Poh Kong Annual Report 2009: Chairman's Statement

Main Points:

The Group opened eight new outlets in various urban and suburban mega malls in FYE2009.  The Company has a total of 95 retail outlets nationwide.

Poh Kong’s higher revenue was attributed to additional revenue from new stores together with like-for-like growth in existing stores, as well as higher sales of diamonds and gem-based jewellery from existing stores.

Poh Kong’s inventory comprising of gold and gems, notwithstanding the outlets expansion, have decreased from RM391.3 million in FYE2008 to RM356.7 million in FYE2009 due to efficiencies in stock control. 

 As at 31 July 2009, the Group’s net assets recorded an increase of RM22.6 million at RM283.7 million over the previous year of RM261.1 million.

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95 outlets


2009 Revenue: RM 541.636 m
Average Revenue per outlet: RM 5.701 m per year or RM 475,000 m per month


2009 PBT:  RM 38.558 m
Average PBT per outlet: MR 405,874 per year or MR 33,823 per month


2009 PAT: RM  28.420 m
Average PAT per outlet: MR 299,158 per year or MR 24,930 per month


2009 Inventories:  RM 356.7 m
Average Inventories per outlet:  MR 3.755 m


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Chairman’s STATEMENT

Dear Valued Shareholders,

On behalf of the Board of Directors (“Board”) of Poh Kong Holdings Berhad (“the Company” or “PKHB”), I am pleased to present the Annual Report and Audited Financial Statements of the Company and its subsidiaries (“the Group”) for the financial year ended 31 July 2009 (“FYE 2009”).

Economic and Business Overview
The Malaysia’s economy registered a lower growth of 4.6% in 2008 compared to 6.3% in the previous year. GDP growth was close to negative territory in the fourth quarter of 2008 at 0.1%. In 2009, the global economy was largely affected by the financial crisis and economic recession which emanated in the US and Europe on a scale that was unprecedented. As asset prices fell and global demand plunged, developing economies were impacted by the fallout.

In the first quarter of 2009, the Malaysian economy contracted by 6.2% due largely to a drop in external demand and exports as advanced countries had to contend with a deepening recession. The country’s  economy contracted to a slower 3.9% in the second quarter of 2009 and in the third quarter, the economy contracted to a smaller 1.2% mainly due to a decline in the manufacturing sector but it was reported that the worst was over for the economy.*

Notwitstanding the various uncertainties, the global and domestic economies are expected to register modest growth in 2010. In Malaysia, this is mainly due to the Government’s earlier stimulus spending packages totalling RM67 billion, unveiled in November 2008 (RM7 billion) and March 2009 (RM60 billion), which are having positive impact on the economy.

Supported by the domestic demand, stabilization and the fiscal stimulus packages designed to lessen the impact of a global recession, the Government is confident of achieving a 5% GDP growth in 2010. In announcing this on November 18, 2009, YB Tan Sri Nor Mohamed Yakcop, Minister in the Prime Minister’s Department, said the Government had no plans to introduce additional stimulus package to boost the economy as it was in the process of formulating the 10th Malaysian Plan and a new economic model.**

According to Retail Group Malaysia (RGM) which tabulates retail data, spending in the retail industry in Malaysia was expected to grow marginally between 1% and 3% by the end of 2009 in view of the sluggish economic conditions.***

This posed challenging times for malls and retailers of luxury goods which have gone through one of the toughest ever operating environment.

However, RGM is more optimistic next year and projects annual retail sales growth at about 5% in 2010.
In this context, Poh Kong remains committed to the luxury retail sector and has put in more focus on promotions of its products to further enhance sales of its jewellery.

Shopping malls and retailers have geared up for the Malaysia Year End Sale (MYES) campaign, a much anticipated celebration of shopping, dining and entertainment from Nov 21 to Jan 3, 2010. This campaign aimed at promoting domestic and tourist shopping regionally, would benefit the Group in jewellery retail sales.

Sources:
* Reported in The Edge online “Malaysia Q3 GDP shrinks less than expected”, 20 Nov 2009
** Reported in StarBiz, “No plan for additional stimulus package”, 19 Nov 2009, Page 5
*** Reported in StarBiz, “Retail industry still growing despite slowdown” 19 October 2009, Page 6

Review of Financial Performance

The Poh Kong Group achieved an increase of 6.34% in revenue of RM541.6 million in its financial year ended 31 July 2009 (FYE2009) compared with RM509.3 million for its previous financial year (FYE2008). This is an increment of RM32.3 million in sales revenue.

Poh Kong’s higher revenue was attributed to additional revenue from new stores together with like-for-like growth in existing stores, as well as higher sales of diamonds and gem-based jewellery from existing stores.


The Group opened eight new outlets in various urban and suburban mega malls in FYE2009. Poh Kong’s inventory comprising of gold and gems, notwithstanding the outlets expansion, have decreased from RM391.3 million in FYE2008 to RM356.7 million in FYE2009 due to efficiencies in stock control.  Profit before taxation stood at RM38.6 million for the FYE 2009 or a marginal decrease of RM1.4 million or a 3.5% decline against RM40 million for its FYE2008. The decrease in profit before tax was mainly due to thinner profit margins from having purchased gold at higher prices and increased initial operating costs associated with the opening of new outlets.

Based in terms of the number of outlets, the Group is the largest jewellery retail chain store in Malaysia, and the market leader nationwide (RAM Ratings Report, November 2009). Gold jewellery remains Poh Kong’s main revenue contributor although the Group has stepped up the sales of diamonds and gems in its advertising and promotions campaigns. The branding strategy of these stores have been adopted so that the Company
becomes less dependant on its traditional yellow gold jewellery.  As at 31 July 2009, the Group’s net assets recorded an increase of RM22.6 million at RM283.7 million over the previous year of RM261.1 million.

Retailing and Marketing Support
Besides Poh Kong stores as the top line contributor to total sales revenue, the Group has broaden its range of non-yellow gold jewellery via alternate brands, namely Tranz and Walt Disney Collections. The Company currently operates specialty brands and retail concept stores, such as Diamond Boutique, Diamond & Gold, Jade Gallery, Poh Kong Gallery, Oro Bianco white gold jewellery, and Schoeffel boutique, as well as the Schoeffel Time Collection, a range of fine watches from Germany. At Poh Kong, we are committed to brand building and will continue to invest in branding as a long-term investment in our luxury fashion retailing business.

The Group also represents exclusive designer jewellery brands from international houses, such as Alessandro Fanfani, Angel Diamonds, Lapplesite Collection, Luca Carati, Rodney Rayner, SunDay and Verdi Gioielli. These brands are mainly from European countries, such as the United Kingdom, Germany and Italy. From exquisite pieces to simple elegant designs, from irresistible collections to dazzling custom-made orders, Poh Kong has just the right jewellery for every occasion. The Group’s marketing mix continues to place strong emphasis and commitment on design, craftsmanship, reputation, premium quality and competitive pricing.

For marketing support, intensified efforts in advertising, merchandising and implementing various product launches, sponsorships, road shows and promotions over the year will help to maintain the Group’s leading position.

These effort included the Miss Poh Kong Glamour/ Miss Tourism International Pageant World Final 2008 beauty parade held at the Sunway Pyramid Shopping Mall in December. We plan to continue the Miss Poh Kong Glamour 2009 sponsorship in conjunction with the opening of an upcoming outlet in Malacca in December.

In June, we launched one of Italy’s oldest and most prestigious jewellery brand Luca Carati and commemorated Poh Kong as the sole distributor in Malaysia. Poh Kong’s co-sponsored the Mary Search for Celebrities, a popular cable TV programme to unearth talents in Malaysia to star in the Jia Yu family entertainment channel on Astro 304 in September. Road shows for this talent search were organized during preliminary rounds in Penang, Ipoh, Klang Valley and Johore Bahru with the grand finals held in Kuala Lumpur. Several jewellery road shows were organized to coincide with the Hari Raya Puasa and UMNO General Assembly in Kuala Lumpur from August to October. In October, Poh Kong featured two of its labels, Schoeffel pearls from Germany and Luca Carati diamonds from Italy, and held a jewellery show at the “Fashion on the Turf” Ladies Day event in the Selangor Turf Club. Poh Kong and Schoeffel also presented the new line of ready-to-wear Schoeffel pieces for the Autumn-Winter Collection 2009/2010 to a group of patrons and guests at the Hilton Kuala Lumpur in November.

Branding & The Customer Experience
Poh Kong has been spending considerable time and capital in brand building which has paid off over the years. The Group has promoted its brands to become one of the most recognised jewellery brands nationwide. Our specialty brands and retail concept stores not only stands out distinctly for our renowned
yellow gold but also for the finest quality in jewellery, be it pearls, jade, gold, diamonds or gem stones.
The customer’s experience and brand’s advertising are the two most critical elements that go into the building of our successful brands. The advertising of our specialty brands and retail concept stores are often remembered, being the first point of contact with our customers, and that sets the stage for the brand’s promise. It is the customer experience that ultimately delivers the promise in our branding.

Poh Kong continues to deliver the customer’s experience through our brands and products at our stores that’s high-end, accessible and affordable. At the end of the day, we believe our customers will look for chic products at the right price points and mix to complement their individual lifestyle.

Corporate Social Responsibility
The initiatives of Corporate Social Responsibility (CSR) have been an integral part of the Group’s social objectives. This means integrating CSR activities into our workplace, our market place, our community and our environment. The Group’s CSR activities are highlighted on a separate page in this Annual Report.

Future Prospects
The Board expects FYE 2010 to pose stiffer competitive challenges than before and remains cautious of the current economic conditions and weakness in consumer demand.

In response to this general trading environment, the Group has taken a more prudent approach in major capital expenditures and implemented cost control initiatives. It will continue to place emphasis on achieving higher productivity and improve operational efficiency for the Group’s divisions. Poh Kong’s management plans to continue its drive to build market share by enhancing and differentiating its product offerings to its targeted market segments. The Company is actively evaluating various initiatives and opportunities to attract new customers through the introduction of new product lines, designs andenhanced customer service.

The Company has a total of 95 retail outlets nationwide and will identify strategic locations for outlets across the country which have the potential for higher revenue growth and consumer demand.  Moving forward, the Group will continue to expand outlets at a more moderate pace in view of the softer economic conditions and will invest on the refurbishment of existing stores.

With the current economic environment, Poh Kong does not expect to record any significant momentum in sales growth in the fourth quarter 2009 and first quarter 2010.  However, the Group is optimistic on its retail sales due mainly to the festive seasons and its loyal customers who buy gold-based jewellery as a long-term investment and as an alternative to term deposits or as a hedge against inflation.

Barring unforeseen circumstances, the Board remains positive on the performance of the Group for the FYE 2010.

Earnings Per Share
The basic earnings per share for the financial year ended 31 July 2009 stands at 6.93 sen (2008: 6.99 sen).

Dividend
The Board is pleased to recommend a first and final single tier tax exempt dividend of 1.40 sen per ordinary share of RM0.50 each in respect of the financial year ended 31 July 2009 (2008 : 1.40 sen single tier tax exempt per ordinary share of RM0.50 each). The proposed dividend is subject to shareholders’ approval at the 7th Annual General Meeting to be held on 20 January 2010.

Acknowledgements
On behalf of the Board of Directors, I would like to record our appreciation to Mr Choon Yee Fook who has resigned as an Executive Director of the Board during the course of the year. We are also pleased to welcome Datin Shirley Yue Shou How as our new Independent Non-Executive Director of the Board.
I would like to express my utmost and sincere appreciation to all my fellow Board Directors for their counsel and support during the course of the year. To the Management and Staff, thank you for your conscientious efforts, commitment, dedication and contributions towards the Group.

We are also grateful to our shareholders for their confidence, valued customers, business partners, Government authorities, financiers and suppliers for their continued support and cooperation in the
Group.

DATO’ CHOON YEE SEIONG
Executive Chairman & Group Managing Director
16 December 2009


Source:
Annual Report of  Poh Kong:
http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/ad831d76bbe08151482576950032bfe5/$FILE/POHKONG-Cover%20to%20Page%2014%20(2.5MB).pdf

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/ad831d76bbe08151482576950032bfe5/$FILE/POHKONG-Page%2015%20to%20ProxyForm%20(2.6MB).pdf

Amidst All Hype: Stock Market Scam And How To Avoid Them

Amidst All Hype: Stock Market Scam And How To Avoid Them

By Divina Bryt | March 31, 2010

With all of the prices going high nowadays, people would right away grab the chance on anything which will make them earn cash. And this is basically where fraudulent folks take advantage of.

Today, there are many cons as there are stars in the sky. They had been so rampant that folk became so mindful of its worrying condition. But still, regardless of if they know that there is a sure to be a swindle out there, they could not yet distinguish what’s a scam and how can they avoid it.

In the industry, one of the proliferating stings is the stock market tricks. A lot of folk are getting lured to join these just because their offer seems so hard to resist.

Why? Because who wouldn’t resist a “get rich quick” strategy? These are just petty things but are actually bigger problems than what you thought it is.

For people to know what stock market scams are and how to avoid them, here’s a list of the common stock market scam lurking mostly in the Internet today:

1. The “Pump and Dump” stock market scam

This sort of stock market con is generally spread in the internet. Here, folk typically get to see messages posted in the web suggesting them to get a stock immediately. This type of con also urges those who have stocks already to sell their stocks right before the worth depreciates.

These deceptive scammers claim that they have reliable sources about a threatening development. They even assert that they utilize a foolproof combination of the stock market and the trade and industry data so as to get some stocks.

The base line is that this kind of stock market scam is negative especially to people who are starting little. Actually, people behind this sting would want to manipulate the exchange through small time companies because home businesses are easier for them to manipulate.

2. Pyramid trick

Just like its motherboard, this pyramid trick in the Net makes an attempt to hoard money from the clients by letting them invest their small amount of money and grow it very big provided that they recruit more people into the company.

These two are the most common stock market scams lurking in the Internet today, and the only way to avoid them is information. It’s a must that people should be aware of them, know their styles, and how they recruit people. If in case, they cannot determine if it is a scam or not, they should verify the claims from the right people. That’s the simplest thing to do.

http://www.uberarticles.com/web-owners/marketing/amidst-all-hype-stock-market-scam-and-how-to-avoid-them

The Role of Hedge Funds in Financial Crise

The Role of Hedge Funds in Financial Crises – Stephen Brown 

On October 2, the U.S. House Oversight and Government Reform Committeeannounced a Hearing on Regulation of Hedge Funds scheduled for Thursday, November 13, 2008. The focus is on the causes and impacts of the financial crisis on Wall Street, and the Committee will hear from hedge fund managers who have earned over $1 Billion.

The underlying premise of these hearings was expressed by Dr. Mahathir Bin Mohamad, the former Prime Minister of Malaysia, who wrote on September 26 “Because of the extraordinary greed of American financiers and businessmen, they invent all kinds of ways to make huge sums of money. We cannot forget how in 1997-98 American hedge funds destroyed the economies of poor countries by manipulating their national currencies”. The Prime Minister is recognized as an authority on the role of hedge funds in financial crises, given his experience managing the Asian currency crisis as it engulfed his nation in September eleven years ago. He is particularly critical of the role of George Soros who will in fact be invited to testify before the House Committee at their November hearing.

It is perhaps too early to write about the causes and consequences of the current financial crisis while the storm still rages. However, it is not too early to examine the history of the earlier financial crisis. During the 1990s, according to the International Monetary Fund, financial intermediaries had been investing steadily into South East Asia. There was a net inflow of about US$20 billion into the region over and above portfolio and direct investment, up until 1995 and 1996 when the amount increased dramatically to US$45 billion per annum. Then with the collapse in both the Baht and the Ringgit in 1997, there was a sudden outflow of US$58 billion. It was self-evident to the central bankers in the region that the collapse in the currency had everything to do with an attack on the currencies of the region by well-financed international speculators. As Dr. Mahathir observed in a Wall Street Journal opinion piece that was published on September 23, 1997: “We are now witnessing how damaging the trading of money can be to the economies of some countries and their currencies. It can be abused as no other trade can. Whole regions can be bankrupted by just a few people whose only objective is to enrich themselves and their rich clients…. We welcome foreign investments. We even welcome speculators. But we don’t have to welcome share- and financial-market manipulators. We need these manipulators as much as travelers in the good old days needed highwaymen”. What was most remarkable about this statement was that its premises and its conclusion were immediately accepted by the international community, despite the fact that Dr. Mahathir did not provide any evidence to support his analysis of the role of hedge funds in the Asian financial crisis.

The first premise of Dr. Mahathir’s argument is that hedge funds act in concert to destabilize global economies. This is at best a misapprehension of the definition of a “hedge fund”. There is no such thing as a well defined hedge fund strategy or approach to investing. Rather, a hedge fund is a limited investment partnership otherwise exempt from registering with the Securities and Exchange Commission under Sections 3C1 and 3C7 of the Investment Company Act of 1940. As I note in my testimony last year before the House Financial Services Committee the available data show a remarkable diversity of styles of management under the “hedge fund” banner. The long-short strategy often associated with hedge funds captures about 30 to 40 percent of the business. The style mix has been fairly stable (in terms of percentage of funds) although there has been a dramatic rise in assets managed by funds of funds. These diversified portfolios of hedge funds are attractive to an institutional clientele. Event-driven funds focussing on private equity have risen in market share from 19% to 25% over the past decade, while the global macro style popularized by Soros has actually fallen from 19% to 3%. In my paper Hedge Funds with Style, with William Goetzmann, Journal of Portfolio Management 29, Winter 2003 101-112 we show that accounting for style differences alone explains about 20 percent of the cross sectional dispersion of hedge fund returns. The facts do not support a presumption that hedge funds adopt similar investment strategies coordinated with the objective of causing global instability. If their objective was to profit from the current instability, they were remarkably unsuccessful. According to Hedge Fund Research, the average fund this year is down 10.11 percent through September with equity hedge funds down 15.45 percent.

The second premise of Dr. Mahathir’s argument is that hedge funds are risktakers – gunslingers on a global scale. While it is true that the aggressive incentive fee structures (often 20 percent of any profits on top of a management fee of about 2 percent of assets under management) appear to encourage risk taking, career concerns are an offsetting factor. Given that the typical hedge fund has a half life of five years or less and the fact that it is hard to restart a hedge fund career after a failure, managers can be quite risk averse as we document inCareers and Survival: Competition and Risk in the Hedge Fund and CTA Industry, with William Goetzmann and James Park, Journal of Finance 61 2001 1869-1886. According to a recent Wall Street Journal article (10/14/2008)some of the few remaining successful hedge fund managers such as Steven Cohen of SAC CapitalAdvisors, Israel Englander of Millenium Partners and John Paulson of Paulson & Co (who is scheduled to appear in the November 13 hearings) have taken their funds out of the market and are in cash investments.

This last result seems at variance with popular wisdom that has arisen around some recent and spectacular hedge fund failures. The failure of Amaranth, a multi-strategy fund with more than $8 Billion assets under management, with more than 80 percent invested in a natural gas trading strategy, is often cited as an example of undiversified financial risk exposure. However, a close reading of the U.S. Senate Permanent Subcommittee on Investigation’s report on the Amaranth blow-up, Excessive Speculation in the Natural Gas Market shows clearly that excessive risk taking took place in a context of poor operational controls, where trading limits were exceeded multiple times and ordinary risk management procedures were dysfunctional. In recent research forthcoming in the Financial Analysts Journal Estimating Operational Risk for Hedge Funds: The ω-Score, with William Goetzmann, Bing Liang and Christopher Schwarz we argue that operational risk is a more significant explanation of fund failure than is financial risk, and that financial risk events typically occur within the context of poor operational controls.

Given that the initial premises are false, it is not surprising to find that the strong conclusions Dr. Mahathir draws from them are also false. In Hedge Funds and the Asian Currency Crisis of 1997, with William Goetzmann and James Park, Journal of Portfolio Management 26 Summer 2000 95-101 we show that while it is possible that hedge funds involved in currency trade could have put into effect the destabilizing carry trade Dr. Mahathir describes, there is no evidence that these funds maintained significant positions in the Asia currency basket over the time of the crisis. As to the question of illicit enrichment that Dr. Mahathir charges George Soros with, his funds did not increase in value, but actually lost five to ten percent return per month over the period of the crisis.

From a point of pure logic, there cannot be any factual basis for any of these claims. Malaysia is fortunate in having a very fine and able Securities Commission. If there were any factual evidence at all to support a claim that Soros had intervened in the markets to bring down the Ringgit, it would have been produced by now. I should note that the silence is deafening. I suspect that what is really going on is that Soros was an expedient target of opportunity. The only remaining question is why, given the lack of evidence, Dr. Mahathir felt compelled to bring such serious charges against the hedge fund industry in general, and George Soros in particular. There is an interesting story here which I document in Hedge funds: Omniscient or just plain wrong, Pacific-Basin Finance Journal 9 2001 301-311.

It is interesting to note that Dr. Mahathir’s feelings about currency speculation have changed over the years. In the shark-infested waters of international Finance the name of Malaysia’s central bank, Bank Negara stands out. In late 1989, Bank Negara was using its inside information as a member of the club of central bankers to speculate in currencies, sometimes to an amount in excess of US$1 billion a day. The US Federal Reserve Board had advised Bank Negara to curtail its foreign exchange bets, which were out of proportion to its reserves which at that time were about US$7 billion. At the time, Dr. Mahathir defended this currency speculation, referring to it as active reserve management and was quoted by the official Bernama News Agency in December 1989 as saying “We are a very small player, and for a huge country like the United States, which has a deficit of US$250 million, to comment on a country like Malaysia buying and selling currency is quite difficult to understand”. According to a report in the Times of London (4/3/1994) . Bank Negara came something of a cropper in 1992 when it thought to bet against George Soros on whether Britain would stay in the European Rate Mechanism (ERM), and promptly lost US$3.6 billion in the process and would end up making a US$9 billion loss for 1992. Malaysia’s loss was Soros’ gain.

http://www.financems.com/the-role-of-hedge-funds-in-financial-crises-stephen-brown.html

KNM 1.4.2010

Bursa Malaysia
Company Announcement


Name of Principal Officer : Ho Guan Ming

Description of securities	Date of transaction	Direct/Indirect interest	No. of securities disposed	% of securities	Disposal price per share (RM)
Ordinary shares	26.3.2010	Direct	50,000	0.001	0.70

A quick look at NTPM

NTPM Holdings Bhd Company

Business Description:
NTPM Holdings Bhd. The Group's principal activity is manufacturing paper products, such as toilet rolls, tissues, serviette and personal care products, such as sanitary products. It distributes its products under the brand names of Premier, Royal Gold, Cutie, Intimate, Diapex and Premier Cotton. It is also involved in trading of paper, cotton, diapers and sanitary products, as well as providing management services and operating as an investment holding company. Operations are carried out in Malaysia, Singapore, Thailand, Hong Kong, Brunei, the Philippines, Africa, Australia, New Zealand and the United States of America.

Wright Quality Rating: LAA1



A quick  look at NTPM
http://spreadsheets.google.com/pub?key=tGFeNNTvEX3qSBBWES_QXTA&output=html

This is a 'Great' company.
Its earnings and dividends have grown consistently.

There are many Great Stocks in the market.  The only catch is to acquire them at bargain prices.

Is NTPM undervalued, fairly valued or pricey?

At the present price (PE), what is the upside reward/downside risk ratio?

Read also:

NTPM 28.7.2009

Is Poh Kong a Great, Good or Gruesome Stock? Is it Undervalued, Fair price or High price?

There is a rising trend in its EPS.  However, earnings are rather cyclical, as evidenced by its ups and downs.
Poh Kong has grown its revenue and earnings through opening new outlets.  Its SSS figures are probably stagnant (this need to be confirmed).  It has acquired a lot of debt in growing to its present size.  Though its recent CFO and FCF are strongly positive, its FCF will mainly be used for paying down its debt and reinvesting into new stores.  Its DPO is in the region of 20% of its earnings and its DPS has increased little if any over the years.

Its ROE in 2009 was 10.05%.

Is Poh Kong a Great, Good or Gruesome stock?
Not a Great stock.  Perhaps more a Good stock rather than a Gruesome stock.

So,  perhaps it is better to skip this stock and search for another.

But then, let's look at the fundamentals of Poh Kong.

http://spreadsheets.google.com/pub?key=tx8wcqGqfTVH8s7RRSy-19g&output=html

What should be its intrinsic value?  Note in particular, its net working capital minus total debt owed equals RM 146 m.

At a price of 39 cents, its market cap is RM 160 m.

Therefore, effectively, the investor is buying the whole business of Poh Kong for RM 14 m.

Is Poh Kong not undervalued?  Severely undervalued?

Moreover, owning this stock gives you a DY of 3.6%.  Given its strong FCF, this dividend level can probably be sustained and this should protect the downside of your investment dollar.  Therefore, the upside reward/downside risk ratio is also favourable.

Disclaimer:  Please invest based on your own assessment and decision.  Always do your own homework.

Also read:

What are value traps?

5 Value Traps to Avoid Right Now

 I’m all for buying stocks on the cheap.  But there’s a catch: We’re only interested in good values if they also happen to be great businesses, companies with years of exceptional performance behind and ahead of them. And, of course, ones that pay us to wait for our thesis to play out.


and this:
Understanding  "Value Trap"

Leaving on a jet plane

Buffett (1984): 'Investments in bonds' and 'Corporate dividend policies'

We saw Warren Buffett put forth his views on the concept of 'economic goodwill' and why he prefers companies that have a high amount of the same. Let us now see what the master has to offer in terms of investment wisdom in his 1984 letter to the shareholders.

While Buffett has devoted a lot of space in his 84' letter to discussing in detail, some of Berkshire's biggest investments in those times, but as usual, the letter is not short on some general investment related counsel either. In a rather simplistic way that only he can, the master gives his opinion on a couple of extremely important topics like 'investments in bonds' and 'corporate dividend policies'. On the former, he has to say the following:

"Our approach to bond investment - treating it as an unusual sort of "business" with special advantages and disadvantages - may strike you as a bit quirky. However, we believe that many staggering errors by investors could have been avoided if they had viewed bond investment with a businessman's perspective. For example, in 1946, 20-year AAA tax-exempt bonds traded at slightly below a 1% yield. In effect, the buyer of those bonds at that time bought a "business" that earned about 1% on "book value" (and that, moreover, could never earn a dime more than 1% on book), and paid 100 cents on the dollar for that abominable business."

Berkshire Hathaway in 1984 had purchased huge quantities of bonds in a troubled company, where the yields had gone up to as much as 16%. While usually not a huge fan of long term bond investments, the master chose to invest in the troubled company because he felt that the risk was rather limited and not many businesses during those times gave as much return on the invested capital. Thus, despite the rather limited upside potential, he went ahead with his bond investments. This is further made clear in his following comment:

"This ceiling on upside potential is an important minus. It should be realized, however, that the great majority of operating businesses have a limited upside potential also unless more capital is continuously invested in them. That is so because most businesses are unable to significantly improve their average returns on equity - even under inflationary conditions, though these were once thought to automatically raise returns."

Years and years of studying companies had led the master to conclude that there are very few companies on the face of this earth that are able to continuously earn above average returns without consuming too much of capital. Indeed, such brutal are the competitive forces that sooner or later and in this case, more sooner than later that returns for majority of the companies tend to gravitate towards their cost of capital. If we do a similar study on our Sensex, we will too come to the conclusion that there are not many companies that were a part of the index 15 years back and are still a part of the same index. Hence, while valuing companies, having a fair judgement of when the competitive position of the company, the one that enables it to consistently earn above average returns is likely to deteriorate. This will help you to avoid paying too much for the company's future growth.

After touching upon the topic of bond investments, the master then gives his take on dividends and this is what he has to say:

"The first point to understand is that all earnings are not created equal. In many businesses particularly those that have high asset/profit ratios - inflation causes some or all of the reported earnings to become ersatz. The ersatz portion - let's call these earnings "restricted" - cannot, if the business is to retain its economic position, be distributed as dividends. Were these earnings to be paid out, the business would lose ground in one or more of the following areas:

•  its ability to maintain its unit volume of sales, 
• its long-term competitive position, 
• its financial strength. 

No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused."

While the master is definitely in favour of dividend payments, he is also aware of the fact that not all companies have similar capital needs in order to maintain their ongoing level of operations.

• Hence, in cases where businesses have high capital needs, a high payout ratio is likely to result in deterioration of the business or sooner or later will require additional capital to be infused. 
• On the other hand, companies that have limited capital needs should distribute the remaining earnings as dividends and not pursue investments which drive down the overall returns of the underlying business. 
• In a nutshell, capital should go where it can be put to earn maximum rate of return.

He then goes on to add how his own textile company, Berkshire Hathaway, had huge ongoing capital needs and hence was unable to pay dividends. He also further adds that had Berkshire Hathaway distributed all its earnings as dividends, the master would have left with no capital at all to be put into his other high return yielding investments. Thus, by not letting the operational performance of the company deteriorate by retaining earnings and not distributing it as dividends, he was able to avoid a situation in the future where he would have had too put in his own capital in the business.

http://www.equitymaster.com/detail.asp?date=8/16/2007&story=1