While most Australian investors receive payment of full-year dividends (plus valuable franking credits) this week from their favoured Australian stocks, I am encouraging you just to be a little patient before you reinvest those dividends.
Of course, your friendly stockbroker will be encouraging you to reinvest them instantly, but I suspect a little patience will be rewarded and a better opportunity to reinvest those dividends will present itself between now and year end.
Yes, I fully understand cash in the bank generates no real return, but holding some cash for a month or so won’t hurt you either. This is particularly so if I am right and a better opportunity to deploy that capital presents itself.
Cash gives you optionality as an investor and also on the right (bad) day buys you more than $1 of value. The hardest part of this whole process is actually deploying the cash you have on the day you should.
Trust me, when that day comes, most people will be cheering the cash they have rather than deploying it. The day it looks like someone has spilled tomato sauce all over your portfolio is the day you need to deploy cash. Don’t look away from your screens, press the buy button.
I also find this running money professionally. With hedging and cash, you have to do almost the complete opposite of your instinct on the given day. On all green days, we need to sell a few things. On all red days we need to buy a few things. In all of investing this remains the hardest decision, but if you do it more often you will generate better overall returns.
I know it sounds obvious, but try and sell on up days and buy on down days. It’s exactly the same for our short hedging. We need to put index shorts on up days and take them off on down days. It’s too easy to start believing the positions are anything more than hedging if you don’t maintain this discipline.
So why am I encouraging you to be a little patient and sit on some accumulated cash from dividends?
Quite simply because I think equity market volatility both globally and domestically is going to increase into the US Presidential election (Nov)and inside that increased volatility we will most likely get an opportunity to deploy our cash at better risk adjusted entry prices.
We also start getting Q3 earnings news from US companies which also lead to an increase in US equity volatility at a stock specific and potentially index level. Nike reported yesterday and the stock fell -4% on the back of weaker than expected sales guidance. While expectations for US earnings have been ratcheted down (again), meaning the bar to jump is reasonably low, I actually think it’s more about forward-looking statements from US companies and I suspect they can’t be too aggressive considering we are in a period of US political uncertainty.
In Australia, there is basically zero company news for the next month, so the ASX200 will be subject to global developments. You find in the periods between reporting seasons the Australian market becomes completely hostage to global market moves on a daily basis. Yes, why do we fall when Deutsche Bank shares are down? Quite simply because we are part of global markets and particularly so when there is no stock specific Australian news flow.
My final concern is: will markets start questioning central bank policy rather than cheering it? We are in a strange world where markets continue to reward central banks for their largesse, but they are now at the point of where central banks are deep into unconventional policy and I tend to wonder whether the markets are simply now too dependent on them.
We have already see the Nikkei and Yen start to defy the Bank of Japan’s “bazooka” and I do wonder whether that is the start of markets starting to act a little more independently of central banks. What I am saying is markets can FALL despite central bank policy.
Similarly, I am very sceptical of any OPEC ‘agreements’ on oil production cuts. While oil bounced +5% last night on headlines from an oil ministers meeting, the real ‘agreement’ from OPEC needs to be sorted out at the November 30th OPEC meeting. I doubt that a binding agreement will be made and even if it is the so called production cut is to -1% below all-time record high production levels. Oil, and LNG for that matter, remain structurally oversupplied and I’d be surprised to see the oil price get above $50 and hold there for any period of time.
With all equity markets recovering from a mid-month swoon, I think it is time to be patient with your cash and actually look for the odd stock to take some profits in.
On that basis today I’m going to recommend locking in some profits in a stock I recommended earlier this year that has done very well but now I think is fully valued. That stock is Southern Cross Media Group (SXL).
In mid-May I wrote to you on SXL under the title “tune in to a 6%ff yield”… to recap that note.
The stock we have recently bought after doing our sector research is Southern Cross Media Group (SXL $957m market cap). This mid-cap industrial is undervalued in our opinion and its sustainable fully franked dividend alone should support it at current prices.
We see 5 clear catalysts that should lead to SXL being re-rated
- Net debt is down to $350 million this stock is no longer highly geared. They also have $100m of franking credits and with the corporate tax rate changes, no point keeping them from shareholders
- They will now be selling Nine product not the 3rd ranked Ten product on their regional TV networks.
- In my view much like how outdoor ad segment has grown share significantly, I feel radio could see a similar uplift from its current share circa 8% of advertising spending
- I think there is zero chance SXL has interest in buying NEC. Could NEC bid for SXL to diversify away from free-to-air more? Sure, NEC owns 9.9% of SXL already.
- SXL own around 67 transmission towers. These could prove attractive to infrastructure funds just like how they value mobile phone towers on big prices.
Finishing the note with..
Putting this all together, we see the potential for solid, ground out, total shareholder returns from SXL over the years ahead. Broker valuations are around $1.35 but there’s no reason to believe SXL can’t head towards $1.50 while paying 6%ff along the way.
The technical picture also looks very encouraging with SXL about the break out of a well-defined trading range. Again, a technical breakout of this trading range would set the next technical target around $1.50.
Today, SXL shares are $1.68 and we have also collected the 3.5cff fy16 dividend. On the basis that our price target has been exceeded and a +40% total return (pre-franking credit value) generated in the SXL idea in less than six months, I think it’s time to take profits in SXL shares.
The FY17 P/E has also risen to 13.7x and the prospective FY17 dividend yield dropped to 4.73%ff. That is an appropriate valuation for SXL but no longer compelling or cheap like it was when we first recommended it at $1.20.
In markets like these, where I expect further volatility, when you make +40% in less than six months in a stock, it is prudent to lock that in. At Aitken Investment Management (AIM) that’s exactly what we do and why our AIM Global High Conviction Fund is performing very well (+12% last 6 months) absolutely and relatively. You need to be disciplined and contrarian, which means holding some cash for a bad day and taking some profits when you’ve made them in quick time.
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