Don’t Buy Telstra (Now’s Not The Time)

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

In this week's Weekly Insights:

– Don't Buy Telstra (Now's Not The Time)
– Australian Banks: The Long Term View
– Risk Assets: A Maturing Bull
– BHP Billiton: A Dividend Stock, Always Was
– Rudi On TV: The Week Ahead
– Rudi On Tour Visits Brisbane In September

This week's Weekly Insights has a shorter format due to result season overload, but everything should hopefully be back to normal next week.

Don't Buy Telstra (Now's Not The Time)

By Rudi Filapek-Vandyck, Editor FNArena

How does one put a rocket under a share price? In Telstra's ((TLS)) case, it's as easy as going a little better than what the market was expecting in terms of dividend -29.5c instead of 29c- and then add a $1bn off-market share buy back with a large franking component embedded.

Consider Telstra the dividend go-to stock in the Australian share market, especially now all and sundry are convinced there will be more dividend increases and probably more buy-backs in the years ahead.

This, of course, doesn't mean investors should be buying at all price levels. The chart below, from JP Morgan, suggests the Telstra share price has displayed a very recognisable pattern around ex-dividend dates in years past which in essence sees the share price rise ahead of the announcement and then gradually reset at a lower price level which, on JP Morgan's calculations, more often than not slightly exceeds the dividend that has been paid out.

This year, however, the pattern has been broken as investors buying stock with the intention to participate in the off-market tender are pushing and supporting the stock. What this does suggest is that investors who have no intention to trade in their shares, should simply sit pat and watch events unfold. Chances are very much you'll be able to buy more at a cheaper price… if history repeats itself.

Australian Banks: The Long Term View

Share market commentary is often dominated by general truths and wisdom that sound very plausible, but ultimately don't stack up against empirical evidence to the contrary. Buy ANZ Bank ((ANZ)) because of its Asian exposure is one such misconception.

As if exposure to Asia all of a sudden transforms ANZ into a less risky, more solid growth stock. Last week's market update once again confirmed it has not, to date, and it is rather remarkable the spruikers who were all over the theme earlier are now adding "Asia is a long term proposition".

Maybe.

In the short term CommBank ((CBA)) remains at the helm of the sector, being the best, the brightest and the strongest, and this month's full year result once again proved CBA deserves its premium, despite negligible exposure offshore. What CBA's FY14 report also proved -and I am relying on bank analysts across the spectrum- is that the sector has seen the best of its market outperformance. It's all going to be a little less, from here onwards, though further growth should continue (in non-spectacular fashion).

Analysts at Citi, after doing the maths and adjustments for all Big Four in Australia for the decade ahead, switched their Buy rating for CBA to Neutral. Only Macquarie Group ((MQG)) still enjoys a Citi Buy in the sector. The move was accompanied by the prediction that sector outperformance is going to disappear and financial metrics for the sector in Australia are now essentially entering a period of long term decline.

If Citi's estimates for the years ahead prove correct, investors are going to be scratching their head as to why Asian growth potential is not showing up in ANZ Bank's shareholders returns? (Answer: it's probably a long term story, at best). Above all, note how in the table below CBA continues to outperform its peers.

Enough said.

Risk Assets: A Maturing Bull

Citi's credit strategist Matt King has developed a four stage cycle clock for risk assets in general, and for equities in particular (see below). The good news is equities are now entering what King's clock defines as the third phase. The not so good news is that after this third phase comes the fourth and that's not a good time to own risky growth assets.

The underlying framework is based upon the observed relationship between corporate bond spreads and global equities. From here, suggests the clock, credit spreads usually turn up but equities rally on further increases in EPS. This third phase lasted another 1-3 years in the 1980s and 1990s, notes Citi, while in the last cycle it only lasted four months.

In terms of what is likely to transpire this time, Citi is leaning towards a repeat of the 1980s and 1990s, predicting this bull market has at least another two years in it, before global EPS turns south.

In terms of the optimal exposure, Citi notes history suggests investors should favour equities over corporate bonds. Within global equities, they are advised to be overweight cyclicals versus defensives, growth versus value and large caps versus small/mid-caps.

BHP Billiton: A Dividend Stock, Always Was

People still give me a funny look whenever I refer to BHP Billiton ((BHP)) as a dividend stock. Like, who really is buying resources stocks for their dividends, right?

One easy observation to make is the BHP share price is today still where it was in August 2007. So for all those long-term shareholders who enjoyed the spoils during the early phase of the resources revival, and then held on to what had been a highly profitable investment, there have been no net returns in the past seven years.

Unless, of course, one takes into account BHP's annual dividends which have been paid without interruption and in steadily rising numbers throughout the period. Still, dividends may be the only tangible benefit that has befallen the company's long-term loyal shareholders, with the shares usually trading at a 3% yield handle, it hasn't exactly been fantastic – definitely not when corrected for inflation.

Enter AFR journalist Philip Baker who, in response to an update from AMP's chief economist Shane Oliver on dividends, added the following facts (from unknown source):

Since floating on the ASX, Commbank ((CBA) shares have delivered a total return of 4479%. Remove the dividends and only 1135% remains through share price appreciation. Translation: three-quarters of long term investment returns from CBA stem from dividends.

BHP Billiton shares have, over that same period, generated a total return of 1189%, of which 600% remains if we strip away the dividends. Translation: nearly half (49.5% to be exact) of long term investment returns on BHP shares have come from dividends. I definitely will keep this fact in my pocket from now onwards.

The All Ordinaries, by the way, posted a return of 795% during that time. Without dividends, BHP shares would not even have managed to keep track with the index, just like the shares have severely underperformed since 2009; total return of 55% versus 272% for CBA and 113% for the index. All this, and so much more, is neatly summarised in the price chart below, from Shane Oliver's update. Yes, when we account for dividends, the domestic share market is now well past its peak of November 2007, without dividends there's still a fair way to climb.

Just to cap off the subject, here's one final quote from the AMP report: Of the 11.8% pa total return from Australian shares since 1900, just over half has been from dividends.

Powerful statistics, indeed.

Rudi On TV: The Week Ahead

On request from readers and subscribers, from now onwards this Weekly Insights story will carry my scheduled TV appearances for the seven days ahead:

– Monday – Sky Business – circa 11.20am (Broker Calls)

Rudi On Tour Visits Brisbane In September

On Wednesday, September 3, I will be presenting in Brisbane twice. First at 2.45pm on invitation of the Australian Investors' Association (AIA) and later in the evening on behalf of the Australian Technical Analysts Association (ATAA)). More details to follow.

(This story was written on Tuesday, 19 August 2014. It was published on the day in the form of an email to paying subscribers at FNArena).

(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. All views are mine and not by association FNArena's – see disclaimer on the website)

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THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

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MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Things might look a lot different today than they have between 2008-2012, but that doesn't mean there are no lessons and conclusions to be drawn for the years ahead. "Making Risk Your Friend. Finding All-Weather Performers", was published in January last year and identifies three categories of stocks that should be part of every long term portfolio; sustainable yield, All-Weather Performers and Sweetspot Stocks.

This eBooklet is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of July available. Just send an email to the address above if you are interested.

Click to view our Glossary of Financial Terms