Investors can ride out volatile stock market with steady income
AT times of financial crisis, cash is king, or so the adage goes. But with inflation eating up interest gained from bank deposits, investors looking for real returns on their money should take a second look at prevailing equity prices.
And yes, it is a hard sell to talk about investing in stocks given the pessimistic outlook on the economy and financial markets these days.
CLSA Asia Pacific last week slashed its target level for the KL Composite Index (KLCI) to below 800 points for next year as companies’ earnings outlook turned bleaker. The firm recommended Resorts World Bhd, DiGi.com Bhd and British American Tobacco (M) Bhd (BAT) as “must-have” stocks to ride out the economic downturn, while Genting Bhd and YTL Power Bhd were for those with a higher risk appetite.
The defensive strategy was also the key theme in J.P. Morgan Asia Pacific Research’s 2009 outlook on local stocks. The 65-page report dated Nov 18 said it expected best-in-class firms such as Bumiputra-Commerce Holdings Bhd (BCHB), DiGi.com, IOI Corp Bhd, Resorts World and Tanjong plc to outperform the market when “risk appetite returns.’’
Local brokerage CIMB Research picked out Public Bank Bhd, Resorts World and YTL Power last week, banking on the companies’ solid management and balance sheet strengths to ride out near-term uncertainties.
A check showed all those companies mentioned above have a predictable policy of distributing part of their profits to shareholders as cash or share dividends on a regular basis.
One counter that really stood out was BAT. The company had been paying out large chunks of its profits as cash dividends to shareholders consistently in the past decades.
Bloomberg data showed BAT paid out RM4.50 per share in dividends in 2007. The year before that, it was RM3.75 per share. A consensus estimate of 20 analysts tracked by Bloomberg put BAT’s dividend payout for the fiscal year ending Dec 31 (FY08) at RM3.16 per share, and at RM3.18 per share for FY09. That gives the stock a prospective dividend yield of 7.3% at Friday’s closing price of RM43.25.
The current dividend yield on BAT at 7.3% is more than double the returns from fixed deposit rates at local banks, while the three-year Malaysia government bonds have a yield of around 3.6%.
At Friday’s close, shares in BAT were up 4.8% for the year against the benchmark KLCI’s 40% decline over the same period. It was the second best performer in the KLCI 100-stock basket behind fast food operator KFC Holdings Bhd.
Analysts who recommended BAT said the stock’s stable and predictable cash returns made it a “safe haven” in times of stock market turmoil. Elsewhere in the market, dividend yields are rising on falling stock prices.
Bloomberg data showed KLCI component stocks boasted an average 12-month trailing gross dividend yield of 6.3% as at Friday.
More than 80% of these quality companies tracked by the index paid regular dividends, either annually, twice a year or even every quarter. A number of companies distributed special dividend payouts.
As the market prices down these stocks amid rating cuts by analysts, prices are likely to continue to tumble in the coming months. If they do, dividend hunters should consider buying.
Falling prices have already pushed up trailing dividend yields of companies such as IOI Corp and YTL Power at above market average. A rebound in prices, as and when sentiment recovers, should provide the patient investor with handsome capital gains.
For example, an investor who bought Public Bank shares at RM6.30 three years ago and continued to hold on to the stock until Friday would be sitting on a capital gain of RM2.20 per share.
During that three-year period, Public Bank paid out RM2 per share in gross dividends.
Smaller-sized Uchi Technologies Bhd, which had seen its annual dividend payout rising 20% on average over the past five years, has a dividend yield of 12% after the stock plunged 60% year-to-date.
Famed investor Warren Buffett wrote in New York Times recently that cash was a “terrible long-term” asset class. He believes equities would outperform cash in the long run. More so with the prevailing high inflation and low returns on deposits in today’s environment.