In the last couple of days, I have received a number of responses from clients and readers regarding our article ‘The golden age of banking is over’. Given the connection some investors have with banks shares this was to be expected and I’ll take some time in an attempt to... Show More
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If you’d held banking shares for the last 30 years, and those share prices and dividends had increased in most of those years with only a few hiccups, one can understand the sentimentality and attractiveness these names carry in the minds of investors. This, of course, doesn’t make that thought... Show More
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Overnight falls of 3.2% for the DOW (3.30% for S&P, 4.40% NASDAQ) are reminiscent of January-February 2018, and just like then it feels very unpleasant. However as always perspective is required when trying to ascertain whether this is a transitionary correction or the start of something more sinister. Show More
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Medical device manufacturer and distributor ResMed Inc delivered their full-year result today. We highlight our three key takeaways from the report, share our view on the stock and focus on something that we feel the market has underappreciated. Show More
The ASX 20 has been a consistent underperformer in recent years leading some to conclude that after persistent underperformance, a reversal is due to take place between the ‘big’ end of town, and the ‘smaller’ business that sit outside those largest 20 companies on the ASX. Show More
With over 2000 companies listed on the Australian Stock Exchange, it is impossible for an individual to be adequately across all the businesses in that investment universe. Therefore, the question is, how do investors identify which businesses to invest in? Show More
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So far 2018 has begun just as 2017 finished, with the established ‘more mature’ businesses, as categorised by the ASX top 20, underperforming their smaller cousins. Typically, these larger more mature businesses are synonymous with stable dividends and income, naturally luring those investors whose stage in the investment lifecycle preferences... Show More
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Gold is holding up despite an environment of rising bond yields that are traditionally a headwind for the metal. With this relationship breaking down, we look at what is supporting gold, and nominate our preferred exposures in the sector. Show More
To assist investors in navigating these increasingly uncertain times, we have tried to distill in this wire some of the key themes to emerge out of earnings season. We also nominate one of our top picks in the mid-cap education space with some of the key traits we believe investors... Show More
Thanks Jack. I'm not writing off the banks or pointing to their demise. As with all businesses it is possible to go on operating large and systemically important businesses without the share price necessarily going up. I'm just asserting that the conditions have changed and the likely outcome in my opinion is that it will be more challenging for the banks to thrive as they have in the past. If, and as they evolved into "different animals" our view might well change, but assuming they'll "work it out" because they're big and well resourced is fraught with danger.
Hi Elizabeth, you make a good observation. I feel the landscape for US banks and Australian banks differs at the moment. Although the US banks haven't shot the lights out over the last 12 mths the argument is they stand to benefit from rising US interest rates in that they will be able to use the change in rate cycle to increase margins. Given the small Aust. population and smaller deposit pool Aust. banks need to raise funds overseas. As such as rates increase in the US, the cost of funding moves higher and actually places downwards pressure on Aust. bank margins.
You touch on a number of good points Dino. It'll take some time to address but I'll try. I'm not suggesting banks share holders should go out today and sell all their banks. It's never a case of being all in, or all out. Banks could indeed rally from here, but we feel it's going to be difficult to recapture 5 year highs in this environment. People should speak to their adviser about tax implications etc. Instead my general advice would be to suggest that now is a good time to think about weightings to banks and expectations from those positions. Long term, with the exception of the NAB, the banks have delivered sustained capital income growth. Over the very long term some would argue that you can expect banks to continue to grow simply because of GDP growth and population growth. But I'd caution against assuming banks will only increase over time. You only have to look at European banks or US banks for evidence that is simply not the case. The question is will the rate of growth over the long term remain at a consistently high rate? And we don't think so. To your point on sustainable dividends. Dividend p/sh are ultimately a function earnings. Over the last 30 years earnings have grown rapidly enabling dividends p/sh to increase rapidly as well. We are now at a point where the earnings aren't growing as quickly, therefore dividends aren't growing as quickly either. I don't foresee dividends being cut in the near future, but its certainly a possibility (for some banks more than others) in the coming years if the recent trends in bank balance sheets continue and bad debts increase. Also worth pointing out is that the business models have changed. During the 90's and 00's banks vertically integrated and moved into higher ROE businesses. Generally speaking the media now views this as a bad thing, but at the time the economics and risk of those decisions made sense and the banks profited immensely from many of those decisions. Given the changed business models and greater profitability (and greater ROE) the market rewarded the Aust banks by re-rating them higher to trade on some of the highest P/E's in the world for banks. Due to the royal comm and higher capital requirements, among other things, the times have now changed and banks are returning to their roots which are inherently less risky but lower returning businesses. Therefore, Aust banks should arguably loose some of their P/E premium and arguably trade on multiples closer to there global peers. To answer your question, dividend growth rates (and share prices) and ROE are linked. In simplistic terms dividend growth can be estimated as follows: DivG = ROE x Payout Ratio In recent years some of the banks have been maintaining dividends essentially by increasing payout ratios to offset the falls in ROE. Naturally you cant raise payout ratios forever, and will need ROE to stabilise of rise. For those income focused there are diversified alternatives such some LIC's with lower price volatility then the banks, and growing dividends that are equal, if not higher than the banks.
You may well be right Ahmet, nevertheless many investors still hold portfolios with 50%+ exposure to banks so perhaps it's a message worth repeating.
Thanks for your comment Ahmet. I don't necessarily disagree with your view, as mentioned above; "Going forward, we don’t necessarily believe the bank share prices are going to fall off a cliff, instead, we feel the banks are most likely to continue oscillating within a range driven by changes in market and sector sentiment. We foresee a situation where the bulk of shareholder returns comes in the form of dividends rather than growth." However with a number of headwinds, and business models changing to more closely resemble building societies, I believe it will become more difficult for bank share prices to perform as many have become used to.
Thanks for the question Simon. I tend to agree with you that the withdrawal of QE is another headwind for markets. QE has widely been credited as having been a significant driver of asset price returns. Therefore, one can expect the withdrawal of QE to have an adverse impact on asset prices. Exactly how that plays out is difficult to predict however we would expect it to show up in fixed income markets. Naturally with central banks pulling back, or out, of many markets there will now be less demand for certain parts of the yield curve. This will likely contribute to the upward pressures we are already seeing in yields. In the end of the day it’s not one factor alone the causes asset prices to fluctuate, rather a series of things. Some of these factors will have a positive impact on prices (Earnings growth), others will have a negative impact (Withdrawal of QE). It’s the net result of these factors (i.e. positives outweigh negatives or Vice versa), that will determine whether the move is positive or negative.
Hi Adisen, Thanks for your comments. I would tend to agree with you. Dividends aren't of the greatest concern if that company is reinvesting earnings that then go onto earn a companies high ROE. However certain investors have different objectives. For instance retirees may require dividends for income. For those investors we feel they should focus on dividend streams that are growing overtime rather then the headline dividend yield.
Hi Parth, you are right that generally you don't want a high debt to equity ratio. In the article we discuss 'net gearing'. Net gearing is a similar and arguably a superior measure to the debt to equity ratio, as net gearing takes into consideration the cash on a company’s balance sheet. The calculation for net gearing is Debt - Cash / Equity. As you can see very it's similar to the debt to equity ratio.
Hi Shane, no doubt at this stage SHM hasn't turned out to be some of our best work. The filtering system isn't foolproof and we certainly will never get everything right. In fact we'll get a lot wrong. As mentioned in the article it can just help narrow the focus. Strictly speaking SHM didn't pass the filters as it didn't deliver 2 years consecutive Revenue growth. It met all other filters however. We were more drawn to SHM for its dividend yield characteristics and low valuation multiple, as well as what we feel are underappreciated growth prospects with the BBQ business.
Thanks Dean and Ben! Hopefully the information is of some assistance going forward.
Hi Phillip, you make some valid points. Based on long term track records it's hard to argue against WAM and WAX. When looking at LICs it is important to examine the composition of the underlying portfolios to determine whether the particular LIC satisfies what it is the investor is looking to achieve. WLE has over 40% of its FUM invested in ASX 20 businesses many of which retail investors would already own directly. Investing in the likes of WAM, WAX and CIE can allow investors to avoid duplicating existing positions and gain exposure to other parts of the market.
Hi Peter, thanks for your interest in the article. As pointed out by Ian the $0.016 represents a quarterly dividend payment. In recent years CIE has moved from paying half yearly to quarterly dividends.