In the chase for yield big banks and telcos emerge as favourites
"You'd probably choose both, if you were looking for income," ATI Investment's Head of Research David Liu, said.
The response says a lot about the current environment. There is a lack of conviction and confidence among some fund managers about the earnings profile of resource stocks.
There is uncertainty about the future direction of commodity prices and, about the demand profile of China and the political environment in Australia.
Even though mining giants such as BHP Billiton and Rio Tinto have higher valuations than in the past, relative to the big banks and Telstra, investors' "marginal dollar" still goes to banks and telecoms. That's because they are considered a safe trade and are seen as having an earnings profile that can sustain the yield of the companies, Mr Liu said.
Citigroup banking analyst Craig Williams wrote this week that bank dividend yields would continue to attract investors while alternative investments provided "significantly lower returns" and the earnings and dividend outlook for the sector remained solid near term.
"All we can say is buy ANZ, Commonwealth Bank and Westpac today!" he said. This was on the same day that ANZ Bank shares surged to a record high, inspiring a sector-wide rally, after it vowed to give shareholders a bigger slice of future profits and increased its dividends by a bigger than expected 11 per cent to 73 cents a share. And on Friday, Westpac announced a fully franked dividend of 86 cents a share, up 4 cents on the same half last year. It came after a 10 per cent boost in half year profits to $3.53 billion.
But Telstra has also performed strongly, breaking through the $5 barrier this week, in a five-year high.
It is also one of the best-performing blue chips on the ASX so far this year, its share price rising more than 11 per cent since the Coalition announced its plan to build a cheaper version of the national broadband network.
"The market's saying there's a lot of value and opportunity in the resources sector, that's where the value trade lies," Mr Liu said.
But not everyone feels as warmly about the banking sector. UBS's banking analyst Jonathan Mott, warned the banking sector could be in a bubble. "We are conscious of the bull case for Aussie banks and all 'yield' stocks," he said.
He noted further quantitative easing, interest rate cuts, falling term deposit rates, asset allocation flows into equities, the "least worst investment", and the value of franking credits were all contributing to the banks' rise.
But those bank dividends were a result of significant leverage, Mr Mott said. "As with all asset bubbles, they can go higher and for longer than many expect ... all we can say is buyer beware."
Frequently Asked Questions about this Article…
Analysts quoted in the article say big banks and telcos are seen as a "safe trade" for income because their earnings profiles look able to sustain dividends. Bank dividend yields in particular are attracting investors who are chasing yield, while Telstra's strong share performance and reliable dividend history make it a favourite among income-focused investors.
Telstra broke through the $5 mark to reach a five-year high and has been one of the best-performing ASX blue chips this year, with its share price rising more than 11% since policy changes around the national broadband network were announced. That price strength, combined with Telstra's income profile, helps explain why investors are attracted to it as a yield stock.
According to the article, ANZ increased its dividends by an 11% boost to 73 cents a share and its shares rose to a record high after promising a bigger slice of future profits. Westpac announced a fully franked dividend of 86 cents a share, up 4 cents on the same half last year, following a 10% rise in half-year profits to $3.53 billion.
The article highlights mixed views: some managers lack conviction in resource stocks because of uncertainty around commodity prices and demand from China, while others see value opportunities in the resources sector. At the same time, many investors are directing their "marginal dollar" to banks and telcos for perceived income stability. Ultimately, the choice depends on your risk tolerance and income goals.
UBS analyst Jonathan Mott warned the banking sector could be in a bubble. He pointed to drivers such as further quantitative easing, interest-rate cuts, falling term-deposit rates, asset-allocation flows into equities and the value of franking credits as factors pushing bank shares higher — and cautioned that bank dividends have been supported by significant leverage, so investors should be careful.
The article notes that bank dividend yields are a key attraction for investors, with Citigroup saying yields will continue to draw interest while many alternatives offer lower returns. UBS also highlighted the value of franking credits as a contributing factor to the banks' rise, making yield stocks more appealing in the current environment.
Fund managers cited in the article express uncertainty about future commodity prices, China’s demand profile and Australia's political environment. Those uncertainties reduce conviction in the earnings outlook for resource companies, even though some analysts say the value trade still lies in resources.
Based on the perspectives in the article, everyday investors should weigh income needs against risks: consider the sustainability of dividends, be aware of sector-specific risks (bank leverage, commodity and China risks for resources), and note that analysts are divided — some strongly favour banks and telcos for yield while others warn of a possible bubble. Diversification and understanding why a stock pays yield are sensible starting points.
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