Rudi's View | May 27 2015
This story features MACQUARIE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MQG
In this week’s Weekly Insights:
– Superior Strategy Also Offers Best Protection
– Lies, Silliness And Stats
– Update On All-Weather Performers
– Share Buybacks – Who’s Doing It?
– Rudi On TV
– Rudi On Tour
Superior Strategy Also Offers Best Protection
By Rudi Filapek-Vandyck, Editor FNArena
It happens every time and last week in front of an audience of ATAA members was no different.
From the moment I show one of my favourite slides, illustrating the outcome of in-depth data analysis by analysts at Goldman Sachs for the years 2000-2014 (see below), supporting my own research that combining dividends with growth is the superior investment strategy in the long run, all of a sudden time stands still, for a while.
Pupils dilute, brows frown, backs straighten up, breathing in the room goes to slo-mo. If I pay close attention I can almost hear dozens of human hard drives accelerating into superfast overdrive status.
For what the eyes are seeing, and what I am pointing out verbally on stage, is so outrageously in contradiction to what everybody “knows” about the share market it almost equals blasphemy.
Yet, there it is, in three neatly construed performance calculations for the ASX200, high yield stocks and dividend + growth stocks; the latter strategy has outperformed the index by close to 100% and high yield stocks by a factor 2.5.
What about the absence of a separate bar for growth stocks only? There’s always one who doubts and questions the absence of one dedicated fourth performance bar that would have simply added more visual evidence to the same conclusion: dividend + growth beats everything else, just not necessarily on a day-by day, short-term basis.
Sustainability Is The Key
Let’s for now not get bogged down in the nitty gritty details of the above chart or Goldman Sachs’ research. This is not the first time I have written about this and I literally do talk about it every time I get up on a stage. It is not that difficult to figure out why growth-only stocks have not delivered superior returns: the keyword here is “sustainability”.
Let’s take Incitec Pivot as an example. In the halcyon days before the 2008 meltdown, the share price rallied from $1 to $8, but then fell back to $2. By 2011 it had clawed its way back above $4 but retreated back below $3 and the rally in recent times had taken the share price back above $4, but it has again retreated since.
The story whether Incitec Pivot shares have been a good or bad investment quickly harks back to two simple questions:
-when did you get in?
-when did you get out?
Assuming investors’ timing to get in was not perfect (i.e. at the lowest price point possible), returns have been very much dependent on when exactly one decides is the cut-off to measure it. Let’s be honest: it probably wasn’t such a good idea to buy the shares for a typical set-and-forget strategy. Unless your timing/entry-price was perfect (Hindsight can help with such observations, but foresight much less so).
Luckily, for investors, Incitec Pivot pays out a dividend twice per year. This is one of the key factors to remember about 2000-2014; when share price gains melt away, the dividends in your pocket do not disappear in sympathy. They are non-refundable. Admittedly, you will be eligible for tax -one important factor never included in such research- but fact remains: what you receive in dividends is all yours. The gains you have in share price appreciation are only yours until the next sell-off, pull-back, correction or otherwise downward movement, unless you sell or take profits on time.
We all know, from harsh first hand experience or otherwise, that I could’ve easily replaced Incitec Pivot with BHP Billiton, Woodside Petroleum, JB Hi-Fi, Woolworths and many, many others. One way to read the graphic above is by acknowledging that sustainability hasn’t been great for the large majority of so-called growth stocks.
Yield Is Not Defensive
The second observation that stands out is high yielding stocks are one sure way to underperformance. This may surprise many, as high yielders have done exceptionally well from mid-2012 onwards until earlier this year, and most investors would put the major banks under “high yield”.
Fact is, Australian banks have been such a wonderful and rewarding investment since the mid-1990s because they offered yield + growth. As such, they have contributed to the ASX200 and to the yield + growth performance bar, not to the underperforming high yield basket of stocks.
What Goldman Sachs’ analysis confirms (and every investor should know this) is that investing in the share market is always somewhere, somehow linked to growth. Despite all the fads and bubbles throughout times, at the end of the day no investment strategy can be successful or rewarding in the long run unless it has been backed up by growth.
The “secret” as to why high yield stocks deliver a far less satisfying return in the long run is visible through the dark blue parts of each performance bar. These are the returns from share price appreciation only. The share market has a tendency to de-rate stocks that go ex-growth. If they pay dividends, there’s a natural support at an above market average yield. But if there’s no growth, there won’t be much in terms of share price appreciation, if one’s lucky, otherwise the share price might actually fall.
In terms of total return, the dividends on offer in many cases represent the maximum return available, and this is not taking into account the risk that dividends might actually have to be cut or suspended or scrapped altogether.
The best way to make a comparison with stocks that offer dividend + growth is by acknowledging those dividends are the minimum return on offer, with share price appreciation on top. Maximum versus minimum. Have a good think about this. It may solve many dilemmas that are currently on investors’ minds.
Whatever your angle/horizon/strategy, never make the mistake to treat investing in dividends as a defensive move. One of the first sentences in the Goldman Sachs report stated dividends were not a defensive tool. I cannot highlight this point prominently and often enough. If you choose the right stocks, those that combine sustainable dividends (cash flow) with sustainable growth, you will find there’s less downside in turbulent times (because of dividend support) and more total return over time, which is a superior strategy. Nothing defensive about any of this.
One Often Ignored Important Factor
One factor that has co-determined the large differences in total returns between various strategies throughout the fourteen years as analysed by Goldman Sachs is the top part of each performance bar; re-investment. You receive dividends from the companies in your portfolio. What do you do with them?
According to the Goldman Sachs research, you better reinvest them in those stocks that offer dividends + growth. The return from such reinvestments has dwarfed total return from high yield stocks and pretty much equaled total return from the ASX200 without franking and reinvestment. But then reinvesting in growth stocks has not been equally rewarding. Again, it all comes down to sustainability. Putting your dividends in a stock that is going to have a bad year next is simply adding more to a stock that is going to cause losses.
Reinvesting in companies that offer dividends + growth will, at the very least, increase next year’s dividends. In practice, the better industrial stocks pay out dividends to shareholders while still investing for growth and generating plenty of cash and growth from their core operations. It goes without saying my selection of All-Weather Performers (see below) has genuinely distanced itself from the majority of ASX-listed alternatives through consistency and sustainability. Two key values that determined the outcome of the Goldman Sachs research.
And of all investment strategies over the period.
This Time Is Different, Or Not?
It is oft heard: the yield trade is over! However, if we genuinely pay attention to what the Goldman Sachs research implicates, then the yield trade is never ever really over. What has been happening is the share market went a little overboard with an extreme focus on yield and on yield only, because that just happened to be the theme of the moment, and there was plenty of money to be made from it for quite a while.
Those days have gone and what we are seeing now is a “normalisation” of sorts. Extreme yield valuations have deflated, not the least in the form of a decent sell-off in bank shares. Is the RBA going to cut again? Believe me, nobody really knows, not even those economists making declarations full of confidence. But bond yields have been rising across the developed world and they might have further to go.
The best protection against rising bond yields is, you guessed it, combining dividends + growth.
Stocks that only offer dividend (“yield”) trade in direct correlation with bonds, so there’s little protection if bond yields do rise further. Add growth and you might see short term weakness, but eventually the share price is more likely to come out on top.
Investors should note that Big Banks in Australia (three of the Big Four, NAB is the exception) have been such a rewarding and sustainable investment because they combined dividends with growth. Right now, the dividends still look pretty solid, but the growth part has a big question mark attached. Same applies to Coca-Cola Amatil and to Woolworths.
Meet GARY, He’s Your Friend
Rising bond yields in Europe has genuinely put the kybosh on global consensus trades. Ever since the calendar started approaching May global financial markets have become a lot less predictable and a lot more volatile. In Australia the share market has lost a lot of its prior glamour, not in the least because resources stocks have given market watchers whiplash, while insurers and the banks have settled at lower price levels. It’s been a hard slog for the long-time faithful.
Analysis by analysts at Morgan Stanley suggests the best performers throughout this turmoil have been stocks characterised by the acronym GARY, which stands for “Growth and Reasonable Yield”. Again, see also Goldman Sachs research and my own five cents worth above.
Morgan Stanley’s favourites to play this theme include Macquarie Group ((MQG)), Tabcorp Holdings ((TAH)), AMP Ltd ((AMP)), Super Retail ((SUL)) and JB Hi-Fi ((JBH)). The stockbroker also still likes USD-earners with ongoing favourites Macquarie, James Hardie ((JHX)), Goodman Group ((GMG), Ansell ((ANN)) and ResMed ((RMD)).
Deutsche Bank Agrees
Market strategists at Deutsche Bank agree the best defense against rising bond yields is probably a combination of yield plus growth. Their model portfolio has several stocks that fall under this label, including Stockland ((SGP)), Fletcher Building ((FBU)), James Hardie and Harvey Norman ((HVN)) with exposure to building, Perpetual ((PPT)), AMP and Iress ((IRE)) with exposure to financial markets and QBE Insurance ((QBE)) and Sonic Healthcare ((SHL)) as so-called defensive growth stocks.
So many angles, so many ways to play the dividend theme.
More Dividend Ideas
I recently appeared a few times on Switzer TV to discuss and share my thoughts on dividend stocks. This has forced me to pause and take inventory.
Among industrials offering yield + growth all of the following stocks come with specific risks and twists, so investors are advised to get acquainted with them through further research (in no particular order): Asaleo Care ((AHY)), Flexigroup ((FXL)), Nine Entertainment ((NEC)), Energy Developments ((ENE)), Sigma Pharmaceuticals ((SIP)), GUD Holdings ((GUD)), Pact Group ((PGH)) and Navitas ((NVT)).
Subscribers should be aware they can do their own research into dividend + growth stocks via Sentiment Indicator and Stock Analysis on the FNArena website. In addition, the FNArena-Pulse Markets All-Weather Model Portfolio does include dividend stocks, including a few from the above mentioned.
P.S. The best performing stock in the Model Portfolio to date is Macquarie Group.
The Big Threat Ahead
The Big Threat ahead for Australian investors may not necessarily be related to rising bond yields but instead to the unsustainability of high payout ratios, warns Credit Suisse quant analyst Richard Hitchens. Again, I believe if investors focus on dividend + growth they are less likely to be hit by the unpleasant surprise of a lower payout ratio and what this possibly can do to the share price in the years ahead.
The adage “yield is not a defensive strategy” will no doubt come to the fore again from the moment companies start announcing lower payout ratios, effectively meaning yields will drop, but this may not happen in 2015 just yet.
Lies, Silliness And Stats
Let’s start with a confession. I never sit with baited breath behind my pc screen waiting for a data release in order to buy or sell a financial asset. Then again, I don’t think this will come as a surprise to anyone who has been reading my commentary and analysis over the past decade or so. But excuse me for sometimes feeling a bit “alien” when I observe how one small piece of data release -so tiny in the bigger scheme of things- has algorithms, machines, traders and market experts alike all fired up.
This is even more so the case when one actually realises how fickle the outcome for these data releases often is. See, for example, the worldwide research explosion into how “seasonal adjusted” in the US effectively amounts to “underappreciated”. For those who haven’t genuinely followed the discussion: the USA has now built up a legacy of starting off on underwhelming GDP growth in Q1 (pretty much each calendar year) and economists are blaming the statistical amendments that are being made to data collected.
The latest CPI read in the USA equally had tongues wagging (and trigger happy fingers acting) on Friday. Here’s the opening sentence from the Monday morning response from the economy desk at National Australia Bank:
“If US April core CPI had printed just .007% lower than the 0.256% it actually did, it would have been rounded down to 0.2% on the month not up to 0.3%, and arguably most of Friday’s market price action wouldn’t have occurred”.
Please forgive me if, at times, I do feel a bit removed from it all. Not my game.
Update On All-Weather Performers
First up: since late last year FNArena, in conjunction with partner Pulsemarkets, has been running an All-Weather Model Portfolio based upon my personal research post 2008. The direct aim is not to beat the index or the bulk of funds managers out there, but to offer investors a genuine alternative through diversifying away from the usual suspects in the Australian share market, to offer a less risky & less volatile portfolio but with ongoing positive rewards. And to prove in real-time share market exposure that my research has a lot going for it.
Within this framework I can report that, unless things change dramatically in the coming days, the All-Weather Model Portfolio seems poised to beat the major indices over the first five months of the calendar year. And we still have a big chunk sitting in cash on the sidelines, for whenever we think time or valuations are right to allocate more.
This is not me trying to claim a prize this early in the process. There is no such prize as this is a long term endeavour. Time to consider/re-consider a few things: your portfolio does not need to be overweight major banks and/or major resources simply because that’s how the ASX200 is weighted. The All-Weather Model Portfolio has zero exposure to these stocks.
Also, don’t fall for the dominant idea that stocks should always be bought cheaply and only cheaply for the long term. If you do your research well, you’ll notice certain stocks seem always “expensive”, but they perform well. The All-Weather Model Portfolio contains stocks that haven’t looked “cheap” in ages, but they are in the portfolio and responsible for its (out)performance to date.
In response to recent queries about when I intend to publish the next update on this category of stocks: I’ll try to do it before the August reporting season. Promise. But bottom line: not much has changed since the last update in December. Those who are interested in finding out more about said Model Portfolio: send an email to email@example.com
Share Buybacks – Who’s Doing It?
Below is an incomplete overview of companies buying in their own shares this year. We very much appreciate all contributions and suggestions at firstname.lastname@example.org
– Amcor ((AMC))
– Aurora Buy-Write Property Income Trust ((AUP))
– Australian Governance Masters Index Fund ((AQF))
– Boral ((BLD))
– Centuria Capital ((CNI))
– CSL ((CSL))
– DWS Ltd ((DWS))
– Fairfax Media ((FXJ))
– Fiducian ((FID))
– Finbar Group ((FRI))
– GDI Property Group ((GDI))
– GWA Group ((GWA))
– Industria REIT ((IDR))
– Lemur Resources ((LMR))
– Logicamms ((LCM))
– Matrix Composites & Engineering ((MCE))
– Nine Entertainment ((NEC))
– Orica ((ORI))
– Pro Medicus ((PME))
– ResMed ((RMD))
– Rio Tinto ((RIO))
– Seven Group ((SVW))
– Sigma Pharmaceuticals ((SIP))
Wants to buy in own stock (but still awaiting shareholders approval): Intrepid Mines ((IAU))
Rudi On TV
– on Wednesday, Sky Business, 5.30-6pm, Market Moves
– on Thursday, Sky Business, noon-12.45pm, Lunch Money
Rudi On Tour
I have accepted invitations to present:
– May 29, CEOs lunch French Chamber of Commerce
– August 2-5, AIA National Conference, Surfers Paradise Marriott Resort and Spa, Queensland – for more information about this event:
Note: FNArena subscribers can attend at similar discount as AIA members
(This story was written on Monday, 25 May 2015. 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.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: email@example.com or via Editor Direct on the website).
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.
MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS
Odd as it may seem, but today’s share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.
The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.
Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, 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 firstname.lastname@example.org
For paying subscribers only: we have an excel sheet overview with share price as at the end of April available (Next week we’ll have an update for May). Just send an email to the address above if you are interested.
For more info SHARE ANALYSIS: AHY - ASALEO CARE LIMITED
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: AMP - AMP LIMITED
For more info SHARE ANALYSIS: ANN - ANSELL LIMITED
For more info SHARE ANALYSIS: APA - APA GROUP
For more info SHARE ANALYSIS: BLD - BORAL LIMITED
For more info SHARE ANALYSIS: CNI - CENTURIA CAPITAL GROUP
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: DWS - DWS LIMITED
For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED
For more info SHARE ANALYSIS: FID - FIDUCIAN GROUP LIMITED
For more info SHARE ANALYSIS: FRI - FINBAR GROUP LIMITED
For more info SHARE ANALYSIS: FXL - Flexigroup
For more info SHARE ANALYSIS: GDI - GDI PROPERTY GROUP
For more info SHARE ANALYSIS: GUD - G.U.D. HOLDINGS LIMITED
For more info SHARE ANALYSIS: GWA - GWA GROUP LIMITED
For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED
For more info SHARE ANALYSIS: IRE - IRESS LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC
For more info SHARE ANALYSIS: LCM - LOGICAMMS LIMITED
For more info SHARE ANALYSIS: MCE - MATRIX COMPOSITES & ENGINEERING LIMITED
For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED
For more info SHARE ANALYSIS: NEC - NINE ENTERTAINMENT CO. HOLDINGS LIMITED
For more info SHARE ANALYSIS: ORI - ORICA LIMITED
For more info SHARE ANALYSIS: PGH - PACT GROUP HOLDINGS LIMITED
For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED
For more info SHARE ANALYSIS: PPT - PERPETUAL LIMITED
For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: SGP - STOCKLAND
For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED
For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED
For more info SHARE ANALYSIS: SVW - SEVEN GROUP HOLDINGS LIMITED
For more info SHARE ANALYSIS: SYD - SYDNEY AIRPORT
For more info SHARE ANALYSIS: TAH - TABCORP HOLDINGS LIMITED
For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED
For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED