It's the business.. Part III

In the previous post, Its the business.. Part II the example discussed was based on the assumption one had purchased Multicode on 20th Sept 2001. I wrote the following.

• It announced its 2001 Q4 quarterly earnings on 20th Sept 2001. The traded prices at that time was 1.52. At that time Multi-co had around 39 million shares. So for fy 2001, Multi-code had an eps of 26 sen. Based on a price of say 1.52, this meant that Mutli-code had an PER of 5.8x and with a dividend of 10 sen tax exempt, Multicode had a dividend yield of 6.6%. This makes an investment case, right? The reason to invest in Multi-code was there.... rite?

Now assume that one purchased the stock in 2002, instead of 2001. Here is Multicode's 2002 Q4 quarterly earnings. The year low for Multicode in 2002 wass 1.88.

1. company's net profits are down. Is it a blip? (net earnings was only 8.9 million vs 10.1 mil)
2. company's profit margins showed some weakness.. 15.4% to 12.5%
3. there is a 10% tax exempt dividend yearly.
4. net cash also.

So if say at 1.88, was there a justification to buy the stock?

One could have argued that perhaps fy 2002 was just a blip. A single one-off poor result. And because the company is a nett cash company and pays their 10% tax exempt dividend like clock-work, the investor is seduced to buy the bugger. Earnings per share was 20.4 sen and at 1.88, per was around 9.2x and dividend yield would 5.3% assuming 10% company continues paying their 10% dividend.

So the investor ignores the poor business performance and focused on the issue of dividend and that the company is in a net cash position...

Assuming one had purchased Multicode back then at a price of 1.88.

Cost of investment of 10,000 shares at 1.88 = 18,800.

Dividends received.

2002 10 sen (10 x 10 = 1000) (NO bonus issue entitlement lor..)
2003 10 sen (10 x 10 = 1000)
2004 7 sen ( 10 x 70 = 700)
2005 8 sen (10 x 80 = 800)

So total dividend received would be 3,500.

So total dividends received after holding a stock for 4 years = 3500. And based on an investment outlay of 18800, this means that the investor has recieved back 18.6% of their invested money.

But... the current share price is 1.10. And since one now have 10,000 shares, the current market value of the shares based at a price of 1.10 is 11,000.

And if you add up the dividend received.. 11,000 + 3500 = 14,500!

Ahem... see the end result now?

An investment of 18,800 would mean that based on current price of 1.10, the investor is holding a paper loss of 4,300!!!

What's your opinion on It's the business that counts... now ?

I really do think that O'Neil have taught us something good here. Do not hold or buy a just because of its dividends. If the stock earnings performs poorly, the stock will STILL get hit.