Are You In Tune ?

This story features TELSTRA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TLS

By Rudi Filapek, Editor FNArena

Let me introduce you to a very good friend of mine in the Australian share market; Ardent Leisure ((AAD)).

On face value, there's little to like about Ardent. Its theme park operations are in Queensland while marinas are going through their own boom-and-bust cycle. Add bowling centres and gyms and it should be no secret as to why Ardent is not high on most investors' wish list. Consumer spending is lagging historical averages in Australia (not to mention the US where Ardent also has operations) and the strong Aussie dollar is keeping tourists away.

Further adding to the apparently non-attractive picture is the fact that the price of Ardent Leisure shares fell to $1 late last year, the same level as twelve years ago. This is still better than the declines recorded over those twelve years by Harvey Norman ((HVN)), Fairfax Media ((FXJ)) and the likes, but regardless, investors like to think their investments in equities appreciate over time and Ardent Leisure has little to show for itself on that measure.

Except, of course, that Ardent Leisure has a lot to offer, which is why it has become one of my best friends in the share market. It's not something that can be read from price charts as these do not reflect the dividends that have been paid out to shareholders. Appreciating what Ardent Leisure has to offer is appreciating that the overall investment climate post 2008 has changed.

In line with several other steady dividend payers in the share market, Ardent Leisure shares have since January risen from circa $1 to above $1.30. Even if some of these gains will prove unsustainable in the weeks ahead, this still makes Ardent Leisure one of the better performers in the market post-2008.

So what's the secret formula that makes Ardent Leisure so successful? It's as simple and as straightforward as can be: solid, sustainable and growing dividends. Even with the share price going nowhere (prior to the recent surge) shareholders still enjoyed double digit dividend returns in each and every year post the March 2009 low. And each and every year those dividends have been increased.

Mind you, the dividends are not franked, further adding to the seemingly unattractive proposition, but contrary to a much more popular dividend stock called Telstra ((TLS)), Ardent Leisure shareholders do not anticipate receiving 28c year after year after year after year. Two years ago (FY10) Ardent Leisure shareholders received 11c. Next year (FY13) the annual dividend is forecast to increase to 12.6c.

As such, Ardent Leisure is one fine example of how dividend investing should be done as the yield/return on the original investment made steadily increases for as long as investors own the shares.

Investors with a quick mathematical mind would have picked up that the prospective yield has now fallen into single digits, even on the prospective FY13 dividend. This is, of course, directly related to the 30% increase in share price. FNArena's Stock Analysis shows the share price is now within reach of the consensus price target.

Personally, I would not recommend chasing the shares at this price level but I also question whether we will see the shares back at $1 anytime soon. As I have pointed out on numerous occasions in the past, yield has become the new black in the share market and I still believe the underlying trend towards yield on a global scale is only in its infancy, which means that natural support for dividend champions such as Ardent will only solidify further in the years ahead.

It is thus no coincidence that share prices for the likes of Telstra, ASG Group ((ASZ)) and Australian Pipeline Trust ((APA)) have seriously outperformed the broader market this year. This should raise a few alarm bells for long term investors looking for yield in today's share market. Arguably, the best opportunities are no longer cheaply priced while questions should be asked as to why other dividend payers have not equally outperformed?

This now means that yield seekers in the share market are in a similar quandary as investors looking to buy government bonds as potential yield becomes secondary to the potential direction of the underlying security, at least in the short to medium term. To put it simply: in both cases movements in price can easily wipe out the prospective yield on offer in the short to medium term.

As far as the dilemma "equities or bonds" goes, I'd say this in itself makes yield in the share market more attractive as long as investors choose the likes of Ardent Leisure as the yield/return from these shares will increase in the years ahead, regardless of what happens to the share price. The yield on government bonds is merely decided by the time and price of purchase; it will not increase.

Probably needless to point out, but I do it anyway: prospective yield on shares such as Ardent Leisure is much higher today than it is on Australian government bonds. This is not going to reverse anytime soon.

Recent analysis by Goldman Sachs in Australia confirms what every investor should know by now: selecting dividend stocks in the share market solely based on seemingly high yield is the perfect starting point for future disaster and disappointment. Investors need not look further than recent examples such as JB Hi-Fi ((JBH)) and David Jones ((DJS)) to remind themselves of the dangers that come with buying "yield traps".

Goldmans' research, which involved data from the past 15 years, strongly suggests that investors seeking equities with yield better avoid stocks with the poorest momentum, the highest earnings risk and the weakest forecast returns. It is my personal observation that all three often come in one package. On the other hand, investors who managed to pick the correct yield stocks at relatively cheap price levels have significantly outperformed the broader market in the years past. A fact again emphasised by Goldmans' research.

Macquarie went a few steps further on Monday morning; the investment banker reiterated the view that, overall, investment returns from the share market will be lower than what investors had become used to in the years before 2008. As such, Macquarie not only observes that yield investment strategies have outperformed in the years past, but this observation comes with the prediction that the years ahead will offer more of the same.

On Monday, Macquarie did not just publish one or two research reports on yield and dividends. Macquarie's daily research report that day contained no less than eight (8) special reports on dividends and yield, covering the broad theme from small caps to telecoms, to banks, to transport stocks and Australian government bonds.

Yield is the new black. From a personal perspective (and this comes from someone who has expressed the same view over and over again since early 2009) Monday's tsunami of research reports by Macquarie supports my own long standing observation that among stockbrokers and investment bankers in Australia, Macquarie is by far the most in tune with the changed investment climate post 2007/08.

No doubt, Macquarie's stand-out position is directly related to the presence of strategist Tanya Branwhite who, according to my observation, is one of few only who has closely studied and analysed the changed conditions for risk assets, and published about her findings on a regular basis. Just as I have.

Other stockbrokers are catching up though. What about you?

On Tuesday, FNArena published a follow up on this story on its website with conclusions, favourites and tips from stockbrokers who've recently released research on this matter, including Macquarie. This follow up story is only accessible for paying subscribers, see "Yield Stocks: Where Are The True Opportunities?"

Readers should note that all names mentioned are for educational and illustrative purposes only. Investors should always consult with a licensed advisor before making any investment decision.

(This story was originally written on Monday, 14th May 2012. It was published in the form of an email to paying subscribers on that day).

See also last week's "All-Weather Performers Rule".

Coming up next week: why it might be time to reconsider resources stocks (as a speculative investment).

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