FYI | Apr 20 2016
By Peter Switzer, Switzer Super Report
Fund manager and TV buddy Roger Montgomery is often slagging off at traditional blue chip stocks, even questioning whether they really are blue chippers! Companies such as BHP-Billiton (BHP), Telstra (TLS), AMP (AMP) and the like are in his sights and he regularly lets them have it.
But are his blue chip arguments and stock suggestions right for everyone?
He makes the correct point that BHP and Rio Tinto’s (RIO) share prices are lower than 11 years ago and Woolworths’ (WOW) share price can hardly beat the price it was a decade ago.
Of course, if someone had bought BHP for the first time last week, they would have made 19% in a week. That’s not bad for a dud blue chip stock, however, that’s a short-term analysis. If you’d bought BHP a couple of years ago, you’d be unhappy with the stock, the company and especially chairman Jac Nasser, who, especially letting his CEO promise a progressive dividend and then welched on the deal.
That said, if you’d bought your portfolio of stocks because you were happy with a 7% dividend after franking credits, and even happier if your long-term accumulation of ‘blue chip’ stocks gave you 7% before franking credits, then you might question aspects of Roger’s argument.
When it comes to his position, it depends on your appetite for risk and your goals.
He has pointed out that he thinks the following four stocks are real, new age, blue chips: REA Group (REA), Challenger (CGF), Isentia (ISD) and IPH Ltd (IPH).
These come out of his definition for blue chips, which gets down to:
• Does the company retain large amounts of capital?
• Does it generate higher returns on incremental capital?
• Is it free from external curve balls, such as commodity prices and OPEC, that could KO the company? (The weekend’s failed meeting in Doha is a case in point.)
I think these are important questions you should ask and I’d throw in questions about debt levels and the quality of management. But do Rogers’ companies suit retirees running their own shares in an SMSF?
If I were a younger Australian trying to build wealth via shares, inside or outside of an SMSF, I’d be looking for the growth companies that Roger searches for but at a certain age you do want income as well as growth.
If I had $1 million in my SMSF and let’s say I started in 2009 and I drew my million out of my employer-funded super fund and rolled it into an SMSF, my yield would be pretty damn good.
Let’s take the usual old world blue chip stocks: the four banks, Telstra, Woolworths, Wesfarmers (WES), AMP, Transurban (TCL) and Sydney Airports (SYD).
Commonwealth Bank of Australia (CBA) was around $34 in 2009 and is now $75, which would be a 120% gain and the dividend yield would be close to 12% before franking credits!
Wesfarmers was at $18 and now is $41. That’s a 127% gain and your dividend yield would be around 6.1%, even with a lower dividend. That’s because you bought these blue chip stocks at the right time.
Even Telstra is a good story for the 2009 buyer, with the share price at $3.70 and with the current price at $5.24, there’s a 41% gain. Your yield on Telstra before franking credits would be 7.5%, which is pretty damn good.
Of course, I selected March 2009 because it was a good time to buy. It was after the GFC crash, the uptrend had been established, good companies were at great prices and even though Roger’s criticism of them as poor growth companies is generally true, they can be very good dividend payers and that’s what a lot of SMSF investors want.
In a perfect portfolio for the person I’m talking about, you’d have a core group of stocks paying reliable dividends/yields. You then should have exposure to growth companies to build up the capital but remember, great growth companies, even Roger’s group, can be creamed in a crash. Sure, quality companies can slide too but their dividends don’t slide at the same rate. In fact, they often don’t fall that much at all.
As I say, added to your core dividend stocks, you could have Roger’s kinds of companies to ensure growth. That said, there’s a hell of a lot of people who could not sleep easy with all their share money in Roger’s growers, which generally pay small dividends, knowing that they might fall 50% in one crash and stay low for a year or two.
I guess if you had a big nest egg in super of $2 million, you could have a $1 million in dividend payers, cash and other fixed income for stable income and $1 million in growth companies to ensure you’d never have to tell your kids “I’ve shrunk your inheritance” but that’s not the usual situation for most Australians.
And anyway, after a crash, your capital would shrink but, provided you hold your nerve, it would rebound in the ensuring years.
Roger is right to differentiate between old blue chips and new blue chips — my words not his — but I think there’s a role for both, depending on who you are, what kind of risk you’re prepared to live with and what your goals are.
One size advice seldom fits everyone, comfortably.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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