Punished blue chip stocks present good buying opportunities for patient investors seeking capital growth and dividend yield. A mix of industrial and resource stocks can deliver solid year-on-year returns providing you stick to proven performers that your research shows have been over-sold and you don’t entertain unrealistic expectations, such as doubling your money over night.
A portfolio of growth and income stocks is a good strategy, particularly at a time of volatile global equity markets.
Investors often overlook dividend yield in roaring bull markets, but yield is getting ever-increasing investor and analyst attention in falling markets. Stable dividend yield can attract investor support in the absence of capital growth. While share price growth is the objective, dividend yield can provide a level of insurance and comfort if a company’s share price is punished.
Income stocks able to sustain yield from reliable earnings streams will at least cushion the damage if several growth stocks in the portfolio are savaged. But investors should also be wary of an exceptionally high dividend yield as that can paint a bleak outlook for a stock that has already fallen. The higher the yield, the higher the risk.
Several analysts had no hesitation in recommending QBE Insurance as a long-term buy, particularly at today’s low $20 levels. QBE’s share price was $35.49 in September last year. QBE is widely recognised for its management rewarding share holders. Brendan Fogarty, of Alto Capital, says QBE’s record speaks for itself. During the past 10 years, the company’s cash flow has averaged an increase of 13.2 per cent a year, earnings on average have risen by 27 per cent a year and dividends are up on average by 19 per cent a year. In early July, QBE’s been trading on a forecast price/earnings ratio of about 10 times compared to a sector average of 13.6. Fogarty says: “It’s one of the most consistent stocks in the ASX 200 for earnings growth despite occasional global shocks, such as September 11. It’s one of the best managers of risk in the global insurance sector. QBE offers investors the best of both worlds in terms of potentially strong capital growth, supported by solid fully-franked dividend yield of almost 5.5 per cent (on July 10). I expect a difficult investment environment to continue in the short-term, but long-term investors can buy QBE Insurance with confidence.”
Mark Goulopoulos, of Tolhurst, says QBE Insurance offers a cheap entry point at today’s levels. “The stock is way off its highs and the company’s fundamentals are sound. QBE has been caught up in negative investor sentiment flowing from the credit crunch,” he says.
Goulopoulos says investors can comfortably buy BHP Billiton for capital growth. The biggest miner in the world offers multiple earnings streams from a diversified suite of resources that China and India demand. Goulopoulos says India, historically a services-orientated economy, is growing, becoming wealthier and embarking on big infrastructure projects that require more metals. “India is now exhibiting similar patterns to a China of five to 10 years ago,” he says. Goulopoulos says BHP Billiton’s existing pipeline of stgelopment projects can keep it busy for the next 10 years in the absence of new discoveries. The company generates huge profits and cash flow, but its dividend yield at July 10 was below 2 per cent.
Woolworths is another stock way off its highs that can be included in portfolios for capital growth. Higher petrol prices combined with rising cost-of living expenses have contributed to the retail giant’s share price falling from $35.05 in December last year to $24 levels in early July. Woolworths, which also owns Dick Smith, Dan Murphy’s and a stake in the Australian Leisure and Hospitality Group, is partially exposed to discretionary spending amid tighter household budgets. But Woolworths at today’s price offers long-term upside for a company that’s clearly leading arch rival Coles. Woolworths is also poised to benefit from recent tax cuts, and any signs of an improving economy given consumer sentiment is at its lowest in 16 years. Goulopoulos says: “Woolworths has the best logistics supply chain in the supermarket sector and is clearly the most efficient.” At July 10, it was offering a dividend yield of 3.2 per cent.
Goulopoulos says buying blue chips today for long-term growth is a sound strategy when the investor objective is to buy low and sell high. The sharemarket’s plunge provides opportunities, and renowned blue chips are the first to benefit when emerging from a bear market.
Westpac, Goulopoulos says, is the best provisioned of the four majors as bad debts are already factored into the company’s numbers and share price. Westpac’s planned merger with St George will make it the nation’s biggest bank and provide cost saving synergies. In the absence of short-term capital growth, Westpac can be bought for dividends alone as it’s yielding an attractive, fully franked 7 per cent on July 10.
Fogarty, of Alto Capital, recommends Commonwealth Bank for long-term growth supported by a dividend yield above 6 per cent at today’s price levels. Fogarty again crunches the numbers to support his argument – cash flow on average has risen by 18.2 per cent a year for the past 10 years, earnings averaged an increase of 10.7 per cent a year since 1998 and dividends averaged a rise of 10.5 per cent a year for the past decade. The share price has fallen about $20 since November last year in response to the credit crunch and a slowing economy. Astute investors can buy at today’s levels and pocket the dividend while waiting for an easing in credit markets. “Buying any of the big four banks is a much safer strategy as opposed to buying some of the higher geared investment banks, such as Babcock Brown,” Fogarty says.
Ben Potter, of ABN Amro Morgans, says National Australia Bank and Westpac are his preferred exposure to the banking sector. Potter says: “The banking sector is providing strong fully-franked dividend yields of about 7 per cent and this cannot be ignored. High yielding stocks with sustainable earnings always form an important part of any portfolio, but even more so in times of sharemarket volatility.”
Potter says industrial giant Wesfarmers is another strong yielding stock at 5.75 per cent following a gradual decline in its share price. But the share price offers upside over the longer term from diverse earnings streams, which include energy, chemicals and fertilisers, industrial and safety, insurance and retailing. Eventually, a meaner and leaner Coles Group will complement the profitable Bunnings hardware chain. “A diverse range of operating businesses reduces earnings volatility,” Potter says.
Project management and stgelopment group Leighton Holdings is a growth stock with multi-billion dollar projects in the pipeline. “This company is priced at a premium to the market, but deserves this rating given its earnings performance and strong balance sheet,” Potter says. “It’s a worthy buy for capital growth, but not for a partially-franked dividend yield of about 2.7 per cent.”
Potter says another growth stock WorleyParsons is a proven performer with a solid balance sheet and strong cash flows. In providing professional services to the energy, resource and infrastructure industries, WorleyParsons also has an appetite for corporate deals that it seamlessly integrates into its own strong business. Again this is not an income stock as the partially-franked dividend yield is only marginally above 2 per cent.
Michael Heffernan, of Austock, recommends cement maker Adelaide Brighton for its high return on equity of 17 per cent, strong profit forecasts and low debt. Its share price has held up well during the sharemarket downturn and its outlook is bright courtesy of relatively buoyant construction and resource industries.
Heffernan says commercial explosives supplier Orica will continue to benefit from a mining boom that shows no signs of slowing down. Orica is trading in the mid $20 levels, comfortably off its $32.50 high in December last year. Heffernan says: “When good quality stock is $7 off its high, then that’s the time to consider buying. This stock has nothing to do with the credit crunch, but, like so many others, is suffering from negative investor sentiment. Orica has a good history of earnings and is trading on a favourable price/earnings ratio in the mid teens. It offers a dividend yield of about 3.5 per cent, which is quite good for a capital growth stock.”