1. We have been offered entitlements to purchase new Tabcorp (TAH) shares at $3.25 per share (on a ratio of 1 entitlement for every 11 shares held). TAH has not performed well since it amalgamated with Tatts and has not paid any dividends this year. Do you think it is a buy or pass?
I think Tabcorp has been an appallingly-led company and in my book, it is an “avoid”. It is in the “AMP” category. Change is on the way, with both the Chair and the CEO set to leave the company in the next six months.
The market is more charitable in its assessment. According to FN Arena, of the seven major brokers that cover the stock, the consensus target price is $3.84, an 8.2% premium to the current price of $3.55. Broker ranges vary from a low of $3.10 from Ord Minnett to a high of $4.70 from UBS. There are 2 buy recommendations, 4 neutral recommendations, and 1 sell recommendation.
The institutional component of the entitlement offer also went well (97% take-up), shortfall being auctioned at $3.70 (which was a premium to the theoretical ex-rights price of $3.64).
The 1-for-11 entitlement offer to buy new shares at $3.25 closes on 10 September. You can also sell your entitlements on the ASX (trading under stock code TAHR) until Thursday 3 September. If you do nothing, your entitlements will be auctioned, with any premium paid to you on about 23 September.
If you like the company, take the entitlements up.
If you are like me and don’t, then: (a) if you have a decent holding – sell the entitlements on the ASX; (b) if you have a small holding, do nothing and wait for your entitlements to be auctioned.
2. What do you think of Rural Funds Group (RFF) as an income investment choice?
Rural Funds Group is a $1.3 billion rural real estate trust. It owns 61 agricultural properties from 5 sectors – cattle, vineyards, cropping, almonds and macadamia.
It has forecast a distribution of 11.28c for FY21, which puts it on a yield of 5.0% (at a price of $2.25). This is reasonable and relatively secure given that the leases average over 10 years, the corporate nature of the lessees and gearing at 30%. The return is unfranked.
My main concern would be on valuation – the NTA at 30 June was $1.94. Today, it is trading at $2.25, a 16% premium. I think you also need to be on board with its strategy to recycle assets to invest in macadamia.
I can only find one major broker who covers the stock. UBS has a ‘neutral’, with a target price of $2.35.
3. I hear commentary about the Dow Jones not being a particularly good guide to what is happening in the US share market. Some say the S&P 500 is much better. Could you explain why?
There are two problems with the Dow Jones. Firstly, it is only 30 stocks, so it is very narrow (the S&P 500 has, of course, 500 stocks). Secondly, it was designed before the invention of calculators and uses an arithmetic average of the stock prices, such that $1 movement in any of the 30 stock prices has the same impact on points in the index. This means that a higher priced stock has a bigger impact on the index than a lower priced stock (for the same percentage movement in price). On the other hand, the S&P 500 is weighted by the market capitalisation of each stock (just like our S&P/ASX 200). A 1% move in a large cap stock has a much bigger effect on the index than a 1% move in a small cap stock.
The other day, when Apple did its share split (1 share became 4 shares), it was massively “down-weighted” in the Dow Jones. There have also been some important component changes: on August 24, Salesforce, Amgen, and Honeywell were added to the Dow, replacing ExxonMobil, Pfizer, and Raytheon Technologies.
The S&P 500 is a much better guide to the overall US share market.
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