Stock Picks

When it comes to banks, the season can make a difference

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

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