Rudi’s View: Banks, Central Banks, Inflation & Debt

rudi-views
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 | Jul 26 2019

Dear time-poor readerPart Two contains an interesting piece of research on Australian banks, and further zooms in on the threats and risks from super-accommodative central banks' policies and the ever rising mountain of global debt; and why there still is no inflation danger.

In this week's Weekly Insights (published in two parts):

-Corporate Earnings Still Matter In 2019
-Dividends, Quality And Australian Banks
-Central Banks' Policies Not Without Risks
-Charts: Mind The Output Gap, And Global Debt

-Rudi Talks
-Rudi On Tour
-Rudi Talks

By Rudi Filapek-Vandyck, Editor FNArena

Dividends, Quality And Australian Banks

With the August reporting season approaching fast, I thought it worthwhile to reference one particular piece of research released last year by banking analysts Brian Johnson, Christopher Kightley and Ed Henning at CLSA.

The three conducted detailed historical share price performance data and found there is quite the difference as to how long it takes for the Major Banks in Australia to see their share prices recover after having paid out dividends to shareholders.

For some among you, no doubt, this will be useful information when setting up specific, timing-based dividend stripping strategies. For others, it is yet another piece of evidence that corporate quality does show up, as long as investors are looking into the right direction.

As it turns out, CommBank ((CBA)) shares tend to require significantly less time to recoup the loss in dividend. CLSA's research stretched back 53 dividend payments up until August last year and their calculation is that CommBank shares require about 44 days on average to fully compensate for going ex-dividend following the release of interim and full year corporate profit results.

The difference? Westpac ((WBC)) shares require an average of 87 days. For ANZ Bank ((ANZ)) shares the average duration is 91 days and National Australia Bank ((NAB)) needs 92 days. The research did not include any of the regionals, but my gut feel tells me they won't do this quicker than CommBank or even Westpac.

Also, the gap between CommBank shares and the first runner up -Westpac- is nearly double in time. This makes one wonder: why such a big difference?

One explanation could be that CommBank shares virtually always trade at a premium versus the rest of the pack, and this means less needs to be compensated for, in terms of percentage loss from going ex-dividend. This would also explain why Westpac comes second, and why NAB sits at its familiar sector-last position.

But the gap between CommBank and the others is way too large to simply blame the market leader's valuation premium. CLSA saw a correlation with the tighter-than-peer share register for CommBank. Shareholders consist mostly of retail investors, and they don't necessarily sell upon receiving dividends, suggest the analysts.

In other words: it's the institutional investors that are to blame. They are structurally underweight the sector leader. I would wager this might also be the case because analysts tend to feel attracted to the "cheaper" alternatives, which, as my own data research taught me over the many years past, does not translate into the better investment returns.

The irony of the local banking sector is that, over time, CommBank shares significantly outperform the three other Majors, and this runs contrary to the general belief that "valuation" and a "cheaper entry point" are sacrosanct for achieving superior long term returns.

National Australia Bank shares have looked the "cheapest" ever since the in-house currency scandal from around 18 years ago. The shares pay out the highest yield. NAB shares are most often recommended as a Buy/Outperform for these reasons.

But apart from a temporary catch-up rally here and there, NAB shares have proved the perennial underperformer in the sector and CLSA's research into the duration of loss of dividend compensation in banking share prices again confirmed the NAB as the least desirable exposure to the sector.


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