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We Can't Lose Buying These Cash-Rich Dividend Payers

By Tom Dyson, publisher, The Palm Beach Letter
Wednesday, September 10, 2008

A man was yelling in Chinese...

We were relaxing in our cramped Taipei hotel room last week when we heard one of those cars with loudspeakers attached to its roof. I've seen these cars and trucks in every foreign country I've ever been to. I just assumed this guy was promoting a furniture liquidation sale or a nightclub opening in Taipei.

A few minutes later, I looked out the window and noticed thousands of people streaming past our hotel. They were demonstrating against Taiwan's new president. We ran downstairs...

Turns out, this protest was a big deal. I found news reports on it from all the major international press agencies the next morning. They say 100,000 people took part in the march. Demonstrators came from all over Taiwan on free buses organized by one of the groups leading the protest. Crowds were streaming past our hotel for over two hours... waving flags... banging drums... and chanting.

The protesters don't think the country's new president, Ma Ying-jeou, is living up to his election promises... even though he's only been in office for 100 days. They think he's screwing up the economy and letting China have its way with Taiwan. We saw banners that said things like: "Stop inflation," "We want more jobs," "Democratic Taiwan is not part of communist China," "Show me the money," "Taiwan yes! China no!"

But if the protesters want Taiwan to be more prosperous, they need to get closer to China, not farther away...

Taiwan's economy and stock market are stagnating... and it's mainly due to the war with China. Taiwan split from China in 1949 following a civil war. But China still claims Taiwan as its territory and threatens to attack it from time to time. Officially, the two countries remain at war.

As part of its defense against Chinese aggression, Taiwan's government controls the flow of money in and out of Taiwan. These policies are an attempt to make a "capital" fence around the country. The fence prevents China from taking over Taiwan's economy.

While they keep Chinese businesses from infiltrating Taiwan's economy, these regulations make it very hard for Taiwanese companies to send their capital out of Taiwan... or to borrow money in currencies besides Taiwan dollars. Taiwan companies can't get credit overseas, because the government won't let them use their Taiwan assets as collateral. And any Taiwan companies that do have operations overseas will do anything in their power to avoid bringing the capital they generate back to Taiwan... because they know it'll get stuck once it gets here.

These rules are stifling Taiwan's economy and stock market... and preventing Taiwan's companies from expanding.

These rules mean Taiwan companies are loaded with cash. I studied the balance sheets of Taiwan's 10 largest companies. These companies have total cash balances of $40 billion and only $9 billion in total long-term debt.


Company

Company Cash (millions)

Debt (millions)

Market Cap (billions)

TSMC

$6,106

$710

$51

Hon Hai

$5,381

$932

$35

China Steel

$644

$594

$14

Chunghwa

$2,959

$415

$24

Cathay Financial

$11,766

$860

$19

HTC Corp

$2,460

$0

$14

Mediatek

$1,558

$0

$12

Asustek

$1,658

$433

$8.5

Formosa Plastics

$4,753

$1,569

$11

AU Optronics

$2,970

$3,128

$1

Taiwan companies make excellent dividend payers. For one thing, the government hates seeing cash sitting around on balance sheets out of its reach. So it levies a special 10% tax rate on companies who pile up cash for no reason. This tax makes sure companies either use their cash to grow Taiwan's economy or pay it out to shareholders, where it generates income tax revenue for the government.

There's another reason Taiwan's companies dish out cash to shareholders. Cash-rich companies make attractive takeover targets. The predator can grab the cash and get the business for much less than it's worth. Taiwan's companies distribute their cash to dissuade predators...

Taiwan is a mature economy. There just aren't many opportunities for these companies to make big investments in Taiwan. So I know dividend payments are going to increase in the future... unless Taiwan's government deregulates and allows Taiwanese companies to use their cash on overseas investments. If this happens, Taiwan's stock prices will jump anyway. Either way, shareholders win.

Right now, Taiwan's stock market has a dividend yield of 5.5% and trades at about 11 times earnings. With stocks this cheap, and so laden with cash, I can't see how an investor in Taiwan's stocks can lose money...

Good investing,

Tom




Market Notes


THE DEPOT'S TAKE ON THE AMERICAN CONSUMER

Last month, we produced a chart of Harley-Davidson (HOG) and speculated the huge downtrend in consumer spending stocks was over.

HOG is the quintessential American brand. It prospers when folks have spare cash. It suffers when they don't. We lump NordstromPool Corp, and Home Depot in the same boat. Share prices in these companies speak volumes about the American consumer.

For much of the past few years, these stocks told us horror stories. Home Depot, for instance, fell 46% from mid '07 to mid '08. But now... even as the Depot reports sinking earnings... shares have held around $28. HOG shows similar price action.

Does this strength mean we can say with certainty the worst is over for the American consumer? No way. But something big is happening in the market that says we can "consider" it...

World stock markets are in widespread decline. And stocks like Harley-Davidson and Home Depot are reporting terrible earnings right now. Their share prices, however, are near nine-month highs. When stocks hold steady in the face of bad news, it's a big bullish sign. This bear market looks to be over.
 


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