As a result we have been cautiously building our clients’ exposure to resources.
Over the past two months we have added further BHP and Origin shares to clients’ portfolios. In each case the company produces (at a group level) positive operating cashflows. That is, after they pay all their bills at the end of every year, their bank accounts are fuller. And they can pay dividends (if they choose) or invest further (for future growth) in their businesses.
In the BHP case, it can’t pay the same dividend as before, but at $14.50ps it can afford a 4-5% (6-7% with franking) dividend yield and still be paying down debt or buying things. This is not a bad result and therefore we are happy to be quietly buying shares as the manic market throws them out at these prices.
In Origin’s case it is currently trading on a free-cash yield of 6.5% (at current spot /oil LNG prices) which reflects a yield of 14% on its core business (versus AGL on 7.1%) and substantial cashflow losses on APLNG at these A$ oil prices. We don’t see this as being a long-term situation for Origin. Either oil prices will rise (they have until the end of FY-17 before current prices will hurt them due to their hedging), or APLNG will be cut free. Either way the value in the core business will be realised eventually. And it is substantial. Meanwhile it is likely Origin will pay a dividend which on their most recent guidance equates to about 8% p.a.
So whilst there are real things that are slowing the economic world, the market has responded in an overly fearful fashion to what are now longer-term and well-known issues.
When the market takes a cool shower and sees that an economic slowdown is not the same as an economic meltdown, the 20% decline in global share prices will be seen as being at least enough to reflect what the real story is.
We will continue to manage our portfolios carefully. We have considerable cash in client’s equity portfolios and some good insight into the real things occurring in our current investments. We think reporting season in February will provide a good realigning of reality between what the market thinks is going on and what is actually going on.
I look forward to reporting on our investments/companies in February.
- Dennison Hambling