The vast majority of Australia-based companies tracked in the AE How They Rate coverage universe have reported earnings for the first half of fiscal 2012, which started Jul. 1, 2011, and runs to Jun. 30, 2012. Some that report on a calendar basis turned in full-year 2011 numbers. Still others, with fiscal years ending Jan. 31, also squeezed reports in. And of course a few–a Feb. 29, period-end date, believe it or not, here, and a couple with Mar. 31 circled on the calendar–will come across in time for the April issue of Australian Edge.

What we know from the numbers so far is that our AE Portfolio Holdings certainly belong in the class of high-quality wealth-builders that typify stocks that populate, for example, Utility Forecaster, or Canadian Edge.

This is still a broader market defined by the uncertainties roiling economies and regions all over the world. It remains a two-steps-forward-one-step-back environment, where sensitivities are still defined by events post-Mar. 16, 2008, when Bear Stearns went belly up, to Mar. 9, 2009, when equity indexes started to turn.

Here on Mar. 16, 2012, we can point to the following positives:

• initial jobless claims declined to 351,000, equaling the lowest level since March 2008;
• February retail sales rose in line with estimates, and January sales were revised higher, but what impact will gas prices well above February averages have?;
• the Philadelphia and New York manufacturing surveys came in higher, but components were mixed, and New Orders declined in both regions;
• home-purchase applications have risen to an eight-week high; and
• a reading on investor confidence in the German economy over the next six months far outstrips expectations on its way to its highest reading since June 2010.

Questions, however, persist, as noted. And of course no positive list in this choppy world of ours would be complete without corresponding negatives:

• global interest rates have jumped, with the 10-year US Treasury yield in particular up by 30 basis points to its highest level since late October and the UK gilt yield spiking, too, by 30 basis points;
• inflation was up 2.9 percent year over year, in line with expectations but still ahead of wage growth;
• the University of Michigan Confidence Survey unexpectedly declined a point, as one-year inflation expectations jumped to 4 percent from 3.3 percent, the highest since May 2011.
• The National Federation of Independent Business small business optimism index was less than expected, and Plans To Hire declined for the third straight month, in contrast to payroll optimism;
• Foreign direct investment (FDI) in China fell unexpectedly for fourth straight month;
• India didn’t cut rates, as wholesale inflation rose more than expected; and
• UK unemployment was steady at 8.4 percent, the highest since 1995, as jobless claims rise more than expected.

It’s important to note that though official rates have “popped” and Bankrate.com says average 30-year mortgage rates have gone to 4.03 percent versus 3.88 percent, the highest since late November, these are still extraordinarily low.

It’s hard to escape the conclusion, with gasoline prices up another USD0.07 per gallon to USD3.82 according to AAA, that consumer confidence is slipping.

But will anyone notice the multibillion-dollar “stimulus package” provided because there was little need to heat homes this winter?

Now, are you ready for the best list? Because here’s the really good part: the following AE Portfolio Holdings boosted distributions along with announcing results, with the change rounded to the nearest whole percentage:

• APA Group (ASX: APA, OTC: APAJF) 3 percent
• Australand Property Group (ASX: ALZ, OTC: AUAOF) 5 percent
• Cardno Ltd (ASX: CDD, OTC: COLDF) 8 percent
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY) 3 percent
• Envestra Ltd (ASX: ENV, OTC: EVSRF) 6 percent
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF) 29 percent
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF) 7 percent
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY) 20 percent
• Transurban Group (ASX: TCL, OTC: TRAUF) 12 percent
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY) 11 percent

And these companies under How They Rate coverage did the same:

• Amcor Ltd (ASX: AMC, OTC: AMCRF) 6 percent
• Ausdrill Ltd (ASX: ASL, Germany: FWG) 18 percent
• Boart Longyear Ltd (ASX: BLD, OTC: BEPTF) 75 percent
• Bradken Ltd (ASX: BKN, OTC: BRKNF) 5 percent
• Emeco Holdings Ltd (ASX: EHL, OTC: EOHDF) 25 percent
• Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF) 33 percent
• GUD Holdings Ltd (ASX: GUD, OTC: GUDHF) 3 percent
• JB Hi-Fi Ltd (ASX: JBH, OTC: JBHIF) 2 percent
• MACA Ltd (ASX: MLD, Germany: MKM) 17 percent
• Navitas Ltd (ASX: NVT, OTC: NVTZF) 8 percent
• NIB Holdings Ltd (ASX: NHF, Germany: 3GU) 6 percent
• Ramsey Health Care Ltd (ASX: RHC, OTC: RMSYF) 13 percent
• Sedgman Ltd (ASX: SDM, OTC: SGTDF) 50 percent
• Stockland (ASX: SGP, OTC: STKAF) 2 percent
• Tatts Group Ltd (ASX: TTS, OTC: TTSLF) 5 percent
• UGL Ltd (ASX: UGL, OTC: UGLLF) 6 percent
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF) 8 percent
• Woolworths Ltd (ASX: WOW, OTC: WOLWF) 4 percent

Portfolio Update

“This is the stuff of superior long-term total returns, and that’s what we’re playing for here.”

Ten of the 18 stocks present in the Portfolio entering this reporting season boosted their dividends, an impressive showing and another turn of good fortune for an advisory launched during the relevant six months.

Our investment thesis is based on the relative strength of the Australian economy and the impact on the value of its currency versus others around the world, including the US dollar, of course. In this context, however, the focus is entirely on high-quality businesses. High-quality businesses build value and shepherd cash-generating assets for the benefit of their owners over the long haul. One way this manifests is through dividend increases.

So we’ve seen the impact of a strong aussie on our Portfolio Holdings, which have been juiced about 10 percent but local currency strength versus the US dollar. And we’ve now learned about fiscal 2012 first-half and full 2011 results and seen a spate of dividend increases.

So far, so good

But it is early, and there’s always the first rule of investing, which is, “don’t lose anything.” The first, best way to ensure against this is to stick to our buy-under targets. If there’s anything we can be sure of–and we got another reminder of this in early March with the first triple-digit down day for the widely watched and emotionally significant Dow Jones Industrial Average–it’s that this market will present us opportunities to establish positions at good prices.

So don’t chase.

But again, so far, so good.

In Focus

Iluka Resources Ltd (ASX: ILU, OTC: ILKAF) commands a few key but rather mundane products, one of which, zircon, is used in tile glazes. It just so happens that ceramics happen to be the floor covering of choice in China, where 74 percent of homes use tile.

This is a cultural preference with deep roots, one that makes for an interesting and investible trend in a land where urbanization is at its climax but will have implications for consumption for decades to come.

Iluka Resources is well positioned to benefit from the continuing evolution of the Chinese economy. For this reason primarily–and coming off the fact of management’s adroit and shrewd use of its good pricing fortune in 2011 to completely revamp the company’s balance sheet–Iluka Resources is also a new member of the AE Portfolio Aggressive Holdings. It’s a buy under USD18.

A middle class in the Middle Kingdom also means more bank accounts. A charter member of the AE Portfolio is poised to pick up a lot of this action, as it takes its place alongside other heavyweights in a battle for regional market share.

We identified Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) as a long-term buy-and-hold candidate from the very beginning of Australian Edge because of its competitive advantage outside its home base relative to the other three pillars of the banking system Down Under. The stock is outperforming this year, but ANZ is about more than 2012. Or 2013, for that matter.

Although the emphasis is on China–which, after all, is on course to become the world’s largest economy within decades–Asia is a vast place. The Middle Kingdom, in other words, is an ocean of potential commerce inside a bigger ocean. India, for example, is too a vast economy on its own that does a lot of trade with Australia. And though these key minerals and resources will and should command the story, there’s more here than just coal, iron ore, gold and gas.

In Focus this month are Iluka Resources, China, Asia and urbanization.

Sector Spotlight

We’re shining just one Sector Spotlight this month, on Australian real estate investment trust (A-REIT) Australand Property Group (ASX: ALZ, OTC: AUAOF). We discussed the Australian property market in last month’s In Focus.

Australand was the focal point of that article, as it’s made impressive progress reorienting itself in the aftermath of the debilitating Lehman Brothers bankruptcy in the fall of 2008. That crash left assets all over the world in the bargain basement. Most have crawled out, but not A-REITs. And Australand is cheap.

The good news is its underlying business is firming, which makes now a good time to establish positions. Australand Property Group, a new addition to the AE Portfolio Conservative Holdings, is a buy under USD2.80.

The Spotlight on Iluka Resources Ltd (ASX: ILU, OTC: ILKAF, ADR: ILKAY) is an excerpt from the In Focus feature. Iluka is a new addition to the Aggressive Holdings and a buy under USD18.

News & Notes

Franking, Explained: “Franking,” essentially, is a gross-up system designed to eliminate double taxation of funds paid to shareholders as dividends. It’s the one-word, short-hand description for Australia’s system of tax imputation. “Franking credits” do exist for American investors, but no cash changes hands, and there are no real tax consequences beyond Australia’s borders.

It’s questionable, however, whether ordinary Australian investors are aware of the potential financial benefits to them of this system. One estimate suggests it adds about 1 percent to total returns. If ordinary Australian investors knew this, perhaps it would result in a share lift for those of us investing Down Under from well beyond.

At any rate, here’s a brief primer on franking.

The Dividend Watch List: The Dividend Watch List this month features the “rogue’s gallery” of How They Rate companies that announced reduced dividend compared to the prior corresponding period, whether the company announced fiscal 2012 first-half or 2011 full-year results. Twenty of the 107 companies we cover paid less to shareholders than they did a year ago. Keep in mind that 28 boosted their payouts.

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 107 Australian companies, organized according to the following sector/industries:

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

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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