Coca Cola Index - Open Happiness

Whenever I am down and weary, I always remember to drink a can of coke. Somehow, it helps to lighten my mood and keeps me going.  I know, I know. They will dissolve your bones and slowly melt you away. Just kidding. Of course, there are some side effects to doing anything. And, you have to worry about this and about that in life. You have to worry about it everyday but not today. It is Coke day today !! So, I drank up and relaxed.

Anyway, when I was about to empty my last drop, some funny idea came to my mind. Whenever I go overseas, I will always try my best to get a can of coke just to see whether it tastes the same. Well, so far, Coca Cola has been able to maintain its standard. But, what about its price? Uhmm...does the law of one price work for Coke? As usual, I work out some statistics to show that it does not work - just like the Big Mac index. Just for info, law of one price states that the price of a particular product will eventually be the same when exchange rate is taken into consideration. If one product costs more in country A than B, people will buy this product from country A and eventually the price will be the same because the currency for country A will appreciate. Yes, you are right, this is just hypothetical and it may take many years for it to happen or it will never happen.

Let's look at the Coca Cola index below.

Coca Cola			SGD
	Local Currency	Exchange Rate
Singapore	$0.68		$0.68
Malaysia	RM1.49	2.57	$0.58
US	US$0.83	1.25	$0.66
China	CNY 2.90	4.98	$0.58
UK	68p	2.13	$1.45

The price of a can of 330ml Coca Cola cost almost the same in countries like Singapore and United States of America. They are relatively cheaper in Malaysia and China. But, look at UK. Wow, it is more than double the price of the other countries. Maybe cough syrup costs more in UK (serious - Coca Cola started off as a cough syrup. And, why can't they make modern day cough syrup as tasty as Coke?). Well, before law of one price works (if it really can), I better enjoy my Coca Cola happiness now.

Fraser Hospitality REIT vs Transformers

There was an article on the Fraser Hospitality REIT this morning. Interestingly, the yield reported is about 7%. If you compare the 7% REIT return versus the return that you are getting from the bank for your saving account, I bet you will be overwhelmed by the spread that you will be getting from this REIT. However, do take note that the gearing ratio of this REIT is close to 40%. Well, I have not read the prospectus. So, I cannot comment much about this REIT. But, I really think you have to be careful about some of the accounting that goes into deriving the dividend yield. Take the following for example.

Scenario	Gearing	Equity	Debt	Asset	Dividend	Dividend  per share	Price	Dividend  Yield
A	20%	$100	$20	$120	$5	$0.05	$1	5.00%
B	50%	$80	$40	$120	$5	$0.06	$1	6.25%

Assuming there is a REIT (Scenario A) with gearing ratio of 20% and dividend of $5, the dividend yield will be 5% for a share price of $1. In layman term, it means I borrow $20 from the bank and I get $100 from you to buy a building of $120. I get $5 as rental income which will be paid to you yearly for the $100 that I get from you.

However, under Scenario B, if I increase the gearing ratio (i.e. amount of debt from bank) to 50%, I can basically push up the dividend yield by reducing the amount that I get from you. Now, the dividend yield is 6.25%. The above is a very simplistic example with the assumption of interest expense for debt borrowing = $0. This is, of course, not ok because more debt means more interest payment. In the current ultra-low interest rate environment, it can only mean one thing in the near future - interest rate goes up and interest payment goes up. This will eat into your dividend return. Hence, it is very important not to judge a REIT just by its dividend yield.

I will probably spend my time watching Transformers 4 - Age of Extinction this weekend rather than looking into the details of this REIT. I think it will be more exciting. Anyway, always remember - "There’s more to them than meets the eye."