The search for income is becoming increasingly important for investors in a low interest rate world, as bonds become low-yielding and more expensive.
Kate Howitt, Australian equities portfolio manager for Fidelity says that advisers should be telling their clients to look to Australian equities for this income, because from a yield point of view they are still not “terribly over-valued”.
At the Fidelity adviser briefing last week, Howitt produced a graph that showed the high-yielding sector of the Australian market was still yielding 6% and not looking particularly expensive. She said Telstra was a great example of a typical high-yielding stock in the Australian market.
Telstra’s depreciation has been significantly lower than it’s Capex, and in many areas its cashflow has been higher than its profits. The company does not have to make large capital expenditure investments to generate growth; it’s harvesting its cash, and there is plenty of cash to cover its dividend.
“The cashflow that Telstra provides is typical of the very high-yielding stocks in our market,” said Howitt. “It’s not just that the stocks are dirt cheap, they have strong yields because they have strong businesses throwing off a lot of cash and then we get to take advantage of the franking regime. So we’ve got 6% yield that’s tax free.”
Amit Lodha, portfolio manager at Fidelity, agreed that the franking regime was a point for Australia on the scoreboard, but that the difference when looking at global equities was in the analysis. He said it was important that investors asked themselves these questions:
Where is that yield coming from – cashflow or capex? Is it coming from future growth? Is it coming from capital? Is that company reinvesting enough to sustain itself over a period of time? Is the yield coming from a company that has leveraged itself 20 times, like a bank?
Lodha said that as an investor, he was looking for a good fundamental story: “A company which can continue to increase yield over a period of time. A company which can continue to have cashflow growth, continue to pay me that yield out of cashflow returns not out of capex – not out of taking it away from future growth.”
He cited a bank listed in Europe, which provides him with a 7½ - 8% yield, without any risk to capital. He said it was in a knowledge-based economy, so it would continue to grow over a period of time, and that the payout ratio was 75% so the yield is safe.
“When you look at yield from a global perspective you’ve got a lot more ideas out there with very sound fundamentals, without you having to worry about that sustainability of the yield – which is a very important question to ask when you look at the yield.”
Lodha also looked at:
Johnson & Johnson (3.2%)
SK Telecom (5.3%)
At the end of the debate, audience members voted on whether Australian or global equities were best placed in the search for income, and it was a landslide 93% for Austrlia.
Do you think the audience got it right?