Has yield craze run its course?

Forge Engineering was belted last week for failing to hand out a massive dividend. Today it was rewarded for not doing so.

Has the yield obsession begun to wane as investors look for growth?

The just completed reporting season bore witness to legions of companies prepared to pay out a greater proportion of earnings just to keep investors onside, with some lifting dividends and payout ratios to dangerous levels even as earnings fell.

Those that refused to lift the payout incurred the instant wrath of speculators banking on higher or special dividends.

One of the best examples was Forge Engineering which was belted last week for merely keeping its dividend steady, despite a result that beat earnings expectations on revenue and that included a 28% lift in profit.

On Thursday, the result was greeted by a 9.9% fall in the Forge share price to $4.74.

This morning, after announcing that it had won a $1.47 billion contract on the construction of the Roy Hill mine, the company had more than recovered all its lost ground, rising 6% to $5.60.

The Roy Hill contract, in partnership with Duro Felguera, is expected to begin in December depending on Roy Hill finalising its financing arrangements and will involve the construction of, among other infrastructure, a 55 million tonnes per annum iron ore processing plant.

With Forge expected to earn around $830 million from the contract, investors clearly have forgiven Forge for its dividend transgression and rewarded it for its growth prospects.

Forge clearly decided it was best to conserve capital to help fund the expenditure required in the construction rather than bow to the fickle whims of the investment community.

Forge is part of the Uncapped 100.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles