Buy Hold Sell

With the cash rate at just 1.0% and Westpac calling 0.5% by February, income stocks are firmly back on the menu. So, this week we scanned the market for outsized dividends. The average gross yield on this diverse cluster is a healthy 8%.

Big yields can of course signal the risk of capital erosion; the infamous ‘dividend trap’, and prices on these stocks are on average down by over 8% in the last 12 months. So, what’s on offer from this group? Will it be a free lunch, or will it be food poisoning? 

Find out as Ben Clark from TMS Capital hosts Vince Pezzullo from Perpetual and Adam Alexander from Evans & Partners in the latest episode of Buy Hold Sell.

 

Transcript

Ben Clark:
Welcome to Buy, Hold, Sell. I'm Ben Clark and joining me today, we've got Adam Alexander from Evans and Partners and Vince Pezzullo from Perpetual and we are going to be looking at some big stocks, paying some big yields. The Australian 10-year government bond yield has hit 1.4%. The term TINA is being thrown around everywhere again and the bond proxies are flying. So you've got to look somewhere a bit different for some good income on offer. Vince, start with you, Harvey Norman, it's flying this year. It's up strongly. Buy, hold or sell?

Vince Pezzullo:
A hold at this stage, doing okay. But I think the consumer weakness would persist.

Ben Clark:
Okay. Adam, Jerry's got the shorters off his back for the moment anyway. Buy, hold or sell?

Adam Alexander.:
Yeah. Now, I'll put them back on. Sell. We think it's had a good run. Consumer starting to roll over and you've got Amazon always mounting a campaign in the background.

Ben Clark:
Okay. And then onto Star, which is on a 6% fully frank trailing yield, but did downgrade recently. Buy, hold, or sell?

Adam Alexander:
I think post downgrade, buy, it's come back. You know the numbers now look okay. And I think probably the negatives are too priced in. We might get a surprise in the next six months.

Ben Clark:
Okay. Vince, is the yield sustainable? Buy, hold or sell.

Vince Pezzullo:
Yep. Pay out ratio is reasonable, a buy for us. A $50 million cost out, the flag should soften some of the blow of a weaker consumer.

Ben Clark:
Okay. And Challenger, it's another one that's guilty of an earnings downgrade recently. But they did say they'll maintain the dividend. Is this one a buy, hold, sell?

Vince Pezzullo:
Sell for us. NTA is about $4.80. There's still issues regarding productivity report regarding annuity. So I think there's still risk out there for it.

Ben Clark:
Okay. Adam? Different view on Challenger? They've been hurt by the low bond yields. Do you think the yield's enticing enough?

Adam Alexander:
Yeah, not too different, we're a hold. I think it's just the wrong time in the cycle for that one. Very hard to sell annuities with interest rates where they are and hard to see a catalyst to get that one moving.

Ben Clark:
Okay. And Boral. Now this one, a business that has got a lot of moving parts under the hood, but a 5% fully franked dividend yield again, buy, hold or sell?

Adam Alexander:
We're sell. A bit worried about this one. Think the construction cycle's going against them and they've got some issues around the Asian plasterboard joint venture. We don't know how that's going to play out. Too much uncertainty to back that yield. So sell.

Ben Clark:
Okay. Vince? Pretty divisive stock, this one. Buy, hold or sell.

Vince Pezzullo:
Hold for us. Still on its lows, a bit of the bad news is priced in, but the entry point for us is a bit lower, to take out some of the risks.

Ben Clark:
Okay. And let's go to one of the behemoths, the big income payers NAB, which was the first of the big four to cut its dividend. But it looks potentially more sustainable now. Is it worth buying it?

Vince Pezzullo:
NAB is a buy. New CEO coming along. Is there another reset coming? Possibly, but I think the RBAs intending to take the fat tail risk of a credit cycle.

Ben Clark:
Okay. Adam, anything to add? What do you reckon? Buy, hold or sell?

Adam Alexander:
We're a hold on one just because of the new CEO. A new CEO coming in just could reset the earnings, reset the business. So until that happens, we'll hold.

Ben Clark:
Okay, well look, there's still some good income opportunities out there, but you might need to get a bit outside your comfort zone.



Comments

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Kieran O'Shea

Regarding Crown, this aged well! I love Adam's comment, "We might get a surprise in the next six months." Yep...