20c in Melbourne and two big preliminary finals ahead.
I guess it must be Spring.
There was actually a lot to take away from the market this week, both in its behavior (and the lessons we should take from it), and the substance behind its move.
In truth, most of the market-drivers happened overseas (so I will reference them in the international remarks for a change this week), but on the whole I am tipping my glass from half empty to half full.
But ever so slowly.
In Australia, we are down a little over 2% this week – not unlike most global markets. The miners and banks have seen the worst of it, falling 5% and 3.5% respectively.
Within the mining sector, BHP (BHP) was the focus of most attention. There was two items of news that I think drew attention back to the very core of what BHP is as a share – first, the suggestion BHP would fund part of the dividend to UK shareholders in after-tax dollars (effectively squandering some Australian franking credits), and second, that it was considering a substantial ‘hybrid’ capital issue.
In turn – funding the UK dividend by way of Australian profits is not a huge deal for the stock, but does imply a modest tax inefficiency is set to arise.
I am not overly bothered by this, as its impact will be modest.
However, issuance of a multi-billion dollar hybrid does interest me. Not because a few billion dollars in hybrid capital is a big deal for BHP either, but simply because it again highlights in stark reality, that BHP (like Rio Tinto) is still a company with US$25bn in debt and one that with current commodity price forecasts will struggle to cover its current US$1.24 annual dividend from underlying cash-flow.
Assuming BHP maintains the dividend, it is currently on a dividend yield of 7.7%, a level many would see as very attractive.
However, since the share is now under $23, it is plain to see that the market is taking a rather negative view of the sustainability of this policy (and of future earnings), and is hence marking the stock back to a more appropriate level to discount for the increasing potential that the dividend is cut.
I for one expect the dividend to be maintained at least another year, and do in fact happen to think that BHP is becoming more interesting by the day.
But more importantly for BHP, and for other major stocks in the Australian market, this is a wonderful demonstration of our need to look beyond the headline figures and to follow sustainable cash-flow generation when making our investment decisions.
The banks frankly have been very similar in their behaviour.
Current dividend yields pushing 7% in each of ANZ (ANZ) and National Australia Bank (NAB) would have been snapped up a year ago, but the market has grown savvier in its understanding that what might be a neat dividend now, will actually be a dividend that doesn’t grow for the better part of 2-3 years.
Once again, equity is THE ‘growth’ asset, and if there is no growth, then unquestionably we should demand a lower valuation in the here and now to offset the absence of growth.
Interestingly, Woolworths (WOW) is a stock that we have been giving recent consideration too, but similarly suffers the same question-mark for us on future earnings potential.
Our struggle in determining where and when to BUY WOW is simply because we are undecided on how hard WOW super-market earnings could be hit as it re-bases its inflated margin, and how long it will take to see a re-emergence of earnings growth.
It’s very easy to go through the WOW earnings numbers and to rip out the Big W and Masters franchises and ‘hey presto’, WOW becomes a cheap turnaround story. And whilst I am minded to thinking that, I still have this nervousness that I could still be waiting until 2018 before WOW sees earnings growth on the 2015 year.
So a snapshot of WOW would be to say it’s on 14x and a 5.5% yield now, but is that so great if it’s on the same figure in 2018?
Hmm. Makes for a tough decision doesn’t it.
Westpac (WBC) report full-year results on November the 2nd and seem a lock to raise upwards of $3bn in equity capital.
That is merely a month away, and as we learned from the Commonwealth Bank (CBA) and ANZ (ANZ) raisings, these numbers are not to be sniffed at.
RESMED (RMD) kicked into gear for us again this week, rising 5% against the falling tape. A broker upgrade to BUY was the key driver for the performance, and one we are genuinely thankful for.
RMD has been an amazing performer for us this past 12 months, but has pulled back 20% from its lofty heights near $10 after a surprise (and disappointing) trial result in a non-core product.
We fully expect a re-ignition in performance from RMD given strong product momentum in flow-generation devices, excellent margin potential from the weaker AUD, and an increasingly sound valuation of 17-18x P/E ex-cash.
Go on son!
To round out the Australian comment for the week, no doubt many of you would have seen the kick in weekly consumer confidence numbers following the change in Prime Minister. It was the biggest weekly jump on record (albeit the data series isn’t the longest), and will be interesting to see how sustained it is.
Have a wonderful Spring weekend wherever in the country you are.
Good luck to your football team if they are playing – even if they happen to be the Eagles or Dockers, many of whose supporters I saw last week in Perth (NB I think the only cockier supporters than my Hawks right now are the Eagles fans who were positively frothing when I saw many of them!).
Key Dates: Australian Companies
Mon 28th Sep
Div Pay Date: Origin (ORG), Medibank (MPL)
Tue 29th Sep
Dividend Pay Date: BHP (BHP), Oil Search (OSH)
Ex-dividend: IOOF Holdings (IFL)
Wed 30th Sep
AGM: AGL Energy (AGL), ASX (ASX)
Dividend Pay Date: Challenger (CGF), SANTOS (STO), Wesfarmers (WES), Worley (WOR)
Thu 1st Oct
Dividend Pay Date: Cochlear (COH), Commonwealth Bank (CBA)
Fri 2nd Oct
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