All-Weather Performers Rule

This story features AMCOR PLC, and other companies. For more info SHARE ANALYSIS: AMC

By Rudi Filapek-Vandyck, Editor FNArena

One of the better things I have done post-2007 is introducing investors in Australia to the concept of "All-Weather Performers" in the equities market.

Let there be no mistake: once you put some of your investment funds in the equities market, you by default take on board specific risks related to the fact that you have direct exposure to the share market. As we've all experienced in 2008, when the world appears on its way to hell in a handcart, any exposure to equities can become painful and disappointing.

However, for investors who have tried to play the investment game in the same manner as in the pre-2007 era, this is not where disappointment has ended. One of my favourite references in this regard is oil and gas producer Santos ((STO)) whose share price this week again returned to near $13. For investors who like to pick opportunities for the longer term, Santos shares have looked "cheap" and "undervalued" since at least early 2006, when, believe it or not, the share price sat above $13. Back then the price of crude oil was US$80 per barrel. Today a barrel of Brent (the "true" price of oil) costs US$113 (or thereabouts) but the share price has failed to follow.

Another prime example, which is poised to become one of my new favourites, is gold and copper producer Newcrest ((NCM)) whose share price today -around $25- is also unchanged from early 2006. Back then, and this is going to shock many among you, the price of gold was around US$550/oz. Today gold is priced above US$1600/oz, or circa 2.5 times as much, yet the Newcrest share price has failed to keep pace.

Note that both Santos and Newcrest are not good dividend payers. They are no exceptions either.

Let's have a look at how some of my personal favourite "All-Weather Performers" have performed post 2008. Shares in Amcor ((AMC)), which I gave a prominent rap in my e-booklet "The Big De-rating. A Guide Through the Minefields"(*) last year have nearly doubled in price since bottoming below $4 in March 2009. More importantly, Amcor shares have returned a positive return in each calendar year since: 2009, 2010, 2011 and so far they are up for calendar 2012 as well. Amcor shares pay a dividend (non-franked) between 4.5-6%, depending at what price shareholders join the register, and these dividends have grown each year.

This means shareholders who bought Amcor shares at $6 in 2010 -at the time with an estimated dividend yield of 5%- this year will enjoy a dividend payout of no less than 6.15% (consensus estimate) on their original purchase price. Next year, the dividend yield will rise to 6.75% which, if we ignore the absence of "franking credits", might well turn out better than most of the banks.

Investors note that while the banks are oft quoted as the obvious candidates for yield in the Australian share market, they are not the best options available. Being forced to operate inside a low growth environment and with international risks never more than a few headlines away, it is highly unlikely banks will be able to grow their earnings or dividends at the same pace as companies such as Amcor can. Banks share prices have done "OK" since March 2009. Steady dividend payouts mean shareholders in ANZ Bank ((ANZ)) and CommBank ((CBA)) have recouped all losses since November 2007 and that is much better than what shareholders in most miners and energy companies have experienced.

But banks are being beaten by the likes of Amcor on total investment return (dividend + share price appreciation), which, in the case of Amcor, more than compensates for the lack of franking credits. Note that on current consensus estimates, Amcor should continue growing its earnings per share (EPS) by double digits in the current fiscal year and in the years ahead. This means patient shareholders -all else being equal- will eventually enjoy an annual yield starting with a '7' and even an '8' if they wait just a few more years.

One of my other favourites post-2007 is Coca-Cola Amatil ((CCL)), probably the most prominent example of an "All-Weather Performer" in the Australian share market. Investors are being reminded that Warren Buffett's Berkshire Hathaway, while paying no dividends to its shareholders, is a long-time major shareholder in Amatil's equivalent in the US share market, The Coca Cola Company; a steady and very reliable payer of growing dividends, year-in, year-out.

Shares in Coca-Cola Amatil have equally performed well since March 2009 and they are now, just as is the case for Amcor shares, trading above the price at the share market peak of November 2007. Jumping on board the CCL train is a bit more tricky though as the stock is constantly on the radar of big funds managers and at times its valuation can run up too high, especially when global risk aversion dominates as it does in the month May this year. Because of a higher PE rating, Coca-Cola Amatil shares tend not to offer more than 4.5-5.5% in prospective dividend yield, but fully franked.

There are many more stocks in the share market that deserve the label "All-Weather Performers" including Domino's Pizza ((DMP)), Invocare ((IVC)), Ramsay Healthcare ((RHC)) and Transurban ((TCL)). I hereby invite you all to take a detailed look at how their share prices have performed post-2008. Admittedly, not all these companies are good dividend payers -I personally like the ones with good yields the most- and none of them are completely without risks. Moreover, the nomination of stocks that deserve the label of "All-Weather Performers" is as far as I am concerned open for public debate.

Should I not include the ASX ((ASX))? Woolworths ((WOW))? Wesfarmers ((WES))? CSL ((CSL))? For reasons I have explained in the past, I have never included any of these stocks, but I am willing to change my view if and when the time is right (or when facts change, or my insights). Overall, however, I hesitate when I see high PE multiples and I would rather avoid them.

Probably the most important characteristic when concentrating on "All-Weather Performers" is that investment returns don't have to be 100% dependent on what happens to growth and demand in China, or to stimulus and interest rates in the US, or to banks and government debt in Europe, not to mention to inflation and interest rates in Australia. One easy to make observation is that companies such as Amcor, Coca-Cola Amatil, Domino's Pizza and Invocare have been operating in the same world as all others have, and their share prices were listed on the same exchange, yet investment returns have been far superior.

(Believe me you don't want to open a chart comparing BHP Billiton ((BHP)) with Domino's Pizza, unless you want to inflict maximum pain upon yourself).

Note being an "All-Weather Performer" does not mean you are and remain forever free of all problems and threats. For example, Cabcharge ((CAB)) has been a few years in struggle-street, just like Woolworths, which is why I have been reluctant to use the label for the stock. Under normal circumstances, a company responsible for most payments processed through cabs in Australia deserves the label "All-Weather Performer", but one has to keep an eye on a company's specific circumstances. Since the tide has turned for Cabcharge earlier this year, the market has been quick in jumping on the shares which have risen from $4.60 to $6.48 in three months only.

This now means Cabcharge shares are on par with the likes of Domino's Pizza, Invocare and Coca-Cola Amatil: far from cheap. Investors should always keep in mind that no matter how good a stock -even for All-Weather Performers- timing and valuations do still count. The best suggestion for investors looking to join the register of these companies is to wait for pullbacks and dips.

Another example comes via one of my long standing personal favourites: McMillan Shakespeare ((MMS)). The stock lost all favour and attention last year from the moment Treasurer Wayne Swan considered changing tax regulations which could have impacted on the company's fleet management operations, but the share price has strongly recovered since. This stock remains one of my personal favourites, until it becomes too expensive, as it ultimately will.

Some "All-Weather Performers" seem to have run into short term headwinds, including Blackmores ((BKL)) and SAI Global ((SAI)). In both cases management has invested heavily in securing future growth, but making investments is not without risks and in both cases short term results have been disappointing. There's a broader message in here for investors: be mindful of the extra risks that come with companies spending money on capital and assets, plus the market is likely to price some of these extra risks in (de-rating). Obvious examples outside the group of All-Weather Performers are the Big Miners and major energy companies in the Australian share market.

If you believe Blackmores is simply experiencing a blip in an ongoing well-supported growth story, than the de-rating since last year has now opened up an opportunity offering double-digit growth from next year onwards (FY13) and a dividend yield of circa 5%. SAI Global will have to do much more to convince investors, after issuing two profit warnings in a relatively short time-span. I'd be careful despite analysts' confidence. The shares are trading on a Price-Earnings (PE) ratio of 18 and a dividend yield of 3%+ only.

Also note I am not the only one who has conceptualised the changing investment climate post-2008. Few other experts have been talking "DARP"; dividend yields at a reasonable price. David Rosenberg at Glushkin Sheff focuses on "SIRP"; safety and interest at a reasonable price. Market strategists at BA-Merrill Lynch formulated it as follows on Friday:

"In an era of deleveraging, in a world of low growth, low rates and low returns, assets that have GROWTH, YIELD & QUALITY should continue to outperform until the US & G7 real estate, labor and banking markets sustainably recover to cause a normalization of monetary policy and a “good” bear market in bonds."

What all of us have in common is that we are not trying to repeat what used to work pre-2007. The investment climate has changed. The sooner more advisors and investors accept this fact and change their strategies accordingly, the better the impact on their longer term returns (and of their clients).

Buy-and-Hold is not dead. You just have to know what to look for, and not accept it at just any price.

Note all companies mentioned are for educational purposes only. This is not investment advice. Investors should always consult with a licensed advisor before making any investment decisions.

(This story was originally written on Monday, 7th May 2012 and sent out via email to paying subscribers on that day).

P.S. A paying subscription now comes with two e-booklets written by myself in which I explain, among other things, the how, what and why behind "All-Weather Performers". Paying subscribers who have not as yet received their copies can send in an email to info@fnarena.com

P.S. II – I remain in favour of a 3-way investment approach post-2008: 1.) sustainable dividends, 2.) All-Weather Performers, 3.) companies servicing investments made by miners and energy producers

P.S. III – you can follow me on Twitter via @FILAPEK

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