Question 1: As we are in our senior years, what would your advice be for holders of the Westpac Capital Notes 6 which we are being asked if we wish to reinvest into the new Westpac Capital Notes 10?
Answer: I think if you want to maintain your exposure to hybrid securities, then I would re-invest. They are being priced at a margin of 3.1% over the 90-day bank bill rate, which makes them pretty competitive. They have a nominal term of just over 10 years, so they are relatively long, and at Westpac’s option, can be redeemed from September 2031. APRA has announced a review of the rules around bank second-tier capital, and it is unclear what impact this may have on the hybrid market. Potentially, this may stop banks issuing securities such as Westpac Capital Notes 10. Another consideration is that this is “floating rate” exposure – so if interest rates start to fall, then your returns will decrease. Arguably, it may make sense to take on more “fixed rate” exposure. I wouldn’t be concerned that you are in your “senior years” …it is very easy to sell the hybrid securities on the ASX if you need access to the cash.
Question 2: Increasingly, I’ve moved our SMSF investments into exchange traded funds (ETFs) across equities, fixed interest, property, infrastructure and gold with a strong weighting towards Australian investments rather than overseas investments with the exceptions of infrastructure and gold. Do you see any problem with such an emphasis on ETFs?
Answer: No, I don’t see anything wrong with your approach, as long as you understand the limitations of passive, index tracking ETFs. The key limitation, of course, is that they are only as good as the underlying index, and you will never get outperformance. For example, if you invest all your offshore allocation in US equities (or ETFs that track US indices), and the US market underwhelms in comparison to European and Asian markets, then your fund’s performance will also underwhelm compared to if it had invested in an ETF that instead tracks global markets. Be wary of “thematic ETFs” – really important to understand how the index they are tracking has been constructed. You can also invest in actively managed ETFs – sometimes, they may be a better option.
Question 3: Suggestions that CSL is “the one” – what is the foundation of this? P/E is 33, Debt to equity is 70% and Dividend Yield is 1.5%. How can that be better than say NAB – P/E is 12, Dividend Yield is 6.5%. Both have analyst upside of about 18%. So, for 10 shares in CSL and $39 dividend, I can get 93 shares in NAB and $157 in dividend.
Answer: The same argument could have been made at any time in the last 20 years if one just looked at dividends. For the record, 10 years ago in November 2013, CSL was trading around $67. Today it is around $260. NAB, on the other hand, was trading in November 2013 around $33. It has gone backwards, and today is around $28.
CSL is growing profit at around 15% pa. NAB is going backwards – its recent half year (April to Sept 23) was 7% lower than the first half (Oct 22 to March 23).
That’s why there is such a difference in PE ratios. The dividend payout ratios reflect that NAB can’t grow (and is returning what it makes to shareholders), whereas CSL is re-investing for growth. Don’t get me wrong – I own both stocks and there are sound reasons for owning both. (I have never seen a professional portfolio of just one stock). They represent exposure to different industries, countries and demographics, with totally different characteristics and tailwinds/headwinds. Of the financial metrics, the dividend yield is probably the least relevant.
Question 4: What are the details of the Appen (APX) capital raising?
Answer: Appen (APX) is effectively doing an “emergency raise” by seeking a further $30m from shareholders. This will be at a knockdown price of 55 cents, a 35.1% discount to the theoretical ex-rights price. The money is being raised through a non-renounceable entitlement issue on the basis of 1 new share for every 3.65 Appen shares already owned. This is set to raise $23.6m. An institutional placement will raise an additional $6.4m. If retail shareholders wish to participate, they will need to apply by Friday 8 December.
