Why Woodside is a yield play

Chief Investment Officer and founder of Aitken Investment Management
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If you own enough banks/TLS etc for sustainable fully-franked dividend yield, an alternative to further increasing exposure in these stocks is WPL. Woodside Petroleum (WPL) is one of only two resource sector members on my high conviction list.

Yes, I can hear you all scream “you don’t buy resource stocks for yield”, but I don’t think WPL is a resource stock. I think it’s a ‘high barrier to entry’ industrial manufacturing value-add stock with minimal commodity price exposure (contracted prices) or commodity extraction risk. Now that WPL, under the leadership of Colman & Chaney has sensibly turned off the capex tap and turned on the free cashflow/ dividend payout tap, we can now look forward to “bank similar fully franked yield” from WPL.

While WPL’s lifted dividend payout ratio guidance got plenty of headlines, what wasn’t widely reported is that WPL pays US dollar dividends.

Aussie dollar outlook

We have had some success forecasting the AUD fall this year, sending out numerous warnings and predicting it to have an “8 handle” before anyone else did. I continue to believe this is the start of a much more significant AUD bear market, particularly versus the US dollar. I continue to believe that unnatural/weak holders of AUD vastly outweigh any hedge fund shorts, while options and hedging downside protection from importers remains minute. The fact the AUD has fallen 15 US cents with very little resistance confirms the statement above.

The AUD/USD cross remains in a nasty spot. There is over-ownership of the numerator (AUD) and under-ownership of the denominator (USD). This is occurring at a time when the fundamentals of the numerator are worsening and the fundamentals of the denominator are improving.

What happens from here is the RBA continues to cut rates and the FED starts tapering QE. I think that could see the AUD/USD cross hit the long-term technical target of 80 US cents far quicker than anyone currently believes possible. I hope it doesn’t happen before January 2014 as I have booked the family US ski trip, but that in itself almost ensures it does!

AUD/USD: target remains 80US cents

Woodside yields

At these current AUD cross rates on consensus numbers for CY2013, WPL yields 6.50% ff (fully franked). For CY14, consensus is a dividend yield of 6.27%ff. P/E’s are undemanding at 14.9 times CY13 and 12.6 times CY14.

But here’s the more interesting bit, if I am right and the AUD/USD cross drops another 11% to 80US cents, then WPL’s prospective dividend yields lift above 7.00%ff, taking it above what any bank or TLS offers for the years ahead.

It’s just a thought, but if you are going to buy a resource stock for sustainable fully franked yield, WPL should be it.

I also think the WPL chart looks very promising with the five-year downtrend broken and a technical target of the mid $40s. WPL report 1H 2013 earnings on 21 August.

Go Australia, Charlie.

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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