Question 1. I’m a shareholder in Sonic Healthcare. Do you think the share purchase plan is worth taking up? I have a long-term perspective so am prepared to hold it for approximately five years.
Answer (by Paul Rickard): On the basis that the share purchase plan is at $19.50 per share, and on market, the shares are trading at $21.95 per share, it would seem like a “no brainer” to take up. It will probably be subject to a scale back.
I am a little more cautious about the acquisition of Aurora Diagnostics (this is the reason for the share purchase plan and institutional placement). While the market has given it the thumbs up, the history of Australian companies achieving immediate benefits from US acquisitions is pretty poor.
This all said, the brokers see the stock as somewhat undervalued (consensus target price is 18.5% higher at $26.02). I would be somewhat surprised if there is much short-term upside.
Question 2. Could you please tell me if the following could happen? Could a company such as CBA pay an increased dividend before tax to an SMSF, in lieu of a franked dividend?
Answer (by Paul Rickard): No. Franking credits are of no value to the company – they just represent the tax the company has already paid to the Australian Taxation Office. So franking a dividend “costs” a company nothing – but increasing it in lieu (your suggestion) would be “hard” dollars.
Question 3: I would like to buy some bank capital notes (hybrid securities) and was wondering if you have any preferences in this area?
Answer (by Paul Rickard): The market is now pretty efficient so that the notes all trade around the same margin. You could look at one of the recent Westpac issues – WBCPI (Westpac Capital Notes 6). It pays a margin of 3.7% over the 90-day bank bill. It is offered on the ASX at 100.26.
Question 4: If one were to buy shares (for the first time) in the four major Aussie banks i.e. ANZ, CBA, NAB and WBC, which of these four would most likely have the highest return on investment (ROI) in the next five years? Presumably, with some doubts on NAB dividends, this bank would likely be lowest of the four? Would ANZ be expected to have the highest ROI, considering that it has taken the opportunity to cut costs earlier and make more use of technology improvements? .
Answer (by Paul Rickard): The market likes CBA the best (it is trading at the highest multiple, has the highest ROE and the best technology). I prefer ANZ because I think they are the most advanced in cutting costs. NAB is my least favourite. This all said, there really isn’t that much difference between the four major banks
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