Direct Equities - Best Ideas for Retiree Portfolios

Transcription

1 Direct Equities - Best Ideas for Retiree Portfolios Mathew Hodge, CFA, Senior Resources Analyst, Morningstar Australasia David Ellis, CPA, Senior Equity Analyst Banks, Insurance and Diversified Financials, Morningstar Australasia Brian Han, Senior Equity Analyst, Morningstar Australasia Moderator: Carolyn Holmes, CPA, Director of Equity Research, Morningstar Australasia 2016 Morningstar, Inc. All rights reserved.

2 Important Information Any Morningstar ratings/recommendations contained in this presentation are based on the full research report available from Morningstar or your adviser. Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. No part of this document may be reproduced or distributed in any form without the prior written consent of Morningstar. Any general advice or class service have been prepared by Morningstar Australasia Pty Ltd (ABN: , AFSL: ) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN ("ASXO"). 2

3 Chasing dividend growth and dividend yield stocks is not without risk Today we will discuss the outlook for dividends in the Australian market and weigh up the risks 3

4 Setting the scene : We remain in unchartered territory g 10 year Aussie bond yields have declined over the last 5 years from 5.5% to 2.3%. (15 year historic average is 4.9%). g Lower bond yields have driven much of the more recent expansion in P/E ratios. g Over the last 5 years the 1 year forward ASX 200 market P/E ratio has expanded from 12.5x to 16.4x (15 year historic average is 14.1x). g Dividend Yield to 10 year Bond yield gap currently +2.4% (15 year average is -0.6% and 30 year is -2.9%) Source : Morningstar estimates, Thomson Reuters 4

5 Setting the scene : Correlation of 10 year bond yield to ASX 200 accumulation index Australian 10 year bond yield over the last 5 years has declined from 5.5% to 2.3% (15 year historic average 4.9%). Australian 10 year government bond yield (lhs) ASX 200 accumulation index (rhs) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 60,000 50,000 40,000 30,000 20,000 10, /01/2007 1/07/2007 1/01/2008 1/07/2008 1/01/2009 1/07/2009 1/01/2010 1/07/2010 1/01/2011 1/07/2011 1/01/2012 1/07/2012 1/01/2013 1/07/2013 1/01/2014 1/07/2014 1/01/2015 1/07/2015 1/01/2016 Data as of 6 May Source: Morningstar estimates and Thomson Reuters 5

6 Setting the scene : The Price/Earnings Ratio is tracking above its long run average Over the last 5 years the 1 year forward market P/E has expanded from 12.5x to 16.4x (15 year average 14.1x) One year forward estimated Price/Earnings ratio 15 year average 19x 17x 15x 13x 11x 9x 7x Data as of 6 May Source: Morningstar estimates and Thomson Reuters 6 1/05/2001 1/02/2002 1/11/2002 1/08/2003 1/05/2004 1/02/2005 1/11/2005 1/08/2006 1/05/2007 1/02/2008 1/11/2008 1/08/2009 1/05/2010 1/02/2011 1/11/2011 1/08/2012 1/05/2013 1/02/2014 1/11/2014 1/08/2015 1/05/2016

7 Setting the scene: Yield gap remains in unchartered territory ASX year forward Dividend Yield minus 10-year Australian Government Bond Yield now at +2.4% (15 year average -0.56% and 30 year is -2.9%!!) ASX 200 one year forward dividend yield - Australian 10 year government bond yield historical average 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% 05/ / / / / / / / / / / / / / / / / / / / /2016 Data as of 6 May 2016 Source: Morningstar estimates and Thomson Reuters 7

8 Where to look for dividend yield and what to look for Key Thematic : Interest rates to stay low for longer but for how long???? g The so called safe Utility type stocks have seen a significant price appreciation which has not necessarily been reflective of strong dividend growth. g Many of the current prices are only justified in the current low bond/interest rate environment and hence there is a real risk that share prices decline across the board once interest rates rise a consideration for retiree funds g So What we recommend you look for : Strong expected dividend growth Attractive forecast dividend yield and franking Current price / fair value Sustainable DPS/EPS payout ratios (cognisant of risk to payouts) Balance sheet risk (be aware of the risk to dividends if/when rates eventually rise) Morningstar moat rating (note that even stocks with moats can be overpriced) 8

9 Significant expansion in multiples since 2010 for utility type stocks Arguably the expansion in some multiples was driven by the lower discount rate than underlying growth in cash-flows Stock Sector DY 2010 DY 2017F EV/EBITDA 2010 (1 Yr forward) EV/EBITDA 2017F Hist 5 Yr DPS CAGR Sydney Airport Infrastructure 7.0% 4.1% 13.8x 20.8x 4.0% Transurban Infrastructure 4.7% 3.8% 18.6x 22.0x 10.8% Telstra Telco 8.2% 5.7% 5.5x 7.4x 1.7% APA Utility 9.7% 4.9% 10.0x 13.5x 3.5% AGL Utility 4.2% 4.0% 8.5x 8.7x 1.6% Spark Utility 9.7% 5.8% 7.7x 11.5x -2.2% Duet Utility 11.1% 8.0% 9.4x 11.7x -2.6% Ausnet Utility 8.7% 5.4% 8.1x 12.8x 0.9% Charter Hall Retail REIT 9.6% 6.1% 6.4x 12.4x 0.7% Dexus REIT 8.7% 5.1% 8.5x 12.7x -1.3% GPT REIT 7.8% 4.7% 10.3x 13.2x 6.0% Investor Office REIT 8.2% 4.8% 11.9x 17.9x 4.2% Data as of 9 May 2016 Source: Morningstar estimates 9

10 How do the sectors stack up on forecast dividend growth and dividend yield.. Rankings by forecast 2017 dividend yields - Hard to look past the Banks, Insurance and Telstra Data as of 9 May 2016 Source: Morningstar estimates 10 Forecast Yr DPS CAGR Rank Sector Gross Dividend Yield Net Dividend Yield ( ) 1 Banks 9.5% 6.6% 2.9% 2 Telcos (Telstra) 8.2% 5.8% 1.9% 3 Insurance 7.4% 5.3% 8.5% 4 Media / Leisure 7.1% 5.8% 6.1% 5 Diversified Financials 6.5% 4.6% 7.9% 6 Utilities 5.9% 5.3% 3.6% 7 Retail / Food & Bev 5.6% 4.4% 4.6% 8 Technology 5.5% 3.8% 10.4% 9 REITs 5.3% 5.2% 2.5% ASX 200 market 5.2% 4.1% 5.8% 10 Gaming 5.1% 3.9% 8.1% 11 Bldg materials/ industrials 5.0% 3.8% 7.6% 12 Transport 4.6% 3.9% 3.2% 13 Infrastructure 4.3% 4.2% 10.2% 14 Oil & Gas / Mining services 3.4% 2.7% 0.6% 15 Health Care 3.4% 2.7% 10.5% 16 Metals & Mining 2.6% 2.0% 0.2%

11 Morningstar Equity Research Methodology Our methodology revolves around fundamental analysis with a focus on economic moats and DCF based valuations. Five stars / BUY = significantly undervalued One star / SELL = significantly overvalued 11

12 Morningstar Economic Moat Rating Sustainable competitive advantages that allow a company to generate positive economic profits for the benefit of its owners over an extended period of time. Wide 8 in Aust Narrow 81 None Moat Sources Intangible Assets Switching Costs Network Effect Cost Advantage Efficient Scale 12

13 Morningstar Equity Research Measuring an Economic Moat Duration of excess returns is far more important than absolute magnitude. A sustainable competitive advantage drives shareholder value creation. Return on Invested Capital (ROIC) No Moat Narrow Moat Wide Moat Time Horizon: 10 Years 20 Years Weighted Average Cost of Capital 13

14 Banks, Insurance and Telstra what are the risks? Payout ratios look comfortable but dividends will be influenced by factors bad debts, cost of debt etc Moats reflect the competitive position and are only one consideration even moat companies can be overvalued Data as of 9 May 2016 Source: Morningstar estimates 14 % changes to FY17F DPS for a Gross DY FY17F Morningstar moat Price/Fair value DPS/EPS FY15 payout a 6-7ppt reduction in DPS payout ratio Bad debts increase by 3x FY15 NAB 9.9% wide % -9.9% -15.6% Bendigo 9.8% none % -5.6% -7.7% BOQ 9.7% none % -7.3% -23.0% ANZ 9.2% wide % -8.8% -12.7% WBC 8.9% wide % -6.8% -7.8% CBA 8.2% wide % -6.5% -9.4% Claims increase 3-4% QBE 7.2% narrow % -9.9% -18.8% Suncorp 7.8% none % -7.5% -12.7% AMP 7.5% narrow % -10.3% -9.4% IAG 7.4% none % -6.2% -21.6% Medibank 4.7% narrow % -9.0% -22.9% NIB 4.6% narrow % -8.4% -20.0% FY15A EBIT/Interest cover 1% change in cost of debt Telstra 8.2% narrow % 9.8x -4%

15 What about the high dividend growth companies what are the risks? Some of the high dividend growth companies are highly geared herein lies the risk when rates rise Moats reflect the competitive position and are only one consideration even moat companies can be overvalued Data as of 9 May 2016 Source: Morningstar estimates 15 5 Yr DPS CAGR Morningstar moat Price/Fair Value DPS/EPS payout Note Interest Cover (EBIT) FY15A 1% increase in cost of debt ( F) to FY17F DPS Sydney Airport 10.5% narrow % DPS/GCF (pre capex) 2.3 (EBITDA cover) -10.0% Transurban 10.0% narrow % DPS/GCF 2.0 (EBITDA cover) -12.6% Cochlear 15.5% narrow % % CSL 13.1% narrow % % Ramsay 11.4% narrow % % Sonic 11.8% narrow % % Resmed 10.6% narrow % 28.3 (adj for acquisition) -0.9% Healthscope 10.5% narrow % % MYOB 27.3% narrow % Pre amortisation % Flight Centre 11.6% none % (net cash) n/a isentia 11.7% narrow % % REA Group 18.5% narrow % (net cash) n/a G8 Education 11.3% none % % SEEK 10.4% none % % Technology One 12.8% narrow % (net cash) n/a

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