First Gen: Year of the Investing Dogs?

My apologies for not having posted updates since I was out of town and had been inaccessible....Anyway here is one belated “micro” article which I sent last January 27, and which I think deserves a look...

First Gen: Year of the Investing Dogs?

"It can be no dishonor to learn from others when they speak good sense."- Sophocles, Greek Playwright (496-404 BC)

Because it is the NEW “year of the Dog” then we will take the definition of “Dog” in the context of the investments. In the financial markets, a “Dog” is usually defined as “a bad investment” or ‘investments that under perform”. In the US markets, the ``Dogs of the Dow” is defined by investopedia.com as ``An investing strategy that consists of buying the 10 DJIA stocks with the highest dividend yield at the beginning of the year. The portfolio should be adjusted at the beginning of each year to include the 10 highest yielding stocks.”

This suggests that the lunar year of 2006 could be one of the following: the year of UNDERPERFORMERs, a bad year for equities or possibly the year of the high yielding dividend paying stocks.

The First Gen IPO ends its offering this week, and was reportedly met with unresponsive demand from the public or in particular, domestic investors, which fits our new year’s characteristic of our “Dog”. However, could it be that the market has discounted factors or have been remiss in their assessment of the First Gen IPO?

First of all, First Gen is an Independent Power Producer (IPP) which is required to list as part of the Electricity Power Industry Reform Act (EPIRA). In other words, First Gen’s listing is part of a compliance of an existing regulation. Without the law, it would be unlikely for First Gen to list.

Second, Utility firms are usually characterized by high margins and huge dividend payouts, investopedia.com identifies an important aspect of utilities investing as (emphasis mine), ``Utilities still go to great lengths to ensure distribution of cash to shareholder; relative to others the industry offers good income potential. Dividend Yield, measured as the Annual Dividend/Market Price at the time of purchase, probably offers the best tool for gauging the income generated by utilities stocks. Besides, a solid dividend yield suggests a more attractive proposition for conservative investors.” In short, the public may have omitted the reason for investing in utilities…DIVIDENDS.

Today, the public has tagged First Gen as typical of any publicly listed firm which disregards the significant “FUNDAMENTALS” aspects and fails to distinguish between capital appreciation- based relative to dividend-based investing. Most of them have reckoned that stockmarket investing is primarily the capital appreciation based ergo the “speculative bent” of domestic investors rather than what fundamentally matters.

To consider, mainstream sellside analysts are wont to present to its clients the attractiveness of an issue based on sophisticated financial jargons, yet I find it quite unusual where NONE of the conventional/mainstream analysts so far has delved on the margin-dividend aspect of the issue.

And quite curiously too, First Gen has been bizarrely reticent about declaring its Dividend Yield. While it has noted in its prospectus of the nominal figures it distributes as dividends it has clammed up on how much dividends it pays out per share.

	2002	2003	2004
Dividends	1,539,000,000.00	5,421,000,000.00	2,243,000,000.00
common	11,307,110.00	11,307,110.00	11,307,110.00
preferred	4,076,872.00	3,643,204.00	3,643,204.00
total	15,383,982.00	14,950,314.00	14,950,314.00
net income	3,218,000,000.00	5,328,000,000.00	4,960,000,000.00
Payout Ratio	47.82	101.75	45.22

I have made a short table based on the data from its prospectus of the dividends it pays out to its shareholders (common and preferred) and its net income. I omitted my estimates of how much it pays out per share since it looks too enormous and could be most likely wrong. However, based on its stated net income and nominal dividends payout...the minimum payout or payout ratio (dividend/income) has been an incredible no less than 45% since 2002!!!

Third, the previous IPOs could be an example to what we may call as ‘Past Performance are not indicative of future results’. One may find subscribing to last year’s IPOs as “UNPROFITABLE” because to this point none of them has risen above its subscription offering and all three were listed during the PEAK of last year’s bullish market; in particular, Semirara Mining (SCC) listed on FEBRUARY, Manila Water (MWC) and SM Investments (SM) both listed on March.

One would also note that the three issues where mostly warmly received (remember five to eight times oversubscribed!) during their offering, which at the time had a very bullish backdrop considering the upside momentum of the Phisix. Stated differently, today’s lackluster appetite for First Gen has been due to the “rear view mirror effect”, phlegmatic sentiment aggravated by poor track record of past IPOs. Comparing the past issues to First Gen is like comparing apples to oranges.

Candidly, I have NOT scrutinized on the entire prospectus of First Gen to make an in-depth ‘fundamental’ recommendation. However, being your contrarian analyst or seeing value in what the public fails to appreciate, First Gen looks likely a buy for me (I have not subscribed but am looking at the prospects of buying on listing). In essence, when the public disregards or dismisses the reason to why one should invest in utilities, gauges subscription on IPOs based on popularity and uses flimsy basis as comparison, my inclination is to go against the popular sentiment.

Fourth, utilities investing are also reckoned as defensive or countercyclical investing meaning going the opposite direction or against a cycle, where on general market weakness, utilities tend to outperform the general market since energy issues are usually considered economically as having inelastic demand.

Finally, today’s global trend of ‘supply inelasticity meets growing demand’ has resulted to investors paying attention to energy related issues…utilities issues have not escaped the global investor’s eyes…

``Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." remarked the legendary investor Warren Buffett. Ah ah, I certainly would not ignore the writings on the wall.

***

A follow up observation on First Gen (February 12)....

Here is an irresistible commentary by a local analyst who predicts First Gen to FALL by as much as 18%???!!!...., ``Like SM Investments and Manila Water, First Gen was offered “without a discount" to comparative companies. If it follows the performance of those recent IPOs (emphasis mine), First Gen could fall around 18%”...based on comparing apples to oranges!!

I noted that past performance cannot be indicative of future outcomes. This analyst has essentially been entrapped in the so-called heuristic bias or cognitive illusions of ‘hindsight bias’ or ‘anchoring’ in determining his projections about the share prices of First Gen by comparing “laggards” mostly weighed by sentiments rather than fundamentals (instead of comparing with companies from the same industry).

Second, such observation emanates from the initial listing activities which had been weighed down by lackluster sentiments in the general market, as well as in the particular stock (as a matter of bad publicity more than anything else), in short, the analyst is a practitioner of “rationalizing” events to past actions rather than finding value buys.

If I am right (conditional on the dividend per share data) about the “surprisingly above average dividend yields” offered by the newly listed utility power producing firm, especially in a defensive market, First Gen would likely be a winner than a DOG. I am yet trying to get in touch with the proper authorities to uncover “unearthed” figures that I expect.