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Dividend Support, Still Investors’ Most Reliable Guide?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Feb 12 2014

By Rudi Filapek-Vandyck, Editor FNArena

Not everyone is equally convinced 2014 shall be a good year for equity investors. Harry Dent, US author and forecaster of markets, has returned to Australia. One of his current predictions is that 2014 will be the year of reckoning for bubble inflated equity prices.

Now, it has to be pointed out Dent has been consistently negative on US markets even as indices soared to new highs between March 2009 and last year. As such, Dent has been labeled a contrarian indicator by some who doubt the man has any credibility left. Here's one such analysis on Dent's predictions:

There must be a natural attraction for doom and gloom forecasters such as Dent, even if they consistently get it wrong over a long period of publishing predictions. Otherwise, I cannot explain how his well-oiled marketing apparatus still manages to get enough people through the door for Dent's public appearances.

Global stock markets have quickly recovered from earlier weakness these past few days and already the optimists are declaring the gates are now open for the next rally, and the next all-time high milestone for US markets.

However, weakness in the opening weeks of 2014 has certainly shown that markets, and sentiment in general, have become more vulnerable, and even quite fragile at times, than they have been since mid-2012. Needless to say, there is always a large army of mini-Harry Dents around with lines and signals on price charts to support their predictions and this time is certainly not different.

US-based William Kurtz, for example, put out a gloomy note last week, which can be read here:

The team of technical chartists at Citi has equally grown worried about the fact that US equities look stretched to the point comparisons with the years 2000 and 2007 do not seem totally out of the question. Citi's technical analysis of US markets' set-up can be viewed here:

In Australia there's equally a lot of talk among chartists and technical analysts about potential further losses that might pull the ASX200 below 5000, or even as low as 4600 before the next solid rally can announce itself. The fact that markets have now bounced for a few sessions would not have changed any of these predictions.

In my personal view, investors had simply become too convinced that the rally throughout 2013 was simply going to extend itself in 2014. Call it "bullish complacency", like Glushkin Sheff's David Rosenberg if you wish, but several measurements and indicators for market sentiment have essentially laid bare the same underlying observation: everyone thought markets were only going to go up, and thus they didn't.

There are, however, strong indications that the main problem with today's stock markets is situated in the sentiment corner, and high PEs certainly support such view, while corporate earnings seem OK and vulnerabilities in Emerging Markets seem unlikely to erase the economic recovery in Europe and the US this year. Even so, and as suggested by Citi's technical analysis, a swift retreat in general optimism can still have a rather profound effect on asset prices, especially when valuations are elevated to start with.

How worried should investors in Australia be?

I believe two of my observations published in last week's Weekly Insights should offer some comfort to investors that the Australian share market is not about to fall out of bed. Both observations are based upon one of my favourite instruments which virtually never features in anyone else's market analysis elsewhere: rock solid dividend support.

Investors in Australia may not realise it, but one of the most secure dividend payers in the local share market is BHP Billiton ((BHP)). Since 2003 the company has increased annual dividend payments to shareholder in every year, without interruption, including throughout the depths of the Global Financial Crisis. Not even the banks, widely regarded as the safest dividend providers in the market, have such a track record.

Every analyst, whether bullish or not on iron ore prices this year and the next ten years, believes BHP's dividend track record will remain unblemished for many years into the future. In other words: this is one of the most solid elements in the share market investors can count on.

Which instantenously explains why history shows BHP shares tend to find support at around 4% projected yield, while Woodside Petroleum ((WPL)), for example, needs to offer at least 6% to get investors excited. Rio Tinto ((RIO)) equally does not have the track record BHP has and thus the 4% support does not apply.

But in BHP's case it does. As this is one of my long-standing market observations, I have kept a close eye on BHP shares over the past year. As shown in the price chart below, BHP shares have now bounced off the 4% support level on ten different occasions since April last year. If anyone wonders as to why dividend support was first around $31 and then later climbed to $34-$35, the answer is the Australian dollar.

BHP reports in USD so AUD/USD weakening has effectively pushed up support for BHP shares. It also explains as to why dividend support for the stock is not an exact science.

Bottom line: BHP's dividends are a rock solid feature and the 4% dividend support is something both investors and traders maybe should consider taking on board as yet another tool to time and define levels of entry.

I regard BHP as one of the leaders in the Australian sharemarket. Its index weight is second behind CommBank ((CBA)) only at approximately 8.5% but due to its leadership position it probably represents more like 30% of the index with all other cyclicals and resources with leverage to iron ore and China in general following in its slipstream.

The number one index component in Australia, CommBank, also happens to be one of the most reliable dividend payers around. I have yet to see the first analyst predict the bank will not lift its dividends for shareholders this year and next, let alone cut it.

The banks' popularity, which was carried by their dividend appeal, last year pushed share prices to historical premiums, but share prices have come off since November. In CommBank's case, from $80 to circa $74. It means that share prices for ANZ Bank ((ANZ)), Westpac ((WBC)) and National Bank ((NAB)) are now offering dividend yields between 5.9-6.1%.

I think this is probably where dividend support for the sector as a whole starts kicking in. CommBank shares still enjoy a sector premium, its projected yield is around 5.2%.

Probably the key question is as to whether such a large premium is due for erosion? Some analysts believe the gap between CommBank and the other three is likely to narrow as rising interest rates should impact on demand for mortgages and CommBank is the largest provider of such property loans.

If this were the case, CommBank shares would become less of a reliable leader, but looking at the general picture we see three of the Big Four trading near 6% fully franked dividends. Probably fair to assume there shouldn't be a lot more weakness in store, not without a serious threat to those highly reliable dividends.

The Big Four Banks together represent more than 25% of the ASX200. If we take a broader view, it can be argued CommBank represents potentially up to 40% of the index, as a leader.

What does this mean for the broader market?

I asked the TechWizard about technical support levels and he sent me the chart below, clearly showing technical support for the All Ordinaries sits at 5070 and then at 5000. When the index bounced from the first level last week, that's when BHP and the banks were touching their respective levels of dividend support.

I therefore think it is rather unlikely the index (either All Ords or ASX200) will fall through the 5000 level, let alone continue falling until it reaches 4600. I rather think it looks like a much safer bet that the Australian share market won't fall further than to where it fell last week.

This, however, does not imply the only way is up from here and it is well possible the Australian share market may revisit last week's levels. If this happens, I hope you all know how to use this information to your advantage.

(This story was written on Monday, 10 February 2014. It was published on the day in the form of an email to paying subscribers.)

(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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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 this year and identifies three categories of stocks that should be part of every long term portfolio; sustainable yield, All-Weather Performers and Sweetspot Stocks.

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