ASX Shares Selling IP's to invest in Telstra Shares (TLS)

This link provides an interesting insight in to the buy vs sell ratings recommended by brokers / analysts. In short, the market is heavily skewed towards the buy vs sell : Why Not To Listen To The Media And Brokers

 

Yep. And this

Exchange Traded Funds (ETFs)

 

Beginner's Guide to Investing in Listed Investment Companies

Listed Investment Companies (LICs)

Exchange Traded Funds (ETFs)

LIC's v ETF's which is better and why

 

JK200SX, Willair,

I'll use a simplified thought process to illustrate TLS's issue (but this counts for all high-yield underperforming stocks).

If you subscribe to efficient markets, generally there is no free lunch without insider knowledge. So say in this example the share price of TLS is $5.00 and it pays a fully franked 10% yield.

Now companies don't simply magic the dividend from nowhere, the money needs to come from profits (or earnings per share). Say TLS again underperfomed and only has earnings per share growth of 2% in a year.

That means that $5.00 grows to $5.10 right? Well no, the dividend will take off 10% as that money goes out the door and out of the companies share price.

So the end result is the investor gets $0.50 in dividends but his shares are now only worth $4.60.

For reference, TLS's CAGR in earning per share is under 3% over the last 10 years. That's why although dividends have been increasing/steady, share price has not moved for 15 years. Its growth story can't keep up with the dividend yield it pays.

This is a grossly simplified example ignoring several other factors, but illustrates the point.

PP

 

When I worked for wall street this was common knowledge with traders. The buy/hold/sell ratings are not worth much on their own. This is obvious when they have 8/10 stocks overperforming the market and 2/10 stocks underperforming the market. Logic says it should be 5/5 right?

The reason for this is the human factor. Research analysts need company CEOs/CFOs on side as they can glean extra info for their research reports which make them look good internally come bonus time. You need to stay pals with the management of companies if you want that extra info, so better not have a sell rating on their stock...

In fact, research ratings are sometimes a contrarian indicator. If every analyst has a buy recommendation, the only way is down in the event of re-ratings.

PP

 

What was your previous job at wall street? I have not worked at any financial firms and I can say you are probably confused with what you are talking about.

EPS growth is definitely not the same as EPS.
A 2% growth on an annual EPS of 50c would be an additional 1c to 51c.

[That means that $5.00 grows to $5.10 right? Well no, the dividend will take off 10% as that money goes out the door and out of the companies share price.]
This is totally wrong. $5 remains at $5 (this is what the market thinks the company is worth and can fluctuate)

To be specific and taking telstra as an example, the current latest NAVPS(net asset value per share) is 45.4c. Paying a dividend of 15.5c as it intends means after payment NAVPS would be 29.9c. However share price could be any price though usually the market adjusts for this payout when the stock goes XD (ex-dividend). So if the price was $5, it would adjust to $ 4.845. This is an adjustment in stock price, not in the real assets of the company.

Also, during the 2H of the year, Telstra would continue to make money and add another ~15c of EPS, bringing the NAVPS back up to 45 or thereabouts again when the next report comes out.

Telstra made in 1H17 an EPS of 14.8c and is doing a dividend payout of 15.5c.

Do note that in 1H16 telstra had an EPS of 17.2c and it paid a dividend of 15c. So 2.2c of EPS was retained in the company. This could be used to help with the 0.7c gap this 1H.

Finally, it is somewhat of a misconception that dividends are paid out directly from earnings.
Dividends are actually paid out from the cash flow. In fact, sometimes companies can still pay out a higher dividend than their EPS and still not have to add on additional debt or dip into the cash reserves. This is a good article that explains this concept well..
Dividends Come Out of Cash Flow, Not Earnings

Going forward Telstra should have no problems maintaining and slowly increasing its payout slowly. Especially with whats happening with the NBN and Telstra. So far, its earnings and cash flow have been keeping up with the dividends its been paying.

I have no doubt its cash flow and earnings can and will be able to keep up with the dividend it pays. It's business has a wide moat and it has extensive government backing. With the threat of NBN now out of the way, it will just continue on its monopolistic/oligopolistic way and continue to be a "cash cow" generating billions every year.

 

Sales & Trading

Without being combative (this is a property forum after all), your post is generally not correct. For a stock such as TLS, NAV is not the metric that investors value the stock with. What you call market fluctuation is driven by views on future cash flow and growth. That is why share prices change from day to day even if NAV and earnings remain objectively the same. A real world example is TLS's share price itself as illustration.

Now paying high DPS vs EPS is not a criticism per se. It just means that TLS's management do not see adequate return opportunities within the company, so return it as dividends back to shareholders.

My warning to the property experts on this forum interested in stock investing is merely to look beyond dividend yields, and my simplified post was intended for that audience.

That is your view and no one can say you are wrong. Dividend income may well remain high, just watch out for capital loss associated with your investment. And good luck!

PP

 

This is very useful for me. I only really know property and never considered listed securities. I guess because in the past yields were higher and expenses were lower with property? Well, that was my perception anyway. Put it this way, property is not living up to my expectations. That said, jumping into listed securities as a beginner is risky. So I am trying to get up to speed. It's a steep learning curve. This helps! Thank you.

 

No worries, I see it as fair compensation for the invaluable property insight I gain from you and others on here.

The reason high-yield stocks are different to high-yield properties is mainly the following:

1. Excess supply suppresses both rents and capital gain in property. In stocks yields can actually increase drastically when companies are in difficulty (the "dividend trap").

2. Yields for stock can be high one day and 0 the next, and stay that way. For property you have vacancy periods but can find some income as lower rent (hopefully)

3. Stock investors price cash flow over a much longer period than property. This sounds counter-intuitive, but look at it this way: The recent Snapchat IPO has valued a large loss-making company at $28bn, with no profits for the foreseeable future. However, they see revenue over the horizon of 5, 10, 20 years as significant. With property, investors generally look at what the rental yield is right now, or straight after renovation/build.

These concepts sometimes trip up investors moving from property into the stock market.

PP

 

This isn't something I would do. As I still rely on the leveraging benefits property offers as an investment vehicle. My question was more geared towards people who are entering retirement years and may have held property in syd or Melb and have had significant growth recently but the properties net yield may be 2-3%. People in this scenario may be better off selling some low yielding properties and investing in a high yielding stock to provide more retirement income. I wouldn't put all my eggs in one basket though. But I would be willing to put a large amount of my equity into Telstra and live of the dividends under those circumstances

 

TELSTRA IS GETTING SMASHED

 

Yep, I exited TLS quite sometime ago thankfully. Although the reason was more to do with further simplification. But looking at the portfolio at that time quality (or lack of) wise TLS was the first to go. We only have three direct stocks remaining now.

 

I did a cheeky little transaction earlier this year and bought at 4.00 and then sold at 4.30 but thats my interest in TLS over.

 

Is TLS not part of the LIC's you hold?

 

Yes of course. As I said the reason for selling was more to do with simplifying our overall portfolio. But holding it directly as well as indirectly through LICs meant that I was overweight TLS. Plus one of the reasons I don't like holding direct shares is when one is having a bad trot it tends to jump out at you screaming "hey loser look a me". When owning shares through a LIC / Index fund you don't pay any attention to what might be going on under the hood. Never underestimate the psychological elements of investing.

 

fair point

 

First post in the thread:
Selling IP's to invest in Telstra Shares

Move over Nostradamus!

pinkboy

 

A lesson in portfolio construction/position sizing. Who would have thought 100% payout would be unsustainable?

 

The reality is that for those of us who own the market through large cap focused LICs and cap weighted index funds / ETFs you get TLS whether you like it or not. But what I enjoy about not investing in direct shares is that I couldn't care less what's happening to this company or that company ... . More times than not the troubles companies face tend to resolve themselves over time. The beauty is I don't have to do anything and I can ignore all the noise whilst others or an algorithm look after it for me for a rediculously low fee. That's my idea of investing.

Besides I don't know what the surprise is as I thought most realised that TLS would have to cut their dividend at some stage.

 

I hope this thread saved PC'ers some of their hard earned money, that was the intent. Yield in shares & yield in property are very different beasts.

PP