These seemingly persistent worries about globally important institutions, financial, sovereign or otherwise, put us in the mind of September 2008 and all that followed Lehman Brothers’ inglorious and destructive collapse. Stuck between panic and cheap valuations, your focus should be on solid, dividend-paying companies, whether in the US, Canada or further abroad, in places such as Australia.

The latter two afford what I call the “Commonwealth Protection Plan,” a regimen trained on high-quality companies backed by healthy balance sheets and the proven ability to operate, and well, amid all sorts of economic turmoil. Of course these stocks’ prices will rumble and tumble along with the market from time to time. But their ability to sustain and grow payouts will get you through the darkest nights.

The current environment is especially challenging. You can’t just close your eyes, hold your nose and buy whatever looks cheap. Our task here is to find value. We accomplish this by focusing on buy-under targets, weeding out the cheap by looking at things such as payout ratios, recent dividend history, debt and the kinds of operations in which companies in our coverage universe engage.

Share-price fluctuations do matter, but at present we look at downside days as opportunities to establish new positions at favorable entry points. Doubling down on a stock is never a good idea, nor is chasing one that’s rallied hard. Sticking to buy-under targets and using buy limit orders for stocks trading above these levels is a good way to establish discipline and avoid the emotional roller coaster.

As for the issues shaping these interesting times, the Athens Stock Exchange rallied nearly 15 percent this week on hopes the pro-euro New Democracy Party will pull out a victory in this weekend’s elections.

The vote in Greece on Sunday boils down to a choice between the common currency and the Drachma. The great fear is that an anti-austerity coalition will emerge that rejects bailout terms currently in place between Greece and the European Commission, the European Central Bank and International Monetary Fund, forcing an exit from the eurozone and the beginning of the end of the Continental currency.

Europe’s troubles don’t–and won’t–end with resolution of the Greek political turmoil, not with yields on the Spanish 10-year bond crossing over the dreaded 7 percent level for a brief spell this week. The yield on the Italian 10-year also rose, suggesting strongly that this will be a long, hard slog.

Meanwhile, the Middle Kingdom’s run of good news-bad news continues, as Chinese retail sales and industrial production each grew less than expected in May. Policymakers haven’t taken the type of dramatic steps they did back in 2008-09 to combat the Great Financial Crisis, but efforts are being made to pump the economy.

And both consumer and producer prices moderated further in China, providing further room for the People’s Bank of China to boost growth with interest rate cuts. Loan growth as well as exports and imports were stronger than expected, but overall recent data suggest more to come from China in terms of stimulus.

And India, that other major emerging market engine in Asia, reported a 7.5 percent year-over-year increase in wholesale inflation. The Reserve Bank of India meets Monday, Jun. 18, with a full plate, as industrial production on the Subcontinent rose just 0.1 percent. The country also registered its slowest GDP expansion in a decade for the first quarter of 2012. This is another conundrum, strong inflation and slowing growth

The US, still the biggest and most important economy in the world, has its own story of news-good-and-bad. Homeowners are beginning to notice historically low mortgage rates, as refinance applications jumped 19.2 percent to the highest level since April 2009. New purchase applications, meanwhile, rose 1.3 percent to a six-month high. It’s still too early–and foolish–to call a recovery for US housing, but lower mortgage costs will put spending money in peoples’ pockets, or at least help them defray other debt.

Headline consumer inflation slowed to 1.7 percent, the slowest year-over-year pace registered since January 2011, while producer prices increased by 0.7 percent, due in large part to declining energy costs.

Now the other hand: US retail sales were soft in May, as a drop in prices at the pump was overcome by what is still a terribly soft labor market and still-modest income growth. Initial claims for unemployment were higher than the consensus expected at 386,000, above 370,000 for the ninth straight week. The University of Michigan Consumer Sentiment Survey for June showed the lowest reading of the year, as both current conditions and the outlook declined.

Industrial production declined in May contra expectations and the Empire State Manufacturing Survey posted its weakest reading since November 2011. Finally, core consumer prices rose 2.3 percent year over year, equaling the fastest pace since September 2008, while core producer prices rose 2.7 percent.

This is all to say that growth is still lumpy, jagged and unsatisfying. Things are tough all over.

And yet Reuters reports that monetary policymakers stand ready where fiscal authorities seem to have abdicated:

Central banks from major economies stand ready to take steps to stabilize financial markets and prevent a credit squeeze should the outcome of Greek elections on Sunday cause tumultuous trading, G20 officials told Reuters.

A senior US official cautioned that the Greek election will not provide “the definitive signal on what happens next” in the eurozone debt crisis.

But if severe market strains emerge after an unusual confluence of three elections this weekend–there are important polls in Egypt and France as well–central bankers are on standby to ensure enough cash is flowing through the financial system.

“The central banks are preparing for coordinated action to provide liquidity,” said a senior G20 aide familiar with discussions among international financial diplomats. His statement was confirmed by several other G20 officials.

All the more reason to focus on high-quality dividend-payers that pack the gear to survive as businesses no matter what sentiment or headline is driving day-to-day market action.

If your plan of action is structured around a timeframe of months and years rather than minutes, days and weeks you’ll be able to see clearly and build wealth for the long term.

Portfolio Update

The Australian Edge Safety Rating System is based on six criteria. The more a company meets the higher its Safety Rating and the more secure we can infer its dividend is come what may.

Over the past several months–in fact since the first issue of AE in September 2011–higher-rated companies in the Portfolio and How They Rate coverage universe have outperformed lower-rated companies’ stocks.

The main reason is investors are placing a very high premium on safety in mid-2012. That’s rooted in the memories of the crash of 2008-09 and the determination to avoid getting caught up in another one. And that market psychology is likely to be with us for some time.

One major factor that separates the highest-rated AE picks from lower-rated fare is exposure of earnings to commodity prices. We award a Rating point to companies whose businesses are generally shielded from the ups and downs of oil and other resources.

Our Rating System also awards companies a point for not cutting their dividends at any time in the past five years. That disqualifies many resource-producing companies that were forced to slash payouts during the global recession that followed the 2008-09 crash.

Companies that were able to hold dividends steady–or even raise them during that extraordinary period–have been battle-tested in the best possible way for a future crisis. And they deserve a point, too, for their ability to endure challenges.

Successful stock market investing is all about being prepared for unwanted surprises. That’s why the Safety Rating System also includes two criteria focused on debt.

One is simply the debt-to-assets ratio, which measures total obligations against the assets that would make good on them during a bankruptcy. A low debt-to-assets ratio is a sign of strength, just as a high one is a potential danger sign. Our system uses what amounts to a sliding scale, with greater slack cut towards companies in steadier businesses.

The second debt measure we use is obligations coming due in the near future, specifically between now and the end of 2013. This is the debt companies would potentially have to come to market to refinance were a real credit event to strike between now and then.

This month’s Portfolio Update details a slightly revamped Safety Rating System and new scores for our Aggressive and Conservative Holdings.

In Focus

“When you come up here,” said Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) CEO Grant King of the recent World Gas Conference, “you realize Australia has got to come through for everybody.”

According to Mr. King, speaking to The Australian in the afterglow of the Jun. 4-8 gathering in Kuala Lumpur, “Australia is the LNG supply story. The world is depending on Australia delivering the LNG supply story. The discussion in Australia tends to revolve around the challenges this has brought to Australia and the economy and productivity, and the politics surrounding where we get the workers from, but the world needs it delivered.

“Sometimes we lose sight of it in Australia, just how important this is to the rest of the world.”

Australia’s liquefaction capacity is set to grow significantly over the next decade. Of projects currently under construction, 73 percent–accounting for 61 million metric tons per annum of capacity–are rooted in the Land Down Under. This growth is driven by ample conventional reserves, located primarily offshore of northwestern Australia, as well as significant coal-seam gas-to-LNG projects, based in eastern Australia.

In addition to the 61 million metric tons per annum of liquefaction capacity currently under construction an additional 93 million metric tons is in some stage of front-end engineering and design (FEED) or is proposed for future development.

Not all this capacity will actually be brought onstream on schedule. And very few projects are scheduled to debut during the 2012-to-2014 period. But many of the Australian projects now underway will contribute to supply beginning in 2015 and ramping up in 2016.

The global market for LNG is clearly of growing importance to the Australian economy.

Sector Spotlight

GrainCorp Ltd (ASX: GNC, OTC: GRCLF) is an international company with over 280 country elevators in Australia. It boasts total grain storage capacity of up to 20 million metric ton spread across more than 2,700 kilometers, from Mackay, Queensland, to Portland, Victoria. It also operates seven bulk grain export elevators, serviced by 20 contracted trains with the capability of hauling up to 4 million metric ton of grain annually.

The company manages a further 1 million metric ton of road transport is managed annually, and the Ports elevate an average of 5 million metric tons of grain and up to 1.5 million metric tons of non-grain commodities each year.

We included GrainCorp in the original “8 Income Wonders from Down Under,” the companies that made up the Australian Edge Portfolio in our Sept. 26, 2011, debut issue. Since then the stock has generated a total return in US dollar terms of 46.29 percent, beating the S&P/Australian Securities Exchange 200 Index’s 11.33 percent performance as well as the S&P 500 Index’s 14.93 percent gain.

It’s the No. 1 stock in the AE Portfolio on total return terms, for that matter, and the combined AUD0.30 interim-plus-special dividend it paid in respect of fiscal 2012 first-half (ended Mar. 31, 2012) results, up from a combined AUD0.20 for the prior corresponding period, justify a boost in our value-based buy-under target to USD9.50.

This month’s second Spotlight falls on AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY), which following its all-but-complete assumption of ownership of the Loy Yang A power plant is now equal to Aggressive Holding Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) in terms of total generation capacity Down Under.

Over the last five years–from mid-June 2007 through Wednesday, Jun. 13, 2012, a period encompassing the 2008-09 period known Down Under as the Great Financial Crisis–AGL Energy has generated a total return in US dollar terms of 47.83 percent, besting losses of 4.57 percent for the S&P/Australian Securities Exchange 200 Index, 15.87 percent for the MSCI World Index and 4.32 percent for the S&P 500 Index.

Since we included it among our “8 Income Wonders from Down Under,” the charter members of the AE Portfolio, AGL is up 16.92 percent, better than the Australian benchmark’s 11.33 percent US dollar total return, the MSCI’s 9.67 percent and the S&P 500’s 14.93 percent.

Management hasn’t cut the dividend in the half-decade-plus the company’s been making regular payouts. But each final dividend has been larger than the preceding one since it began paying in March 2007. Although the interim dividend declared Feb. 24, 2012, and paid to shareholders on Apr. 5 was flat with last year’s interim dividend, management’s forecast for a “strong” second half of fiscal 2012 (end Jun. 30, 2012) bodes well for another increase in late August.

News & Notes

Game of Rates: Australia’s “Four Pillars”–the country’s largest banks, so called because of a federal statute that prevents them from merging with each other–have been in a 2012-long battle with the Reserve Bank of Australia and politicians Down Under because they no longer follow central bank interest cuts with cuts of their own to borrowing rates.

This change was led by AE Portfolio Conservative Holding Australia and New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY), which last December announced that it would break with tradition and make its own, independent rate determinations on a monthly basis, with only the slightest regard for RBA moves. ANZ justified the move because its funding costs are no longer strictly tied to the RBA’s overnight cash rate, but rather are affected by myriad factors, including participation in global wholesale funding markets and tighter competition for domestic deposits.

Well, ANZ has zagged following the RBA’s June rate cut of 25 basis points, passing along the full value of the reduction for the first time since its new policy was introduced. It did this to ease pressures on Australians not participating in the stronger sectors of the economy. And it might help it gain market share, too. So there’s that.

Re-Rating the Universe:We’ve adjusted the manner in which we rate companies in the Australian Edge coverage universe. These changes are detailed in this month’s Portfolio Update, where the reinterpreted AE Safety Rating System and new scores are discussed for our Aggressive and Conservative Holdings.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that announced reduced earnings guidance during the recent quarterly update period in Australia as well as the usual constituents that reduced dividends during the most recent official reporting period.

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.

You can also follow me on Twitter (@ddittman).

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