Was fwd'd this email and makes for an interesting read...
Telstra is likely to pay a 30c fully franked dividend this year having paid 28c each year for the last 10 odd years. Now see how the lower A$ and the lower interest rates impacts on the value of Telstra.
From an international investor’s point of view the A$ has fallen from 110c to 80c. In effect this has increased the value of Telstra’s 30c dividend by 110/80 which is 37.5%. At the same time the share price of Telstra from an international investor’s point of view is costing 37.5% less. No wonder the stock has tripled since 2010.
Then take on board this little equation. Generally speaking equities have been priced against bonds and have generally speaking commanded (say) a 2% yield premium to bond yields for the risk you take in equities. For instance the average yield on equities is now 4.5% with cash rates at 2.5%. So you can imagine that if interest rates dropped to 1% then the average yield on equities might be expected to drop from 4.5% to maybe 3%.
Now look again at Telstra. If Telstra was on a 3% yield paying a 30c dividend, you can work out the share price. Yes, it’s $10. Telstra’s share price is currently 667c. In other words if interest rates moved to 1.0% and Telstra moved to an average yield the Telstra share price could go up another 47%. And that, just to ice the cake, is from an international investor’s point of view and is before franking. Domestic investors can add franking. That means that at $10 Telstra is still yielding 4.28% when interest rates are 1%. And that is what the market is beginning to anticipate
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