Australian Dividends Still Attractive

This story features FLEETWOOD LIMITED. For more info SHARE ANALYSIS: FWD

– Australian yield still attractive
– Ageing population an important factor
– Dividend surprises forecast

By Greg Peel

In recent months the Aussie dollar has weakened sharply, US bond rates have risen and foreigners have exited Australian equities, suggesting an end to the yield play which has prevailed since last year in particular. Yield stocks remain attractive for local investors, and specifically from a superannuation perspective, while the RBA remains in an easing phase. Yet the yield gap has begun to close for foreign carry-traders, and the falling currency has hastened their departure.

Many analysts are now assuming US bond prices have peaked and yields will now begin a longer term steady increase towards “normal” settings. On that basis, and given a sombre economic outlook in Australia, most houses are shifting towards a Neutral or even Underweight stance on yield favourites such as the banks and consumer staple stocks. Hedge funds are rumoured to be shorting the banks in particular ahead of expected further currency weakness and further foreign selling.

CIMB Securities disagrees that it’s all over for Australian yield stocks. CIMB does not see the yield trade as solely cyclical, but rather reflective of an underlying structural shift. Populations are ageing across the developed world, note the analysts, and rising levels of government debt (on easy monetary policy) are keeping interest rates low. A combination of the need for income and insufficient returns from traditional fixed income means equity dividends have become an important component of investors’ total return, the analysts suggests.

CIMB has studied stock markets across the developed world and found that Spain is the only market offering a higher dividend yield on its bank sector than Australia. Yet in terms of credit ratings, the two are chalk and cheese. In consumer staples, only Finland offers a higher yield.

The net yield on CIMB’s top twenty preferred Australian yield stocks is still 190 basis points, or 1.9 percentage points, above the ten-year government bond yield, and 220 basis points above the average one-year term deposit rate. Self-managed super is growing by 17% per year and now owns 12% of the ASX 200 by market cap. Preferences are weighted towards blue chip yield.

Super investors are nevertheless still heavily weighted towards cash within their portfolios, well beyond traditional levels, as nervousness still holds sway over thoughts of re-entering the volatile equity market. Demand for equities is thus not as strong as might otherwise be, CIMB notes, hence the market price/earnings ratio is not as high as it might otherwise be. The market PE is the traditional measure of “value” against long-run averages. Lower equity balances in portfolios are ensuring a still attractive market PE, particularly since the May-June correction.

Yield investors nevertheless need to be cognisant that unlike fixed income, company dividends are paid solely at the discretion of the board. Some companies offer fixed dollar dividends, such as Telstra, others offer target payout ratios, such as the banks, while more cyclical stocks will pay or not pay dividends based on their point in the cycle. In every case, those dividends may be subject to reduction, such that entry yields are never fixed. Telstra could cut its fixed dollar amount, for example. Companies offering payout ratios will pay less on lower earnings. Cyclicals, such as retailers, could pay a special dividend one period and no dividend the next.

Or they could all go up.

Macquarie’s quant team runs models every six months ahead of the February and August results season (in which most but not all Australian companies report earnings and declare dividends) to provide lists of companies which may provide a “dividend surprise”. That surprise can be positive, meaning a declared dividend is greater than consensus forecast, or negative, meaning less than.

Since 2010, note the quants, stocks providing a positive dividend surprise have outperformed the market by an average 3% in the following quarter and 6% in the following six months. Stocks providing a negative dividend surprise tend to hold their ground in the shorter term but are then punished subsequently, underperforming the market by an average 6% after six months.

While negative surprises have become fewer since the initial GFC impact in 2008, downside price reactions to dividend misses have gradually become more severe over that time, the quants note, which clearly reflects the growing popularity of equity yield.

Macquarie’s model suggests the stocks with a high probability of a positive dividend surprise in August are Carsales.com ((CRZ)), Flight Centre ((FLT)) and Breville Group ((BRG)). Stocks with a high probability of a negative surprise are Fleetwood ((FWD)), Kingsgate Consolidated ((KCN)) and Newcrest Mining ((NCM)).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms