DMP has been an outstanding creator of shareholder wealth over the last several years and reinforces my belief that selling stocks just because they trade on an above average PE can result in you leaving a hell of a lot on the table. Often stocks trade on higher multiples for a reason. Sure, some so-called "blue chips" in the ASX100 only trade where they do, due to FM mandating but in the case of DMP it's just been a pure growth story. The market will continue to reward until it shows signs of not meeting its lofty growth trajectory.
Is it worth selling? Well, even if we could pick at what price the top would be, which we can't, one would need to do some careful calculations to see what sort of CGT liability this stella little investment would generate for them, what dividend income they would be forgoing and finally, exactly how far it's going to fall, which, again, is guesswork.
Suppose you've held from $10 on a $50k investment. You now have a $250k holding. Applying the cgt discount method, you could sell the lot for $50/sh, which would generate $100k of assessable income. Say, you're earning an average $100k, therefore you pay 37% or $37k on the transaction, not to mention a higher medicare levy surcharge, so let's say $40k. Worth noting, many on HC would be in the top marginal tax rate and would pay even more, unless they have a trust structure setup.
Now let's assume DMP falls 20%, down to $40/sh. Your $250k portfolio is now worth $200k. Ok, you've lost $50k, versus ~$40k if you sold. However you're also making the assumption that:
- The forgone dividend income stream can be immediately replaced with a similar performing investment
- That DMP shares don't go back up.
- That when you sold at $50, that it was the top.
Hardly seems worth all the effort and guesswork in my view and i'd rather just hold good stocks that go up and pay me an income stream.
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