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A combination of high yielding stocks and company issued notes are attracting investors fed up with constant market volatility, according to market watchers. In the past 12 months, investors have lost money in companies exposed to floods, uranium, manufacturing, healthcare, construction and a struggling retail sector.

Constant news of Europe’s debt woes continues to generate market volatility. As John Rawicki, of Ord Minnett, puts it: “The past four years of extreme market volatility has challenged the success of the traditional buy and hold strategy for many long term investors.

Corporate notes and hybrids are becoming increasingly attractive to income-focused investors. Cash flows from these securities are predictable, and security prices tend to exhibit low volatility.” Rawicki says stocks with a history of paying strong dividends also appeal for their reliable income and attached franking credits providing a legitimate tax break. Also, stocks with good businesses tend to generate capital growth over time.        

HYBRIDS & NOTES

ANZ subordinated notes to June 20 (ANZHA)

On March 20, 2012, the ANZ Bank announced it had raised $1.5 billion after successfully completing its subordinated notes offer at $100 each. Interest is paid quarterly. For the period between March 20 and June 20, ANZ has calculated an interest rate of 7.18 per cent based on the 90-day bank bill rate of 4.43 per cent on March 20 plus a margin of 2.75 per cent.

The notes mature in June 2022, but ANZ may redeem the notes on June 14, 2017. The notes won’t dilute ordinary shares because there’s no mechanism to convert them. Rawicki says the notes appeal for their regular coupon payments in a defensive investment. The notes were priced at $100.62 on April 11.

Alternatively, Rawicki says investors can buy ANZ shares for solid dividend yield and potential capital growth. He says ANZ offers a strong management team committed to an Asian growth strategy that broadens its earnings base beyond Australia and New Zealand. “The ability to cut costs given the slowdown in revenue has resulted in a strong share price re-rating in recent months,” Rawicki says. “We are forecasting a fully franked divided yield of 6.05 per cent for 2012. A grossed up yield is more like 8.6 per cent.” Rawicki says the risk to ANZ’s Asian strategy is slowing growth in the region and stiff competition.

Woolworths Notes II to May 23 (WOWHC)

The price of Woolworths notes II have risen from an issue price of $100 in November last year to $104.15 on April 11, 2012. Rawicki says what appeals to investors is the 3.25 per cent margin on top of the 90 day bank bill rate. The latest quarterly coupon is set at 7.665 per cent until May 23, 2012.

He says even though the notes are unsecured, but rank ahead of shares, Woolworths is a blue chip company that’s almost certain to meet its debt obligations. “In relation to notes, what investors are buying are an attractive coupon and reliable income stream from a supermarket giant with strong cash flows,” he says. The interest rate will increase by 1 per cent if Woolworths hasn’t redeemed the notes by the set up date of November 24, 2016. 

Westpac convertible preference shares (WBCPC)

Another stockbroker, Paul Clarke, of State One Stockbroking, also likes Woolworths’ notes and Westpac’s recently issued convertible preference shares (CPS) at $100 each for an expected gross return of 7.7 per cent on September 30, 2012. The first Westpac (CPS) return is made up of a 180-day bank bill rate of 4.45 per cent on March 23, 2012, plus a margin of 3.25 per cent.

The convertible preference shares convert to ordinary Westpac shares on March 31, 2020. “Investors are attracted to notes and preference shares as they offer a strong indication of returns that aren’t totally linked to a company’s performance,” Clarke says. “A growing trend in recent months has seen large blue chip companies issuing debt instruments to strengthen balance sheets and provide additional working cash flow. While the terms of each individual issue varies, the fundamental mechanics of the instrument are similar  – the issue price is often $100, they trade on the ASX and pay a margin above a bank bill rate.” 

 

COMPANYCODEINTEREST RATE % PRICE: APRIL 13, 2012
ANZ Banking GroupANZHA7.18 (subordinated notes to June 20) $101.25
WoolworthsWOWHC7.665  (Woolworths Notes II to May 23)$105.00
WestpacWBCPC7.70 (Convertible preference shares to Sept 30) $99.25

 

DIVIDEND PAYING STOCKS

Both Clarke and Rawicki argue that buying companies with proven businesses is a sound investment strategy in volatile markets. Apart from exposure to potential capital growth, the yields are often better than bank interest, particularly when franking is taken into account. Here, they put forward stocks that investors can consider buying for income.

ALE Property Group (LEP)

 

Chart: Share price over the year to 13/04/2012 versus ASX200 (XJO)

Clarke says Ale Property Group is Australia’s largest listed freehold owner of pubs, owning 90 across Australia. All are leased to Australian Leisure and Hospitality Group (a subsidiary of Woolworths), with income underpinned by long-term inflation linked leases. Clarke says Ale is forecasting a yield of 8.6 per cent in 2012, increasing to 8.9 per cent in 2013. “The long term nature of the leases provide income certainty and there’s potential for better returns as more properties come on line and surplus land is developed,” he says.

Charts: ALE Property Group Limited

More news: ALE Property Group Limited

 

Tabcorp (TAH)

 

Chart: Share price over the year to 13/04/2012 versus ASX200 (XJO)

Australia’s big banks are well capitalised and hold tier one reserves above regulatory requirements. They also pay attractive fully franked dividends from consistently booking multi-billion dollar profits each year. Their share prices were punished over European debt concerns, but recently rallied on brighter news of a potential solution.

Chris Elliott, of Shadforth Financial Group, prefers Westpac for its strong banking franchise in Australia and New Zealand, that offers balanced exposure to retail, corporate and institutional sectors. “Westpac is a strong performer and has retained a relatively consistent dividend payout ratio of between 70 per cent to 73 per cent,” he says. “Our 2012 dividend forecast is $1.57 a share fully franked, which represents a yield of 7.15 per cent or grossed up yield of 10.2 per cent.”

Elliott says Westpac’s earnings growth is slowing in line with credit growth due to challenging economic conditions. “But Westpac represents good income with less exposure than its peers to the fragile Asian and European banking sectors.”

Charts: Tabcorp Holdings Limited

More news: Tabcorp Holdings Limited

 

Telstra (TLS)

 

Chart: Share price over the year to 13/04/2012 versus ASX200 (XJO)

John Rawicki says Telstra remains a top divided stock and should be able to retain its fully franked 28 cents a year. The company reported a 22.5 per cent increase in net profit after tax to $1.479 billion for the six months to December 31, 2011. Total revenue rose 1.1 per cent, or $136 million, to $12.419 billion. It added 958,000 domestic mobile customers. 

“The Telstra business has significantly improved, which has been reflected in a steadily increasing share price,” Rawicki says. “The company’s growing mobile segment should continue to drive meaningful revenue gains for the full year. Investors can expect a fully franked dividend yield of 8.3 per cent for the next few years.”

Charts: Telstra Limited

More news: Telstra Limited

 

DuluxGroup Limited (DLX)

 

Chart: Share price over the year to 13/04/2012 versus ASX200 (XJO)

Energy giant AGL recently announced a 32 per cent increase in total proven and probable gas reserves in the 12 months to June 30, 2011. It also contracted almost 96,000 new electricity customers in New South Wales in the 2011 second half. 

Revenue for the year grew by 7 per cent to $7.072 billion, largely driven by rising transmission and distribution charges. Underlying operating cash flow before tax was up $45.7 million to $676 million.

AGL also carries very little debt, with a debt-to-equity ratio of about 6 per cent, leaving the company in a strong position.

With Australia’s largest retail energy and dual fuel customer base, Mark Lennox, of Think Technically, says AGL is defensive, but he also expects significant growth from its merchant energy and retail division. AGL announced a return to 100 per cent franking for the final 31-cent dividend, taking the full year to 60 cents, up 1.7 per cent. “AGL’s financials will continue to improve,” Lennox says.

Charts: DuluxGroup Limited

More news: DuluxGroup Limited

 

Adelaide Brighton Limited (ABC)

 

Chart: Share price over the year to 13/04/2012 versus ASX200 (XJO)

Rawicki forecasts Adelaide Brighton to post a fully franked dividend yield of 6.5 per cent for 2012.  He says the cement and lime producer is on track to benefit from a recovery in construction across its key markets of South Australia and Western Australia. “The company has increased its prices for concrete and other materials, a push that we believe will be well absorbed by customers and help underpin the company’s earnings,” he says.

Charts: Adelaide Brighton Limited

More news: Adelaide Brighton Limited

 

COMPANYCODEFORECAST DIVIDEND YIELD % (2012)PRICE: APRIL 13, 2012
ANZ Banking GroupANZ6.05%$22.98
ALE Property GroupLEP8.60%$2.05
TabcorpTAH8.80%$2.78
TelstraTLS8.30%$3.36
DuluxGroupDLX5.50%$3.09
Adelaide BrightonABC6.50%$2.98

 

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