Dear Switzer subscribers,
Last week I attended a small private dinner with the Prime Minister of Australia, Malcolm Turnbull.
It was a small gathering of private businessmen and women to discuss the economy with the PM.
To me, the economy is a “company” and the PM is the CEO. The Treasurer is the CFO.
On that basis, I attempt to assess our political leaders in the same way I assess listed company management.
I have to say I thought the Prime Minister’s performance at this dinner was outstanding. I can say that without any bias.
He can annunciate his vision for the country, with a very specific focus on the economy. As a capitalist and investor, this was very heartening to hear.
Of course, talk is cheap and actions speak louder than words, but in my opinion, the economic debate leadership that the new PM is showing is what has been missing in this country for nearly a decade. Finally we have a PM who is economically literate. Our previous “CEOs” had zero real world experience in economics, markets or private business. Just sitting down and listening to Turnbull, you can see blatant evidence of this.
I am not going to break the confidence of those who were in the room, or the confidence of the PM, as it was a private function, but it’s fair to say the main topics of the evenings conversation were major public infrastructure and how to fund it, cities, tourism, productivity, the lack of a corporate bond market, out of cycle mortgage rate hikes by banks, and broad taxation system reform. It was a very wide and hugely interesting conversation. It was one that made me VERY BULLISH about Australia’s future.
That is important because I can report to you that offshore investors and offshore investment banks/brokers are very bearish/cautious on Australia’s prospects as the economy transitions from a once in a generation mining investment boom back to a service and export-based economy.
The good news is we have a “growth”, “innovation” and “reform” based PM, who appears not to believing in “shrinking to greatness”. This is a key point that will be absolutely vital in shaking corporate Australia out of its confidence malaise.
My view is for the economy to grow, you need the Federal Government, State Governments, RBA, listed corporates and consumers all effectively “spending”. Economic growth is about the velocity of money moving through the economy and the key variable is confidence.
As I have written hundreds of times, “confidence is a derivative of leadership”. My opinion is the “leadership” of Australia Pty Ltd has changed markedly for the better and there is a confidence upswing underway. More accurately, the lack of confidence has bottomed.
What we need next is for corporate Australia to start spending. Corporate Australia must start playing its role. The cost cutting to maintain dividends game is the wrong game. It’s actually leading to GDP growth undershooting because cost cutting aimed at maintaining or growing dividends leads to a lower velocity of money through the economy. Yes, dividends are great for shareholders, but you need to know the flipside is lower than achievable economic growth.
Don’t get me wrong. I have no issue with shareholders receiving a greater share of company profits. But a greater share of cost cut driven earnings growth or debt funded dividend growth is unsustainable.
At the end of the day, the best performing stocks over the long-term offer dividend GROWTH, not just dividend yield. Consistent dividend growth drives far greater share price performance than basis dividend yield. I’d rather buy a 3.5% consistently growing dividend yield than a stagnant 6.00% yield.
Corporate Australia needs to wake up and realise that you can’t cost cut to greatness and you can’t shrink to greatness. You need to GROW to greatness.
We may have already seen the peak of the so-called “yield trade”. Therefore we may also have seen the peak of the “sugar hit” that ASX listed companies get in share price terms for raising dividend payout ratios. I think that’s certain actually and we are actually starting to see ASX listed companies getting a “ sugar hit” for spending money on GROWTH.
Recent examples of ASX listed companies being rewarded in share price terms for sensible GROWTH initiatives include Macquarie Group (MQG), Treasury Wine Estates (TWE), Servcorp (SRV), & Domino’s (DMP). This is the start of a trend in my view where GROWTH will outperform YIELD.
At the portfolio strategy level, that’s exactly what I am doing with the fund. We are strongly favouring global and local GROWTH stocks over basic dividend yield stocks. That doesn’t mean we have abandoned our core strategy of Australia for income, rest of world for growth, but we have tilted far more to GROWTH (price to growth) where we see Boards and management teams sensibly allocating capital to future growth over current dividend payout ratios.
We also think GROWTH is quite hard to find so we are prepared to pay up a little for it in P/E terms. I gave you an example of that in Vitaco (VIT) a few weeks ago and it would appear the analyst community is starting to agree with us on that one. That little growth stock idea is performing well.
Remember, not all companies are created equal and not all stocks should have the same P/E. We focus on price to growth investing (PEG ratios) feeling in most cases structural growth stocks are cheap versus their future growth prospects. This is what I wrote about Macquarie Group (MQG) last week and why my team and I are looking all around the world for companies with those structural growth prospects. We have even bid into the Ferrari (RACE) IPO because we think it has those attributes.
If we end up with a portfolio with a higher prospective P/E and lower prospective dividend yield than the market, so be it. It will mean we have significantly more growth prospects in the portfolio and GROWTH is how you make money in the medium-term.
I’m headed overseas to look for some more of that growth this week and I will report back to you where I find it.
So I believe it’s time to tilt to GROWTH, whether it’s local or global growth. The boards and management teams of corporate Australia need to wake up quickly and realise GROWTH will be rewarded from this point, not simply dividend yield.
If they do, then all this chatter about Australian recessions will prove wrong and the Australian share market might actually get to Peter’s 6000 target in the next few years. I can assure you we can’t get to 6000 by cost cutting and high dividend payout ratios. We can ONLY get there by investing in GROWTH and generating earnings AND dividend GROWTH.
So my challenge to you, Peter Switzer, is to ask every company CEO who comes on your TV show “how do you intend to GROW your business?”
If we all want the country and share market to advance, that’s the question we need to ask.
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.
