Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Monday, 30 December 2019

Should I Get Singapore Companies To Do More Share Buyback?


What is Share Buyback?
It is the company buying back shares of itself to reduce the number of shares outstanding, and in return increase the value each share is worth.
For a more in-depth explanation about it, refer to the Investopedia page HERE.

Why Companies (particularly US companies) Love Share Buyback?
The main reason: Tax
In the US and other countries, shareholders have to pay a dividend tax for the dividends they receive.
In the US, the nominal tax rate is 30%.
This causes shareholders to experience double taxation - once on the company's profits, then again on the dividends paid out of the profits.
To avoid double taxation, companies use share buybacks as a way of "giving" returns back to shareholders.

The math of Share Buybacks
You can skip this if you know how buyback works
A company made $1 million in profits, has 1 million shares outstanding, and a PE of 10.
The current share price of the company is $10, and the Earnings Per Share (EPS) is $1.
If the company bought back 10% of its shares (100,000 shares), the EPS will increase from $1 to $1.11 ($1m profits / 900k shares).
Assuming the PE of 10 does not change, the new share price will become $11.11 (an 11% increase just by reducing the share count by 10%).

Recommended Read: How I Saved $1000 of my $2500 Salary

The Math Portion of Why Buyback Is Better Than Dividend
A company made $1 million in profits, has 1 million shares outstanding, and a PE of 10.
The current share price of the company is $10.
Assuming the company grew earnings by 4% this year, the new share price will become $10.40.
Assuming that the company pays a 2% dividend, which means it will pay out $200,000 in dividends.
As a shareholder, you will earn 6% this year.

Now, instead of spending $200,000 in dividends, it used the $200,000 to reduce the shares outstanding via a share buyback.
At $10 per share, $200,000 will buy back 20,000 shares or 2% of the shares outstanding.
With a 4% growth rate, profit becomes $1.04 million, divide by 980,000 shares, the EPS becomes $1.06.
The new share price will become $10.60, you as the shareholder will still earn that 6% return.

Problem with Share Buybacks in Singapore
1. Dependence on the Company Performance
When you get a dividend, it is cash into your pocket you can use to invest in other companies or buy things you like.
When you get buyback, you get no cash, but your ownership in the company increases.
If the company grows and earns more, your increased ownership in the company will be worth more.
But if the company shrinks, your ownership in the company will be worth less - worse still, you have no dividends to help you cushion the blow or to use as funds to buy more of the company's shares at a lower price.

2. No Tax Efficiency
In the US (and other countries), dividends are taxed, but share buybacks are not.
Hence from the shareholders' perspective, it might be better to spend cash doing share buybacks than paying out as dividends to avoid taxation.
But in Singapore, dividends are tax-free.
So the idea that "buybacks are better than dividends because of tax advantages" no longer works in Singapore's context.

3. Management Problems
I often tell my friends the statement below when explaining why I prefer Singapore companies do dividend over buybacks.
"I much rather they give me the cash and let me decide what to do with the money than let management hoard the cash. Rather I make a mistake with my money and lose it than for management to make a mistake with my money and lose it."
Of course, there are good companies that really make great use of shareholders' money to reap even higher returns, like what Warren Buffett did for Berkshire Hathaway.
But then again, how many Warren Buffett and Berkshire Hathaway do you really see in the world?
The probability of investing into the next Warren Buffett or Berkshire Hathaway is fairly low actually.

4. Company Problems
IBM spent US$83 billion on share buybacks over the past decade, but the stock price and market capitalisation went nowhere.
As an investor of IBM, it might be better had they just gave all that US$83 billion out as dividends.
Even though shareholders have to pay taxes, but at least they will still have US$58 billion and a shrinking company, instead of now where they have no cash but huge ownership in a shrinking company.


Conclusion
Share buybacks can be great for shareholders if they are done correctly.
Except it is really difficult for it to be done correctly.
Warren Buffett (world's greatest investor) set a limit on his buyback activity - he would only buy back shares if the share price fell to below 1.2x his company's book value.
At 1.2x, he considers his company to be undervalued enough to justify buying back shares and benefiting those shareholders who held on to their shares.
Unfortunately, most management teams do not have such discipline - particularly so since almost no management will ever say their share price is undervalued, even if it is significantly overvalued.
Hence, it might be better, if we as shareholders demand higher dividend payouts and fewer share buybacks!

Recommended Read: CPF Home Protection Scheme is a Lousy Scheme You Probably Own

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Monday, 16 December 2019

CPF Home Protection Scheme is a Lousy Scheme You Probably Own


What is Mortgage Insurance?
It is an insurance plan the homeowner buys when they buy a home with a loan.
In the event that the owner passes away, or suffers from a terminal illness or permanent disability, resulting in his/her inability to pay the mortgage, the insurance will pay the remaining balance of the mortgage.

What is the CPF Equivalent?
It is called the CPF Home Protection Scheme.
You must buy this insurance if you are using your CPF to pay for your HDB mortgage.
It is automatically deducted from your CPF OA every year when it is up for renewal.
For more information about this scheme, click HERE.

Why does it Suck?
The premium you pay is fixed for the whole period, eg if the premium $300 per year when your outstanding mortgage is $400,000; the premium will still be $300 after 20 years even though the outstanding mortgage balance would have dropped to $50,000.
If the owner passes away during the first year of the insurance, the insurance company will cover the full $400,000 of the mortgage.
However, if the owner passes away 20 years after buying the HDB, the insurance will only pay the $50,000 outstanding to cover the mortgage, even though the owner has paid $6,000 ($300 x 20 years) worth of premiums.

Source: CPF

But, if instead of buying an HPS, you instead bought a life insurance policy.
The cheapest 30-year term-life insurance plan we found on CLEARLYSURELY cost $368 per year - a little more expensive than the HPS.
But, the thing here is, if the homeowner has a life insurance instead of a mortgage insurance, whether the homeowner passes away on the first year or the last year while the mortgage is still outstanding, the dependents would get the full $400,000 instead of just an amount that is sufficient to cover the mortgage.
So the dependents can use the $400,000 to pay off the outstanding mortgage, and any amount of leftover can be used for funeral cost, living expenses, etc.

Source: CLEARLYSURELY

Recommended Read: Should I Have A CPF Term-Life Insurance?

What's the Good News then?
You can apply to be exempted from the CPF HPS.
If you have one or more of the following policies:
  • Whole life
  • Term life
  • Endowments
  • Life Riders (must be attached to a basic policy)
  • Mortgage Reducing Term Assurance (MRTA) / Decreasing Term Rider
In addition, these policies must cover the outstanding housing loan up to the full term of the loan or 65 years old, whichever is earlier.
The exemption can also be revoked if any of the insurance policies used for the exemption is discontinued or altered.

So, if you are considering buying an HDB and paying for it with your CPF, you might want to consider replacing the CPF HPS policy with a term life insurance policy.

Recommended Read: How I Saved $1000 of my $2500 Salary

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

Have feedback? Tell us now!

Subscribe to us or
Follow us: Investment Stab on Facebook


Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Wednesday, 11 December 2019

Should I Have A CPF Term-Life Insurance?

Today we will be answering this question: How much is my Dependents' Protection Scheme (DPS) premiums?

DPS is a term-life insurance scheme that provides your family with a lump sum of $46,000 when you:
1) suffer from a terminal illness or total permanent disability
2) passed away

Its is term insurance and is meant to insure you until you reach the age of 60.
In simple words, it is a term life insurance that insures you up to $46,000 and is paid by your CPF money.

The insurance premiums are paid annually and the rates are as per below.
If you would like to know how to save on your monthly insurance cost, link HERE

Age (as of last birthday) Yearly Premiums
34 years & below $36
35 - 39 $48
40 - 44 $84
45 - 49 $144
50 - 54 $228
55 - 59 $260

Assuming you started contributing to your CPF at the age of 16 (our first part-time job) and bought this insurance since then and continued it till you reach 60 years old, you would have paid out $4,504 in premiums for a $46,000 protection - sounds pretty worthwhile?

Source: CLEARLYSURELY

By comparison, a private term-life insurance plan would cost more for the same amount of coverage.
So for 45 years of coverage, the CPF DPS worked out to about $100 per year in premium paid.
We did a search on CLEARLYSURELY for the cheapest $100,000 term-life with 45 years of coverage, and it worked out to $285 per year in premiums (or $131 per year for $46,000 of coverage if we calculate it ourselves).
So private insurance is 30% more expensive than the CPF one.
Of course, just relying on the CPF one alone is not enough - you might need more protection for your family members and you probably need to supplement it with private insurance.

Recommended Read: How I Saved $1000 of my $2500 Salary


Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

Have feedback? Tell us now!

Subscribe to us or
Follow us: Investment Stab on Facebook


Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF