Investors look for magic in numbers

By Peter V O'Brien

Friday 23rd July 2004

Profit results from the June-year reporting round and consequent dividend payments will have particular interest for income-conscious equity investors.

They will have to adjust their assessment of gross dividend yields (which give effective yields for dividend tax imputation credits) to changes in yields on alternative fixed interest securities in recent months.

Gross dividend yields were considered in the National Business Review on February 20.

Interest rate yields rose between then and July 16, as shown in table I, in line with an increase in the Reserve Bank's official cash rate (OCR) this year.

Comparative yields on wholesale and retail fixed-interest securities at February 20 and last Friday are in Table I.

Government stock maturities were taken at February 2005 and 2006 because the first was a suitable alternative to dividend yields, many of which will be set in August and September for the year ended June.

The next dividend for those companies will be struck around February next year.

February 2006 provided a useful comparison for February 2005 yields.

People with a bent for the mathematical mysteries of calculating yields to maturities will note that yields rose on all wholesale securities between February and July, despite the maturity dates being closer in July.

Yields on retail rates were "real" in the sense that a deposit made in February carried the same rate five months later, irrespective of the maturity date.

Few retail deposits are traded, although there is always a market for any financial paper, given willing buyers and sellers.

Most people who find they need to liquidate retail deposits do so with the institutional issuer and take an adjusted interest rate.

Top-of-the-line gross dividend yields showed minor changes in the past five months, with the number of companies yielding more than 10% going from six in February to seven last week and a continuation of those showing more than 9%. Gross yields over 9% on July 16 are in table II.

They again disposed of the old theory that dividend yields fell as share prices rose.

The other part of that theory said yields went up when interest rates increased, with the corollary that there would be a decline in share prices.

Historical theory has gone awry, because share prices spurted this year.

The NZX50 gross index was 2426.83 on February 20 and 2709.81 last Friday, an increase of 11.2%.

Gross dividend yields could move up again as companies report and some increase their dividends with appropriate imputation credits.

Further gains in share prices would depend on whether investors underestimated profit results, an unlikely situation in most cases, given companies' requirements to engage in continuous disclosure.

Steel & Tube Holdings, for example, said on Monday its profit for the year ended June was upgraded from February's $24 million estimate to a range of $27-28 million.

That could be significant in dividend terms, when related to last Friday's 12.08% gross yield.

The table II figures had an ironic element.

AMP NZ Office Trust's gross yield was 10.52% on July 16, in line with other property companies, but the company had set a rate of 8.5% on its $95.2 million rights issue of mandatory convertible notes.

The three-year notes convert to ordinary units in the trust on June 30, 2007.

There was a higher theoretical risk on the convertible notes than on distributions for current units.

Unitholders who exercised rights to the convertibles seemed satisfied with the different returns, which could also depend on what they paid for their rights-entitled holdings.

The relationship between dividend payments, profit results, gross dividend yields and returns on fixed-interest securities could be intriguing in the next two months.

Comments from our readers

No comments yet