Lacking disclosure

PORTFOLIO POINT: Quarterly reporting and dividends should not be a wish. It should be a requirement.

A positive feature of many of the securities in the Income Portfolio is the receipt of quarterly income. The portfolio is constructed mainly from listed hybrid and debt securities. There is also an allocation to high yielding equities that generate franking credits to enhance the total income returns.

The receipt of quarterly income on notes does beg the question, why don’t Australian listed companies also pay quarterly dividends?

I wrote in this column recently that I yearn for a return back to the days when convertible notes were simple securities that were fairly structured between issuer and investor. Another feature of those bygone days was the regular statement (normally quarterly) by an issuer, to the note trustee, that all covenants of a note trust deed were being complied with. So why is it that our regulatory authorities do not insist that our listed companies undertake a form of quarterly financial reporting?

Much has been written about the veracity of continuous disclosure, market guidance and “rumourtrage” in the Australian market. However, many of the issues evolve from a lack of consistent regimented financial reporting to shareholders and investors. Indeed, whilst it is common to see that our largest companies (such as BHP, RIO and the banks) undertake a form of quarterly update, it is far more common to see none from most companies.

This is in stark contrast to the quarterly reporting regime of the US equity market, where the largest companies in the world manage to keep their shareholders informed as to how they are trading on a regular basis. Frankly, there is an appalling information flow in Australia and it is one reason why many self-managed retirees regard the market as like a casino. The lack of information stimulates the suspicion amongst retail investors that the big companies in this country just do not respect them as shareholders.

Further, poor information flows encourage speculation and therefore volatility. The creation of a publicly owned company (ASX Limited) to oversee the stock exchange seems to have decreased the sensible oversight of the market. ASIC is now fully charged with surveillance of a volatile market where the operator of the market encourages volatility.

So how do we help the market become better informed, address speculative volatility and improve the compliance regime for both continuous disclosure and market guidance? How do we improve the disclosures in the market so that there is less speculation and more relevant information for investors?

Some simple suggestions include that companies should be required to do some or all of the following:

1. Produce balance sheets and cash flow statements on a quarterly basis. Unaudited reports to be produced by the end of the third week of quarter;
2. Consider the production of rolling 12-month financial reports encapsulating four quarters (thanks to George Sutton of “Ecinya” for this idea);
3. Companies to update profit guidance by the end of the tenth month of each financial year;
4. If guidance cannot be given a statement of the reasons or the circumstances which inhibit guidance;
5. The financial sensitivities that do affect performance and should be considered by investors in a company including currency, interest rates; and
6. Ask shareholders, through a general meeting vote, whether they seek quarterly dividends.

Investing in the stockmarket is not a game and it is important that capital is correctly priced. The integrity of the market is constantly challenged by rules and practices that require legal interpretation. That should not be and the quality of some statements regarding profit guidance is often misleading in that crucial facts or assumptions are withheld on legal advice. Further, the notion that “buyer beware” in the market is only relevant if a market is properly informed is not an argument that justifies scamming.

It is axiomatic that if businesses are trading then they are achieving financial results. These results are known to a few (insiders), gleaned in conversation by another few (analysts) and disseminated sporadically to large clients (based on commission). Updates by companies to the market are spasmodic and often are so short on detail that they are potentially misleading. Then there is the common observation of share price moves occurring before public downgrades.

I am constantly monitoring current year market consensus earnings and forward year forecasts from leading stockbroking analysts. I can only speculate as to the reasons for many of the forecast changes but note that some forward year estimates adjust before current year guidance is updated by companies. Could it be that discussions with a company regarding next year are speculation and therefore comfortably escape a tag of inside information? In contrast, current year trading discussions are avoided as they could constitute inside information if not generally in the market.

Recent updates on the Income Portfolio

There was good news this week for floating hybrid investors when the RBA did not cut interest rates. The bank bill market had anticipated this but there continues to be expectations of more cuts before Christmas. Time will tell, but most Australian economic indicators moved positively in June.

There has been some announcements by issuers of the following securities regarding September quarter distributions. Yes, some companies are producing quarterly statements!

These are:

• AAZPB 8.3467% (perpetual) annualised yield equivalent to a September quarter distribution of $2.10 (rounded)

• MXUPA 7.4467% (perpetual) annualised yield equivalent to a September quarter distribution of $1.87 (rounded)

• ANZHA 6.26% annualised yield equivalent to a quarterly distribution (pay 20/09) of $1.58 (rounded)

• WOWHC 6.72% annualised yield equivalent to a quarterly distribution (pay 24/08) of $1.69 (rounded)

The Income Portfolio

Start Value: $120,000.00
Current Value: $120,920.53

-Hybrids/Pseudo Debt Securities
Company	ASX	Market Price ($)	Margin over BBSW (%)	Running Yield (%)	Franking (%)	Total Return (%)
ANZ Note	ANZHA	100.00	2.75	6.23	0	2.03
Multiplex SITES	MXUPA	74.55	3.90	10.05	0	-0.47
Australand ASSETS	AAZPB	90.75	4.80	9.28	0	0.22
Macquarie Group Floating Rate Note	MBLHB	60.00	1.70	8.33	0	-3.77
NAB Floating Rate Note	NABHA	68.20	1.25	6.89	0	-5.40
Seven Group TELYS4	SVWPA	78.25	4.75	10.35	100	-4.07
Woolworths Notes II	WOWHC	103.85	3.25	6.57	0	0.33
Ramsay Health Care CARES	RHCPA	100.80	4.85	8.14	100	1.72

-High-Yielding Equities
Company	ASX	Market Price ($)	Dividend ($)	GUDY (%)	Franking (%)	Total Return (%)
Telstra Corp	TLS	3.73	0.28	10.72	100	6.27
Ardent Leisure Group	AAD	1.30	0.12	9.27	0	8.63
Commonwealth Bank	CBA	53.81	3.29	8.73	100	4.16
Westpac Banking Corp	WBC	21.75	1.66	10.90	100	-0.44
			Average	8.79	Weighted	-0.77
			Yield		Portfolio Return

John Abernethy is the chief investment officer at Clime Investment Management. Use MyClime to identify high yielding equities to enhance income returns for your portfolio.

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