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Activity Update, November 2015

It’s been more than two weeks since our last post here on GRB. This marks the longest period of inactivity since we launched the site in July of last year. While we haven’t been idle, we just haven’t had a great chance to post.

As a result, I’m going to take this opprtunity to bring you up to speed on a few events that have had our attention recently.

Hydro One (H)

From a local perspective, an electricity transmission company in our home market of Ontario, Canada, held its IPO for 15% of its shares. Another 45% are intended for offering between now and 2020. H went public at $20.50 per share and raised total gross proceeds of $1.83 billion CAD. Significantly, however, the company did not retain any of these funds. Instead, the provincial government is able to use this money to reduce its deficit.

In the short term, this will help lighten the debt load of the Ontario government. A near $2 billion cash infusion would surely help any government with its immediate-term financing problems. With a few more billion slated to arrive over the next few years as H is sold off to the public, Ontario’s government feels secure. The problem is, of course, that when you cut limbs from the apple tree for the wood, you limit your apple production (cash flow) for years to come. This move will almost certainly come back to haunt the government when looking out a decade from now. They may well be killing the golden goose.

As patient, intelligent dividend growth investors, we know that selling off assets is not the way to build a portfolio that is built to last. Instead, we acquire assets over time that produce increasing amounts of cash flow that will ultimately finance our financial freedom.

While I believe H may well prove to be a high quality investment, the problem at the moment is threefold:

  • We do not buy IPOs. IPOs tend to trend down below their offering price over a six-to-twelve month period. Who knows what will be revealed about H once it has had some time to trade in the open markets?
  • While H went public with a dividend yield of +4%, it has not yet produced a dividend growth track record. We prefer companies that not only sport a high yield but also have proven their ability and commitment to rewarding shareholders with an increasing payout.
  • Even when the full 60% of H’s shares are issued, the provincial government will still own 40% of H’s stock. I’m not a huge fan of investing in a company which still has some government control. Depending who is in power, policies and sentiment can change swiftly which may lead to unforeseen and potentially damaging circumstances. Who knows all of the implications?

So, while H poses an opportunity, I will be waiting this one out. If the share price deflates over the coming months, I will take another look.

Yum! Brands (YUM)

I have been a shareholder of YUM since mid-2014. The company has posted solid dividend growth through the years on the strength of its flagship brands including KFC, Taco Bell, and Pizza Hut. The company has established a leading position within the Chinese market.

Last year the company became embroiled in a meat supplier scandal which has significantly set the company off course. Its growth has been repeatedly stalled as it has taken longer than YUM anticipated to turn these problems around.

Nevertheless, I expected the resurgence to take time and have continued holding my shares. I even added to my stake in October below $70s per share.

The company recently announced that it will be splitting into two distinct, publically traded companies. Yum! China will become a franchisee of Yum! Brands with rights to the three aforementioned brands in Mainland China. Yum! Brands will continue as is, elsewhere.

As a shareholder, I would rather the company remain as one entity. In my experience, break-ups such as this only complicate things. For instance, what if Yum! Brands in time does not like the direction Yum! China is taking with its operations? What recourse does it have to influence what Yum! China does with the brands? Things can get messy and I’d rather avoid even the potential for such a situation.

Nevertheless, YUM plans to discuss this further at the Analyst/Investor Day this December 10. I’ll be tuning in at that time for more details.

In any event, this is not expected to take place until sometime in late 2016. At this point, I am most likely to just continue holding both companies when they split. The ridiculous thing is that, without doubt, we’ll be hearing rhetoric within a decade from now about whether the companies should merge once again. The same ilk of investment bankers recommending this split will be recommending a merger to generate some more fees. Such is capitalism, I suppose.


This was intended to really bring you up to speed with two of the issues I’ve been thinking about over the past few weeks and provide some food for thought.

I’ve also been chewing on writing something regarding the Syrian refugee situation which has swept headlines along with the crisis in Paris. These are trying times, but so have all the ages of men been for those who have cared about the world at large.

What storylines have you been following over the past month?

Full Disclosure: Long YUM

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