate of fair value, if we’re right. Our valuation is probably off. Fair value could be higher or it could be lower and we don’t know by how much. This is why we ideally want to buy a company at a good discount to our estimate of fair value. It gives us a margin of error to work with.

The 4 (But Really 3) Dividend Aristocrats Warren Buffett Owns

I’ve seen this headline a few times Warren Buffett’s 4 Favorite Dividend Aristocrats. Just like everyone else I’m susceptible to the listicle and I clicked it. If you’re a Buffett follower you can probably guess the four. In case you can’t the four are:

  • Coca-Cola (KO)
  • AT&T (T)
  • Wal-Mart (WMT)
  • Procter & Gamble (PG)

But here’s the thing. Technically Berkshire-Hathaway still owns 52,477,678 shares of Procter & Gamble (PG), but it entered into a swap agreement with Procter & Gamble to sell its shares back to Procter & Gamble in exchange for Duracell. In the latest letter to shareholders, the Procter & Gamble (PG) stake is marked as held for sale.


From Berkshire-Hathaway 2015 Annual Letter. Click image to enlarge.
From Berkshire-Hathaway 2015 Annual Letter. Click image to enlarge.

So yeah Warren Buffet owns 4 of the Dividend Aristocrats, but one of them is in the process of being sold out of the portfolio.


Warren Buffett’s 4 Favorite Dividend Aristocrats (Sure Dividend)

Continued European Growth for Visa and MasterCard

Visa (V) and MasterCard (MA) are the two lowest yielding positions in our dividend growth portfolio, both yield under 1%. We think they will be the two companies to grow their dividends the fastest.

They both have low payout ratios that they can increase.

Neither needs to reinvest a lot of capital back into their business which leaves more to return to shareholders.

Both Visa and MasterCard have dominant payment networks that should allow them to generate excess returns on capital well into the future.

Electronic payment adoption and migration to Visa’s and MasterCard’s networks still has a lot of growth left in it. Even in developed markets like Europe.

From Barron’s.

On June 9, the second tranche of European payments regulation begins, creating a multiyear earnings catalyst for MasterCard and Visa. New merchant routing provisions will enable MasterCard and Visa to negotiate directly with retailers to process their domestic transactions for the first time. For context, regional networks in markets such as Cartes Bancaires (”CB”) in France and Girocard in Germany currently process nearly all domestic card transactions. Such networks dominate their local payments market by setting local payments routing rules, but upcoming European payments regulations replace these rules. Such presents an opportunity for MasterCard and Visa to accelerate European processed transaction growth.

Large retailers could lead share shift to Visa and MasterCard. Visa and MasterCard can entice international retailers to re-route domestic transaction processing away from local networks, such as CB and Girocard. After June 9, retailers with pan-European operations could further consolidate multi-country agreements with global networks such as Visa and MasterCard. This to negotiate better volume-based processing rates, organize joint marketing programs, and create a globally consistent consumer payment experience. For context, pan-European retailers represent a substantial portion of the overall French market, and 9 of the top 10 French retailers.

Also, Visa and MasterCard are far ahead of the local European networks in regards to tokenization. As payments move from physical cards to smartphones and digital wallets, the security tokenization offers is vital. If European retailers want to offer Apple Pay, which relies on tokenization, then they need to be on a payment network that can handle it.


MasterCard, Visa Set for European Boosts (Barron’s)