Rudi's View | Aug 23 2017
In this week's Weekly Insights:
-More Pain For Telstra Shareholders
-Rudi In The Australian Newspaper
-Rudi On BoardRoomRadio
-AREITs In Top Form
-The Gillette Factor In Health Insurance
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
More Pain For Telstra Shareholders
By Rudi Filapek-Vandyck, Editor FNArena
All good things must come to a (divid)end. This is how analysts at Credit Suisse responded to Telstra's ((TLS)) much larger than anticipated dividend shock last Thursday.
Sometimes a lot of creativity goes into research report titles. Most investors never get to see or appreciate them. So I thought I would honour Credit Suisse's smart word play in today's follow up on Telstra.
Most shareholders have been on Telstra's register for many years. It has been a mixed experience, to say the least. The shares surged to nearly $9 during the dotcom bubble days. That was back in 1999. After that, a long drawn out slide unfolded that lasted more than a decade, ultimately pulling Telstra's share price as low as $2.60 by late 2010. That's a capital loss in excess of -70%.
Between October 2010 and early 2015 the shares rallied in excess of 150% to $6.70. Since February 2015 (31 months ago) the shares have lost -42.5% in value.
Now the dividend promise has been reset, with one final jumbo payout of 15.5c on September 28, most shareholders will be asking the question whether a bottom is finally in sight?
Given the lure of that big final payout, and a general reluctance among retail investors to take a loss, no one is able to answer the question with great certainty until Telstra shares go ex-dividend on August 30th.
One shareholder, DNR Capital, believes the shares are likely to fall further than the upcoming 15.5c final dividend payout and has decided to sell all shares ahead of the event. DNR Capital's logic is based upon the observation that Telstra's historic dividend yield is 6%. After the 10%+ sell down post Telstra's new dividend policy announcement, the shares are still trading on a dividend yield (forward looking, 22c) of around 5.7%, so DNR Capital's concern seems justified.
But history is not necessarily the best guide. The market has been treating Telstra as a company cum dividend cut since 2015, which it might not do in the year ahead. Then again, bond yields might be rising later this year and next, and it appears there remains an unhealthy dose in uncertainties when it comes to operational dynamics and competition for telcos in Australia in general, and for Telstra in particular in the years ahead.
One important signal that should not be underestimated by investors and current shareholders is that Telstra's announcement last Thursday about the new payout of 22c in FY18 was that the number consisted of regular plus special dividends. Analysts rightfully picked up on this with views that once payments from the National Broadband Network (NBN) cease, this could open the door to Telstra only paying out regular dividends.
Already speculation has started about when the next dividend cut could be announced. In three years time, maybe? Could be as low as 16.5c.
The more optimistic analysts point out there certainly is room for upside surprise as well. There can still be a better-than-expected outcome from the planned securitisation of NBN receipts. There still is potential for an additional share buyback.
JP Morgan, which has been one of Telstra's most fervent and loyal supporters throughout the 2015-2017 de-rating, considers last week's -30% dividend cut a worst case scenario outcome. The company's intention to invest more of NBN receipts while paying less to shareholders does not instill JP Morgan analysts with a lot of confidence that all shall be alright in the end.
A special mention goes out to Morgan Stanley's view that telecom services should now be seen in the same light as newspapers and free-to-air TV operators a few years ago. The underlying suggestion is the potential for a lot more downside and uncertainty cannot be underestimated.
Maybe there is one way to find out where the "new" Telstra fits in, once that 15.5c disappears from today's share price.
On my assessment, 13 stocks of the ASX20 are trading as a "yield" stock, Telstra not included. Of these, three stocks are offering yields between 4.3%-4.8%. These are, in order of rising yield: Insurance Australia Group ((IAG)), Westfield ((WFD)) and Transurban ((TCL)).
The by far largest group of ASX20 members offers a yield between 5.1%-5.9%, ranging from Wesfarmers ((WES)) at the bottom of that range to Macquarie Group ((MQG)) and the Big Four banks, as well as Suncorp ((SUN)) and Scentre Group ((SCG)) further op the yield scale.
I am fairly confident Telstra will not be joining the first group. So the question becomes: group two or group three?
I am inclined to think Telstra will be put in the second group, towards the upper end of that range, close to Suncorp, AMP ((AMP)) and Westpac ((WBC)). This means DNR Capital's 6% target might prove pretty accurate. This, reports Morgan Stanley, is the average yield over the past five years.
Assuming 6%, it implies Telstra's share price might settle between $3.60-$3.70 after going ex-dividend next month.
This does imply there is likely more pain in store for loyal shareholders, though probably not enough to make them quit now and say goodbye to one last jumbo payout, plus franking, plus the ongoing promise of a market beating yield in the year(s) ahead.
It goes without saying that if the competitive environment deteriorates, or the Telstra board starts flagging the end of special payouts, further capital losses will follow.
All of the above leads me to repeat one of my favourite statements about investing in the sharemarket: investors cannot control their returns, but they can control the risk in their portfolio.
Rudi In The Australian Newspaper
My analysis about All-Weather Performers made it into the Wealth section of the Weekend Australian newspaper. Unfortunately, this also means it rests behind a paywall for non subscribers to the Australian. Interested readers can ask for a copy in PDF via firstname.lastname@example.org
Rudi On BoardRoomRadio
My interview on BoardRoomRadio last week also zoomed in on my research & analysis about All-Weather Performers, as well as my observation most investors use Price-Earnings (PE) ratios in the wrong manner:
AREITs In Top Form
Who would have thought? In a reporting season that was supposed to start with a positive bias, given the confession period had been so quiet, more prominent misses and many more share price falls have stolen the show over the past three weeks. And AREITs!
As shown on the graph below, the share price performance for most AREITs has been well above the tepid market average this month. As pointed out by Citi analysts, also responsible for the overview, the momentum lies with the non-retail AREITs.
The Gillette Factor In Health Insurance
I have written and spoken about this in the past, but there comes a point whereby further price increases for shaving gear turn into a negative as targeted men simply start growing more and longer beards. That Gillette-effect is becoming visible in private health insurance in Australia as well.
The short term trend appears to be for a favourable trend in industry claims, which should act to the benefit of listed health insurers nib Holdings ((NHF)) and Medibank Private ((MPL)). Meanwhile, younger people are not joining their parents and other "oldies" by taking up private health insurance. The June quarter of 2017 actually registered a decline in the number of Australian citizens insured for hospital care.
This is rapidly becoming a real headache for the industry and for the government in Canberra, of course, but what are the chances we might see a comprehensive policy response?
(Thanks to Shaw and Partners for the nice looking graph)
2016 – L'Année Extraordinaire
It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.
If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).
For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
All-Weather Model Portfolio
In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.
This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: email@example.com
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, Skype-link around 12pm
-Friday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors, 7pm inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton. Title of presentation: Investing In A Slow Growing World – An Update
(This story was written on Monday 21st August, 2017. 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: firstname.lastname@example.org or via the direct messaging system on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.
Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): http://www.fnarena.com/index2.cfm?type=dsp_signup