In the chase for yield, resources left out in the cold
"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. There is uncertainty 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 they have in the past, relative to the major banks and Telstra, the "marginal dollar" of investors is still being invested in banks and telecoms.
That is because they are considered a "safety trade" and viewed as having an earnings profile that can sustain the yield of the companies, Mr Liu said.
Citigroup banking analyst Craig Williams said in a note 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 wrote.
Mr Williams made that pronouncement on the day ANZ 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¢ a share.
On Friday, Westpac announced a fully franked dividend of 86¢ a share, up 4¢ 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 been performing strongly, breaking through the $5 barrier this week, at 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 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…
According to ATI Investment's head of research David Liu, many investors would pick both — banks and Telstra are seen as a "safety trade" with earnings profiles viewed as able to sustain yields, so combining them can be a sensible income strategy.
The article says fund managers lack conviction about the earnings profile of resource stocks because of uncertainty over commodity prices, China demand and Australia's political environment. Even though miners like BHP and Rio Tinto have stronger valuations than in the past, the "marginal dollar" is still flowing into banks and telecoms for perceived safety and yield.
Citigroup analyst Craig Williams notes bank dividend yields continue to attract investors because alternative investments are providing significantly lower returns and the near-term earnings and dividend outlook for the sector looks solid — making majors like ANZ, Commonwealth Bank and Westpac popular for income-seeking investors.
UBS analyst Jonathan Mott warned the banking sector could be in a bubble. He pointed to factors such as further quantitative easing, interest rate cuts, falling term deposit rates, asset flows into equities and the value of franking credits as drivers — and he also cautioned that current bank dividends are supported by significant leverage, so "buyer beware."
The article reports ANZ shares surged to a record high after the bank vowed to give shareholders a bigger slice of future profits and increased its dividend by about 11% to 73¢ a share. Westpac announced a fully franked dividend of 86¢ a share (up 4¢ year‑on‑year) after a 10% boost in half‑year profits to $3.53 billion.
Telstra broke through the $5 mark to a five‑year high and is among the best‑performing ASX blue chips so far this year, with its share price up more than 11% since the Coalition announced a cheaper NBN plan. That price strength, plus its yield profile, has made Telstra attractive to income-focused investors alongside the major banks.
Analysts quoted in the article say the market sees value and opportunity in the resources sector — that's viewed as the "value trade" — but in practice many investors are still allocating fresh money into banks and telecoms because they are perceived as safer yield plays.
The article suggests weighing the attractiveness of dividend yields against risks highlighted by analysts: consider sustainability of earnings and dividends, the impact of macro drivers (QE, interest rate moves, deposit rates), leverage in the banking sector and the possibility of elevated valuations. As UBS put it, yields can look inviting but "buyer beware."
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