FYI | Oct 29 2012
This story features ANZ GROUP HOLDINGS LIMITED. For more info SHARE ANALYSIS: ANZ
Update on share prices and consensus price targets.
By Rudi Filapek-Vandyck, Editor FNArena
A few enquiries have been received in recent times about why oh why the major banks in Australia continue to trade above consensus price targets. Isn't this a sign those share prices are expensive? Why aren't we seeing more weakness?
Firstly, being expensive is under most circumstances a relative position and in the midst of the banks' FY reporting season there are final dividends on the agenda and this is usually a time when investor interest is high, and share prices likely to remain supported. Just think about all those income-yield strategies that are constantly being promoted, centred around combining three dividend payouts over 13 months, good for a double digit payout (fully franked) over the period.
So from this perspective: any worries about potentially weaker share prices should not be the main menu before the earnings releases, but more so after those dividends have been paid out in November.
Don't forget, however, that the Reserve Bank is widely seen as still on a loosening strategy and the market usually translates this into more buying orders for the banks on the old knee-jerk interpretation that lower rates will translate into more loans, one way or the other, and this should benefit share prices. There has been quite some academic research throughout the past decades that argues this is a false assumption, but that won't stop Mr Market from doing whatever has worked in the past.
Maybe of even greater importance than these two supportive factors is the fact that doubts have emerged about the sustainability of dividend payouts by European telcos, which reduces the number of places to invest and reap high dividends. The Australian banks are amongst the few stand-outs globally and with doubts creeping in in Europe, the Big Four banks will simply look even more attractive (as long as overseas investors are comfortable with AUD/USD above 1.03).
Bottom line: banks surging above consensus targets used to be a very reliable indicator that the share market was too expensive, but sometimes things really are different and this might be one of those times.
Compare it to the Dow Theory in the US where Transports have to confirm every trough and peak for Industrials to make it a genuine and solid downtrend or uptrend respectively. There is a lively discussion going on in the US about this year's move in equities as the Transports ("Trannies") have hardly gained anything for the year, while the Dow Industrials is up around 10%.
Again, some analysts are putting forward that the divergence between the two illustrates the divergence between the financial world and the real economy. The Industrials represent global liquidity pumped out by the Fed and its peers in Tokyo, Beijing and elsewhere. The Transports represent the real economy; sluggish, not much happening.
Bottom line: sometimes things really look different. If this interpretation is correct, than ongoing plentiful liquidity might continue to support US Industrials for longer, while Transports may be condemned to lag for longer.
As far as I am concerned, the most important thing that has happened thus far this banks reporting season is that the more bearish banking analysts have assumed no increases in dividends for the years ahead for ANZ Bank ((ANZ)). This is not everybody's view and FNArena subscribers can observe, via Stock Analysis, how market consensus is still for continued low growth.
Again, in an environment wherein yield is still the new black, and likely to remain so for much longer, this may not matter as much as it once did. As long as those dividends remain solid, sustainable and secure, Australian banks will remain attractive for investors seeking yield and income. Macquarie analysts pointed out on Friday morning, available dividend yields from Australian banks are still well above what shareholders used to receive in the decade to 2007. This means, from an historical perspective, that Australian banks shares remain attractive – for their yield, not for their growth.
On Friday, ANZ Bank shares were the only ones trading below consensus target (out of the Big Four), but not by much.
Of course, investors must always consider the possibility that this time is not really any different and that Australian banks are simply a bit slow this year to correct from too highly priced share prices. This probably solves the puzzle rather easily for investors: if not interested in sustainable dividends, there is at this point no reason to have any of the major banks on the menu.
(Due to travel commitments this story has been prepared on Friday. All data and info in the tables below are on the basis of Thursday's closing prices. FNArena subscribers can access daily updates on the website).
Investors should consider the information and data are provided for research purposes only.
Stocks <3% Below Consensus
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Stocks Above Consensus
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Top 50 Stocks Furthest from Consensus
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