All six stocks in this sector beat the ASX 200’s capital gain of 5.3% over the period since my last review – noted in Table 1. Given that the dividend yield over this ‘half year’ was 3.1%, investors in this sector should have been happy.
Yield still king
Back in March, I was worried that there might be some negative impact on capital growth in the telco sector to detract from the yield. This has not yet happened – and may not – but the patterns of expected yield in the four high-yield sectors – noted in Table 2 – has firmed in recent times. These four yields have tracked each other ever so closely over the last six months – in a historically close range and between 5% and 6%.
At some point, this co-movement of yields will break, so it is a question of how this break up happens. It seems unlikely that yields will fall to the low end of this band, as last time they did in May 2013, yields snapped back up rather quickly due to share price falls. Investors need a premium over term deposit rates to cover the risk of possible capital losses.
My empirical view now puts that floor at around 5.3%. Any future capital gains will dilute yield from the current sector view of 5.8% shown in Table 2 so that the sector remains more of a bond play than an equity investment. Of course, if investors start to believe in a return to growth in other sectors, they may well trade expected yield in the high-yield sectors for capital gains in the other sectors and the high yield co-movement may be disbanded as a result.
The pick of the bunch
Only Singapore Telecom (ASX Code SGT) has a current consensus recommendation that meets my 2.5 cut off for a stock to enter my portfolio (see www.woodhall.com.au [1] for an explanation of my ratings) but all – except for Telecom Corp NZ (ASX Code TEL) – are good holds for dividend players. The strong price run by TPG has been accompanied by a drop in ratings from 2.64 to 2.80. Only two stocks, Telstra and SGT, have ratings that have improved.
Table 1: Data on companies in the ASX 200’s Telco sector
[2]Turning to the sector views in Table 2, all of the high-yield sectors have relatively low capital gains forecasts, and this ranking does not change when we adjust for exuberance or estimated mispricing. At only a 1.5% overpricing for Telcos, this sector is still a reasonable buy for yield investors. Assuming both the US debt ceiling and partial shutdown are resolved, there is very little on the horizon that is looming as a potential negative shock. Of course, there are always ‘unknown unknowns’ lurking in the wings but, in my opinion, around now is about the best I can recall general prospects to have been for a very long time.
So my conclusions for this sector are quite straightforward. Telstra and SGT could be reasonable to hold in a super portfolio but some switch to growth is increasingly likely and so it is worth keeping an eye on things. Energy continues to be my first pick sector – but of course, diversification across sectors is always important.
Table 2: ASX 200 sector statistics
[3]Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: QBE – cheap at half the price [4]
- Paul Rickard: Road test – Centuria’s 8 Central Avenue fund [5]
- Penny Pryor: Buy, Sell, Hold – what the brokers say [6]
- Sandy Morgan: My SMSF [7]
- Tony Negline: Contribution splitting – a little pain for a big gain [8]
- Questions of the week: Best buys in the current market [9]