Tuesday, December 21, 2010

Australian Exchange Traded Fund Range Bolstered By New iShares ETFs

The choice for ETF investors just got a little broader. Earlier this month BlackRock launched 4 new ASX listed Exchange Traded Funds all covering the Australian stock market. The table below list each of the 4 new funds.

ASX Code Fund Name Purpose of Fund
ILC iShares S&P/ASX 20 Tracks the performance of the S&P/ASX 20 Index
IOZ iShares MSCI Australia 200 Tracks the performance of the MSCI Australia 200 Index
ISO iShares S&P/ASX Small Ordinaries Tracks the performance of the S&P/ASX Small Ordinaries Index
IHD iShares S&P/ASX High Dividend Provides exposure to 50 of Australia's larger high dividend paying stocks

New iShares Exchange Traded Funds

There were already a number of iShares ETFs trading on the Australian Stock Exchange, however up until now none of them provided any exposure to Australian share indexes - they were all international.

ILC - iShares S&P/ASX 20

This ETF aims to reproduce the performance of the S&P/ASX 20 Index. This index comprises the 20 largest companies trading on the ASX. You can view the components of the S&P/ASX 20 index (or indeed any of the S&P indexes) on the Standard and Poors website (try http://www.standardandpoors.com/indices/main/en/au.

IOZ - iShares MSCI Australia 200

This fund tracks the broader based MSCI Australia 200 index. Although I couldn't uncover the exact make-up of the index, it includes the largest 200 companies listed on the ASX (you can read more about the underlying index here - http://www.mscibarra.com/products/indices/domestic_equity_indices/australia/msci_australia_200_index/).

ISO - iShares S&P/ASX Small Ordinaries

The Small Ordinaries index is made up of around 200 ASX-listed small capitalisation stocks. From memory, I think the index is made up of the companies from the ASX 300 index which are outside the ASX 100 (the smaller end of the ASX 300 if you like).

I quite like this index as it contains some very good quality companies, many of which are growing quite rapidly. I think one of the advantages of this fund is that the Small Ordiniaries index performs better at a different stage of the economic cycle than some of the Large Cap indexes.

IHD - iShares S&P/ASX High Dividend

This last new ETF seeks to replicate the performance of the S&P/ASX High Dividend index. The index comprises 50 high dividend yield companies drawn from the ASX 300. Once again, you can read more on the eligibility criteria on the Standard and Poors website.

Each of these new ETFs can be bought and sold on the Australian Stock Market through your Stock Broker just like normal shares. For investors seeking broad exposure to Australian shares as part of their strategic asset allocation, these new exchange traded funds could be quite useful.

Tuesday, December 14, 2010

Dividend Investing For Beginners

A well constructed portfolio of high dividend paying stocks is a great foundation upon which to build a strategy to achieve financial independence. It is the passive income derived from such a portfolio which grants us our financial freedom. There is no point in being asset-rich if we are cash-flow poor. In this article I'll discuss how stock market beginners can get started with dividend investing.

What Are Dividends?

They are payments made out of earnings from a company to its shareholders. What is paid is the portion of profits which a company doesn't need in order to maintain and grow the business. It is the reward which shareholders receive in return for providing capital to the business. Along with capital gains, it is how an investor profits from buying shares.

Dividend Yield

The dividend yield is simply the amount of a company's annual dividend payments divided by the current share price expressed as a percentage. So a company paying an annual amount of $0.25 with a current share price of $5.00 has a yield of 5% (0.25 / 5.00 * 100). You don't really need to calculate this figure though because it is published in the financial pages of many newspapers, is available in the research section of many online stock brokers and can also be found on financial portals like Yahoo Finance.

Dividend yield is sometimes compared to the interest rate on a bank account. They are similar in that they both express the cash return an investor receives as a percentage of the original investment. However it is important to remember that a dividend is paid at the discretion of the company's management. Unlike a bank savings account, the board of directors may choose to lower or even stop payments to shareholders all together.

Dividend Reinvestment

Another important concept in the world of dividend stocks is the DRP or dividend reinvestment plan. In simple terms a DRP is a mechanism whereby investors can elect to receive their payments in shares in lieu of cash. So instead of receiving a cash payment, the investor will receive an equivalent amount in shares. An investor who is entitled to a total of $500 in payment from a company whose shares are trading at $5.00 would instead receive 100 new shares.

DRP's have two main advantages. The investor receives the new shares without needing to pay any brokerage. This means the investor can grow the size of his or her holding at a lower cost than if he or she had bought the shares on the open market. The other advantage is that DRP's often operate at a discount to the current market price. So in the example above, if there was a 5% discount, the shares would be issued at $4.75 meaning the shareholder would receive 105 new shares.

DRP's are optional meaning that shareholders may choose not to participate and instead receive their payment in cash as normal. Not all companies operate DRP's.

An Income Oriented Investment Portfolio

Having read this far you could be forgiven for thinking that building the ideal income oriented investment portfolio should be a simple matter of buying a group of high dividend yield stocks then sitting back to watch the cash roll in. While in theory this is the case, in practise a serious share investor will need to dig a little deeper.

Dividend Payout Ratio

When buying shares for income, the last thing you want to see is for the level of income to fall, or even worse - to stop all together. For this reason it pays to look at the payout ratio. This ratio is simply the amount of dividends paid as a percentage of net profit. What we are looking for is a ratio of 100% or less. If the payout ratio is greater than 100% this means a company has paid out more than it earns and this can't continue for long. The dividend rate will need to fall - and so will your income.

Sustainable dividends

So we've established that we'd like a company to earn at least as much money as it pays out but in order to create a stable income we also need to make sure those earnings are stable. For this reason we need to look at the company's history of profitability. We want to see net profit after tax being stable or preferably growing over a number of years.

We'd also like to see a history of paying dividends. Look back over the past 5 years and make sure the company is paying a regular dividend.

Rising Dividends

While you're checking on the dividend history, check to see whether the amount paid is rising each year. A rising dividend is good for two reasons. Firstly, it normally indicates a growing company in good financial shape. Secondly it means that your income will grow along with it.

Other Factors To Consider

While the income producing capability of the shares which make up your portfolio is important, there is yet more digging to do.

Before investing in shares I like to look at the financial strength of the company in question. This normally means evaluating the level of debt the business has (debt to equity ratio) and its ability to service the debt (interest cover). One thing I think we all leaned as a result of the global financial crisis is the consequences of borrowing too much. Enough said.

The other area I like to delve into before investing money is the performance of the company. The main thing I look at here is how efficiently the business utilises its capital (return on equity or return on invested capital) compared to others in the same industry. To me, the ability to sustain or increase returns on capital demonstrates a good business and increases the chances of capital growth also contributing to your overall investment return.

You've Got Some Homework To Do

I wont lie to you - stock market investing does require some work. Doing the research required to whittle down the list of investment opportunities to those with the best prospects takes time. But I think it's worth it. Watching the steady stream of passive income which results from dividend investing is rewarding in more ways than one.

Sunday, October 10, 2010

QRN - QR National Share Offer Document Now Available

Finally the big day for prospective QR National investors has arrived. The offer document has been released and now we get a chance to see what the 'big' fuss has all been about (don't tell me you haven't seen the ads). What follows are some of the highlights from the QR National prospectus.

How Much?

The indicative price range is between $2.50 and $3.00 per share with the final price paid by institutions (fund managers and the like) to be set by way of an institutional book build (kind of like an auction for the big boys). Retail investors will pay 10 cents per share less than the institutions up to a price of $2.80. I guess that means we will pay somewhere between $2.40 and $2.80 per share.

Retail shareholders are also eligible to receive 1 loyalty bonus share for every 20 shares up to 500 loyalty bonus shares provided shares bought in the float are held until December next year.

What do you get?

As smart investors will know, price is only one part of the value equation. What will we get for our money? Well, the offer document has a forecast price to earnings ratio of between 21 and 25 times for FY2011 and 16.5 and 20 times for FY2012. As you have probably deduced from those figures, earnings are expected to have significant growth over the next couple of years. Earnings per share is expected to grow from 11.8 cents next year to 15.1 cents in the following year. I think part of the rationale for the earnings growth is that the company has not been run as efficiently in the past under government ownership as it will be when publicly listed.

With regard to dividends, a dividend yield of 2.1% to 2.5% is forecast next year rising to between 2.8% and 3.3% the year after. However investors will have to wait until September 2010 to receive any dividends when the company expects to pay out 3.7 cents per share. Also, if you refer to the Dividend Policy in Section 2.7, you'll notice that dividends will be unfranked for the next couple of years and only partly franked after that.

Based on these figures, an investment in QRN doesn't strike me as a screaming bargain but I guess time will tell.

What Are The Risks?

I wont go into all of the risks but if you flip to page 117 of the offer document you'll get the complete run-down. Apart from the standard investment related risks there is plenty for future shareholders to worry about. A couple which caught my eye were the potential impact of the Resource Super Profits Tax (RSPT) and the possible shortfall in the defined benefit superannuation scheme of some of the employees.

One other point of note is the reported strong interest in the upcoming float as indicated by the high number of pre-registrations. After having received a letter from a stock broking company assuring me they had kindly pre-registered interest in the float on my behalf, I wonder how many of these reported pre-registrations were from unwitting clients of large brokerage houses. In other words, how much real interest has there been in the QR National Float and how much of the reported demand has been generated by kind stock brokers like mine. Food for thought.

If you have any interest in this investment, make sure you read and understand the offer document before investing. The retail offer is now open and is expected to close at COB on 12 November. QR National shares should start trading in early December.

Thursday, September 23, 2010

QR National Share Offer

Is it worth buying shares in the QR National float?

That is the $6.5 billion question. Unfortunately, we're all going to have to wait a little longer to find out. Until October 10 to be exact. That's when the prospectus is due to be released.

Although details of the QR share offer are still sketchy, most main-stream media are predicting a market capitalization once the listing takes place to be around 6.5 billion dollars, although the Queensland Government may retain between 25% and 40% ownership. If you do the maths, that's still a sizeable opportunity for Australian investors. In fact this will be the largest float this year and the second largest in Australian history.

Pre-Registration Now Open For QR National Shares

Although the prospectus will not be released until October 10, Australian retail investors can now register their interest in the float. The main benefit of pre-registration seems to be a guaranteed minimum allocation of shares in the offer.

Retail investors also receive other benefits. According to the website we will receive a discount to what institional investors pay. We will have a maximum price (I guess the price paid by institutions will be set by some sort of book build process - kind of like an auction). There will be loyalty bonus shares on offer. This normally means you will receive some additional shares for free if you hold for a set minimum period. I think retail investors in Telstra received a similar deal.

As an added bonus, Queensland residents receive a priority allocation.

If you have any interest at all in the QR National Float, then it's probably worth pre-registering. It doesn't mean you need to take up the offer, but you will at least receive the minimum allocation if you do. You can pre-register at the QR National Share Offer website. Pre-registration closes on October 8.

Update: The prospectus has now been released. I have outlined some of the more interesting details in my latest post on the QR National Share Offer.

Wednesday, June 16, 2010

Valemus Float - Valemus Share Offer Opens Today

Despite stock market volatility in recent times, the Valemus IPO appears set to proceed with the Retail Share Offer opening today. If successful, the float will raise over 1.2 billion dollars, making it the largest IPO so far this year. In fact it will be the largest initial public offering since Myer last year, although prospective investors would be hoping for a much better performance this time around.

Valemus is the recently renamed Australian arm of Bilfinger Berger - a German Construction and Engineering business. While Bilfinger Berger may not exactly be a household name, many of us would have seen the name Abigroup or Baulderstone on various construction sites around Australia over the years. And it is these two businesses which make up the bulk of Valemus Limited.

Abigroup used to be listed on the ASX until it was taken over by Bilfinger Berger back on 2004. Abigroup accounts for around 42% of overall revenue. Baulderstone (formerly Baulderstone Hornibrook) accounts for around 43% of group revenue. Both Abigroup and Baulderstone specialise in major infrastructure projects like bridges, roads, tunnels, ports and the like as well as other non-residential building projects. Conneq, the third arm of the business, is a services business and makes up the balance of revenue for Valemus Limited.

Turning to the financial statements within the prospectus actually gave me a pleasant surprise. The company is projected to carry no net debt - it is actually expected to have net cash of over $150 million. I must admit I was expecting to see a balance sheet loaded up with debt (like some other high profile floats in years gone by). The forecast price to earnings ratio is between 10.5 and 12 times and the forecast dividend yield is between 3.6% and 4.1% depending on the final price. It doesn't look overly cheap, but then it doesn't look way too expensive either.

When looking at the value of the offer, we could perhaps look at Leighton Holdings, which is what appears to be a similar business, at least superficially. Leighton trades on a price to (adjusted) earnings ratio of around 15 times. So on the surface, the Valemus IPO doesn't look too expensive. However we should keep in mind the Leighton is a much bigger beast with a strong history. It should also be noted that while Leighton closed today at $32.31, it has traded as high as $41.70 and as low as $21.10 over the past year. (Compare this to a company likw Woolworths which traded between $25.19 and $30.57 over the same period.) This should give some indication of the volatility one can expect when owning a company which operates in the engineering and construction industry.

The details of the Valemus float are as follows. There are a total of 555 million shares available at an indicative price of between $2.20 and $2.50 per share. The final price will be set at the completion of the Institutional offer and the price may actually be set above or below the indicative price range but Retail Investors will still only pay a maximum of $2.50. The total amount being raised under the offer is between $1.22 billion and $1.39 billion. The retail offer opened today and is due to close on 2 July 2010 although the Commonwealth Securities home pages warns that it may close earlier (not that this is surprising given that CommSec is one of the brokers spruiking the float).

If you are interested in this float, make sure you (or a trusted financial adviser) pay close attention to the risks listed in the offer document. Even though the company appears to be in a strong financial position, it is operating in a tough industry. It is cyclical and profit margins are very thin.

Valemus Limited is expected to begin trading (on a deferred settlement basis) on the Australian Stock Exchange under the ASX code of VLM on 9 July 2010.

Friday, January 15, 2010

Best Shares To Buy In 2010

Buying shares over the past couple of years has certainly been a hair-raising experience for most of us. It's been an extraordinary roller coaster ride. The All Ordinaries index started 2008 at 4,882 before reaching a low of 3201 in November of that year. Then in March of 2009 we got lower still - down to 3,090 in March before finishing the year at 4,882. Overall in 2009 the index gained more than 33% or around 58% since the low point in March but that was a shocker of a year in 2008.

2008/2009 Share Price Graph

So what can we expect from the Australian stock market in 2010? Well quite frankly, your guess is as good as mine. But I think it's worth putting what we learned in 2008 and 2009 into practice in 2010.

What Did We Learn From 2009?

Well the first and perhaps most important thing is that investing in shares is a long term game.

While I like to consider myself a rational long-term investor, I must still admit that when the stock market went into free fall early last year, I was very worried. I found myself checking the prices of the shares that I own much more frequently than I should have been. And even when I was able to restrain myself, a colleague of mine updated me at least daily on the turmoil in Australian and world share markets.

Even though I kept telling myself that my investment strategy is to buy shares in good companies and hold them for the long term, there was still a part of me that wanted to sell my shares immediately and wait for the stock market to recover it's equilibrium before investing again. I knew that doing so would have resulted in missing at least part of the rebound when it did eventually come, but I was still worried. I kept telling myself that I should be focused on what share prices would be in 5 or 10 years time, not what they would be in the next 5 or 10 days.

So in 2010, good shares to buy will be those I'm willing to hold for the long term.

Buying Shares In Quality Companies.

The second lesson learned was to invest the bulk of my portfolio in businesses with strong balance sheets and a history of strong financial performance. If you managed to stick with this investment strategy, you would have managed to pick your way through the minefield of corporate collapses of the past couple of years. Don't get me wrong - your investments will almost certainly be worth less than there were a couple of years ago, but you have every chance of recouping your paper losses as the companies in which you're invested continue to grow and prosper. If a company in which you're invested becomes insolvent (as has happened in a number of highly leveraged situations) then your loss will be permanent. When the liquidator is finished there is not normally much left over for ordinary shareholders.

Fortunately (due to a couple of expensive lessons in the past) my portfolio has managed to survive the latest downturn unscathed. The vast majority of my holdings have little or no debt. And the companies I own which do have any level of debt, have sufficient cash flow to service the debt (plus some to spare).

As I have just alluded to, I lost money in in a couple of corporate insolvencies in a previous downturn. It was an expensive lesson but one which I suspect paid for itself many times over this time around. You see, I am a bargain hunter at heart. I love finding companies with cheap share prices relative to their assets or earnings. However, there is quite often a good reason why they are cheap - high levels of debt being one of those reasons. So these days I avoid investments where debt is a major factor.

Debt can be a company-killer. Bankers don't like to lose money and get very nervous when a business gets up a wobble. A banker is not usually the type of person who will say "...that's fine - just pay me back when you have the money...". They will generally want to see their interest paid on a regular basis and the principle repaid in full at the agreed time.

I should say that I looked closely at both ABC learning and Babcock and Brown when their respective share prices plummeted. I concluded that if they survived, they would turn out to be screaming bargains. However, while their survival was at all in doubt I resolved to stay away. Though I should admit that a previous me would have jumped on board both of those trains.

So in 2010 the best shares to buy will be those with sound balance sheets and strong financial performance. I need to maintain my commitment to avoid any investment opportunities where there is a real risk of permanent loss of capital.

Selling Shares To Raise Capital

A common theme in 2009 was capital raising. A staggering number of companies, many of them blue chip, went out to investors with their hands out, asking "Please sir, may I have some more?"

While it was necessary for many companies to repair their balance sheets through the issue of new shares, unfortunately the capital raisings were at discounts to already depressed share prices. This of course has a dilutive effect. A company which has the same profits this year as it did last year but which issued new shares during the year will have correspondingly lower earnings per share. Put simply, you get a smaller share of the profits.

As an example, imagine a company which last year had 10 million shares on issue and made a profit of 10 million dollars. This would equate to earnings per share of $1.00. Now imagine that the company had sold an additional 10 million shares in order to raise capital to strengthen its balance sheet. If it earns the same 10 million dollars as last year but now has 20 million shares outstanding, the earnings per share will only be 50 cents. This might be an extreme example, but hopefully it illustrates my point.

Will Gold's Bull Run Continue?

The following graph shows the performance of gold in US dollars over the past 5 years.

Gold Price Over 5 Years

As you can see, there is a very strong upward trend. The question is whether it will continue. I have to admit that I don't know a lot about what drives the price of gold. However, I do know that it does well in times of uncertainty and that it is considered by many to be a hedge against inflation.

With the recent stimulus packages delivered both in Australia and overseas, inflation is the word being uttered furtively in economic circles. Warren Buffett warned of the risk of inflation on the New York Times in August last year. So perhaps some exposure to gold might not be a bad thing. I have written on how to go about investing in gold before.

What About Buying Bank Shares?

The big four Australian banks seem to have increased their stranglehold on the residential mortgage market since the global financial crisis - but are they good shares to buy? I've already mentioned the effect that capital raisings will have on earnings per share. And I'm pretty sure that all of Australia's major banks have raised capital over the past 18 months.

Another risk is that regulation will be introduced tightening capital requirements for banks (if you're ever having trouble sleeping, just try reading about capital adequacy requirements). This will lead to lower returns on equity and ultimately lower returns for shareholders.

The last thing to consider before investing in bank shares is the likely impact of higher interest rates. It seems we are past the low point in the interest rate cycle, at least in Australia. As rates continue to rise we will probably see slower credit growth in Australia as people borrow less. This in turn will lower the rate of profit growth of our banks.

What About The Strong Aussie Dollar?

The last thought I'll leave you with is related to the strong Australian dollar. It may be worth considering what further strength in the Australian dollar would mean to your investment portfolio or alternatively what a drop in the exchange rate would mean as well. Certainly, companies with significant US dollar earnings feel the pinch when the dollar is high.

If you've ever considered buying international shares, now might be a good time as well. You'll get more bang for your buck and if the dollar does start to lose value later in the year, you will end up with foreign currency gains as well. But as I've written in the past, your gains will turn into losses if the exchange rate moves the other way.

Good luck buying shares in 2010!

Thursday, January 7, 2010

2010 Share Market Floats - What Can Investors Look Forward To?

What will 2010 deliver to Australian stock market investors when it comes to new share floats? Hopefully, the worst of the global financial crisis is now behind us. After a fairly slow year in terms of the number and size of Initial Public Offerings, companies which had temporarily put their share float plans on the back burner may now be taking a second look at the market.

I think one of the reasons that 2009 was such a bad year for new share floats was the amount of competition for investment dollars. Investors could snap up a bargain pretty much anywhere they cared to look in the first half of 2009 (provided they were looking - some investors were too scared to go anywhere near the stock market given the massive falls an 2008, which continued into the early part of 2009).

Why would someone take the risk of investing in the Initial Public Offering of a company with no history as a publicly listed entity when there were businesses with long histories and strong track records up for grabs? The other area of competition was in capital raisings. With dozens of companies (many of them large and well-known) repairing their balance sheets by offering new stock to investors at a discount to already depressed prices, nobody was interested in the new guys.

There were only 40-odd new share floats in 2009. Of these, only 3 were of any substantial size - Carsales.com, Kathmandu and of course Myer.

So what are the upcoming share floats investors can look forward to in 2010? Well as usual, rumours abound. But here are a few of larger IPO's which may well get a guernsey this year.

Link Market Services

I have read in several places now this share registry service provider is planning an IPO. The business is currently owned by private equity firm Pacific Equity Partners. According to Christopher Webb who writes for The Age, the financials for Link Market Services don't look too flash though. If a Link Market Services share float is on the cards, it will be interesting to see how the sale is marketed to investors.

Ascendia Retail

Another private equity owned business, Ascendia Retail has reportedly engaged investment banks Goldman Sachs and UBS to advise on a possible stock market listing this year. Archer Capital own the group which operates the Rebel Sport and Amart Allsports retail chains. No doubt those involved in the Ascendia Retail share float will have been watching the fortunes of the Myer and Kathmandu IPO's very closely.

QR National (Queensland Rail)

Part of the Queensland Government's planned privatisation bonanza, the $7 billion QR National will list in the second half of 2010. The company will operate Queensland's coal and freight rail network. This is likely to be the largest Initial Private Offering of the year. Apparently priority in the QR National share float will be given to Queenslanders with staff reportedly receiving $1,000 worth of free shares and up to another $4,000 at a discount.

Other household names rumoured to be considering a public listing include cinema chain Hoyts, women's fashion retailer Witchery and Vacuum Cleaner specialist Godfreys. Along with the inevitable flood of speculative mining companies, investors in IPO's may well be spoilt for choice in 2010.

20 June 2010: It turns out the first major sharemarket float for 2010 is the Bilfinger Berger-owned Valemus Limited. The engineering and construction business will list in July. The share offer opened during the week. To find out more about it, read this post - Valemus Float - Valemus Share Offer Opens Today.