Tag: Motley Fool

The RBA palaver?

It’s true that Governor Phillip Lowe erred, badly, in letting Australians believe that rates wouldn’t increase until 2024.

And he and the RBA Board erred in not increasing rates more quickly, and more significantly, once it was likely that inflation was going to be too high.

And yet…

And yet, I think he should likely be reappointed. And that the review of the RBA released today is probably unnecessary (not least because it’s the view of three arbitrary – if eminently qualified – people that may, or may not, be the view of three other, similarly qualified people).

And that’s worth a discussion in itself.

But I want to use that, instead, as a jumping off point to explain how investors often underperform.

See, what’s happening is that plenty of people (including many who are reading this) will have one of two reactions to Phillip Lowe’s recent performance:

1. He screwed up. He should go; or

2. He screwed up, but he’s still the best person for the job.

And your choice matters.

No, not for Phillip Lowe (though hello Treasurer Chalmers if you’re reading this – your choice does matter for Dr Lowe’s continued employment!).

But it matters for your investing.

And I want to demonstrate with some numbers.

According to some relatively recent research, the average US managed fund underperforms the market.

That’s no surprise. The fees alone would all-but guarantee that.

But here’s the kicker. According to the same research, the average US managed fund investor performs worse than the average managed fund!

And if that sounds hard to believe, it’s explained by the fact that many investors sell out of last year’s losers, and invest in last year’s winners, instead.

But… reality being what it is, most funds don’t win two years in a row. The chopping and changing, chasing last year’s performance, costs investors a small fortune.

In other words, making a mistake, or underperforming, usually isn’t fatal.

And, things tend to revert back to average, over time.

Phil Lowe got it wrong, last time.

So, it turns out, did the entire Western world’s central bankers.

Maybe they’re all completely useless.

Or, just maybe, because the future is unknowable, and these circumstances were so unusual, mistakes happen.

If you want to assume Lowe and his cohorts will never be right again, be my guest.

But who do you replace him with? Someone who didn’t learn the lessons of the past couple of years?

Is that really likely to give you a better outcome next time around?

Or is it like managed fund investors who dump last year’s underperformers and buy last year’s winners, hoping they’ve found a path to endless prosperity?

The GOATs of behavioural psychology, Danny Kahnemann and Amos Tversky, knew this.

They gave the example of military aviation trainers. See, there was a prevailing view among trainers of military pilots that if those pilots were given praise after a great landing, performance worsened the next time. If they criticised a poor outcome, performance improved next time.

Which proved…

Nothing.

Other than that performance tends to revert to average. A bad landing was likely an aberration. As was a particularly great landing.

In other words, it had nothing to do with the feedback at all!

Is every central banker in the world suddenly useless? Or are these strange circumstances likely just, well, strange?

How you answer these questions matters for how you approach investing.

If you’re someone who takes feedback from short-term share price movements, you’re going to struggle to be a successful investor.

If you’re someone who takes short term business performance as necessarily indicative of long term performance, you’re going to struggle to be a successful investor.

What matters is long term performance.

Being able to look through short term gyrations – good and bad – and seeing the long term story.

Not chasing last year’s winners. Or selling last year’s losers.

Which isn’t to say last year’s losers will necessarily start winning.

Or that last year’s winners are doomed.

But it’s a reminder that there is, to use another topical statistical concept, far more ‘noise’ than ‘signal’ in most data.

Which, frankly, channels Aesop’s tortoise and hare.

Can it really be possible that, after all of the growing ‘sophistication’ of finance over the past hundred years, it’s really that simple?

It’s more than possible.

It’s very bloody likely, in my view.

Politicians like to find someone else to blame. It’s good for their electoral chances.

We like to find someone to blame, too. It suits our deep seated need for vengeance: It just feels good.

But successful investors, I would argue, focus not on the past, but the future.

And not just the next 6 or 12 months.

But the next 6 or 12 years.

In the RBA context that means not asking ‘Who didn’t make a mistake last year’, but ‘Who is best placed to make the calls next year’.

The investors’ version of that question is trying to identify the companies that have the best chance of long term success, no matter what happened last year.

Feel free to choose the fresh-faced young buck with confidence and bravado, who’s going to learn the hard way.

I’ll take the grizzled general with the battle scars and a determination not to repeat past mistakes, every time.

Fool on!

The post What investors can learn from the RBA’s mistakes appeared first on The Motley Fool Australia.

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• Here are the 3 most heavily traded ASX 200 shares on Thursday
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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Flight Centre Travel Group Ltd (ASX: FLT) share price is up 0.9% in afternoon trade on Thursday.

Shares in the S&P/ASX 200 Index (ASX: XJO) travel stock closed yesterday trading for $18.79. Shares are currently trading for $18.95.

After a strong start to the new year, which saw the Flight Centre share price gain 37% between 3 January and 8 March, the stock has been trading in a fairly tight range. 

While that doesn’t tell us too much by itself, when a company’s stock consolidates it offers a good opportunity to dig in for some research on whether it’s worth buying.

If we take a step back, you’ll see that despite the strong run in 2023, the Flight Centre share price is still down 13% over the past 12 months.

And while shares are up 113% since the pandemic market meltdown lows of 19 March 2020, Flight Centre stock remains down 53% from 3 January that year.

Which tells me the rebound could have a lot further to run.

Are ASX 200 investors missing a profitable buying opportunity?

Whether or not the ASX 200 travel company is a good buy today certainly depends on who you ask.

Shares kicked off the week retaining their spot as the most shorted on the ASX, with an 11.8% short interest.

These short sellers clearly believe (or hope!) that the Flight Centre share price is going to drop from today’s levels.

But I wouldn’t bet on it.

Why the Flight Centre share price has room to run higher

The company remains in recovery mode from the massive pandemic hit. While shares could of course trade lower in the short term, I believe longer-term ASX 200 investors will look back and see today as a profitable buying opportunity.

Remember, while international travel numbers are recovering, they’ve yet to reach or exceed, pre-COVID levels.

But with a bit of help from China’s reopening, Flight Centre expects international capacity will hit 85% of pre-COVID levels by the end of June.

As for the most recent financials, Flight Centre reported a $2.4 million underlying post-tax loss on its half-year results for the six months ending 31 December.

Now a loss is a loss. But take note that the company reported a $188 million loss for that six-month period a year earlier.

With revenue coming in at $1 billion over the half year, the ASX 200 travel share reported underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) of $95 million. One year earlier EBITDA came in at a $184 million loss.

And one more reason I believe the Flight Centre share price remains a buying opportunity is the company’s strong balance sheet.

At 31 December, Flight Centre had a $465 million net cash position. This should help steer the company through any unexpected turbulence in the months ahead.

The post Is the Flight Centre share price handing ASX 200 investors a buying opportunity? appeared first on The Motley Fool Australia.

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More reading

• 11 ASX shares to buy with 4 on-trend qualities right now
• These are the 10 most shorted ASX shares this week
• Flight Centre shares are up 30% in 2023. Can it last?
• These are the 10 most shorted ASX shares this week
• Why did the Flight Centre share price go backwards in March?

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Flight Centre Travel Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Fans of All Ordinaries Index (ASX: XAO) biotechnology share Mesoblast Ltd (ASX: MSB) may have been on tenterhooks today. The company entered a trading halt shortly after the market opened, citing “a proposed placement of securities to targeted investors”.

But the short, roughly 30-minute window in which Mesoblast shares traded today saw the market bidding them lower. The company’s share price is halted at 99 cents – 1% lower than it closed Wednesday’s session.

For comparison, the ASX All Ords is up 0.04% at the time of writing.

Let’s take a closer look at what’s happening (or not happening) with Mesoblast shares on Thursday.

Mesoblast in trading halt amid placement

The Mesoblast share price isn’t going anywhere this afternoon as the company seemingly undergoes a capital raise.

Of course, that’s likely left investors itching for more information. And they might be kept waiting.

The company has requested that the trading halt continue until the market opens on Monday unless it releases another announcement sooner.

The last time the market was given a chance to delve into the company’s balance sheet was in late February.

Then, it revealed it had US$67.6 million of cash on hand and the option to draw an additional US$40 million from existing financing facilities subject to certain milestones.

It also used US$16.5 million of cash in operating activities in the second quarter of financial year 2023, posting a US$24.5 million post-tax loss for the period.

The last time Mesoblast underwent a placement was in August 2022. Then, it raised US$45 million by offering new shares for 75 cents apiece to major shareholders.

Mesoblast share price snapshot

The Mesoblast share price has had a wild ride in recent months.

The stock reached a high of $1.33 in February, a 118% recovery from its June 2022 low of 61 cents.

It’s currently 14% higher than it was at the start of 2023. Though, it’s fallen 13% since this time last year.

Meanwhile, the All Ords has gained 6% year to date and is down 4% over the last 12 months.

The post Here’s why Mesoblast shares are in a trading halt today appeared first on The Motley Fool Australia.

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More reading

• Why 29Metals, Allkem, Alliance, and Rio Tinto shares are falling today
• Why Bank of Queensland, Link, Silk Laser, and Zip shares are pushing higher
• How might the latest RBA changes impact ASX 200 investors?
• Could CBA be about to add $1 billion to its loan book?
• Could the Woodside share price face ‘long-term harm’ from this government tax plan?

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) has founds its legs this afternoon after a shaky morning. At the time of writing, the benchmark index is up 0.15% to 7,375.6 points.

Four ASX shares that have failed to follow the market higher today are listed below. Here’s why they are dropping:

29Metals Ltd (ASX: 29M)

The 29Metals share price is down over 12% to $1.18. This follows another disappointing update on the miner’s Capricorn Copper operation which was recently hit with extreme weather. According to the release, management expects the operation to be back up and running completely by the middle of the first half of 2024. That’s almost a year from now.

Allkem Ltd (ASX: AKE)

The Allkem share price is down 4.5% to $11.72. Investors have been selling this lithium miner’s shares following the release of its quarterly update. Although the company delivered a solid update and pricing ahead of expectations, this wasn’t enough to satisfy some investors. Tesla’s softer than expected quarterly result could have taken some of the shine of Allkem’s update.

Alliance Aviation Services Ltd (ASX: AQZ)

The Alliance share price is down 8% to $3.23. This follows news that the ACCC has blocked Qantas Airways Limited (ASX: QAN) from completing its acquisition of the airline services company. Alliance revealed that it will closely consider the ACCC’s decision and its options before deciding on its next steps.

Rio Tinto Ltd (ASX: RIO)

The Rio Tinto share price is down 2.5% to $120.20. This was despite the release of the mining giant’s first-quarter update this morning. Rio Tinto’s Pilbara iron ore business produced 79.3 million tonnes and shipped 82.5 million tonnes during the three months, which were jumps of 11% and 16%, respectively.

The post Why 29Metals, Allkem, Alliance, and Rio Tinto shares are falling today appeared first on The Motley Fool Australia.

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More reading

• Allkem share price slides despite strong quarterly production from the ASX 200 lithium stock
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Motley Fool contributor James Mickleboro has positions in Allkem. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Alliance Aviation Services. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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In afternoon trade, the S&P/ASX 200 Index (ASX: XJO) is on course to record a small gain. At the time of writing, the benchmark index is up 0.1% to 7,374.1 points.

Four ASX shares that are climbing more than most today are listed below. Here’s why they are pushing higher:

Bank of Queensland Ltd (ASX: BOQ)

The Bank of Queensland share price is up almost 2% to $6.40. This follows the release of the regional bank’s half-year results this morning. The bank reported a 4% decline in cash earnings to $256 million and a 9% reduction in its interim dividend to 20 cents per share. Management also eased investor nerves by saying: “BOQ is in a strong financial position as we enter this more challenging economic cycle.”

Link Administration Holdings Ltd (ASX: LNK)

The Link share price is up 2.5% to $2.14. This follows news that the administration services company has reached a conditional agreement for the sale of its Fund Solutions business to the Waystone Group for an aggregate consideration value of between £110 million and £140 million. The deal excludes its Luxembourg and Swiss entities, as well as the Woodford related liabilities.

Silk Laser Australia Ltd (ASX: SLA)

The Silk Laser share price is up 24% to $3.00. This has been driven by news that Wesfarmers Ltd (ASX: WES) has tabled a $3.15 cash per share non-binding takeover offer for Australia’s largest specialist clinic networks. The deal values Silk at $169 million. Wesfarmers expects the deal to complement its existing Clear Skincare Clinics business.

Zip Co Ltd (ASX: ZIP)

The Zip share price is up over 3% to 53.7 cents. This follows the release of the buy now pay later provider’s quarterly update. Zip reported a 15% increase in revenue to $182 million on a 9% lift in transaction volume to $2.2 billion. The company also delivered a nice improvement to its margins during the quarter.

The post Why Bank of Queensland, Link, Silk Laser, and Zip shares are pushing higher appeared first on The Motley Fool Australia.

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More reading

• Everything you need to know about the latest Bank of Queensland dividend
• Zip share price climbs on 15% revenue boost
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• Silk Laser share price rockets 25% following Wesfarmers takeover bid
• Wesfarmers share price on watch amid $169m Silk Laser takeover offer

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Link Administration and Zip Co. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Silk Laser Australia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It’s in the headlines everywhere you look: The Review of the Reserve Bank has been released, and it seemingly heralds a major overhaul of Australia’s central bank. It’s also likely left some wondering if the suggested changes could impact S&P/ASX 200 Index (ASX: XJO) investors.

Let’s delve into what ASX investors need to know about the report, titled ‘An RBA fit for the future’.

How might the RBA changes impact ASX 200 shares?

To start, it’s important to know the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) are the two major Australian regulatory agencies overseeing the ASX. The RBA’s responsibilities to the ASX haven’t been questioned in today’s report, however.

Instead, the 51 recommendations set forth – which the Albanese government has agreed to in principle – broadly relate to monetary policy decision-making, corporate governance, and culture.

The report’s release comes after ASX 200 shares were (at times) dampened by 10 consecutive rate hikes over the months to March. The hikes were made in an effort to tame inflation by, ultimately, suppressing consumer spending.

Of course, that was bad news for many S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) stocks.

Higher rates also generally mean more costly debt – a burden for many listed companies, particularly those on the S&P/ASX 200 Information Technology Index (ASX: XIJ).

Not to mention, they often weigh on property prices and, in turn, the S&P/ASX 200 Real Estate Index (ASX: XRE).

Thus, one of the suggestions that could be felt by the market is a change in how often the RBA board meets to consider adjusting the cash rate.

There are currently 11 RBA board meetings in a year. The review suggests that be cut to eight to “allow more time to consider the issues and engage with RBA staff within each meeting cycle”.

Another recommendation put forward demands monetary policy processes be more transparent. That could allow us more insight into the central bank’s decisions – a factor that may impact the market and the ASX 200 at times.

Of course, that’s just a few of the recommendations put forward. My Fool colleague Sebastian delved into five key recommendations in greater detail earlier today.

What’s next?

Commenting on the review today, RBA governor Philip Lowe said:

[A]s times change, we need to change too. This review will help us do this as we strive to promote the economic welfare of the Australian people.

But implementing all the recommendations might not be quite that simple. It will demand changes to the Reserve Bank Act and updates to the Statement on the Conduct of Monetary Policy.

On releasing the review, Federal Treasurer Jim Chalmers said:

The government is committed to working with the Reserve Bank, Council of Financial Regulators, and other stakeholders to implement these recommendations, collaboratively and constructively.

The post How might the latest RBA changes impact ASX 200 investors? appeared first on The Motley Fool Australia.

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More reading

• 3 ASX 200 shares making big moves following quarterly updates
• Everything you need to know about the latest Bank of Queensland dividend
• The ASX shares that could win in the long term
• 5 things to watch on the ASX 200 on Thursday
• Here are the top 10 ASX 200 shares today

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Commonwealth Bank of Australia (ASX: CBA) shares are in the green today.

The bank’s shares are rising 1.4% at the time of writing and currently fetching $100.76. For perspective, the S&P/ASX 200 Index (ASX: XJO) is down 0.0041% at the time of writing.

Let’s take a look at what is happening at CBA.

What’s going on?

CBA is not the only ASX 200 bank share rising today. Westpac Banking Corporation (ASX: WBC) shares are jumping 1.37%, while National Australia Bank Ltd (ASX: NAB) shares are leaping 1.66%. ANZ Group Holdings Ltd (ASX: ANZ) shares are also lifting 1.16%.

News has emerged that Commonwealth Bank could be weighing up acquiring business lender ScotPac. ScotPac’s loan book was worth nearly $1 billion a year ago, a source cited by the Australian said. However, another source said CBA could potentially build its own such business without an acquisition.

The publication noted CBA has hired advisory company Gresham and is carrying out “due diligence” on ScotPac, which is owned by Affinity Equity Partners.

This follows sources telling the Australian Financial Review a big bank was looking into ScotPac in August last year, with CBA the most likely candidate.

Most of CBA’s profit comes from lending. As my Foolish colleague Tristan noted recently, the bank received $11.6 billion worth of net interest income in the first half of FY23.

Meanwhile, CBA has today announced a broadening of its Green Loan program to include more funding and products. This may help more customers buy electric and hybrid vehicles.

The green loan is a 10-year fixed-rate loan at 1.99% per annum with no monthly loan fees. CBA is boosting the maximum loan size from $20K to $30K and widening the number of products eligible.

Commenting on the news, CBA retail banking group executive Angus Sullivan said:

The expansion of eligible products will ensure customers can use the loan for items such as double-glazed windows and to switch their homes from gas to electric cooking equipment – building on the clean energy products already eligible, including solar and battery, solar hot water systems, heat pump hot water systems and electric vehicle charging stations.

CBA share price snapshot

The CBA share price has descended 6% in the last year.

CBA has a market cap of about $170 billion based on the current share price.

The post Could CBA be about to add $1 billion to its loan book? appeared first on The Motley Fool Australia.

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More reading

• Own CBA shares? Here’s why the bank could ‘face the full wrath of the law’
• Which is the best ASX 200 bank share to buy today?
• The CBA share price just surged past $100. Too late to buy?
• Are CBA shares bargain buys at under $100?
• Investor or depositor? Warren Buffett sounds off on banking crisis

Motley Fool contributor Monica O’Shea has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Woodside Energy Group Ltd (ASX: WDS) share price is down 1% in afternoon trade on Thursday.

Shares in the S&P/ASX 200 Index (ASX: XJO) oil and gas stock closed yesterday trading for $33.86. At the time of writing, shares are trading for $33.51.

The dip in the Woodside share price is being mirrored by its competitors, likely driven by a 1% fall in crude oil prices. Brent crude is currently trading for US$82.53 per barrel.

But it’s not the price of oil that has Woodside CEO Meg O’Neill concerned. But rather potential changes to the petroleum resource rent tax (PRRT) being considered by federal treasurer Jim Chalmers.

What’s going on with the PRRT?

As The Motley Fool reported earlier this week:

The PRRT allows concessions on expenses relating to exploring and developing gas fields. Under the current system, these can be carried forward and deducted as tax credits against future liabilities. But the Greens want the government to eliminate $284 billion of accumulated credits that enable gas companies to reduce their tax liability.

The suggestion is to remove all of these tax credits, which would mean gas companies start paying from 1 July, and for the government to apply a 10% royalty to all offshore projects subject to the tax.

Should the Greens’ plan prevail, that could see the Woodside share price fall by 2% to 5%, according to analysts at Macquarie.

Understandably, Woodside’s O’Neill doesn’t believe the Greens have a solid grasp of the bigger picture here.

Addressing the National Press Club yesterday, O’Neill noted that last year Woodside’s Australian all-in effective tax rate was 46%. The ASX 200 energy stock paid $2.7 billion dollars in Australian taxes and royalties in FY22.

“Our shareholders also benefit. And our shareholder base is majority Australian. We are an Australian company, and we pay our way,” she said.

O’Neill cautioned the government that amending the PRRT could cause serious unwanted fallout.

“We urge the government, in any changes to the tax framework, to consider the long-term and preserve Australia’s ability to attract the next generation of investment, jobs and energy supply,” she said.

O’Neill added:

Overreaching now could risk undermining future revenue.

In terms of regulatory certainty, agreement on clear processes and response times for project approvals is essential to unlocking reliable supply. Otherwise, energy investment will find another home, taking jobs and opportunities with it.

Woodside’s CEO stressed that the government shouldn’t rush through changes to increase its short-term tax take, saying longer-term it would be a backfire.

“The risk that we run is to try to do something in the near-term that’s a bit of a Band-Aid, but it’s going to cause long-term harm,” she said.

Woodside share price snapshot

As you can see on the chart below, the Woodside share price remains up 3% over the past 12 months, despite a significant retrace from November’s recent highs.

The post Could the Woodside share price face ‘long-term harm’ from this government tax plan? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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There’s a little-known ASX All Ords share currently trading on a staggering 20% gross trailing dividend yield.

This company is a small-cap among ASX healthcare shares with a market capitalisation of $712 million.

It’s pathology services provider Australian Clinical Labs Ltd (ASX: ACL).

What’s a trailing dividend yield?

A trailing dividend yield represents the last two biannual payments a company has doled out. (Most companies pay dividends twice per year, although some ASX shares pay monthly or quarterly).

In the case of Australian Clinical Labs, the last two dividend payments were the interim dividend of 7 cents for 1H FY23 (payable next Wednesday, by the way) and the final dividend for 2H FY22 of 41 cents.

Together, that’s 48 cents in dividends over the past 12 months to date.

Based on today’s share price of $3.53, Australian Clinical Labs is trading on a dividend yield of 13.6%. Add the 100% franking on top, and the gross trailing dividend yield is a whopping 19.4%.

If we base our calculations on dividends paid in the last full financial year of FY22 — that’s 1H FY22 (12 cents per share) and 2H FY22 (41 cents per share) — we get 53 cents per share and our trailing yield goes even higher.

The pitfalls of relying on the trailing dividend yield

Mega yields like this demand that we ask some questions before buying our ASX All Ords shares.

Without investigation, it’s easy to fall into a dividend trap.

A dividend trap occurs when you buy a share expecting big, juicy dividends, based on the previous two dividend payments (or the trailing yield), only to discover those dividend levels weren’t sustainable.

So, you get trapped in the investment when the company announces its next (significantly reduced) dividend and the share price drops as a result — and typically below what you paid for the stock.

Another way you can get trapped is if the share price has dropped a lot in recent months. A fallen share price will result in your trailing yield calculations being artificially higher. That’s because the yield is calculated by dividing the previous two biannual payments by the share price as it is today.

Dividend traps are common with cyclical ASX All Ords shares.

These companies cycle between bumper years when their earnings are high, say due to economic conditions or commodity prices, and tougher years when the opposite is true.

Dividends are funded from profits or free cash flow, so they’ll go up and down with earnings.

If you don’t recognise the cyclicality of a business, or you fail to identify unique circumstances delivering the company a big earnings boost that is only temporary (like a pandemic), you can get caught.

Why is the yield on this ASX All Ords share so high?

Given Australian Clinical Labs is a pathology company, the first question that comes to mind is whether the extraordinarily high trailing yield is a result of temporary bumper earnings during the pandemic.

The last two dividends were paid for the periods 2H FY22 (January to June 2022 — 41 cents per share) and 1H FY23 (July to December 2022 — 7 cents per share).

There was still a lot of COVID testing going on back then, particularly in 2H FY22. Government data shows the rolling 7-day average for new cases was almost 31,000 as of 30 June 2022. Today, it’s 3,600.

So, demand for tests was much higher.

Another factor that might be making the trailing dividend yield artificially high is the fall in the share price. A year ago, this ASX All Ords share was trading at $5.29. Today, it’s trading at $3.53.

Can Australian Clinical Labs sustain its dividend?

In order to determine whether this 20% dividend yield is sustainable, we need to look at how the company’s net profit after tax (NPAT) is changing as demand for COVID testing goes down.

Here’s a snapshot:

• Net profit 1H FY22: $130.2 million (interim dividend 12 cents per share)
• Net profit 2H FY22: $48 million (final dividend 41 cents per share)
• Net profit 1H FY23: $25.5 million (interim dividend 7 cents per share)

As you can see from the numbers above, 1H FY23 NPAT is 80% lower than 1H FY22 NPAT.

The 1H FY23 interim dividend is 7 cents per share — 40% lower than the 1H FY22 interim dividend.

Falling demand for COVID tests is a key element in this decline. COVID-related revenue fell from $271.3 million in 1H FY22 to $148.8 million in 2H FY22 and $45.2 million in 1H FY23.

So, looking ahead, it’s unlikely this ASX All Ords share will be paying a 20% yield.

While the company has not provided official guidance on full-year dividends for FY23, it pointed out in its 1H FY23 earnings statement that the interim dividend “implies an annualised dividend yield of 4.7%”.

The Australian Clinical Labs share price at the time was $2.96.

It ain’t 20%, but most investors would say that’s a pretty healthy yield.

And there are full franking credits attached, too.

The pandemic effect

The spike in demand that COVID prompted for many companies is pretty well over now.

That means reported profits and dividend payments in FY23 will likely be much lower than FY22 and FY21 for these particular ASX All Ords shares.

That doesn’t mean they’re not good prospective investments.

For the purposes of this article, we’re merely investigating whether Australian Clinical Labs can sustain that monster 20% trailing dividend yield.

And it appears not, given the 80% decline in NPAT in 1H FY23 compared to 1H FY22.

The company’s dividend policy is to pay 50% to 70% of NPAT as dividends in FY23.

But by itself, that shouldn’t sway your investing decision.

If you’re interested in this share, the next step is conducting some fundamental analysis. This will give you a broader picture of the company’s current financial and operational health and its future prospects.

What’s next for this ASX All Ords share?

The company says it remains “focused on the ongoing out-performance of the core business”.

As demand for COVID testing dies down, Australian Clinical Labs is focused on capturing more market share of non-COVID testing demand.

In its 1H FY23 statement, the company said:

While ACL expects non-COVID revenue to return to trend growth over time, the timing of this recovery is hard to forecast.

Prior to COVID, the Australian pathology market grew on average by 6% p.a. driven by population growth, ageing demographics and new tests.

ACL’s non-COVID revenue continues to strengthen with January 2023 like-for-like revenue growth of 22% on [the] prior year

ACL’s focus remains on capturing at or above its market share of the expected rebound in non-COVID
revenue [and] growing market share in New South Wales and Queensland following the acquisition of Sun Doctors and Medlab.

What do the experts think?

As we reported last month, Celeste Funds Management is positive on this ASX All Ords share.

Celeste notes the company’s 1H FY23 result beat market expectations.

Celeste said:

Although COVID revenue was down (PCR testing volumes), the core business revenue grew 18.

ACL is an appealing exposure to a defensive industry and remains cheap versus listed peers.

The post Which ASX All Ords healthcare share has a 20% dividend yield? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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One of the biggest pieces of news in the financial landscape today has nothing to do with the ASX share market or ASX shares. At least directly. Today the federal government has released its long-awaited review of our central bank, the Reserve Bank of Australia (RBA). 

The government commissioned a review of the RBA last year. The final report was delivered at the end of last month but today, the review, as well as the government’s decided actions, have been publically released.

The report made 51 recommendations for change to the RBA, all of which have been accepted by the government. It will result in one of the largest shake-ups to the RBA in its history. So let’s dive into the five things you need to know about the RBA and the changes it will be subjected to.

5 things you need to know about the latest RBA shake-up

Full employment will be part of the RBA’s mandate

Full employment is officially set to become part of the RBA’s official mandate through legislation. As it exists now, the Bank has three overarching objectives. Those are price stability in the economy, the maintenance of full employment, and the “economic prosperity and welfare of the people of Australia”.

The RBA’s mandate will now be narrowed to the twin objectives of price stability and full employment, with an overarching framework of economic prosperity. 

This may not sound like a big change. But it could have an impact on future RBA decisions when it comes to interest rates, as the bank now has to treat the dangers of high inflation and high unemployment with equal weighting.

There will now be two RBA boards

Right now, there is but one RBA board. This board fulfils most of the Bank’s primary functions, including the setting of interest rates. But the review recommends that the board be split into two separate entities.

One will continue to focus on monetary policy and set the cash rate for the economy. The other will focus on the internal governance of the RBA.

The review found, “The Reserve Bank Board’s current processes do not provide members with enough information, time or support to sufficiently explore policy options and strategies or to challenge RBA views.” It recommends the two boards change in order to “deepen the Board’s deliberation on monetary policy and ensure it is open to a wide range of inputs”.

No more ten-month streaks

As it currently stands, the RBA meets 11 times a year to decide the course of interest rates. As such, the first Tuesday of every month (except January) has become a highlight on the calendars of most financially-interested people. That is set to change.

The RBA’s monetary policy board will now meet eight times a year, rather than 11. (So perhaps the annual overlap with the Melbourne Cup every November will finally come to an end.) But the ten-month streak of interest rate rises that was only broken earlier this month is unlikely to be repeated with these new changes. 

Business input will be diluted

Right now, the RBA’s board consists of members that are drawn from business and industry. That is set to change. 

The review found the following conclusion when it came to these kinds of experts on the board:

Currently, the Reserve Bank Board provides only limited challenge to the RBA executive’s view and its skillset is not matched to the complex and uncertain economic environment in which monetary policy will increasingly operate. 

The external members of the Board have been outstanding leaders in their fields. However, collectively they have less economic and financial market expertise, and spend less time on monetary policy, than decision-making bodies at comparable central banks.

So the review wants this tightened up. This could mean future RBA board members might come from a narrower range of backgrounds, with an emphasis on economic experience. 

The 2-3% inflation target is set to stay

One of the biggest speculations, when it came to this RBA review, was whether the 2-3% inflation target would stick around. The review has endorsed this target, stating that “it is well understood, it is credible to the public, and has supported good economic outcomes”. It also noted that “there is sound evidence that it has supported stable inflation expectations over the past three decades”.

However, the review also recommended that the target should be refined somewhat, with a focus on the midpoint of the range (2.5%). This will, according to the review, “maximise the chances that the target is met”, as well as “providing a consistent focal point for future inflation should help to better anchor inflation expectations in the centre of the range”. 

The post 5 things you need to know about the latest RBA shake-up appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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