Given the seismic changes taking place in geopolitics currently, with the ground seemingly shifting on a daily basis, there is great uncertainty about the future in general, especially so with the stock markets. What seems certain right now however is a need for increasing national self-reliance in areas that are critical to defence, commerce and manufacturing. With that in mind I have decided to make a notable investment.
When considering where to invest, in my opinion the United States is a far less appealing place to invest now than only one month ago for various reasons. Not only is there considerable political volatility and a worrying descent seemingly towards a divided, bellicose autocratic nation, apparently aligning with formerly hostile states such as Russia at the expense of long standing allies, but there is also a growing backlash to the conduct being witnessed, from within and without the United States.
This backlash includes, boycotting American companies, particularly those whose leaders have ‘kissed the ring’ and may now be supplicants, at the whim of the new administration. I expect the early impact of this boycott to be visible in the next reporting season which is only about two months away. With 41%¹ of revenues generated outside of the United States for companies within the S&P500, according to Citi Global Wealth Investments, I expect the boycott may cause various companies to miss expectations, perhaps notably.
With that in mind I have looked closer to home for my next Double Bubbler investment and in an area central to defence, commerce and manufacturing. One industry that underpins these areas, and may gain from an international shift away from American manufacturers and suppliers, is that of satellite communications. So much of our modern society from trade to warfare relies on this essential technology and I expect the European Union and Britain to support their own regional champions.
Companies such as SES A.S. who provide a range of satellite communication services around the world, with a particularly strong presence in Europe, including being the lead partner for a consortium who will be designing, delivering and operating the next generation IRIS2² MEO-LEO network part funded by the European Union. In short this will be a secure network for European governments, where SES retains the opportunity to commercialise ‘over 90% of the MEO capacity and part of the LEO capacity’.
In time I will write an article on why I bought 100,000 shares in SES this morning, however in brief it is their expertise, current global communications service offering as well as the potential of significant future business, a large proportion of which is already under contract. What I also particularly like about SES is that it is currently paying approximately 10% in dividends and is intent on increasing the dividend further ‘once SES meets its net leverage target of below 3x within 12-18 months’³.
While the future is uncertain, the dividend and apparent prospects for SES, give me confidence this may be a good place to weather the storm and even prosper perhaps. Hopefully with potential share price growth together with compounding dividend reinvestments I will double my money before too long!
¹ Source. ² Source. ³ Source.
Hi. Having done some due diligence and noticing earning per share were 0.04 and dividend payout is 0.21. Obviously this is not sustainable as I’m sure you’re aware. Are you banking on new European government contracts to bolster earnings in the coming months, years?
Also can you confirm if the dividend is paid monthly or quarterly and are dividend payouts converted into US dollars. I also see there is 15% withholding tax.
Many thanks
Simon Ryan
Hi Simon,
Thanks for the message. It is really appreciated to receive feedback and get a chance to address specific questions about my investing decisions. I see it as a triple check on my workings, in having to explain them to others!
Yes, the dividend doesn’t look sustainable when looking at earnings per share however having dug deeply into the company’s financials (which are more complicated than some I have analysed!) I noted that they are only paying out 29.7% of their FY2024 cash flow to shareholders. Furthermore the dividend has been stable for five years now, including a 20% increase in 2021, and SES have a stated intention of increasing the dividend in the not too distant future following the acquisition of Intelsat, hopefully completing later this year.
It will be interesting to see if the acquisition completes given the current geopolitical volatility, however if it doesn’t then SES has over €3b in cash and equivalents, some of which may work its way to shareholders.
Of the remaining 70.3% cash flow in FY2024 some of it was put towards €717m repayment of gross debt as well as €150m in a share buyback programme. Not having to pay interest on that now cleared debt as well as paying dividends to fewer shares in future years should improve the dividend sustainability, and in my opinion demonstrates that the current intended future annual €0.50 A-share dividend, costing SES approximately €210m a year currently, is affordable.
It is also noteworthy that in FY2024, SES actually temporarily increased its dividend payment from €0.50 to €0.75 per A-share. They paid out €320m in total payments including B-share dividends paid to holders such as the government of Luxembourg, whereas this year it is expected to revert to approximately €210m total payments. Last years notional dividend increase resulted from the company’s decision to transition to a semi-annual dividend distribution. Therefore the additional €0.25 in FY2024 was due to the change in dividend payment timings and the core annual A-share dividend remains at €0.50.
Admittedly the balance sheet for SES is not pretty however in my opinion it is currently sustainable and now has additional sales potential that it didn’t have only a month or two ago. As with any investment though there are always risks and with current volatility it is impossible to gauge what probable black swan events or otherwise may be ahead.
There is quite a bit I like about the business so am working away on a post to provide detail for anyone interested in my ramblings. I am hoping to share the post this weekend.
In relation to the dividend payment, it is currently scheduled for payment twice a year with the next ex-dividend date being April 15th. The dividends are paid in Euros and you will need to check with your broker whether they will automatically convert them to USD. My broker will keep the dividend in the payment currency which is ideal in my opinion as the Euro is strengthening of late, so that may increase the value when converting back to USD or GBP, depending upon timing and future exchange rates.
I am not sure where you are based however in many countries the 15% withholding tax can offset any domicile taxes that would otherwise be paid.
Have a good weekend and thanks again,
DB
Thanks so much for the reply. Your research is much appreciated.
A pleasure!
Hi!. I am also a SES shareholder. My stake is 45.000 shares at an 4.33 euro per share. I am wondering what is your view for the Appaloosa proposals. Are you going to vote for or against? Thank you in advance for sharing your opinion.Regards!
Hi Chris, thanks for the asking. In general the proposals look reasonable as a simplified share capital structure and smaller, hopefully more agile board should make for a more dynamic business, which would make sense for the competitive and rapidly changing SatCom industry (not to mention world!).
I particularly like the suggestion of board members being elected annually to keep people on their toes. As for increasing shareholder returns, I would like to see them investing in the business (e.g. securing increased LEO capacity to facilitate their multi-orbit offering, finding ways to further reduce antenna and terminal setup complexity and cost, as well as perhaps reducing debt over time) before any dramatic increases in dividends.
What are your thoughts out of interest?