Special Bulletin | Meeting the challenges in 2009
10 December 2008
Meeting the challenges in 2009
Income Focussed Investors
2008 has been a challenging and turbulent year for investors and companies alike as the impact of the global credit crisis created market wide funding issues. Looking ahead into 2009 we believe the risk/return outlook will improve as we expect the crisis to gradually unwind, but not before leaving some companies with more bruising as they struggle to secure capital in a tight market. Coupled with a falling interest rate environment, investors seeking safe income streams need to be selective in their portfolio investments. In this Special Bulletin we focus on the opportunities that exist to optimise income in the short to medium term. Table 1 below highlights some cash strong, dependable, dividend paying companies which we believe are of value now. Table 1 : Income returning opportunities Code
Rating
FY09 Yield
Franking (%)
Tatts Group
TTS
Buy
7.6%
100
Woolworths
Company
FY09 Gross Yld 10.9%
Sector Consumer Discretionary
WOW
Buy
3.9%
100
5.6%
Consumer Staples
Goodman Fielder
GFF
Buy
10.1%
40
11.8%
Consumer Staples
6
QBE Insurance
QBE
Buy
5.4%
20
5.8%
Financials
5
WH Soul Pattinson
SOL
Buy
4.6%
100
6.6%
Financials
Sonic Healthcare
SHL
Buy
4.2%
100
6.0%
Healthcare
BHP Billiton
BHP
Buy
4.6%
100
6.6%
Resources
Telstra Corporation
TLS
Buy
6.7%
100
9.5%
Telecommunications
SP AusNet
SPN
Buy
12.3%
0
12.3%
Utilities
Figure 1: US Corp spread risk
4 % 3
2
Source: ABN AMRO Morgans estimates
1 94
96
98
00
02 Y ear
04
06
08
10
Source: ABN AMRI Morgans, US Federal Reserve
Figure 2: Aust. 90 Day Bank Bills 14 12 10 8 6 % 4 2 0 88
90
92
94
96
98 00 Year
02
04
06
08
Source: ABN AMRO Morgans, RBA
10
Bailouts have not been catalyst to renewed corporate spending
The crisis and its impact on banks around the world has lead to a reduction in the availability of traditional debt funding for Australian companies. Contrary to expectations, the Government sponsored bailouts of foreign banking systems has not been a catalyst to renewed corporate lending as capital continues to be hoarded. This is illustrated in Figure 2 (opposite) where Corporate risk spreads have dramatically increased. These spreads seem to reflect rising bank lending standards and tightening credit. This risk spread is now the highest since April 1933. Worse still for Australian businesses is that foreign banks are now aggressively repatriating funds back to their home markets further restricting funds available. This move alone is reported to have created a $50bn funding hole for Australian companies that rely on multi-bank syndicates to fund their operations. Tighter cash flow management will continue…. In the face of this very challenging environment Australian companies are now being forced to rethink how they will finance their businesses, reviewing investment opportunities and capex programs in an effort to better manage their balance sheets. The order of the day is tighter cash flow management, DRPs, dividend reductions and new equity capital raisings. ….as will reducing interest rates The global credit crisis is also impacting income investors as interest rates are slashed aggressively in an effort to support economic activity. Figure 2 shows the rapid decline in 90 day bank bill rates following the RBA cash rate cuts in recent months. With more cuts expected we believe this will force investors to look beyond traditional deposits and hybrids to support their lifestyle and retirement.
ABN AMRO Morgans Limited (A.B.N. 49 010 669 726) AFSL235410 A Participant of ASX Group
Consequently, dependable income returning investments look increasingly attractive ABN AMRO Morgans views the demand by many high quality companies for new equity capital as an opportunity for investors seeking dependable dividend income in the period ahead. Remember, notwithstanding the difficult times, quality companies with dependable earnings will prove their
SB_81210
www.abnamromorgans.com.au
worth. In 2009 we believe continued funding issues and reducing interest rates will drive investment into companies such as those listed in Table 1 above. Our regular publication “Investing for Income” will continue to review this portfolio as relative risk/returns change.
Important disclosures regarding companies that are the subject of this report and an explanation of recommendations and volatility can be found at the end of this document.