Question 1: I have done some “trimming” recently with BHP and Fortescue (FMG) at their highs. Is it reasonable to buy back in at a 20% or so discount from my selling price, now they are about to go ex-dividend?
Answer: Well done on the trimming! Although the iron ore price has fallen quite substantially, stronger global growth should still be supportive for commodities generally. BHP has pulled back by almost 25% – partly dividend related, partly iron ore/copper price related, partly a function of the cancellation of its listing in London and arbitrage selling of the Australian listed shares.
My sense is that there is a bit of value in the major miners. According to FNArena, the broker targets are now: BHP $47.98 (about 14% upside), Rio $133.43 (22.8% upside) and Fortescue $21.61 (5.9% upside, but when it trades ex-dividend, this will increase).
I prefer BHP because of the exposure is more diversified.
Question 2: What is the outlook for Mayne Pharmaceutical (MYX)? What has happened to it over the last few years? Is there any upside or should I cut and run?
Answer: I struggle with biotechs like Mayne Pharma (MYX). The company is undergoing a transition from a provider of generic pharmaceuticals to a provider of branded products, and is expected to record a loss again in FY22. It will need to manage risks such as the timing of approvals from the FDA.
The brokers don’t see immediate upside. According to FNArena, the consensus target price is 31 cents, 2 cents lower than the last ASX price of 33 cents. The range is relatively tight….a low of 28 cents through to a high of 35 cents. There are 3 ‘neutral’ recommendations and 1 ‘buy’ recommendation, the latter from Citi and labelled as ‘buy, high risk”.
I can’t get excited by Mayne Pharma. Cut.
Question 3: I have done very well out of Charter Hall Group (CHC), bought in at $9.50 over 12 months ago, now near $18. Would you recommend taking some profits, or just continue to hold the position?
Answer: You have done well with Charter Hall. The brokers liked its August report, and CHC’s guidance of EPS of not less than 75 cents for FY22 was better than expected. According to FNArena, the consensus target price is $19.85, about 11.1% higher than the last ASX price of $17.86. The range is a low of $18.87 through to a high of $21. There are 4 ‘buy’ recommendations and 2 ‘neutral’ recommendations. Charter Hall is trading of a forward multiple of around 22 times FY22 and FY23 earnings. Highish, but not outlandish for a company in an earnings upgrade cycle. I would be inclined to hang on for the ride.
Question 4: We’re told a stock should fall in line with the amount it is paying out as a dividend when it trades ‘ex’ dividend. But does it? Someone must have done some number crunching to prove this? Also, would the expected dip be the gross franked amount or just the base value?
Answer: I can’t prove it, but I know from experience it does.
Here is why (take Fortescue as an example).You can buy it today for around $20.50, and you will receive a dividend of $2.11. Net cost is $18.39. On Monday, when it trades ex-dividend, how much would you pay (all things being equal)? $20.50?? No. $18.39………possibly.
Clearly, overnight movements in overseas markets and commodity prices will influence the opening price…as they do every day…the opening price is not usually the same as the closing price the day before, but if you put these to one side, it will open at least $2.11 down.
In fact, it will probably be a little more…because franking plays a role. Not all shareholders can use franking credits (for example, overseas shareholders), but they will price the value in and make an adjustment for this.
One further point – professionals can arbitrage a stock going ex-dividend (ensuring the movement is around the dividend amount plus a little for franking).
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