Franking sense brings hope of gold and myrrh

When potential yield is the key to your strategy, Telstra represents a unique trading opportunity.

When potential yield is the key to your strategy, Telstra represents a unique trading opportunity.

TELSTRA CORP

THE hunger for yield by Australian investors is almost unprecedented. We only have to look at the speed at which the listed debt issues by large Australian companies were snapped up by retail investors last month.

Leading the charge on the yield front is telecommunications group Telstra. In many ways Telstra is like a listed bond with the majority of investors ignoring the growth potential of the company, opting instead to concentrate solely on the yield. This psychology has created a unique trading opportunity.

Telstra is committed to paying a fully franked 14? a share dividend every six months, which equates to an annualised grossed-up yield of about 11 per cent. It pays this about the same time, with the stock going ex-dividend around February 20 and August 20.

Many superannuation funds, keen to garner franking, tend to buy the stock when the dividend is announced. They hold the shares for 45 days, the minimum to qualify for franking, and then sell them. Generally, those same investors can collect the dividend and the attached franking, while booking a capital gains tax loss as the stock drops after going ex-dividend.

This affects the share price of Telstra. In the lead-up to the shares going ex-dividend, the price tends to rise. On June 24 last year, Telstra's share price closed at $2.94. In a very tough equity market, the stock rose to $3.16 over the next eight weeks.

This is a gain of about 7.5 per cent, or 50 per cent annualised. The stock then went ex-dividend, which caused it to slide back to $2.97. A similar event unfolded before the latest dividend that went ex on February 22.

If you can be certain Telstra will maintain its dividend and pay about the same time each six months, it is worth buying the stock in mid-June and then again in mid-November to take advantage of all the buyers keen to grab the dividend. The key, however, is then to sell in the last few days before it goes ex-dividend.

GALE PACIFIC

ONE turnaround that seems to have traction is screening and shade products maker Gale Pacific. Gale has suffered a wretched time since listing about a decade ago, hitting a high of $2.50 in early 2004 only to plummet to a low of just 4? in February 2009. The stock has climbed off the deck and now trades at 25? a share, with a market capitalisation of $75 million. It has net debt of only $4.4 million.

The business has undergone a big overhaul under chief executive Peter McDonald, who has managed to reduce gearing and expand the business to a profitable global operation.

In the first half of the 2012 financial year the company posted an 18 per cent jump in revenue and a 14 per cent lift in net profit to $4.1 million. The company is forecasting a similar result in the second half, which puts the stock on a price-earnings multiple of about nine times. This is not that exciting for a small company in this market.

What is exciting is the dramatic reduction in capital expenditure, which disguises the free cash flow and real profitability of the business. Capex is expected to stay low into the foreseeable future. On an operating cash-flow multiple, the business is trading on a much lower multiple of 6.8 times. In addition, the business has achieved this with the burden of a high dollar.

A lower dollar to boost the profitability of its export sales and future cost savings from integration into next yea make this a very interesting story that could see the stock travel towards 40? a share.

BANK OF QUEENSLAND

THE arrival of a new CEO and more recently a CFO at the Bank of Queensland could be a catalyst for the stock to perform better. The share price has slid nearly 30 per cent in the past 11 months and there are very few people keen to buy the regional bank whose cost of funding is increasingly uncompetitive to the big banks. A similar scenario has unfolded for its southern neighbour, Bendigo and Adelaide Bank.

It would not be surprising if BOQ follows Bendigo and looks to raise fresh equity as it seeks to diversify its loan book towards leasing. A new management team might find it the right time to tap the market and shore up the future.

With a market capitalisation of $1.6 billion, anything above $300 million would probably require a rights issue as opposed to the combination of a placement and share-purchase plan. It might be worthwhile waiting to see what the company announces at its profit result next month.

The Age accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. Ex-fund manager Matthew Kidman is a director of WAM Capital.

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