Question of the Week

Questions of the Week – Telstra, JB Hi-Fi and the banks

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Question: I hold shares in Telstra and JB Hi-Fi. Both have dropped in price. Do you feel they have bottomed, or is this a good time to take a loss?

Answer: I am not bottom fishing on Telstra, but becoming interested around $4.00. The last 50 cents has been incredibly sudden, and my guess is that it will do a lot of work around $4.00. If Telstra cuts the dividend from 31 cents to (say) 20 cents, this would put them on a yield of 5% at $4.00.  A bit like BHP – a dividend cut might actually be good for the stock.

JB Hi-Fi is in another category. I really like it at these levels. It is being impacted by the “Amazon scare”. I am a buyer.

Question:

Along with many others, I hold all four major banks. From the outside, they all appear similar. Yes, some are bigger or smaller but I can’t see many differentiators as an investor. So why would I hold all four, instead of picking just one or even two, and simplify things to watch in my portfolio? Surely they perform much of a muchness?

If the banks were people or cars, how would you characterise them? This might drive (sorry!!) it home for me as a visual person.

Answer (by Paul Rickard): You are right – there is very little difference now between the major banks. With ANZ abandoning its Asian foray, and NAB exiting its UK and USA banking, the differences from a strategic point of view are now at the margin. Performance is also similar, although CBA has the best ROE, followed by Westpac. ANZ and NAB are a step away, the laggards.

Why hold all four? You don’t need to, but because they have such large individual index weights, holding just one might be taking on too much stock specific risk. Of the S&P/ASX 200, the current index weights are CBA 9.6%, Westpac 7.5%, ANZ 6.0%, NAB 5.6% ‑ in aggregate, about 28.7% of the index.

David – I am not a visual person, so I won’t characterise them as cars. However, here are some very brief comments:

  • CBA – best Australian franchise. Best technology. Highest ROE, and trades at a premium to the other banks (i.e. at a higher PE ratio).
  • Westpac (WBC) – second best Australian franchise, and second highest ROE. Multiple brand strategy, but technology lets it down.
  • NAB – strong in business banking, relatively weak in retail banking. Has been the laggard of the industry – arguably, represents the best value. May be challenged to maintain dividend.
  • ANZ – abandoned failed Asian strategy – now undergoing major cost cutting/re-organisation. Capital position improved. Domestic franchise the weakest.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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