A STOCK I have totally underestimated this year has been Telstra.
I have suggested we play the dividend game and buy the stock seven weeks out from the company going ex-dividend and then sell it. For the rest of the year you could leave the company alone because it offered very little earnings growth and looked expensive. The logic behind this approach was to ride the stock higher as franking-hungry superannuation accounts snaffled up the stock.
The reality is Telstra's share price has rallied a mighty 14 per cent since going ex-dividend in August, compared with a paltry 2 per cent gain from the overall market. The stock sits at around $4.30 and is trading on a 2013 price-to-earnings multiple of 14.6 times - a 15 per cent premium to the market. Management confirmed the company would continue to pay an annual fully-franked dividend of 28? a share, putting it on a yield of 6.6 per cent. We must remember, though, this is almost a 100 per cent pay-out ratio.
Stockbroking analysts who attended an upbeat Telstra investor day last month are still struggling to recommend the stock. The street values Telstra at $3.50 and $4 a share.
The biggest concern is the lack of earnings growth, with most analysts forecasting 2015 earnings per share between 28? and 30?. If this proves to be the case, investors should not expect the type of stunning capital gains they have had in addition to their dividends over the past year or so.
The Telstra bulls believe there is upside in the share price because the company is fabulously placed to take advantage of the data explosion through mobile devices. This may be true, but given the valuation, this growth will have to appear soon to justify another leg-up in the share price. If the analysts are correct and there is little growth, the days of hiding in Telstra may be coming to an end.
Ramsay Health Care
AT ITS annual meeting, Ramsay pointed out that shareholders had had a 23.7 per cent annual compound return since 1997. In comparison, the Australian sharemarket had an annual average return of 7.6 per cent.
The catalyst for the stock to take off was a decision by the federal Liberal government to introduce a 30 per cent rebate for those who took out private health insurance. This drove the percentage of adult Australians in private health insurance from around 30 per cent to 45 per cent. Ramsay's earnings and share price have never looked back.
The Labor government has been steadily chipping away at the $5 billion subsidy it pays into private health insurance.
Initially, it introduced a means test and more recently it added some other measures that will result in the rebate paid fall by about a per cent each year from 2014. None of this is dramatic but it is a slight headwind when hospital margins are historically high and Ramsay is trading on a hefty 18.5 times current year earnings.
Analysts generally have a price target on the stock about 5 to 10 per cent below its current levels of around $26.28. It is hard to sell a star performer, but it might be hard for the stock price to move higher.
E&A Ltd
A STOCK that has been hitting 12-month highs recently is heavy engineering group E&A. The South Australian group floated at the peak of the market in 2007 for $1 a share and rocketed to a high of $1.59. The company missed its forecast profit in June 2008 and the stock began its long journey down to 12? a share in mid-2011.
The stock has climbed to 35? a share. Insiders have been picking up stock in the dividend re-investment plan and now control about 70 per cent of the shares.
Soon after the dividend re-investment plan, the company gave an upbeat assessment after a sturdy first quarter. For the three months to September, revenue was up 16 per cent while net profit was $1.6 million, compared with a full-year result of $3.8 million in 2012. If this rate can continue, the company will earn more than $6 million and pay a dividend of about 5? a share. This would place the stock on a price-to-earnings multiple of 6.5 times and a yield of 13 per cent.
It will be interesting to see if the company is still going so well at the half-yearly result. If so, the stock could easily move up to 45? a share.
matthewjkidman@gmail.com
The Age takes no responsibility for stock tips.
Frequently Asked Questions about this Article…
Why has Telstra's share price rallied recently and what is its current dividend yield?
According to the article, Telstra’s share price has rallied about 14% since going ex-dividend in August while the overall market rose roughly 2%. The stock was trading around $4.30, with management confirming an annual fully‑franked dividend of about 28 cents a share — putting the yield at roughly 6.6%.
Is Telstra still a good dividend play given its payout ratio and valuation?
The article notes Telstra’s dividend is almost a 100% payout ratio, which limits scope for dividend growth. Telstra was trading on a 2013 price‑to‑earnings multiple of 14.6 (about a 15% premium to the market). With little expected earnings growth, the piece suggests dividend income may remain attractive but capital‑gain potential is constrained unless earnings pick up soon.
What are analysts saying about Telstra’s valuation and earnings growth prospects?
Stockbroking analysts at an investor day still struggled to recommend Telstra, valuing it around $3.50 to $4.00 a share. The article highlights the biggest concern is a lack of earnings growth, with most analysts forecasting 2015 earnings per share in the order of about 28 to 30 cents — a level that would limit further upside unless growth accelerates.
How has Ramsay Health Care performed historically and what drove that performance?
The article points out Ramsay delivered a 23.7% annual compound return to shareholders since 1997, compared with the Australian sharemarket’s average annual return of 7.6%. A key catalyst was a federal Liberal government decision to introduce a 30% rebate for private health insurance, which lifted adult private cover from around 30% to 45% and supported Ramsay’s earnings and share price.
Could government policy changes affect Ramsay Health Care’s outlook?
Yes. The article says the Labor government has been reducing the $5 billion subsidy to private health insurance, introducing a means test and other measures that are expected to reduce the rebate by about 1% each year from 2014. That creates a modest headwind for Ramsay, which is trading on a relatively high multiple (around 18.5 times current‑year earnings) and has analyst price targets generally 5–10% below current levels (~$26.28).
What is behind E&A Ltd’s recent share recovery and what upside could remain?
E&A, a heavy engineering group, has climbed from prior lows to about 35 cents a share. Insiders have been buying through the dividend reinvestment plan and now control roughly 70% of the shares. The company reported a sturdy quarter to September with revenue up 16% and net profit of $1.6 million (versus a $3.8 million full‑year result in 2012). If that momentum continues, the article suggests E&A could earn more than $6 million, pay a dividend of about 5 cents a share, trade on a P/E around 6.5 and potentially move up to about 45 cents.
Does insider buying at E&A Ltd matter for everyday investors?
The article highlights insiders picking up stock via the dividend reinvestment plan, now controlling about 70% of E&A’s shares. That insider participation is presented as a sign of management confidence and a factor supporting the recent share recovery, which everyday investors may view as a positive signal when assessing the company’s outlook.
What common caution does the article offer everyday investors about these stocks?
A recurring theme in the article is caution: Telstra’s recent gains have been dividend‑driven and its valuation assumes growth that has yet to materialise; Ramsay’s stellar past returns were helped by policy changes that are now being scaled back; and E&A’s recovery depends on continued operational momentum. In short, historical performance, high payout ratios or one‑off catalysts don’t guarantee future gains without sustainable earnings growth.
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