Stock Picks
Last week I wrote about how the big four banks were heading towards a share price bubble and it would inflate for some time to come. This week's cut in official interest rates provides strong backing for this case.
Investors keen on buying more bank shares in the short term, however, may want to study the annual seasonality closely. Andrew McCauley, author of the online newsletter probabilitytrader.com, points out that since 1997 - when the 45-day ownership rule on franking was introduced - the big four have made all their share price gains in March, April and October. For the remainder of the year, the sector has been down, on average, 1.66 per cent.
The logic behind this seems simple. To qualify for franked dividends, investors must own their shares for a 45-day period around the payment of the dividend. Therefore, investors would start buying bank shares up to seven weeks before the companies go ex-dividend. Given three of the big four banks pay their dividends in early May and early November, it makes sense that the strongest buying times are in March, April and October.
This year seems to be on song. In March and April the four majors posted an average share price gain of 10.6 per cent. May, June and July have produced less inspiring returns for the banks.
UGL
We have entered the time when companies confess they are going to miss their forecast profit numbers for the 2013 financial year. If you can avoid downgrades in May and June there is a good chance your portfolio will outperform the market.
One company to watch is engineering and property services group UGL. The company was the talk of the investment community last week after it withdrew from the Macquarie company conference.
In March UGL said it was reviewing its corporate structure with the intention of spinning out its growing property services division. The stock jumped from $9.30 a share to $10.50 almost immediately. UGL said it hoped to complete the review by August 2013 or earlier.
Most analysts concluded the company was worth between $11 and $13 a share under the proposed new structure. The stock has since drifted to $9.92. With the recent downturn in mining work and the group's withdrawal from the Macquarie conference, investors have became suspicious an earnings downgrade is on its way. If it does announce its restructure in coming days and avoids a downgrade, it could be a great buying opportunity. Alternatively, if it lowers its 2013 profit numbers, then stay clear.
Aristocrat Leisure It hasn't taken long for companies to work out the best bang for their share price is to announce an increase in dividend or a special dividend. Woodside is an example.
Another company rumoured to be considering its dividend policy is Aristocrat. The poker machine maker's price marched to a 12-month high this week after a report from Goldman Sachs that suggested the company was paying down its debt at a rapid clip and was in a strong position to increase its dividend payout ratio from 60 per cent to 80 per cent or higher.
If earnings hold up, it may have room to throw in a small special dividend on top of the higher payout ratio, meaning the yield would nudge 5 per cent. The company is on track to reduce its debt-to-equity ratio from about 45 per cent in 2013 to 15 per cent in 2015.
The excitement around the dividend has stoked Aristocrat's share price 14 per cent higher since a recent bottom on April 18. Investors should be wary, though. Aristocrat is trading on a 22 price-to-earnings multiple (P/E) for the year to September 2013. With solid earnings growth of about 20 per cent in 2014, the P/E drops to 19 times, not overstretched but hardly a bargain.
A plan of attack could be to wait until the dividend announcement is made and then buy the stock when its goes ex that payout. The stock could fall sharply if the higher dividend is not forthcoming or after a larger dividend is paid.
matthewjkidman@gmail.com
Fairfax Media takes no responsibility for stock recommendations.
Frequently Asked Questions about this Article…
Since the 45‑day ownership rule for franking was introduced in 1997, the big four banks have made essentially all their share price gains in March, April and October. The pattern is driven by investors buying shares several weeks before ex‑dividend dates so they qualify for franked dividends — three of the majors pay dividends in early May and early November — creating stronger buying in the months before those payments.
The 45‑day rule means you must hold shares for 45 days around a dividend payment to receive franked dividends. That encourages investors to start buying up to about seven weeks before the company goes ex‑dividend, which concentrates buying activity in the lead‑up months (March, April and October for the big banks) and helps explain the historical seasonal lift in those periods.
The article notes the recent cut in official interest rates supports the case for continued strength in bank shares, but it also warns investors to study annual seasonality carefully. Short‑term buying can be attractive around the dividend season, but investors should be aware of the timing patterns and risks (such as post‑ex dividend weakness) rather than blindly rushing in.
UGL is reviewing its corporate structure with the intention of spinning out its property services division, and analysts valued the proposed structure higher than current prices. However, the stock has drifted after an initial pop and recent mining work weakness plus its withdrawal from a conference has sparked concern about a possible earnings downgrade. If UGL releases a favourable restructure without lowering 2013 profit guidance it could present an opportunity; if it announces a downgrade to 2013 earnings, the article advises staying clear.
The article says UGL’s withdrawal from the Macquarie conference added to investor suspicion that an earnings downgrade might be coming, especially given a downturn in mining work. However, the article does not state a confirmed reason for the withdrawal, so investors should watch for an official company announcement rather than assume an imminent downgrade.
Aristocrat has been linked to rumours it may raise its dividend payout ratio from about 60% to around 80% and possibly pay a small special dividend, supported by reports of rapid debt reduction. That pushed its share price up about 14% from a recent bottom. The stock was trading on roughly a 22x P/E for the year to September 2013 (around 19x in 2014 assuming solid earnings growth). The article suggests waiting for a dividend announcement and being cautious because the price could fall sharply if the higher dividend doesn’t materialise.
For companies like Aristocrat, the article suggests a cautious approach: wait for the dividend announcement, and then consider buying when the stock goes ex‑dividend. That way you avoid the volatility that can occur if the higher dividend is not announced and the share price falls.
The article highlights that May and June are a period when companies commonly confess they will miss their forecast profit numbers for the financial year. Avoiding stocks that issue downgrades in May and June can help a portfolio outperform the market, so investors should be alert to profit downgrade risk during this season.
Call 1300 880 160
Start a chat
Schedule a call
