All Ords Report 03 March 2015
Although from 2011 Telstra (TLS) has shifted from being shunned by investors to being tightly held, one has to wonder, is TLS near a top?
Firstly, over the past four years, the major attraction for most TLS investors has been the healthy fully franked dividends, which at times were set above the market average of around 4.5 per cent, and typically well above term deposit rates.
Remember that as a share price falls, like TLS did through 2008 to late 2010, the dividend yields will rise, unless the company cuts the payout rate to try to keep it more in line with the average. TLS kept the dividend yield high for a time, with a view to continue to hold long term investor interest, and as conditions improved for the Telco and the share price rose, the dividend yield fell.
TLSís payout strategy, being to hold the dividend at around or above the market average, and to remain fully franked, helped to position the stock well to attract investors looking for blue chip, high dividend paying, defensive stocks. Without this strategy, I believe that many investors would not have hung on to TLS through all the ups and downs, around the National Broadband Network (NBN) and when Sol Trujillo was at the TLS helm. However, many did hang on through it all, just to get that dividend.
When David Thodey took the helm long term shareholders were probably relieved. David and his team managed to steer TLS out of the dark days to better times, and a much stronger share price. His vision for TLS was to have a much stronger focus on customer service, which was severely lacking for so long.
Perhaps you experienced firsthand how bad the service was at TLS many years ago, and this may have driven you to look elsewhere for a service provider. However, if you remained with TLS you would probably agree that customer service has changed for the better. Happy customers have helped to support a stronger share price. Whilst change can be good, it can also make shareholders nervous, and there are more changes on the horizon for TLS.
Mr Thodey will soon hand over the reins to Telstraís Chief Financial Officer, Andrew Penn. Of course, there will be a handover process over the coming months, and it may be some time before we see change occur. However, as an early indication, looking at my chart and the timing of Thodeyís departure, I believe that the move signals a pending top is on the horizon for TLS shares for 2015.
Long term investors who buy and hold for dividends are concerned that dividends may be cut as questions are being asked in the market about the opportunity for companies like TLS to cut their dividends and use the capital to reinvest for growth. Now, this may raise a red flag if you have been a long term investor, with a view to hold stocks that pay around or above market average dividend yields, and you hold TLS, as the current payout rate is already just below the market average.
If the dividend is cut, without a compelling reason, many long term investors may decide to look elsewhere for a better income return, which could see the share price soften.
So what do we expect in the market?
Following some big gains over recent weeks on the Australian market, one would be forgiven for thinking that the party may soon be over, as in the space of just five weeks we have seen the All Ordinaries Index put on around 8.0 per cent. Could there be more?
These are interesting times, and while the music may be slowing down, the band hasnít finished yet. Therefore, although the market may pull back slightly, or trade sideways, over the coming weeks to test support below, there is still the potential for the market to continue to trade much higher this year.
Supporting the recent rise, the Australian reporting season has been quite positive overall, and last week, Fed Chair Janet Yellen continued to convey an upbeat view on the US economy, which pushed American and European markets higher. Also, news that Chinaís manufacturing sector has reportedly moved into expansionary territory has also given the market a boost. But many investors are wondering whether this will continue. I believe itís too early to tell, however, I suggest that you keep an eye on the Chinese data, with a view to continue to make hay while the sun shines.
There are many stocks that still havenít reached important targets for 2015, as the analysis indicates ought to be achieved. While these stocks are trading below important levels, the market is more likely to continue to rise than fall significantly. Also, if we look back to what happened after the Ď87 crash, the chart shows how it took the All Ordinaries Index around 75 months from the low, to break to a new all-time high. So where is our market now?
Currently, the All Ordinaries Index is trading at around 71 months from the low in March 2009, and given the strength of the rise last month, we may soon see a continuation of this move and a further acceleration over the coming months and well into the second half. That said, given history, and the slowdown that can occur as we approach mid-year, it is important to be prepared for prices to temporarily pull back.
The real question one must continue to consider in the current climate is with the cash rate so low, and conditions in equity markets bullish, where else will investors put their money?
Dale Gillham is Chief Analyst at Wealth Within