Sometimes trying to pick the eyes out of sectors rather than individual stocks can be a low-risk and profitable exercise. Last month we looked at the seasonality of the banking sector since the 45-day holding period for franking was introduced in 1997. Research by the Veritas Securities analyst Andrew McCauley revealed that it is most beneficial to own Australia's big four banks in the months of March, April and October. Investors buy into the banks so they qualify for franking when three of the big four banks go ex dividend in late May or early June and again in November.
The data shows the banking sector has, on average, risen 5.3 per cent in the consecutive months of March and April since 1997. In October the sector has another spurt, jumping on average 3.74 per cent. These three months have made up the entire yearly gains for the sector over the past 15 years. Obviously, the sector is like a magnet for investors hooked on large fully franked dividends. Interestingly, CBA gets dragged along for the ride even though it goes ex dividend three months earlier.
As we approach the end of April, the 2012 performance has mirrored previous years. ANZ has risen 8.1 per cent since the beginning of March while NAB is up 6.4 per cent and Westpac is 7.5 per cent higher. Once again CBA has also been carried along for the ride firming 6.2 per cent, once you include its dividend payment made during the period. This compares to a meagre gain of 1.8 per cent over March and April for the broader market, measured by the All Ordinaries Accumulation Index.
So should we sell out of the banks and leave the dividends for someone else? Since 1997 the sector has declined 0.52 per cent in May and 0.44 per cent in June. If you do not need franking it is probably worth parking your money elsewhere until some time late in September. Alternatively, those investors such as superannuation funds may want to stick with the banks and pick up three fully franked dividends over the next 13 months. This will deliver a 10.5 per cent yield, which grosses up to about 14 per cent once franking is taken into account. Hopefully, there will be a capital gain over the period as well. This later scenario is boosted by the prospect of lower official interest rates in coming months.
Staying with the banking sector, the joyous months of March and April have not been so kind to the smaller regional banks this year. Suncorp Group, Bendigo & Adelaide Bank and Bank of Queensland have flatlined once dividends are taken into account. The minnows of the market - Wide Bay Australia and MyState - have actually dropped 5 per cent and 7 per cent respectively. Most of these stocks go ex dividend in March or April and are in a different dividend cycle to Westpac, ANZ and NAB.
The market has decided to shun these businesses even though they yield fully franked dividends between 6 and 9 per cent. With system lending growth in the low single digits and funding costs edging higher, investors are concerned their capital is at risk in smaller lending organisations. This is a genuine fear given the increasingly tough environment.
At some stage though these types of dividend yields will become appealing, especially if official interest rates are cut, providing a catalyst for investors. Lower interest rates generally make stocks more attractive and it will take pressure off banks to offer high term deposits to attract funding.
Last week I wrote up the prospects of the minnow Vision Eye Institute. The day it was published the company went into a trading halt pending a decision by the Department of Health and Ageing regarding classification and funding for intravitreal injections. This seemed like a deathblow for the stock. Two trading days later the company announced a decision by the department had been reversed regarding funding issues and a more suitable outcome was being sorted out. In other words the company had dodged a bullet. The stock re-opened and is trading at 29? a share.
There are a couple of lessons from this. Firstly, investors, including me, should be thoroughly across the regulatory risk a company may face. A change in policy by a government or a regulatory body can be fatal to a stock. And we can never assume all the critical information about a stock is in the public domain. VEI now has two major hurdles - regulatory and rolling its debt over by September. If these are resolved the company could be worth significantly more than its present share price. The best entry into the stock may be if the company decides to raise fresh equity.
The Sydney Morning Herald accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.