MARKETS SPECTATOR: The chase goes on

Fund managers and traders say investors are still obsessed with yield although the prospect of earnings downgrades could dampen sentiment.

It must be a curious time to be a fund manager. Total return is not in the forefront of the collective investor mind. Dividend payouts are the obsession. Such a fixation is not going away anytime soon.

Aberdeen Asset Management’s Brett Jollie says the prospect of an even lower Reserve Bank cash rate – currently 2.75 per cent – by year-end is fueling the dividend focus, particularly when investors are not at all sanguine about markets.

ANZ, Commonwealth Bank, NAB and Westpac have increased dividend payments after they reported an increase in profits in the six months to March 31. That has helped all four bank stock prices to rise more than 40 per cent over the last 12 months.

Meanwhile, Macquarie Bank, Woodside Petroleum and the property trusts have also increased their dividends after reporting their latest earnings. Rio Tinto, at its AGM last week, was criticised by the Australian Shareholders Association’s Richard Giles for its dividend payout being 20 per cent  of profits over the last five years. Giles wants Rio’s dividend payout to increase to 80 per cent of profits, a motion rejected by the mining company’s chairman, Jan du Plessis.   

But stocks aren’t annuities that can pay out a steady stream of dividends. Company earnings are subject to a myriad of factors that can help and hinder profits, ultimately affecting what dividend can be paid. UBS analysts have warned that the current dividend darlings, the banks, may not be able to sustain their high payout ratios. The banks’ earnings cycle may be peaking while their bad debt charges may be at historic lows. NAB is paying out about 75 per cent of its profits in dividends. Its bad and doubtful debt charges were $1.09 billion in the six months to March 31. That’s down from $1.48 billion in the six months to September 30, 2012 and $1.13 billion in the six months to March 31.

As June 30 end approaches, the end of most corporate financial years, some traders say the obsession with yield may give way to concerns about earnings downgrades. That may cast a pall over the market especially as the reality of a less than robust economic environment feeds through to bottom lines. The Reserve Bank is not cutting the cash rate to benefit yield hungry investors.

Apart from yield, the US dollar’s strength is forcing some fund managers to adjust their portfolios and buy stocks that generate a significant amount of revenue in the world’s biggest economy. BT Investment Management’s Noel Webster has bought shares in appliance seller Breville Group, Ainsworth Gaming, information services group SAI and fund manager the Magellan Group. News Corp, whose stock is up 65 per cent in the last 12 months, may attract more buyers. Could there be further upside in the S&P/ASX 200 Index which has already blown through the year-end forecasts of many analysts?

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