Old favourites no longer dividend darlings

'This is the old headache for retail investors.' Tim Rocks, equity strategist

By InvestSMART · 24 Apr 2012

By InvestSMART ·
24 Apr 2012

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A LIST of the country's 10 most popular stocks shows retail investors face a difficult decision: they can accept lower rates of return from some of their favourite companies or they can look for other stocks to invest in.

Telstra was the only one on the list whose share price went up, with popular stocks such as AMP, Westpac and Wesfarmers performing worse than the market over the past one year.

Telstra shares, held by nearly 1.4 million investors, are up more than 20 per cent in value over the past year. Shareholders have welcomed the billions of dollars flowing from the telco's national broadband network deal - on top of a dividend yield that reached 8 per cent last year.

If you bought the shares a year ago, you would have got - apart from the share price gains - a double-digit yield.

Analysts have warned that the sectors to which the most popular stocks belong - banking and finance, retail, and resources - hold little prospect for immediate earnings growth.

"This is the old headache for retail investors," the Bank of America Merrill Lynch chief equity strategist, Tim Rocks, said.

"Overall the market's tough, but its been tougher for retail investors because the big mature dividend-paying companies that they tend to own have all done pretty badly, [in some cases] worse than the market."

The recent peak in commodity prices would make things harder for resource companies, adding to investor concern, while the banking sector remained under pressure from changes in the economy and the end of the leveraging cycle, he said.

But offsetting the share price declines, some stocks have delivered reasonable dividends over the past year, particularly the banks.

"The deposit rates that the banks are offering have gone down, and if you can only get 4 to 5 per cent on bank deposits, then a 7 or 8 per cent yield on some of these stocks still looks attractive," Mr Rocks said.

"[But] you've still got to accept that you're going to make your dividend yield but you're not going to make much else, [the stock's] not going to grow very strongly."

Retail stocks have also suffered because consumers are spending less and paying down debt.

Coles will release its quarterly sales results today, and is expected to beat its rival Woolworths for an eleventh consecutive quarter - not that you would know from the share price performance over the past year, with Coles parent Wesfarmers down by double digits compared with Woolworths' more modest falls.

This performance is more an overall reflection on the Wesfarmers group, which has had trouble with its insurance and coal divisions. It is also increasing investment spending and not everyone is sure this will generate acceptable returns.

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Frequently Asked Questions about this Article…

Why are some of Australia’s most popular stocks delivering lower returns for retail investors?

Analysts in the article say many favourite, mature dividend-paying companies — especially in banking and finance, retail and resources — have had weak share-price performance and limited prospects for immediate earnings growth. That means everyday investors may still get dividend income but should expect lower capital growth from these popular stocks.

How did Telstra perform over the past year and why did its dividend yield attract investors?

Telstra was the standout on the popular-stocks list: its share price rose by more than 20% over the past year and it had a dividend yield that reached about 8% last year. The article says investors welcomed cash flow from Telstra’s national broadband network (NBN) deal, which helped support both share-price gains and strong dividend payouts.

Are bank stocks still attractive for dividend income compared with bank deposit rates?

The article notes bank shares have delivered reasonable dividends and, with deposit rates falling to roughly 4–5%, a 7–8% dividend yield on some bank stocks can look attractive. However, analysts warn that while dividend yield may be earned, those stocks may not deliver much capital growth.

Why have companies like AMP, Westpac and Wesfarmers performed worse than the market?

The article reports that popular names such as AMP, Westpac and Wesfarmers underperformed the market over the past year. For Wesfarmers specifically, problems in its insurance and coal businesses and higher investment spending have weighed on overall group performance. Banking sector pressures and weak consumer demand also hurt companies like AMP and Westpac.

What is the outlook for resource companies given recent commodity price moves?

Analysts in the article warned that a recent peak in commodity prices could make things harder for resource companies. That peak adds to investor concern because commodity cycles affect resource earnings and may limit near-term growth for the sector.

Why have retail stocks struggled recently even if sales are holding up?

Retail stocks have suffered because consumers are spending less and paying down debt, reducing retail sector momentum. The article points out Coles is expected to continue winning sales over Woolworths, but that has not translated into strong share-price performance for parents like Wesfarmers.

What should everyday investors understand about dividend yields versus growth for mature companies?

The article highlights a trade-off: many mature, dividend-paying companies can offer attractive yields compared with bank deposit rates, but analysts caution investors should accept lower expected earnings and limited share-price growth. In short, dividend income may be attractive, but capital growth could be modest.

How has Coles’ recent sales performance compared with Woolworths, and why hasn’t that boosted parent-company shares?

According to the article, Coles was expected to beat Woolworths for an eleventh consecutive quarter in quarterly sales. Despite Coles’ strong retail performance, Wesfarmers’ share price lagged (down by double digits) because weaknesses in other parts of the Wesfarmers group — like insurance and coal — plus increased investment spending have weighed on investor sentiment.