Stock Pick

  • Can ASX big banks generate an attractive sustainable dividend yield from FY21?

    Bank shares

    ASX bank investors have to endure a roller coaster ride as the market falls in and out of love with the sector.

    The share prices of the big four crashed as the COVID-19 crisis unfolded and quickly rebounded on a FOMO buying frenzy.

    That bounce quickly petered with bank stocks copping the brunt of the selling today. The Westpac Banking Corp (ASX: WBC) share price was the worst in the group with a 2.9% decline to $17.38.

    But the National Australia Bank Ltd. (ASX: NAB) share price and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price weren’t far behind with around a 2.7% fall each.

    The Commonwealth Bank of Australia (ASX: CBA) share price is the outlier (as usual). Shares in our biggest domestic bank shed 1.5% to $66.30 and is the only one in the group that outperformed the 2.2% drop on the S&P/ASX 200 Index (Index:^AXJO).

    The bank valuation debate

    Investors are blowing hot and cold towards the sector as experts can’t seem to quite agree on whether these stocks are cheap or expensive.

    The debate centres around bank’s return on equity (ROE) and price to book value (P/B). The Australian Financial Review reported that a consensus view seems to be forming around the sector’s post-coronavirus ROE of around 10%.

    The P/B multiple is also fairly black and white with the big banks trading at around 0.9 times, with the exception of the higher quality CBA at 1.5 times.

    The problem is working out if these measurements represent value in the face of growing loan defaults after government support ends in September.

    Multiple earnings headwinds

    The Australian Banking Association data shows that the total number of deferred loans stand at nearly 800,000. If most of these distressed borrowers can’t return to paying off their monthly mortgage payments soon, things could get ugly for the banking sector.

    There’re other headwinds impacting on bank profits too. Their net interest margin (which is essentially their operating profit margin) have been under pressure even before the pandemic.

    Record low interest rates and a flattening bond curve have made more challenging for these lenders to turn a buck. Banks make the most hay when short-term bond yields are materially lower than longer-term yields.

    Stay focus on dividend yield

    I won’t blame you if you don’t quite get what ROE and P/B really measure or why retail investors should care.

    The fact is, the only measure that I think is important at this juncture is the dividend yield. If the banks can achieve a ROE of around 10% as most analysts expect, this should enable them to pay out around 70% of profits as dividend.

    Foolish takeaway

    That should provide investors with a forecast dividend yield of around 6% before franking at the current share prices.

    Add in franking, and that will push the yield north of 8% (except for CBA as investors will need to pay a premium for quality).

    Even if that proves too optimistic and the gross-up yield drops to around 6%, that still represents good value to me as interest rates are expected to stay close to zero for a few years yet.

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    Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

    The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

    The post Can ASX big banks generate an attractive sustainable dividend yield from FY21? appeared first on Motley Fool Australia.

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  • U.S. Stock Index Futures Slide Amid Growing Second Wave Concerns

    U.S. Stock Index Futures Slide Amid Growing Second Wave Concerns(Bloomberg) — U.S. stock index futures dropped alongside shares in Europe and Asia as worries over a potential second wave of Covid-19 led to deepening concerns over the global economy.Contracts on the S&P 500 declined 3% as of 8:27 a.m. in London. Futures on the Nasdaq 100 Index and Dow Jones Industrial Average fell 2.4% and 3%, respectively. On Friday, U.S. stocks rallied from the biggest rout in 12 weeks as dip-buyers emerged for firms that bore the brunt of Thursday’s selling.“Despite Wall Street stabilizing and finishing the week with a positive session, it appears that the FOMO, fast-money, peak-virus, buy-everything, v-shaped recovery herd remains nervously grazing near the edge of the cliff,” Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, wrote in a note.The Stoxx Europe 600 Index tumbled 2.5%, with cyclical sectors such as miners and oil leading the declines. Equity indexes in Japan, Hong Kong, China, Taiwan and South Korea all fell.An outbreak of cases in Beijing raised fears of a resurgence of the pandemic in China. Infections spread to a second fruit and vegetable market and more than 20 residential compounds across the city were locked down. Tokyo also saw infections climb, and South Africa posted record new cases for a second day. Infectious disease expert Anthony Fauci suggested that bans on travel to the U.S. may remain until a vaccine arrives.While U.S. stocks recovered Friday, all three major equity gauges fell for the week on concern over the pace of recovery following months of lockdown.The potential for a second wave of infections “appears to be a much more immediate danger to markets,” said Michael McCarthy, chief market strategist at CMC Markets Asia Pacific.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

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  • Ramsay Health Care and 1 other ASX share I would buy for both growth and income

    ASX dividend shares

    Buying ASX shares for both growth and income isn’t something that too many investors actively strive for in my experience. You’ll hear “I’m a growth investor” or “I’m a dividend income investor’ far more than “I go for growth and income”, I’d wager.

    But by not seeking the best of both worlds, you might be overlooking some potentially lucrative returns. There are many ASX shares that have made investors very wealthy with a combination of both growth and income.

    So, with this in mind, here are 2 ASX shares that I think investors can reasonably expect to deliver both capital growth and dividend income going forward.

    Ramsay Health Care Limited (ASX: RHC)

    Ramsay Health Care isn’t a favourite share of the income investor right now. This company used to have one of the best ASX dividend records around – 20 years of uninterrupted increases. Unfortunately, the COVID-19 crisis put an end to that this year and Ramsay has suspended its dividend payments until further notice.

    Ramsay runs a network of private hospitals across Australia and a few other countries, including the United Kingdom and France. I think private healthcare is going to be playing an increasingly large role in the hospital network over the coming decade or two, given the demographic of our ageing population. Ramsay is well placed to capitalise on this trend, which should give this company a very long growth runway

    I think Ramsay is still a top choice for both growth and income today. Yes, the company has suspended dividend payments. But I think this suspension won’t last long, and indeed I think it was prudent at the time, given the uncertain path ahead for the economy. I don’t think it will be too long until dividends resume and investors enjoy another strong streak of payout increases.

    WAM Global Ltd (ASX: WGB)

    WAM Global is a listed investment company (LIC) that aims to find undervalued growth opportunities from various share markets around the world. This company has been growing its dividends rapidly (including by 50% last year), even though it only started life in 2018. WAM Global’s last interim dividend came in at 6 cents a share, which gives the LIC a trailing grossed-up dividend yield of 4.42% on current prices.

    WAM Global is also well-poised for some nice capital gains down the road. Some of WAM Global’s current top holdings include Amazon.com, Tencent, Costco and Activision Blizzard – all top-notch growth companies outside the realm of most ASX investors. 

    I think WAM Global’s management team has shown, alongside WAM’s other LICs like WAM Capital Ltd (ASX: WAM), that it knows how to grow wealth with a long-term mindset. Thus, I’m very confident in WAM Global today and in its future ability to provide both growth and income.

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    *Extreme Opportunities returns as of June 5th 2020

    More reading

    Motley Fool contributor Sebastian Bowen owns shares of Ramsay Health Care Limited and WAMGLOBAL FPO. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

    The post Ramsay Health Care and 1 other ASX share I would buy for both growth and income appeared first on Motley Fool Australia.

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