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Rudi’s View: A Supercycle In Dividends

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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 25 2021

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

In this week's Weekly Insights:

-February 2021: Banks Are Back!
-A Supercycle In Dividends
-Best Set Of Numbers In A Decade
-The Market Is A Duck Pond
-When Gold Meets Its Master
-Bond Yields Won't Rise Forever

By Rudi Filapek-Vandyck, Editor FNArena

February 2021: Banks Are Back!

In a reporting season that is about to beat all reporting seasons from the past ten years on important key metrics (see further below), the stand-out winners are Australian banks, showing investors the true meaning of "better-than-expected" with a glimpse of what old glory days used to be like.

The most remarkable achievement, probably, is that banks have become the main contributor to rising EPS growth forecasts in Australia, which is no mean feat considering the ongoing stronger-for-longer environment for the three large cap iron ore producers on the Australian stock exchange.

Banks and iron ore producers are at the forefront of what is characterising February 2021 for Australian investors: financial results that beat market estimates, forcing forecasts to rise further, and with a strong come-back for large cash dividends.

All of BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) have surprised with much larger dividend payouts than had been expected. If the iron ore price retains its stronger-for-longer momentum, there should be more of the same in August and again next year, though most analysts would assume dividends will still fall from this year's peak-payouts. These are commodity producers, after all.

No such holding back is prevalent when it comes to analysts' views on Australian banks this season. If anything, many see plenty of opportunity and ongoing upside risks. The faster economic recovery on top of government support programs, combined with rising bond yields and a widening beneficial spread between short-term and longer-dated government bonds is turning banks into the undisputed winners of February 2021. If analysts' forecasts are anything to go by, this sector revival has a lot further to go.

Not only are implied (forward looking) yields on bank shares already approaching levels similar to the good old days, with all three of the Majors outside of CommBank ((CBA)) now promising 5% or more (plus franking) on current share prices, analysts see excess cash and potential for special dividends on the horizon.

This truly is one remarkable come-back, if ever investors have witnessed one in Australia.

A Supercycle In Dividends

The best way to illustrate just how strong this February reporting season has been up to this point (Monday, 22nd) is through equity strategists at JPMorgan. Before February, Jason Steed and Emily Macpherson had been expecting a strong turnaround in earnings and dividend expectations.

On Monday, the duo exclaimed: "The reality, thus far, has exceeded our elevated expectations."

The team at JPMorgan is now predicting a Supercycle in Dividends is building on the ASX. Their favourite seven names to invest in this new supercycle are: Fortescue Metals, Charter Hall ((CHC)), Rio Tinto, Super Retail ((SUL)), BHP Group, ANZ Bank ((ANZ)), and National Australia Bank ((NAB)).

Note: all seven stocks have been selected with a three-year horizon in mind (also showing how bullish above-consensus forecasts are at JPMorgan).

Last year, Australian yield-seekers were extra hard hit as companies cut dividends more dramatically than the average fall in profits, but this year that trend is reversing and, thus far, the comeback in dividends on average is far greater than the big recovery in profits. Citi points out miners including OZ Minerals ((OZL)) and Newcrest Mining ((NCM)) and scrap collector Sims ((SGM)) equally delivered positive dividend surprises this month.

Best Set Of Numbers In A Decade

Two sentences stand out in analyst research reports this month: "better-than-expected" and "best results season of the past ten years". Macquarie has said it. JP Morgan has said it. And the numbers here at FNArena certainly back up that claim.

As of Monday, February 22, the FNArena Corporate Results Monitor covers 155 earnings results reported and, on our assessment, 57.4% (89 results) proved better-than-expected, which is well above average of around 33%. Equally important, only 17 companies (11%) disappointed through missing market forecasts which is well below the percentages of past seasons (varying between 19%-37%).

Target prices have thus far risen by an average of 6.15%. In aggregate, targets are up 7.01% since the start of the month. Both numbers are near the highest increases recorded since 2013 (when FNArena started recording these stats).

One clear divergence from past seasons is that the numbers for the ASX50 are no longer lagging the numbers for the ASX200, which also shows the strong come-back from the banks. Of the 31 companies in the Top50 who have reported so far, 64.5% (20 reports) delivered a "beat" against 12.9% (4 companies only) missing expectations. For the ASX200 the corresponding numbers are 60.4% (58) and 11.5% (11) respectively.

Or to put this in the simplest lingo possible: beating expectations and forcing analysts to lift forecasts and valuations is no longer the sole domain of small and midcap technology companies alongside healthcare and REITs. As a matter of fact: the opposite is happening in this February results season when the likes of Altium ((ALU)) and Appen ((APX)) have been showing vulnerability and weakness, while trustworthy quality stalwarts including ResMed ((RMD)), CSL ((CSL)), and the ASX ((ASX)) have been noticeably out of favour, regardless of their financial performance.

The latter is not completely true. It has been more a case of: if ResMed comes out with another strong result, investors merely shrug their shoulders, and move on. But in case of the ASX, it appears nothing was going to be good enough to stop the slide in the share price. The ASX share price has now lost in excess of -20% since September last year, and it is far from the only victim from the market's all-dominating switch in focus; away from covid-winners, towards covid-victims that stand to gain from this year's global recovery.

Viewed from this angle, corporate results from the first three weeks of the February reporting season can be used as justification for the switch in market momentum in favour of miners, energy producers, banks and other laggards and cyclicals. Though that would be too simplistic a statement to make. The prospect of re-opening economies, and reviving social habits, on the back of vaccine roll-outs this year means investors are happy to buy and wait for the eventual recovery to play out, not disheartened at all by any delays that occur in the meantime.

Price action in the likes of Webjet ((WEB)) and Corporate Travel Management ((CTD)) is the tell-all within today's context. It also once again shows that corporate performances are important, but expectations trump everything. February provides plenty of examples to back up that statement.

The main counter-argument to all of the above is that as of today, with only one more week left in this season, we are still only half-way through the total number of corporate reports for the month. I do think the current trends are too broad-based to reverse throughout the final week. In terms of combined market capitalisation for the companies that have already reported, we are well past the 50% and closer to the two-thirds mark (as also illustrated by 31 out of the Top50 companies having reported).

The Market Is A Duck Pond

The sharp rotation in a heavily polarised share market has turned the ASX into a duck pond. Viewed from the top, not much seems to be going on with the ASX200 meandering in between 6600 and 6900 with occasional a bit of heightened volatility because some hedge funds end up in trouble, but nothing much to upset the writers of tomorrow's headlines.

Underneath the surface, however, quite a different spectacle has opened up. I already mentioned the ASX. Shares in Magellan Financial ((MFG)) have lost around one third since peaking upon the release of FY20 financial performance numbers in August last year. CSL shares are no longer that far off from the depth of the temporary panic selling carnage that occurred in March last year. It seems but a distant memory, but Appen shares rallied to near $44 in August last year (they are more than -50% lower today).

These are but a very select few of examples. Those investors keeping cash on the sidelines in anticipation of that big share market correction that needs to happen eventually might be missing the point. On my observation, that share market correction is happening in the here and now, but we need to look below the surface to see the damage and where it is taking place.

As per always, this extremely bifurcated market behaviour can inflict a lot of pain and gut wrenching despair for holders of impacted shares, in particular since the share market overall seems to be trending upwards, creating quite a pronounced gap between this year's winners and laggards. The alternative view is, of course, that the market always does what the market does best, and that is exaggerating to the downside as much as it is likely exaggerating to the upside elsewhere.

In other words: opportunities are likely opening up for investors not necessarily looking to join today's obvious momentum trade. Many of last year's popular favourites are today trading at -12%, -16%, -20%, -25% below consensus price target. Sure, there might be a longer-lasting impact from the strong Aussie dollar and bond yields, they are on the rise, much quicker and steeper than most among us were anticipating only weeks ago, but many of today's victims are high quality, solid business models with ongoing profitable prospects.

Within this context, I note Longview Economics recently highlighted the fact US bond yields are approaching key technical resistance levels, probably indicating it is time for a pause and possibly a counter-trend move lower. Such a pause would provide a breather, if not more, for those prime victims that have seen quite the selling pressure descending upon them during the first two months of the new calendar year.

When Gold Meets Its Master

Talking about victims, has anyone else noticed those in favour of owning gold have gone really, really quiet of late. In fact, I hear more and more stories about your typical gold bug re-allocating money out of bullion and into crypto currencies.

Owning gold, and crypto currencies, is all about believing in the key narrative and in gold's case one of the narratives that gets repeated over and over again is that it protects against inflation, which, of course, is something it doesn't do, unless under the right circumstances.

Ultimately, gold's direction is dependent on what happens in the US bond market. Yes, I am as surprised as most of you that this is almost never mentioned by most experts when talking about gold as an investment, or portfolio security for that matter.

In the current context, when inflation adjusted bond yields are negative but they might rise into positive territory as global inflation expectations are picking up, gold is not your watertight protector against price erosion through inflation. In fact, as clearly shown on backward looking price charts, gold in USD has done exactly what happened to share prices of the ASX, Magellan Financial, CSL, etc and that's because they are all victims of the same source; rising bond yields.

Gold in USD peaked mid-last year above US$2000/oz and is now below US$1800, and in a visible down-trend. The reason as to why gold hasn't fallen more thus far is because it is also a direct beneficiary of a weakening US dollar, which offers some form of compensation.

The team of technical analysts at Citi last week informed their clientele that were gold to close below US$1765/oz it would create a set-up similar to that of April 2013 when the precious metal lost -US$200 of its value in the course of three trading days.

Historical parallels don't make for a guaranteed exact repeat, as we all should keep in mind. Regardless, I think the underlying sentiment remains correct: gold's movement in 2021 is much beholden to whatever happens with US Treasuries. For some reason, crypto currencies have managed to steal some of gold's narratives (alternative against floundering fiat currencies, protection against excessive money printing, etc) without the historical connection with real US bond yields.

No, I don't know what that means either. And I certainly cannot explain it (other than, maybe, old world relic versus new world promise, maybe).

For those wanting to know more: I wrote a whole chapter on gold in Who's Afraid Of The Big Bad Bear, available for all paid subscribers through Special Reports on the website.

Bond Yields Won't Rise Forever

As I have been writing since my very first 2021 market commentary in January, bond yields are the giant shadow lurking over asset markets this year. If they go up too high too rapidly equity markets will stumble, and possibly sell-off, but under a more mild scenario, which is what we've seen thus far, it'll trigger a de-rating for most of the winners from the past years.

As bond markets are as much dominated by algo-trading, technicals and momentum followers as any public market these days, it is unfortunately not possible to make watertight predictions about how exactly this year's scenario will unfold. But we've come a long way already with 10-year bond yields rising above 1.4% in Australia and the comparative yield in the US now above 1.3%.

Put a gun against any bond experts' head and he/she will probably say: "I think around 1.50% this year". (Assuming that's the question you wanted to ask?)

The underlying message here is: bond yields won't rise forever, and their projected move upwards won't even happen via an uninterrupted, straight line. Thus there will be bargains and opportunities along the way.

One such example, I believe, this month is presented through Charter Hall, whose share price has continued weakening ever since the start of the new calendar year. For good measure, Charter Hall is a diversified, extremely entrepreneurial and experienced property investor and developer, and there are weaker parts inside the group, but these should be more than compensated for through the booming parts, which includes the funds management and asset allocation.

These past two weeks or so the Charter Hall share price has literally weakened every single day. The price is now sitting on top of the simple 200 days moving average (for those who pay attention to these things). Of more importance, for how I look at the share market, the consensus price target is now more than 25% above the share price.

And that consensus price target is derived from freshly updated forecasts and valuations by analysts post a financial results release that not only beat market expectations, but also included an upgrade to full year guidance by company management that is by and large considered conservative by most analysts covering the company.

But the share price keeps falling every day.

It is this disconnect in a share market that is extremely focused on up-trending stocks, with no interest or attention to others, that has my personal attention this reporting season. Charter Hall is far from the only one whose performance and outlook are being ignored these days, but I am mentioning it because it has been included into the FNArena/Vested Equities All-Weather Model Portfolio, for the reasons mentioned.

A second reason is that I suspect the above mentioned strategists at JPMorgan made a mistake when they included Charter Hall in their list of most preferred dividend exposures for the upcoming three-year long supercycle. Looking into the finer details, I suspect they  mixed up Charter Hall with Charter Hall Retail REIT ((CQR)), which is related though not quite the same.

Charter Hall Retail REIT offers a much higher yield of 6.6% for the running financial year, projected to rise to 7.1% in FY22. Sounds more like supercycle dividend material to me, but hey, I am now back on board with Charter Hall and I think that's a keeper for the next three years too.

Previous updates on the February reporting season in Australia:

-Yet Another Short Selling Failure https://www.fnarena.com/index.php/2021/02/18/rudis-view-yet-another-short-selling-failure/
-A February Full Of Promise https://www.fnarena.com/index.php/2021/02/12/rudis-view-a-february-full-of-promise/
-February Feeding Market Optimism https://www.fnarena.com/index.php/2021/02/11/rudis-view-february-feeding-market-optimism/
-February – Reason For Optimism https://www.fnarena.com/index.php/2021/02/04/rudis-view-february-reason-for-optimism/

(This story was written on Monday 22nd February, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

(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: info@fnarena.com or via the direct messaging system on the website).

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– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
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– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
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