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Portfolio Watch - a stock portfolio for big income & capital gain

Portfolio Watch - a stock portfolio for big income & capital gain

Stockbroker Richard Batt has chosen a mix of capital growth and income stocks he believes will generate solid returns in an uncertain investment climate.

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By Anthony Black 24.08.2009

Spreading risk is a sound strategy when building a share portfolio. So with is in mind, stockbroker Richard Batt, of Shadforth Financial Group, has chosen a mix of capital growth and income stocks he believes will generate solid returns in an uncertain investment climate.

He notes short-term uncertainty for capital growth stocks in light of the recent strong sharemarket rally. Whether or not this rally is sustainable, his capital growth choices of ANZ Bank, Woodside Petroleum, BHP Billiton and Toll Holdings are among Batt’s best long-term buys.

Should the rally fizzle under the weight of a correction, Batt forecasts his choice of income stocks, Commonwealth Bank, Blackmores Limited, Tatts Group and Coca-Cola Amatil, to provide attractive grossed-up dividend yields offering far superior returns than term deposits.

What sets the ANZ Bank apart from the other three majors is its Asian strategy. A recent capital raising filled ANZ’s coffers with $4.7 billion and the bank responded by buying Royal Bank of Scotland assets in Taiwan, Singapore, Indonesia, Hong Kong, Vietnam and the Philippines for about US$550 million. ANZ is intent on becoming a notable regional player and Batt believes the bank has the capability to deliver on its strategy, but it’s not without risk. Batt says the ANZ faces stiff competition in the Asian region from the likes of long-term incumbents HSBC and Standard Chartered Bank. And the disappointing record of Australian companies expanding their operations overseas can’t be ignored as it highlights the fierce competition. However, Batt says: “The acquisition of the Royal Bank of Scotland’s assets set the ANZ apart as a real growth stock within the financial sector. If ANZ can make its Asian strategy work, long-term investors will profit.”

Demand for energy here and overseas paints a bright outlook for Australia’s giant oil and gas producer, Woodside Petroleum, Batt says. The company offers exposure to LNG, crude oil and LPG. Batt says Woodside Petroleum stands to benefit from a rising crude oil price as global economies recover. “But the primary driver for the business going forward will be its LNG operations, particularly after completing the Pluto project in Western Australia,” he says. “Once completed, this project will drive earnings and provide significant upside in response to stronger demand for LNG in Asia.”  The short-term risk for Woodside is a global downturn, he says.

Batt says the global financial crisis has provided a rare opportunity to buy quality stocks at relatively cheap prices despite the recent rally. ANZ Bank was trading above $30 a share before it crashed to $12 levels on exposure to soaring bad debt provisions amid higher wholesale funding costs during the credit crunch. ANZ’s share price closed at $19.60 on August 12. Batt says companies with a history of solid earnings generally weather downturns and emerge much stronger on signs of an economic recovery, as money sitting on the sidelines pours back into proven performers. Because share prices were hammered across the board during the global financial crisis, Batt says he has re-classified some conservative blue chips as capital growth stocks at this point.     

Batt says multiple earnings streams and a suite of long-life assets puts BHP Billiton in a class of  its own as the world’s biggest miner. Batt says the 61.8 per cent fall in net profit to US$5.88 billion for the 12 months to June 30, 2009, reflects falls in commodity prices in a contracting global economy. Batt expects stronger demand for commodities to increase prices and the company’s earnings over the longer term. Batt says BHP Billiton’s fortunes mostly depend on the health of the global economy. “Short-term, the company may face challenges, but demand from emerging economies, particularly China, paints a bright long-term outlook,” he says.  “The iron ore joint venture with Rio Tinto will unlock significant value for BHP. The company will be able to reduce costs and develop operating efficiencies which will provide further growth opportunities.”

Toll Holdings is one of Asia’s leading integrated transport and logistics providers. Batt says core operations are performing well, and a strong balance sheet enables it to support future developments. Toll has a strong track record of making successful acquisitions in Australia. In future, offshore acquisitions provide the greatest potential for growth, particularly as it can leverage off its operations in China and Singapore. Batt says Toll is likely to receive regulatory approval to acquire full ownership of its Chinese operations in Shenzhen-based ST-Anda Logistics.

Batt says good quality income stocks can also offer solid capital growth in a stronger sharemarket. But their defensive earnings enables them to post attractive dividend yields if the market turns sour. Batt considers capital growth from income stocks a bonus because it’s a secondary objective for buying them. The major objective is yield in an uncertain sharemarket, and Batt is forecasting his income stocks to post grossed up yields between 6 per cent and 11.5 per cent for 2010. (See table below.)

Commonwealth Bank’s full-year report was given a tick of approval by Batt despite a 7 per cent fall in cash earnings to $4.415 billion for the 12 months to June 30, and a 25 per cent cut in its final year dividend to $1.15 a share. Batt says the CBA’s full-year dividend of $2.28 a share is still yielding above 5 per cent on the company’s August 12 price and more than 7 per cent on a grossed up basis. Batt expects the CBA to pay higher dividends in 2010 as it extracts synergies from the Bankwest acquisition in what may also be an improving economy. “But if CBA’s share price falls in a faltering economy, investors should be able to rely on an attractive fully-franked yield,” he says. “I believe CBA’s outlook statement is conservative – management didn’t want to talk it up in times of uncertainty.”   

Blackmores is an industry leader in distributing vitamins and supplements in Australia and South-East Asia.  “We expect strong cash flows to grow in response to an ageing Australian population that’s becoming more health-conscious,” Batt says. “Stronger earnings should provide shareholders with a steady return in the form of higher dividends.”

Batt says gambling is relatively immune to economic cycles so Tatts Group offers a defensive earnings profile. “The company has a strong balance sheet to grow the business and, as opportunities arise, it will take advantage of them,” he says. “However, until an opportunity arises, investors will be rewarded with top fully-franked dividends.” He says another company shielded from the economic cycle is Coca-Cola Amatil. “The company has a strong brand and no matter what economic cycle, consumers will always buy the brands they know,” Batt says. “This enables Coca-Cola Amatil to deliver recurring revenues, providing investors with consistent and rising income.”

TABLE:  Stockbroker Richard Batt, of Shadforth Financial Group, establishes a portfolio of capital growth and income stocks and forecasts dividend yield and grossed up yield for 2010.

 

Company ASX Code
 Share Price - 21 August 2009
 Forecast Dividend Yield 2010 % Grossed Up Yield 2010 %
ANZ Bank
ANZ
$19.03
 4.70 6.71
BHP Billiton
 BHP $36.61 2.90 4.14
Blackmores Ltd BKL$17.71  4.70 6.71
Coca-Cola Amatil
 CCL $9.57 5.00 7.14
Commonwealth Bank
 CBA $44.55 5.70 8.14
Tatts Group
 TTS$2.53  8.00 11.42
Toll Holdings  TOL$7.19
 3.30 4.71

 

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