Sunday, December 18, 2016

Additional Consideration For The Plan Since Fed Raise Interest Rate

As announced on 15 Dec 2016,  Fed raises interest rate. There was also some indication that it will continue to raise interest rate for 3 times in the year 2017.

Do note that "debt" stated in this post below relates to "bank borrowings" and "interest bearing debt".

How will this impacted my plan?

For those companies that are significant leveraged, their net profit will be impacted negatively. This will created a downwards pressure on their share price.

In the aspect of these companies' cashflow statement, more cash will also be required to either "pay off the debt" or "pay off the financing cost". This will result in less cash being used to pay dividend. Thus, dividend yield maybe reduced in future and share price will most probably be affected.

So what should I do?

I will be including "debt to equity" as a major consideration of my future purchases. This will lead me to shift more significantly from leveraged companies to companies with net cash or even companies without debt.

However, there maybe debt that can be considered as "good". Therefore, as per my Enhanced Triple S Scorecard with Dividend Scorecard Portion, I will continue to set a company's ideal debt to equity ratio to be lower than 35%.

With the above in mind, these are the counters in The Value Portfolio that have debt to equity of more than 35%:

1. Singapore Telecommunications Limited
2. M1 Limited
3. ST Engineering Ltd
4. Suntec Real Estate Inv Trust (Based on reitdata)
5. Frasers Centrepoint Limited
6. OUE Hospitality Trust (Based on reitdata)
7. Singapore Post Limited
8. Maxi-Cash Financial Services Corp Ltd

In Short

A review of the portfolio indicates that most of the companies that fail the debt to equity ratio less than 35% are mostly REITs or Blue Chips, except for Maxi-Cash Financial Services Corp Ltd.

REITs require leverage to continue to operate, while the Blue Chips above, have significant branding and market share to continue to operate. Thus, I can say that my portfolio is rather "safe" from these increment in interest rate.

To further protect my portfolio from these interest rate increases, it will be better to ignore non-Blue Chips that has a debt to equity ratio of more than 35%.

An interesting note that I found was that some blue chips (such as Singapore Airlines Limited and ComfortDelGro Corporation Limited) in my portfolio actually has a debt to equity less than 35%.

Do note that this is not a recommendation to buy/sell any of the following counters.

Please do your own due diligence before you invest in any of the above counters.

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