This time FNP gets a plug from an asset mgr with BlackRock, the...

This time FNP gets a plug from an asset mgr with BlackRock, the biggest fund manager in the world.
Nice that she would single out FNP.

Beware high-dividend stocks: theymight not be best in the long term

Sarah TurnerReporter

Jun 20, 2019 — 4.40pm

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The hunt for yield in Australia hasincreased the attractiveness of companies where the earnings outlook is likelyto be crimped by very high dividend payouts, says BlackRock Asset Management'sMadeleine Beaumont.

BlackRock's Madeleine Beaumont sayspayout ratios are very high in some segments of the market. DanielMunoz

Thesenior portfolio manager, who was speaking at the Bloomberg Buy-side Forum inSydney on Thursday, said the so-called "bond proxy" stocks are amongthe groups at extremes in the Australian share market.

"Peopleare really looking for income inequity markets in Australia," she said, describing the move intohigher-yielding stocks as a "bubble".

Althoughthese stocks looked attractive to income-seeking investors from the point ofview of divided payout ratios, Ms Beaumont said she was not drawn to these"complacent oligopolies"

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The banks – Commonwealth Bank,Westpac, National Australia Bank and ANZ – and supermarkets – Woolworths andColes – are examples of that type of company, the fund manager said. Thesefirms could have "very high" payout ratios, between 80 per cent and90 per cent.

Theaverage payout ratio of listed Australian companies over the past 100 years was65 per cent, the Reserve Bank of Australia noted in a research paper out onThursday. "The introduction of franking credits in the 1980s is widelybelieved to have boosted dividend payout ratios," the paper noted.

Ms Beaumontsaid while companies with high dividend payout ratios might look attractive inthe shorter term, if they were paying out between 80 per cent and 90 per centof their earnings in dividends, "you are not going to grow because you arenot investing capital for growth".

"Soyou will get a good dividend and right now that's a better yield than you aregetting at the bank – but ultimately if you are paying out that much of yourearnings, where do you get growth from?" the fund manager asked.

Insteadof focusing on very high dividend payout levels, she tries to find businessesthat are investing capital wisely for the longer term.

"Ideallythey have a a dividend yield, but that has to be growing dividend rather thanjust a high dividend," the fund manager said.

'Growthis scarce'

Theother segment of the market the fund manager is wary of is Australian growthstocks, especially technology stocks.

"Growthis scarce. People don’t want to touch China and they don’t want to go domesticcyclical because everyone knows that the Australian economy is slowingdown," Ms Beaumont said.

"Australiantech stocks are more expensive than the US FAANGs," she said, referring tothe group of stocks that includes Facebook, Apple, Amazon, Netflix and Googleowner Alphabet.

Australia'sbest-known tech stocks are referred to as the WAAAX stocks, an acronym thatrefers to WiseTech, Afterpay, Altium, Appen and Xero.

"Someof them are fantastic businesses, We have owned some in the past and we stillown some," she said.

However,many of these businesses did not make any money, she said. "Quite a lot ofthese are long duration and very hard to value."

As interest rates have come down,investors have justified higher and higher enterprise values to sales ratiosfor companies in the technology sector, the fund manager said. "Twenty isthe new 10. It becomes an upward spiral, which does concern me."

MsBeaumont said she was focused on some of the longer-term structural trends shethought would persist "regardless of what happens in the short-termmacroeconomic environment".

"Thereare a couple here in Australia that we think are working very well for ourportfolio at the moment," she said. One is a trend toward healthier eatingand people knowing a lot more about gut health.

"Oneof our investments, Freedom Foods, has taken a very long-term view on thischange in the way people are consuming food, in oat-based cereals andplant-based drinks, and we think is a great structural long-term growthstory," the fund manager said.

"Sowe are finding very interesting places to invest."