Big defensive stocks with the ability to keep lifting dividends from rising profits such as pipelines group APA Group, Sydney Airport, toll road operator Transurban and private hospital group Ramsay Health Care will command an even greater premium over the next year, says the boss of $5 billion Argo Investments.
Jason Beddow, the managing director of Argo, says falling yields around the world will push even more investors into those big defensive companies, even though they are already trading on valuations which are expensive on many traditional measures.
“We think they are pretty safe,” Mr Beddow said. He said if there were another slide in global sharemarkets then the big defensives won’t fall as far as other stocks because their profits will generally hold up, and they were in industries where they would be able to keep increasing dividends.
But global uncertainty and the advent of negative interest rates in some countries meant that relying too much on historical patterns may be a little more fraught for investors.
“History is not the best guide at the moment,” Mr Beddow said. Macquarie Group, CSL and AGL Energy were also solid performers likely to be sought after by investors.
Mr Beddow said the big four banks in Australia were still offering a reasonable yield, and by passing on only around half of last week’s Reserve Bank of Australia interest rate cut showed how they would try and protect their margins at a time where earnings growth was slowing, and regulators would compel them to raise even more capital.
“The structure of the market is pretty good for the banks in Australia. They all behave in the same way,” Mr Beddow said.
ANZ had cut its dividends the hardest of the big four banks which include CBA, NAB and Westpac, but on the positive side for all four, fears of a flood of bad debts from big companies failing hadn’t materialised, and this was in part because the low-rate environment meant that debt servicing payments were near all-time lows for most companies.
ASX still ‘pretty attractive’
Argo, which has a heavy skew toward the big banks in its $5 billion investment portfolio, will pay out a flat final dividend of 15.5¢ per share to its 80,000 shareholders on September 9.
The full-year dividend was up by 1.0¢ to 30.5¢ because of a healthier interim dividend.
Argo was formed in 1946 and one of its previous chairmen was Test cricket great Sir Donald Bradman who worked as an Adelaide stockbroker when he retired from the sport.
Argo’s after-tax profit was down 5.2 per cent to $216.2 million for the 12 months ended June 30, 2016 but the previous year’s result was lifted by a $18.6 million one-off from the de-merger of South32 from BHP Billiton.
Stripping out that one-off, Argo’s profit would have been up 3.2 per cent.
The return from Argo’s investment portfolio was negative1.2 per cent for the year, lower than the S&P/ASX200 which delivered a 0.6 per cent return.
Mr Beddow said Argo had been underweight in small cap stocks which generated a solid performance because they were generally in “industrial land” and not exposed to the buffeting which oil and resources had received.
Mr Beddow said the Australian sharemarket even at the current earnings multiple of around 16 times still represented an attractive yield to investors who were frustrated at low cash rates.
“Short of any other Black Swan event we see the yield on the Australian market as still being pretty attractive,” he said.
He thought the ASX200 may now trade in a range between 5200 and 5800 points, having broken out of the range it had sat in for months of between 4900 to 5400 points.
Argo sold out of its entire Medibank Private holding over four to five months in several tranches because it had become too expensive relative to other stocks, and exited its Clydesdale Bank holding after it was spun off from NAB.
Big purchases of more than $10 million worth of stock made during the year included Estia Health, a top-up of both Westpac and CBA, DUET Group and extra Santos shares. Mr Beddow said that over the next 12 to 24 months the oil price will be trading higher than it is now.