One of the most satisfying conversations I had during the recent Investing Daily Wealth Summit, an annual gathering of self-directed individual investors sponsored by AE’s publisher (this year at The Four Seasons Resort Palm Beach, next year at The Four Seasons Resort Scottsdale at Troon North), was one with a Wealth Society member and Australian Edge reader who had placed a buy-limit order on Conservative Holding APA Group (ASX: APA, OTC: APAJF) at USD5, using the US over-the-counter symbol APAJF.

The investor’s order had just been executed, and she was curious about what had taken the stock back within her buying range. I explained that APA Group was trading lower because its former top shareholder had unloaded its entire 17.3 percent stake in the natural gas pipeline and infrastructure company.

Our original buy-under target for APA was USD4.20. We bumped it to USD4.50 in October 2011 and USD5 in December, when the company bumped its interim dividend up to AUD0.17 per share from AUD0.165 the prior corresponding period. Our current advice on the APA is to buy under USD5.50, a new level established after the company reported a 13.9 percent increase in fiscal 2012 first-half earnings before interest, taxation, depreciation and amortization (EBITDA).

What struck me about this conversation is that this AE investor determined a price she was willing to pay, based on our advice, stuck to it and got executed at a level that will secure a dividend yield of approximately 7 percent.

Patience will be rewarded, and no stock is worth overpaying.

The APA situation stands out for the fact that Malaysia’s state-owned oil company Petroliam Nasional Berhad, better known as Petronas, divested its large stake, caused the share price to slide toward the AUD4.85 per share it fetched and thereby created a buying opportunity in a high-quality business that handles roughly half the natural gas consumed in Australia.

Don’t chase your prey, but when there’s blood in the water buy.

Fear-driven selling can also create opportunities for new money to establish positions, and, as the APA example suggests, setting limit orders at recommend buy-under targets is a great way to make the decision ahead of time, free of that which grips other, less disciplined investors.

News from Europe last weekend–the French elected a real Socialist, prompting speculation about what will happen to the “Merkozy”-driven austerity that had swept the Continent, and the Greeks voted in great numbers for fringe parties, leaving political control of the country and its standing in the European Common Market still in question–inspired a steep selloff last Monday, but this was just the culmination of action that built fast and furious as April gave way to May.

The S&P 500 Index is off 3.1 percent this month, the MSCI World Index has shed 3.7 percent and the S&P/ASX 200 Index’s decline has reached 5.6 percent.

But rather than forecast the end of the world, we’re making a list of potential buys.

News and data from around the world continue to indicate lumpy and jagged growth, and the ebb and flow should lead to plenty of opportunities going forward to get in on solid dividend-paying stocks at your price.

In the US employment trends seem to have reversed again, as initial jobless claims came in at l 367,000, down 1,000 from the prior week and below 370,000 for the second straight week following three weeks above 380,000. The US Dept of Labor Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey also revealed that there are more job openings in America than at any time since July 2008.

The Thomson/Reuters University of Michigan consumer confidence survey surged in May 1.4 percentage points to its highest level since January 2008, and the National Federation of Independent Business Index of Small Business Optimism gained 2 points to 94.5 in April, its highest reading since December 2007.

These signs of progress, confidence and optimism for what remains the world’s largest and most significant economy are encouraging. There’s also good news from abroad, as factory orders and industrial production in Germany in March surprised to upside; the theme for some time now has been of the two-steps-forward-one-step-back variety, so it must be acknowledged that these data are somewhat dated and will likely be revised. But resilience is resilience.

At the same time, the German 10-year Bund hit a new weekly closing low at 1.516 percent.

China’s Consumer Price Index slowed to a 3.4 percent year-over-year gain in April from 3.6 percent in March, and the Producer Price Index registered an outright decline for the second straight month. These data should provide room for more stimuli from Chinese authorities.

And former Commonwealth Countries Canada and Australia each posted jobs numbers that trounced expectations.

And now for the other hand, which is short but potentially brutish in its implications.

Returning to the Middle Kingdom, retail sales, industrial production, money supply, bank loans, imports and exports all increased but less than expected. China is slowing, but policymakers have room to act and have demonstrated a willingness to do what it takes to preserve social order and their place atop it. Elsewhere in Asia Indian industrial production declined 3.5 percent in March, a far cry from expectations of a gain of 1.7 percent.

The real show is in Europe, though, where political chaos in Greece pushed newly issued bonds to fall to new lows. Greek stocks, meanwhile, slid 11 percent the week ending May 11 to their lowest level since 1992. The yield on Spain’s 10-year government bond is back above 6 percent, the first weekly close above that level in 2012, while five-year CDS protection is at a record high. The IBEX 35, the official index for the Spanish Continuous Market, hit its lowest level since 2003 but almost immediately bounced off it. Spanish authorities want domestic banks to write off another EUR30 billion, but the market wants something more, on the order of EUR50 billion. Italy remains a concern, as the yield on its 10-year government debt crept up by 14 basis points.

But Greece, where 10-year government debt added 425 basis points for the week, has jumped back to the forefront of global concern. The key question for global markets is whether Greece is a sign of wider debt and political problems. Signs of stability from key markets–most prominently the US–suggest a 2008-09 style debacle isn’t in the cards.

But the worry about and fear of same is what creates opportunities to establish positions in high-quality companies.

Portfolio Update

Every Conservative Holding in the Australian Edge Portfolio is up thus far in 2012. That adds to the gains most of the 10 recommendations rolled up last year following the September launch of this advisory.

By contrast, eight of the 10 Aggressive Holdings are down year to date, even after including dividends paid.

Why the contrast in performance? It mostly comes down to investors’ constantly shifting willingness to take on risk in pursuit of potential reward.

Since investment markets bottomed in early 2009 the global economy has been slowly but surely pulling itself out of the vast deflationary-recessionary morass left by the collapse of the US housing market.

Progress has been anything but smooth, and there have been obvious setbacks and pockets of weakness, such as large swaths of the eurozone.

Overall, however, growth has pushed ahead, in stark contrast to the last time the global economy hit a huge deflationary patch in the 1930s. For example, as Europe has stumbled this year the US has emerged as a relative bright spot. Asia, meanwhile, is growing at a slower pace but nonetheless still expanding.

We choose our Conservative Holdings for their ability to weather economic ups and downs. We choose Aggressive Holdings for their ability to end each cycle on much higher ground and because they dominate the industries Australia is best known for, namely all sides of the natural resources business. We’re willing to ride out the normal volatility Aggressive Holdings present, so long as their underlying businesses stay healthy.

Volatility and downside are always more acute when investors’ general appetite for risk wanes. And that appears to be the case now with Europe’s troubles back in the news.

Our chief task now is to make sure that if and when one of our stocks does take on water that it’s not an indication of real business weakness.

In Focus

The S&P/ASX 200 Materials Index comprises a wide range of commodity-related manufacturing industries, including companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products as well as metals, minerals and mining companies. It forms the basis of the Basic Materials segment of the Australian Edge How They Rate coverage universe.

Until mid-March this index was widely outperforming the broader S&P/ASX 200 Index and the world’s most-watched index, the S&P 500, year to date. But then new worries about a potential Europe contagion as well as suggestions that China’s rate of growth would no longer support the lofty levels materials stocks had found prior to mid-2008 and then again following the March 2009 bottom for global equities.

The S&P/ASX 200 Materials Index has now retraced a significant chunk of its post-March 2009 rally, save the earliest rush back into such stocks that took it from a low around 6,700 in November 2008. It reached a closing level Friday, May 11, 2012, in Sydney that it last saw in July 2009. The real question now is one of value, as in, are there opportunities in the resources space in the aftermath of this correction?

Assuming we don’t experience a global-demand-destroying event such as occurred with the September 2008 implosion of Lehman Brother and all that followed, we’re looking at favorable entry point for well-placed, high-quality, dividend-paying Australian materials stocks.

Sector Spotlight

One of this month’s Sector Spotlights falls on AE Portfolio Aggressive Holding and charter member of the “Eight Income Wonders from Down Under” BHP Billiton Ltd (ASX: BHP, NYSE: BHP). If you’re going to buy one materials/resources stock right now, this is the place to start.

BHP Billiton is one of the biggest companies in the world, with unrivaled diversity of assets that includes iron ore, coal, base metals including copper, lead, zinc, silver and uranium and petroleum resources such as oil, natural gas and natural gas liquids. This diversity allows it to ride out weakness in any one commodity or for the broader market and global economy unlike any other capital-intensive company.

The stock is down 26.1 percent over the trailing year, only slightly better than the Materials Index, which is off 27.4 percent in US dollar terms. But as a business BHP continues to hold up, and it remains extremely well positioned to benefit from China’s transition from an investment-based growth story to one driven by domestic demand. Details are in the Sector Spotlight.

BHP Billiton–The Big Australian, the No. 1 company by market capitalization Down Under–is yielding 3 percent at current levels and is a buy under USD40 on the Australian Securities Exchange (ASX) or USD80 on the New York Stock Exchange.

The other Sector Spotlight is on AE Portfolio Conservative Holding APA Group (ASX: APA, OTC: APAJF), another one of our “Eight Income Wonders from Down Under” and the largest transporter of natural gas across Australia, with an unrivalled footprint. This owner-operator of pipelines, storage facilities and a wind farm pushes about half of Australia’s annual gas use through its infrastructure.

On May 1, 2012, The Wall Street Journal’s Deal Journal Australia blog reported that the Australian unit of Petroliam Nasional Berhad, better known as Petronas and Malaysia’s state-owned energy company, sold its 17.3 percent stake in the company. Petronas’ 111.3 million shares made it APA’s biggest shareholder.

The sale went off at about AUD4.85 per, a 6.4 percent discount to APA’s closing price on the Australian Securities Exchange (ASX) the day before the deal was made public.

This divestment changes nothing with regard to our fundamental view of APA, which remains Australia’s biggest pipeline operator, with lines in every state Down Under that help it deliver about 50 percent of the country’s natural gas demand. It’s a reliable cash flow generator and dividend grower.

All Petronas has done is create a nice opportunity for new investors to lock in a 7 percent yield on a high-quality business with solid long-term prospects for growth that will support as well a rising payout.

APA is ideally positioned to benefit from a concerted effort to switch to cleaner-burning fuels for domestic consumption, a transition that will accelerate with Australia’s carbon tax taking effect Jul. 1, 2012. Results for the six months ended Dec. 31, 2011, underscored its relative strength, and a modest 3 percent dividend increase confirms management’s conservative approach to building wealth over time.

APA Group, a solid asset-growth story now yielding more than 7 percent, is a buy under USD5.50 on the ASX using the symbol APA or on the US over-the-counter (OTC) market using the symbol APAJF.

News & Notes

Better Investing Through Technology: The Technology group in the Australian Edge How They Rate coverage universe provided a solid set of earnings guidance upgrades during the recently concluded quarterly update period.

The Dividend Watch List: The Dividend Watch List includes update on How They Rate companies that announced reduced earnings guidance during the recent quarterly update period in Australia.

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 108 Australian companies–we’ve made no additions to coverage this month–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

I’m notified almost instantly via e-mail when (or if) you post a comment after you read an article. I can provide nearly real-time answers to your questions, provided the subject matter can be disposed of in such manner. If I can’t answer your question, chances are that my co-editor Roger Conrad can, and I know how to find him.

Thank you for subscribing to Australian Edge. We look forward to hearing feedback about how we can improve the service.

David Dittman
Co-Editor, Australian Edge