Defensive exposure to quality equities is a key part of all portfolios. Most investors understand the need to diversify their portfolio in a self-managed super fund (SMSF). Cash, bonds and A-REITs are traditional defensive asset classes and have proven this once again in 2011.
Defensives lower the volatility of balanced portfolios. Within a domestic equity portfolio there are also defensive sectors that are important in constructing a portfolio. Ultimately, investing in equities is all about the discipline of investing in both cyclical and defensive stocks. An investor needs exposure to a business that has good prospects of earnings growth and can pay a good quality dividend along the way. Transurban Group is one of these stocks, quality and defensive.
Why I like Transurban
Transurban is a high quality infrastructure asset with predictable cash flows through an economic cycle – and that is important. The company is involved in the operation of the Melbourne City Link and both the Lane Cove Tunnel and the Hills Motorway M2 toll roads in Sydney. It also has large or majority stakes in three other road tolls in Sydney (the Eastern Distributor, WestLink M7 and the M5 Motorway) plus toll road ownership in Virginia in the United States. Transurban is also involved in developing and operating electronic toll systems.
Transurban is a core part of UBS Wealth Management’s recommended equity portfolio as the predictable cash flows makes this stock a quality defensive exposure. Over the last 12 months, Transurban shares have risen around 12.5% and have significantly outperformed the broader ASX200 (which is still negative on a one-year basis).
Pays dividends
Transurban also achieved the role of a defensive during the 2011 European Credit Crunch, a period of excess volatility. While the projected full-year 2013 dividend yield of 5.75% is not as high versus some other opportunities in the market, it remains a very high quality predictable dividend.
The outgoing CEO, Chris Lynch, has done a brilliant job over the past four-and-a-half years. He was one of the first to understand a new investment horizon post the GFC, that is, funding costs will remain high and that dividends need to be paid via operating cash flow. Further, the yield is well above the cash rate and the 10-year bond rate. Consistent double-digit dividend yields are a very unreasonable expectation.
Transurban assets also benefit because the Australian labour market is effectively tight meaning Australia’s low unemployment rate versus other developed economies is a positive for this type of asset. This is important to users of toll roads because they all need to get to work. Also, the peak hour of the various toll roads has now extended to a three-hour period in both the morning and afternoon.
So long as Transurban meets its interest liabilities, keeps costs low and continues to create dividend per share growth going forward, investors will continue to hold and accumulate this stock. In addition, there has been plenty of potential merger and acquisition activity by global pension funds who are also fans of these long-term stable cashflows. In short, it ticks so many boxes for so many investors.
George Boubouras, Head of Investment Strategy & Consulting, UBS Wealth Management [1].
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: Stocks are still looking good [2]
- Paul Rickard: Should your SMSF buy the new fixed-income ETFs? [3]
- Lance Lai: Chart of the week: it’s good enough for Superman [4]
- Tony Negline: Who will replace you as trustee when you die? [5]
- Rudi Filapek-Vandyck: The broker wrap: nine upgrades in the past week [6]