Income Report / Income Report; Dividends a plenty (TLS, IAG, SUN, NCK)

By Market Matters 15 August 18

Income Report; Dividends a plenty (TLS, IAG, SUN, NCK)

Market Matters Income Report 15th August 2018

The market is holding up well this morning given a chunky CBA dividend is taking ~13 points off the index. Suncorp also went ex-dividend which is dragging the financials index lower + for our income portfolio, Genworth (GMA) is also trading ex-divi today, while CSL’s reasonable result is dragging healthcare higher. Earnings season continues to be the focus, with most companies appearing to have a solid FY18 but downplay guidance for next year.

 

In terms of the MM portfolio for the week, it jumped 1.25%, reversing last week’s losses, now up 1.35% for the current financial year, and +7.44% from inception vs the benchmark which is tracking at 0.66% & 6.10% respectively. An Eclipx rebound along with help from Suncorp & Perpetual helped the portfolio performance for the week.

Income Investment opportunity – International Bond Fund – ASX Listed

There is a new income opportunity doing the rounds courtesy of Neuberger Berman, which is a US based asset management firm that has been around since before time began (1939). They currently manage around $300bn in assets globally, much of that in the fixed income space and they plan to list a corporate bond fund on the ASX. A few key points;

-       They invest in corporate bonds around the world, with huge diversification across the portfolio, hold around 300 individual holdings with position sizes between 0.25% - 0.50% of the portfolio. Normally we like to hold assets directly, however simply put, we can’t get the level of diversification or access to these sort of investments outside a fund structure such as this one.  

-       It targets annual income of 5.25% pa after fees, and income is paid monthly. Currently they are running at 6.77%. The all up fee structure is 0.85%pa

-       These guys have a very strong track record over a long period of time. The specific team that will manage this fund is the non-investment grade team, and they’ve got a 20+ year track record managing high yield corporate bonds. The term non-investment grade means they target bonds that are rated (from a credit quality perspective), between B and BB, with opportunistic use of BBB and CCC credit tiers at times – hence the yield available above 5%.

-       While this is a new product, its underlying portfolio and strategy have been in existence for over 20 years with a strong historical performance. The Neuberger Berman US High Yield strategy, which commenced in December 1997, has returned 8.93% p.a. on average and experienced just 1 default, highlighting the long-term success of NB as a high yield asset manager.

-       Key details of the fund are outlined below. We haven’t met the investment managers as yet – Harry is meeting them on Monday and an update will be provided in next week’s income report, however the opportunity looks an interesting one.  For those looking for more information & a copy of the available research , please email [email protected]

Source; Bond Adviser

Insurance Stocks – Suncorp & IAG

Last week we saw Suncorp (SUN) out with a strong set of numbers and the stock rallied on the back of it. Its trading down 45cps today at time of writing however it has gone ex-dividend for 48cps, so it’s actually trading higher. IAG on the other hand came out with Full Year result this morning and it was a miss to expectations. The outlook has mid-point gross written premium growth of 3% and an insurance margin of 17% which is below what the market had factored in.

IAG has been a better business that SUN for many years and as a consequence, the market had given it a PE premium to SUN. Today’s result showed IAG’s insurance margin was similar to SUN’s in 2H18 at 16.9% but IAG had the benefit provided by reinsurance. SUN’s performance seems to be superior - the first time in a long time, given that benefit won’t be there for IAG in FY19.

 

We covered SUN v IAG in a piece last week suggesting that in relative terms,  buying SUN / Selling IAG made sense.

IAG Chart

 

Reporting

Nick Scali (NCK) – reports tomorrow

It was originally reported that NCK was to release their full year results on the 10th however this is now due out tomorrow (16th August) . The stock that is trading poorly ahead of results, Earnings growth in this business has been very strong over the past 3 years and we’re yet to see actual signs that this is deteriorating (despite the negative structural trends playing out in domestic retailing).  NCK has a reasonable history of beating expectations, since 2010 their average earnings beat is 3.46% and the average stock price change on the day is 4.91%. On 12.2x expected earnings and a grossed yield of 8.34%, it’s hard to see NCK getting hit too heavily on that multiple.

Nick Scali (NCK) Chart

Telstra (TLS) – reports tomorrow

Telstra (TLS) is out tomorrow with their full year results, however there shouldn’t be too many surprises, and hopefully the recent trends we’ve seen amongst the banks, where a ‘less bad result’ has been bought plays out with TLS tomorrow.  TLS have recently downgraded their numbers and launched a significant plan to turn the struggling Telco around, so it’s unlikely we’ll get any variance on the markets expected numbers, however more insight into the 4 pronged attack that TLS outlined in June. At the end of July we saw Telstra release the first phase of its previously announced simplified mobile plan changes with new ‘Peace of Mind Data’ plans while trimming the total number of plans at the same time. It also introduced ‘Companion plan’ options, although it will only be offered to existing subscribers and not advertised on its website.

They are all positive steps for TLS however for the market to regain confidence in the Telco and have faith that the turnaround is happening, the pace of the changes need to pick up and this will be the main focus of the report next week.

Telstra (TLS) Chart

Conclusion (s)

On initial review, the Neuberger Berman listed investment trust (same structure as MXT which we hold) looks interesting
At this stage, we’re comfortable with the Income Portfolio, in terms of both composition and holdings.

Have a great day

James / Harry &  the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 15/08/2018

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