REPEAT Rudi’s View: Gold And Dividends

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

(This story was originally written and published on Wednesday, 24th August, 2011. It has now been re-published to make it available to non-paying members at FNArena and to readers elsewhere).

By Rudi Filapek-Vandyck, Editor FNArena

Apparently, the long term average return for the Australian share market has now fallen to 9%. Thanks AMP, for updating the magical benchmark. It was only a few years ago that the long term average return for the Australian share market had risen to 9.8%, making Australian equities the best performer in the world. Dame Fortuna hasn't been kind to Australian equities since. Many people blame the Australian dollar or the federal government, but both are only part of a much broader story.

Those who pay attention to changing demographics in developed countries have been suggesting for years that general returns in equity markets will slow down as the Baby Boomers generation is now retiring. It was this same generation who, from the early eighties onwards, exerted a positive stimulus on global share market PE ratios, but now that retirement is approaching, the opposite effect is kicking in.

If you think that's a bit too esoteric, maybe because you've never read or heard anything about this until now, you might consider the thesis has been backed up by analysis conducted by two researchers at the Federal Reserve in San Francisco. Their findings have been published in the regional Fed's "Economic Letter" this month, giving it a lot of credence. I am probably not exaggerating when I say the latest study by Zheng Liu and Mark Spiegel is right now attracting attention from all corners around the globe. It is very likely the conclusions published will lead to adjustments and changes in investment and retirement strategies and portfolios for years to come.

What these two researchers are predicting, and note this is not different from predictions made and published elsewhere in the past, is that average valuations for equities (PEs) are now in decline as the Baby Boomers retreat from the wild and risky world of opportunities and this process, while gradual in nature, should at least take another ten years or so to complete. Sometime in the mid 2020s we should switch again towards a gradual upswing.

 

Conclusion numero uno: beware anyone who tries to convince you a certain market or stock is cheap because it is trading below historical values/averages.

Conclusion numero duo: probably fair to assume the decline in average market return to 9% is but the beginning of things to come. If my memory serves me correctly, equity market strategists at UBS conducted a study of their own a few months ago, concluding share market returns would trend towards 7-8% in the decade ahead, which would imply a serious step back from the 9-10% we all got accustomed to since the eighties. (My apologies for having to do this from memory, but I cannot find the info I am looking for).

Just as a reminder: these projected average investment returns are INCLUDING dividends.

This is probably as good as any time to repeat two slides from the investor presentations I have been giving across five states in Australia since 2008. The first one is my favourite as it clearly shows equity markets do not always go up, even if we allow for lots of time in the process.

 

What this chart clearly shows is there are, roughly assessed, two types of periods in the share market. One is when the trend is undeniably up, otherwise labeled "bull" market. However, when the "other" scenario reigns we have rallies and pull backs, and more rallies and more pull backs, but at the end of the journey there has been no progress made. Until we start a new bull market.

The twentieth century had two such "other" periods. The thirties and the mid-sixties until early eighties. It has been my personal view that we are again muddling through a similar time right now. Note the previous time lasted from 1964 to 1980/81 which is roughly 17 years. Also note the last time gold had a fantastic run was exactly during the second half of that period. Ultimately, gold would peak at US$850/oz in 1980, hold steady at that level for less than two trading sessions (!) and then crash into oblivion. It would take more than twenty years before investors genuinely started considering bullion as an investment again.

The 1930s also were a time when gold proved its worth as a store of value. What is lesser known is that investment strategies centred around dividends equally worked well throughout the 1930s, as they did in the 1960s and 70s. As a matter of fact, Benjamin Graham, from whom Warren Buffet learned how to make mustard, was an avid dividend investor and he practiced and researched it a lot during the period.

Okay, here's my second favourite slide:

The quote is usually attributed to Charles Darwin, but nobody has ever found any proof in his books or other writings. Needless to say, changing one's mindset is a tough ask, just look at what has happened over the past decade.

Question: have you adjusted your expectations, strategies and portfolios?

Here are my three rules for successful investing:

– Pick companies that are most likely to grow in years ahead (FNArena offers consensus forecasts and I have yet to come across a better method)
– Pick companies that are mildly valued (not too expensive, not too cheap)
– Pick companies that pay a healthy, growing dividend

I am at present still conducting my analysis of the local reporting season, and have the intention to use next week's Weekly Insights to dedicate to the subject. Keeping all of the above in mind, here are a few companies that I believe are among the stand outs this reporting season, while also fitting in with the three rules for dividend investments (in no particular order): Amcor ((AMC)), Fleetwood ((FWD)), Ardent Leisure ((AAD)), Super Retail ((SUL)), Flexigroup ((FXL)), Campbell Brothers ((CPB)), Bradken ((BKN)), Watpac ((WTP)) and… Telstra ((TLS)).

Note: this is probably the first time ever I have included Telstra in any such lists. While growth ahead should remain in single digits, there are a lot of things moving in support of Telstra at the moment, some are to the credit of current management. I think shareholders finally have a reason to be more optimistic. Not that Telstra has expressed any intention to increase its 28c dividend payout, which is in violation of rule number three, but I think this is compensated for by the 9% yield that looks more secure by the day.

The list is preliminary, incomplete and subject to changes, but at the very least, I think investors with a longer term portfolio should further investigate, research and consider owning these stocks.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

 

Click to view our Glossary of Financial Terms