By the time the next issue of Australian Edge is published, on Sept. 14, 2013, Australians will have gone to the polls to elect a new federal government.

As AE Associate Editor details in News & Notes, this snap election follows the return of Prime Minister Kevin Rudd, who deposed his Labor Party rival Julia Gillard in the climax of an intramural conflict that had simmered since Ms. Gillard toppled Mr. Rudd in June 2010.

Mr. Rudd’s resurrection has triggered some improvement in Labor’s standing with the Australian electorate, but the incumbent party still trails the Coalition, which comprises a formal alliance of broadly center-right parties and is led by Tony Abbott of the Liberal Party.

As Ari notes, resolution of Australia’s political situation will go a long way toward clarifying several issues of significant impact on the local economy, including the carbon tax, the Minerals Resource Rent tax and the federal deficit.

Most importantly, business leaders are hopeful that results of the election will remove some uncertainty from the economic landscape.

“Uncertainty,” however, seems now to be a fixed tool in the political playbook, be it in the US, Australia or any developed democracy.

Take, for example, a relatively minor dispute over the Australian Treasury’s recent Pre-Election Economic and Fiscal Outlook (PEFO) report, which Australia’s Charter of Budget Honesty Act 1998 requires within 10 days of the issue of the writ for a general election.

This writ was issued on Aug. 5, 2013. The Treasury released the PEFO on Aug. 13.

The purpose of the PEFO is to provide updated information on the country’s economic and fiscal outlook. It takes account of government decisions made before the issue of the election writ and all other circumstances that may impact the economic and fiscal outlook.

It is ostensibly an independent document. Nevertheless, what should otherwise be a dry piece of reading is now the touchstone for a campaign-trail spat between Mr. Rudd and Mr. Abbott, the former accusing the latter of questioning growth assumptions underpinning the PEFO report

The Labor government is Mr. Abbott, of trying to use allegations of uncertainty about the forecasts to “hide” deep spending cuts he intends to make if he wins.

Mr. Rudd said Mr. Abbott lacked “the guts” to say where he would make cuts because he was worried people would be less likely to vote for him.

Mr. Abbott, who has said he “wanted to be known as a prime minister who keeps his commitments,” categorically ruled out any change to the goods and services tax, even if elected for a second term, despite its inclusion in the Coalition’s promised first-term tax review.

This is the game Mr. Rudd, Mr. Abbott and politicians the world over have chosen to play.

Politics is clearly an important aspect of the global economy, perhaps more so at this juncture in our history than at any other. And of course petty back-and-forth designed to cop votes has been part of the game since it’s been played.

What it seems to me Australian business leaders are pining for is an end to an era of weak governments, that Labor or the Coalition will emerge with a decisive majority and that the game will be suspended, at least for a comfortable time, while serious questions about Australia’s economic and financial future in a period of significant transition for the region and the world.

In the meantime, our antidote is to keep the process of investing simple, to employ an approach based on fundamentals and building wealth over the long term, with an emphasis on ground-up, company-by-company research supplemented by a learned appreciated for macroeconomic trends.

A long-term, buy-and-hold focus is our primary bulwark against emotionalism and the short-term and portfolio-breaking decision-making it can engender.

At the same time, in recent months we’ve tried to acknowledge the fact that we have in some cases held on too long to stories, recommitting ourselves to following our established discipline that the numbers, on a quarter by quarter basis, will be our guide, and if there be deterioration in the underlying business we be gone.

We’ve also established a broadly diversified portfolio, including energy, utility, financial, consumer discretionary, real estate investment trusts, materials, telecommunications, health care, transportation and industrial companies.

Another primary driver of action-based advice is our adherence to buy-under targets that incorporate value metric as well as potential for one-year total return, including price appreciation and dividends paid.

Generally speaking we don’t advise “averaging down” in stocks that have, for whatever reason, slipped a little or a lot, as we don’t want any particular holding to become too dominant a presence in the portfolio.

By the same token, though we want our winners to run, we also advocate taking some profits off the table from time to time to protect gains and for allocation to other selections in a way that preserves portfolio balance.

We’re not into newfangled financial vehicles. We prefer traditional equities, issued by companies that run easy-to-understand, so-simple-a-caveman-could-get-it businesses. We cover a few funds, only because they provide efficient means for investors who want extreme convenience. But we like to do our own stock-picking.

Steering clear of the “newfangled” means avoiding initial public offerings too. We like a trading history, and, of course, as dividend-focused investors, we like to see a trail of dividends over time. And we also like to see a backlog of public filings and the history of financial and operating performance they detail.

We’re not into generating huge brokerage fees for our readers, another virtue of our buy-and-hold approach. We’re not traders; we’re investors.

This is all part of an ongoing process that culminates in a monthly issue.

Portfolio Update

Conservative Holding APA Group (ASX: APA, OTC: APAJF), one of the original eight members of the AE Portfolio  has made a AUD1.3 billion offer to buy the 67 percent of fellow Conservative Holding Envestra Ltd (ASX: ENV, OTC: EVSRF), also one of our original eight “income wonders from Down Under,” that it doesn’t already own.

Envestra has rejected APA’s offer, but these are simply the opening moves in a process that will include an improved offer by APA and eventual acceptance by Envestra.

Conservative Holdings Australand Property Group (ASX: ALZ, OTC: AUAOF), CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY), GPT Group (ASX: GPT, OTC: GPTGF), Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY) and Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY) have reported earnings, and we have analysis of the numbers.

Wesfarmers provides the highlight, with an 8.4 percent increase to its final dividend that lifts its fiscal 2013 payout by 9.1 percent compared to fiscal 2012.

Aggressive Holdings Mineral Resources Ltd (ASX: MIN, OTC: MALRF, ADR: MALRY), Rio Tinto Ltd (ASX: RIO, NYSE: RIO) and WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY) also reported, and we run their numbers as well.

Mineral Resources declared a final dividend of AUD0.32 per share, up from AUD0.30 a year ago. Total dividends declared for fiscal 2013 were AUD0.48, up from AUD0.46 for fiscal 2012.

Portfolio Update has what’s happening with our Conservative and Aggressive Holdings midway through earnings reporting season Down Under.

In Focus

The Australian dollar has declined from a 2013 high of USD1.0598 as of Jan. 10 to as low as USD0.8905 on Aug. 2.

The aussie is back at USD0.9185 as of this writing, having recovered some of the further ground it lost leading up to the Reserve Bank of Australia’s Aug. 6 decision to cut its overnight cash rate target by 25 basis points to an all-time low 2.5 percent.

Not even during the depths of the Great Financial Crisis did the RBA’s benchmark rate plumb such levels.

The aussie’s 16 percent top-to-bottom decline during 2013 has taken a deep bite out of total returns for US-based investors.

But Australia-based companies with overseas exposure, including financials such as Australia and New Zealand Banking Group Ltd’s (ASX: ANZ, OTC ANEWF, ADR: ANZBY), mining and resource companies such as BHP Billiton Ltd (ASX: BHP, NYSE: BHP) and health care companies such as CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY) are likely to see at least some small benefits from a weaker domestic currency.

The short-term impact of the Australian dollar’s steep 2013 decline has been undeniably negative for US-based investors with long positions in companies based Down Under. The longer-term narrative is more positive.

In Focus discusses the decline of the Australian dollar since mid-April and what it says about the Australian economy and identifies sectors and companies poised to benefit from a more favorable foreign exchange rate.

Sector Spotlight

AE Portfolio Conservative Holding Transurban Group (ASX: TCL, OTC: TRAUF) reported solid operating and financial numbers for fiscal 2013, with underlying cash flow up 2.3 percent over the prior corresponding period to AUD443.3 million and statutory cash flow up 9.6 percent to AUD451.1 million.

Most remarkable about the toll road owner and operator is management’s forecast for a fiscal 2014 distribution of AUD0.34 per unit that will be 100 percent covered by cash flow. Fiscal 2013’s AUD0.31 distribution was 97 percent covered by cash flow.

Distributable cash for the year was AUD0.301 per share. Management had guided to distributable cash of “at least” 95 percent of the actual distribution.

Transurban continues to generate consistent, dependable growth from its assets, for the past five years through some very difficult economic climates and with significant work going on. During this latter period the annual distribution has grown at a compound annual rate of more than 9 percent.

Transurban is a buy under USD6.50 on the Australian Securities Exchange (ASX) using the symbol TCL or on the US over-the-counter (OTC) market using the symbol TRAUF.

We have more on Transurban in this month’s first Sector Spotlight.

The very simple case for establishing a position in AE Portfolio Aggressive Holding BHP Billiton Ltd (ASX: BHP, NYSE: BHP) is that it’s trading below our buy-under target of USD40, which applies if you have the ability to trade its Australian Securities Exchange-listed common share.

The New York Stock Exchange (NYSE) listing for BHP is an American Depositary Receipt (ADR) that represents two ordinary, ASX-listed shares. The buy-under target for BHP’s NYSE listing is USD80.

The reasoned argument for buying and holding BHP Billiton for the long term is that, despite a difficult year for the largest mining company in the world by market capitalization, it remains best-in-class due to its size, well-diversified and competitive operations and a still-solid financial profile.

This month’s second Sector Spotlight focuses on charter Portfolio Holding BHP Billiton.

News & Notes

Clarity for the Economy: Australia has at least two of three key components in place that are necessary to restart its economy: historically low interest rates and a rapidly falling currency. Now we just need to see who prevails at the polls.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that have announced lower dividends during fiscal 2013 earnings reporting season Down Under, which is currently in progress, and those that have yet to report final numbers but that did reduce dividends at the half year. It also includes those that reduced earnings guidance in recent weeks.

The ADR List: Many Australia-based companies that list on the home Australian Securities Exchange (ASX) are also listed on the New York Stock Exchange (NYSE) or over-the-counter markets as “sponsored” or “unsponsored” American Depositary Receipts (ADR).

Here’s a list of those companies, along with an explanation of what these ADRs represent.

How They Rate

How They Rate includes 112 individual companies and four funds organized according to the following sectors/industries:

• Basic Materials
• Consumer Goods
• Consumer Services
• Financials, including A-REITs
• Health Care
• Industrials
• Oil & Gas
• Technology
• Telecommunications
• Utilities
• Funds

We provide updated commentary with every issue, financial data upon release by the company, and dividend dates of interest on a regular basis. The AE Safety Rating is based on financial criteria that impact the ability to sustain and grow dividends, including the amount of cash payable to shareholders relative to funds set aside to grow the business. We also consider the impact of companies’ debt burdens on their ability to fund dividends. And certain sectors and/or industries are more suited to paying dividends over the long term than others; we acknowledge this in the AE Safety Rating System as well. We update buy-under targets as warranted by operational developments and dividend growth.

In Closing

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David Dittman
Editor, Australian Edge

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