China Will Block Travel for Those With Bad ‘Social Credit’

Chinese authorities will begin revoking the travel privileges of those with low scores on its so-called “social credit system,” which ranks Chinese citizens based on comprehensive monitoring of their behavior. Those who fall afoul of the system could be blocked from rail and air travel for up to a year.

China’s National Development and Reform Commission released announcements on Friday saying that the restrictions could be triggered by a broad range of offenses. According to Reuters, those include acts from spreading false information about terrorism to using expired tickets or smoking on trains.

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The Chinese government publicized its plans to create a social credit system in 2014. There is some evidence that the government’s system is entwined with China’s private credit scoring systems, such as Alibaba’s Zhima Credit, which tracks users of the AliPay smartphone payment system. It evaluates not only individuals’ financial history (which has proven problematic enough in the U.S.), but consumption patterns, education, and even social connections.

A Wired report last year found that a user with a low Zhima Credit score had to pay more to rent a bicycle, hotel room, or even an umbrella. Zhima Credit’s CEO has said, in an eerie prefiguring of the new travel restrictions, that the system “will ensure that the bad people in society don’t have a place to go, while good people can move freely and without obstruction.”

Though the policy has only now become public, Reuters says it may have come into effect earlier — in a press conference last year, an official said 6.15 million Chinese citizens had already been blocked from air travel for social misdeeds.

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Has Procter & Gamble Become A Bargain After The 16% Decline?

By Aristofanis Papadatos

Procter & Gamble (PG) stock has lost 16% since it? peak six months ago. The stock has dramatically under-performed S&P in almost any time frame one can check out. To be sure, it has under-performed the market index during the last 5 years (2% vs. 79%!), 2 years (-5% vs. 36%) and the last 12 months (-14% vs. 15%).

And yet, P&G has one of the longest streaks of dividend growth in the entire stock market. It is a Dividend King, a group of just 25 stocks that have increased their payouts for at least 50 consecutive years. You can see the full list of all 25 Dividend Kings here.

This article will discuss the company’s fundamentals, and why the stock may be interesting for dividend growth investors.

Business Overview

Procter & Gamble is a consumer stalwart that is 180 years old and sells its products in more than 180 countries. It generates 55% of its sales outside North America, with 35% of its sales in emerging regions.

Source: Barclays Global Consumer Conference, page 8

The performance record of the company for almost two centuries is certainly admirable. Nevertheless, during the last decade, the consumer stalwart has faced some strong headwinds that have challenged its growth trajectory.

The greatest headwind is the continuously heating competition in the retail sector. As consumers are becoming increasingly price-conscious, private-label products are gaining popularity and are thus gaining market share while also exerting downward pressure on the prices of their competitors.

In addition, large retailers, such as Walmart (WMT) and Target (TGT), are in a price war – and hence they exert great pressure on their suppliers for lower prices. Consequently, Procter & Gamble has seen its gross and operating margins remain essentially flat during the last decade – around 50% and 20%, respectively. Moreover, the company has failed to grow its revenues for six consecutive years.

Part of the decrease in the revenues can be attributed to the unprecedented sale of brands in the last few years, but even the core revenues have not grown for six years. Furthermore, the company has essentially failed to grow its earnings per share for a whole decade.

Growth Prospects

While the above headwinds help explain the stagnation of Procter & Gamble, the company also has another problem: its own size. As it has a market cap of approximately $200 billion, and has already expanded in almost every country on the planet, it is only natural that the company finds it increasingly hard to grow.

On the bright side, the consumer stalwart is in the process of reinventing itself. More precisely, it is doing its best to make the product packaging as appealing as possible while it also tries to enhance the effectiveness of its advertisements. Moreover, the company has sold an unprecedented number of low-margin, low-growth brands in recent years and has thus reduced their number by almost two-thirds, from 170 to 65 brands.

In this way, the management will now be able to focus on the most promising brands with the highest growth potential. Organic sales were positive over the course of 2017.

Source: Barclays Global Consumer Conference, page 5

As the results of the first half of this fiscal year show, the company is on track to deliver core earnings-per-share growth of up to 7% this year. Therefore, after years of stagnation, the transformation seems to be bearing fruit.

While Procter & Gamble is present in almost every country, it still has room to grow in some emerging regions if it improves its execution. Thanks to its ongoing transformation, the company has already shown some encouraging signs.

For instance, in China, Japan and Mexico, it has grown its adjusted sales by 7%, 8% and 9%, respectively, in the first half of this fiscal year. China and India are very promising markets, as they have population of more than one billion each and their middle classes keep growing at impressive rates. Therefore, the consumer stalwart has ample room to grow before it reaches its saturation point.

It is also important to note that Procter & Gamble was negatively affected by a strong dollar until a year ago. However, although the Fed continues to raise interest rates, the dollar seems to have posted a solid top and has been weakening during the last year. Whenever the Fed raises interest rates, the dollar does not rally, as the market has already priced in very aggressive hikes.

On the other hand, whenever the US economy shows any sign of weakness, the dollar tumbles. All in all, the dollar has already lost about 20% in a year and is likely to remain weak for the foreseeable future. This will be a strong tailwind for Procter & Gamble, as it generates 55% of its sales abroad.

Competitive Advantages & Recession Performance

The most important competitive advantage of Procter & Gamble is the strength of its brands. As the company is focused on producing the most innovative and highest-quality products, its brands are viewed by consumers as premium.

When consumers purchase products of this stalwart, they know that they pay a premium over the other brands but they also rest assured that they are not going to face any problems with the quality or functionality of the products. As a result, the company is the market leader in the 10 categories it operates in.

Fortunately for its shareholders, the company does not rest on its laurels. To be sure, it has spent about $1.9 billion each year on R&D in each of the last six years in order to develop technologies and obtain patents. In this way, it easily maintains its status as the market leader.

Moreover, it has spent more than $7 B per year on advertising in the last six years in order to continuously remind consumers that its products are unique and thus deserve their premium status. As most of its competitors cannot spend such excessive amounts on R&D and advertising, the ability to spend such enormous amounts certainly creates a significant moat for P&G over its competitors.

In addition, as the company’s products are essential to consumers, it has always exhibited great performance during recessions.

P&G’s competitive advantages allow the company to remain profitable, even during periods of recession. Earnings held up very well during the Great Recession:

  • 2007 earnings-per-share of $3.04
  • 2008 earnings-per-share of $3.64 (20% increase)
  • 2009 earnings-per-share of $3.58 (1.6% decline)
  • 2010 earnings-per-share of $3.53 (1.4% decline)

P&G enjoyed strong earnings-per-share growth in 2008, and experienced only a mild dip over the next two years. While most investors have forgotten how fierce a recession and a bear market can be, they should not underestimate this characteristic of Procter & Gamble.

Valuation & Expected Returns

P&G expects core earnings-per-share growth outlook of 5% to 7% for fiscal 2018, from fiscal 2017 earnings-per-share of $3.92. Assuming 6% growth, earnings per share are likely to reach approximately $4.15. Based on this, the stock has a price-to-earnings ratio of 19.0.

Source: Value Line

Moreover, the chart shows that it has been almost four years since the last time the stock was trading at such a low price-to-earnings ratio. Therefore, investors who have faith in the management and believe that the ongoing transformation will bear fruit should consider purchasing the stock at its current level.

Procter & Gamble is a Dividend King that has raised its dividend for 61 consecutive years and has paid a dividend for 127 consecutive years. This degree of consistency is certainly a testament to the strength of its brands and their resilience even amid the roughest economic conditions.

Unfortunately, the company has drastically reduced its dividend growth rate in the last few years. While it used to raise it by almost 10% per year until 2014, it has raised it by 3%, 1% and 3%, respectively, in the last three years.

Dividend growth is likely to continue to be limited for the foreseeable future. On the other hand, this is the first time in more than two years that investors can purchase the stock at a 3.5% dividend yield.

Therefore, as the company will continue to raise its dividend for years, those who purchase the stock now lock in a 3.5% dividend yield and are positioned to see it grow for years. In fact, the company is expected to announce its next dividend hike next month.

Even if Procter & Gamble’s valuation remains steady, the stock can generate positive returns from earnings growth and dividends. A reasonable breakdown of total returns is as follows:

  • 5% to 7% earnings growth
  • 3.5% dividend yield

Based on this, the stock would return 8.5% to 10.5% annually moving forward. This would be a satisfactory rate of return for a high-quality blue chip like Procter & Gamble.

Final Thoughts

Procter & Gamble has dramatically under-performed S&P for years. However, the company is going through a major transformation right now. In addition, this is the first time in more than two years that investors can purchase the stock at a 3.5% dividend yield. Moreover, the stock is trading at an almost 4-year low P/E ratio. Therefore, those who believe in the restructuring plan of the company should consider purchasing the stock.

Disclosure: I am/we are long WMT, TGT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Green Energy Stock Yields 10%, Opportunistic Buy With 50% Return Potential

This research report was jointly produced with Seeking Alpha Author Long Player.

Pattern Energy (PEGI) is a renewable energy company that generates a fair amount of cash and is growing. The stock recently traded at $17.2/share and its most recent dividend was $0.422 which provides an annualized yield of 9.8%.

Understanding the Business

PEGI is in the business of owning and operating renewable energy projects. So far, these projects are dominantly wind farms. This involves a number of advanced wind turbines located in a desirable area to harvest wind energy. The projects all have long-term Power Supply Agreements (PSAs) – typically with local utilities. The counterparties to such agreements have, in almost every case, very solid credit ratings. There is, thus, very little market risk or price risk associated with the projects. The main variables are the wind itself and downtime due to malfunction or other factors. The relatively low level of risk provides a strong basis for a yield-oriented investment.

PEGI operates its projects (some of which are partially owned by other companies) as somewhat independent entities. Each project is a separate limited liability corporation (‘LLC’), and has substantial debt financing but almost all of the debt is non-recourse (some of it is partial recourse). Thus, the impact of a failure at any one project is limited. PEGI’s 25 existing consolidated projects are in the United States, Canada, Chile, and Japan. PEGI’s PSA contracts average a term of 14+ years with 90% using Siemens and GE equipment. Its fleet of wind turbines is relatively young and has an average age of less than four years. Counterparties to PSA agreements include utilities like PG&E (NYSE:PCG), SDG&E, and Westar (NYSE:WR) and non-utility entities like Morgan Stanley (NYSE:MS), Citigroup Energy, and Amazon (NASDAQ:AMZN).

A Defensive Stock

PEGI provides electricity, which is a basic necessity. Therefore, the company is unlikely to be affected by economic cycles. As an alternative or “green” electric producer, that company stands out for its profitability as well as the growth of that profitability. PEGI is also part of a group of companies that is trying to bring more “green” electricity to the world. As costs for this technology continue to drop, they may succeed with this wind technology far more than many would have foreseen.

Source: PEGI December 2017 Presentation

The company has invested in countries that are relatively stable and value renewable energy sources. As such, political upheaval is generally not a concern. Successful ventures in Japan could yield some long-term competitive advantages. Japan tends to be a notoriously hard market to penetrate. Therefore, the information shown above is a big deal. Japan would like to avoid importing oil and gas to some extent. Wind technology promises the hope of reducing the energy import bills.

Above all, this technology is not dangerous should a volcano erupt or a major earthquake hit the area. A few years back a major earthquake caused all kinds of problems with a nuclear reactor. The cleanup from that earthquake continues. The nuclear reactor may never go back into service. Wind technology has no such issues. In some ways, wind technology to generate electricity is a blessing in a land where mother nature is very active.

A Beaten Down Stock

The stock has tanked recently for two main reasons:

  1. Investors’ fears that U.S. Tax Credits for renewable energy will expire in a few years.
  2. The stock got beaten down some more (down by another 10%) after the company declared that its quarterly dividend will not increase. As a reminder, PEGI had hiked its distribution every quarter for the past 16 quarters prior to this announcement.

Based on 2018 “Cash Available for Distribution” (or CAFD) guidance, PEGI’s is currently trading at just 10 times CAFD (using midpoint CAFD guidance of $166 million and 95.1 million shares outstanding). The yield is now close to 10%. These valuations are bargains for a growing cash flow and distribution. Mr. Market appears to have tossed away everything but a select group of companies. Companies not in that select group keep getting cheaper.

Interestingly, the company is far larger now and has a better yield than at the time of its initial public offering in September 2013 when the stock was trading at $22/share.

Today, the stock is trading at $17.2/share and the distributions have grown by 35% since the IPO, making it a very attractive investment.

Yet, Mr. Market couldn’t care less. Mr. Market is busy sending the stock to new lows. Sooner or later the growth should outweigh the market disdain. The investor is being paid nearly a 10% distribution to wait for that attitude change.

Source: PEGI December, 2017 Presentation

As long as management continues to make only accretive acquisitions, this company should continue to be an attractive investment.

Risks of ‘tax credit’ expiration are overblown

The finalization of the tax bill last December brought greater clarity to Pattern Energy’s future as it has preserved the critical credits for wind and solar for the time being. Still, this did not calm investors’ fear that tax incentives remain at risk in the longer term. Here is our take on this:

  1. A great deal of PEGI’s planned expansion is outside the US and will be completely unaffected by any potential future change in tax benefits.
  2. Within the United States, should tax credits expire, the effects would be primarily on the development side of the business rather than on existing facilities on the operational side. PEGI is primarily an operating company although it has now some participation on the development side. The point to note here is that the profitability of the existing facilities of PEGI in the United States should not be impacted.
  3. In the U.S.A., most states now have renewable portfolio requirements (and in some cases targets) for their utilities which require that certain percentages of power be generated by renewable sources by certain deadlines. So with or without subsidies, wind farms have to be built. They will just cost more to the end user, but they will still have to be built and to operate to meet the minimum required targets.
  4. Renewable energy is growing rapidly, and the cost of producing wind and solar technology is dropping every year. So in a few years, renewable energy operators will be able to compete with other forms of energy without the need of any subsidies.

2018 Guidance

While PEGI did not raise its distribution in the last quarter, a very important aspect is the analysis of next year’s guidance that management has provided:

  • PEGI is expecting a very strong year in 2018 with “Cash Available for Distribution” (or CAFD) to be in the range of $151 million to $181 million, or 14% higher than the 2017 CAFD using the midpoint of the range.
  • During the year 2017, PEGI agreed to acquire 206 MW of owned capacity in 5 Japanese projects which represent the company’s entry into one of the most robust renewable markets in the world. PEGI is now expanding internationally and the income from these projects will kick in during the year 2018.
  • The 2018 guidance includes 24 projects expected to be operating and contributing during 2018, including 4 new projects in Japan and Canada which were not operational during the year 2017. This is encouraging, as we have been saying all along that the growth in PEGI’s earnings will come from outside of the United States.

Price Target

As of March 11, 2018, there are 15 banks and analysts who cover the stock with a consensus rating of “Overweight” on the stock, and an average consensus price target of $24.67, suggesting a ~43% potential upside from the current price (source:

At $24.67/share, this would put the valuation of PEGI at 14 times cash flow, which is very reasonable. We should note that PEGI traded well above $24.67/share in September 2017, just a few months ago.


The shares of this company are in the bargain bin. With a solid outlook and cash flow growth for 2018, combined with a very low valuation, PEGI is set to greatly outperform within the next 12 months. With a 9.8% yield and +40% upside potential, PEGI could very well generate returns of over 50% in the next 12 months. The pullback provides a unique buying opportunity.

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Disclosure: I am/we are long PEGI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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