Queasy over all the QEs?

When I began preparing for this issue last weekend my first thought was to headline this piece of the puzzle “The Case Against Australia.” A multitude of analyst reports, blog posts and news stories suggested that the Lucky Country’s good fortune had run its course.

Just a few days, an announcement of more Chinese stimulus, a German Constitutional Court ruling and another round of quantitative easing by the US Federal Reserve later the stage looks set for an economic rebound Down Under and more appreciation for the Australian dollar.

The aussie spiked the moment the Federal Open Market Committee’s (FOMC) QE3 announcement hit the wires, following through on an anticipation rally that had taken it from off a nearly two-month closing low of USD1.0193 on Sept. 5, 2012.

Although pressure will rise on the Reserve Bank of Australia to trim its benchmark cash rate from a developed-world high of 3.5 percent, it’s likely investors will continue to seek out the relative strength of a solid economy backed by in-demand resources and a federal government in a healthy fiscal position.

It’s clear based on actual data in equity and commodity markets that asset prices will receive a nice jolt from this new round of US central bank stimulus. What’s less clear is whether it will be enough to get a moribund labor market moving again.

Confidence, according to the Thomson Reuters/University of Michigan preliminary index of consumer sentiment, is on the rise, as that survey jumped to 79.2 in September from 74.3 in August, beating expectations for a decline to 74. And the National Federation of Independent Business small-business indicator rose in August to 92.9 after two straight months of declines, rebounding 1.7 points from its lowest level since October 2011.

The US Dept of Commerce reported Friday that inventories in the US climbed in July at the fastest pace in six months, as companies kept stockpiles in line with demand. The 0.8 percent increase followed a 0.1 percent gain in June. Sales at factories, wholesalers and retailers rose 0.9 percent after falling 1.2 percent in June.

Here’s the downside. The Thomson Reuters/Jefferies CRB Index is now up 20 percent from its late-June low. And the US Dept of Labor reported a 0.6 increase in the Consumer Price Index for August, the biggest gain since June 2009. Meanwhile, the 10 year implied inflation expectations jumped 20 basis points to their highest level since May 2011. August core Retail Sales declined unexpectedly, the third month out of the last fall that that measure has fallen. Initial jobless claims were 382,000, more than expected but mostly due to hurricane. Industrial production was weak all around.

Events in Europe have worked in favor of short-term global economic stability. The German Constitutional Court rejected six requests for an injunction to prevent Germany’s president from signing the treaty establishing the EUR500 billion European Stability Mechanism. And jobless claims in the UK unexpectedly declined.

At the same time, the yield on Spain’s two-year note jumped 40 basis points on indications the Spanish government won’t ask for help with its debt situation.

In Asia, China’s August loan growth was RMB100 billion, better than forecast, and consumer and producer inflation readings were in line with expectations. Industrial production also met consensus expectations. Japanese machinery orders in July grew more than expected.

But Chinese imports unexpectedly dropped in August, and exports rose less than expected. And India’s industrial production was up just 0.1 percent, and August inflation was up.

Having said all that, the massive stimulus in the process of being unleashed in the Middle Kingdom is at least as important a development for those interested in what goes on Down Under.

Chinese Premier Wen Jiabao said Sept. 11 in a speech to the World Economic Forum that his nation will meet its official growth target of 7.5 percent GDP growth in 2012. To this end the National Development and Reform Commission recently announced new subway and highway projects on top of the power stations, wind farms and airports and water supply, sewage treatment, and waste incineration projects previously revealed, as policymakers continue to focus on investment-led growth

These efforts combined are worth an estimated RMB1 trillion (USD158 billion), or approximately 2.1 percent of GDP. Local governments have also pledged about RMB11.6 trillion in development projects for completion over the next three to five years. That’s about USD1.83 trillion, or 23 percent of GDP.

The Peoples Bank of China will also do its part to support the Chinese economy.

The most important part of the Federal Open Market Committee’s Sept. 13 announcement is that it’s commitment to monthly QE3 purchases of USD40 billion per month and “Operation Twist” purchases totaling USD45 billion a month are open-ended.

And, “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

The Fed will do it for as long as it takes, pledging to do what it can to keep rates low even after the economy starts growing again. This commitment is designed to reassure businesses and consumers who are avoiding big purchases, precisely because they’re afraid that a rate hike could make their loans unaffordable in the near future.

During his press conference following the policy announcement Fed Chairman Ben Bernanke noted that monetary policy is not a panacea, that the central bank is offering “not cures, but support” for the economy. He wouldn’t detail what type of data he’s looking for, only that he’s “looking for an economy which is quickening.” Criteria for “improvement” are more qualitative than quantitative.

That’s a little fuzzy. What’s more certain is that Americans who invest Down Under stand to benefit from this non-traditional monetary policy, as the value of their shareholdings and the dividends they receive in respect of same will continue to benefit from a relatively strong Australian dollar.

Portfolio Update

Dividend growth is the fuel that powers yield-paying stocks over the long term. Its near-term impact is considerably less certain.

The seven Conservative Holdings raising dividends the past 12 months have fared well this year, scoring an average return of 27.5 percent. The three holdings that didn’t hike payouts did even better, with a gain of 29.3 percent.

Conversely, even very robust dividend growth has had very little impact on our Aggressive Holdings. Four of our natural resources producers, for example, raised their dividends by more than 10 percent over the past 12 months. But their combined total return is a dismal loss of nearly 15 percent year to date.

Clearly, most investors paid as little attention to these companies’ payout increases as they did to the fact that many non-resource companies didn’t raise. Rather, valuations were set by how exposed companies are to a potential slide into global recession. That in turn is the primary reason why our Conservative Holdings are still outperforming Aggressive Holdings this year, with a 28 percent total return in US dollar terms versus a 1.6 percent total return.

The performance gap is in fact not much changed from two months ago, when global stock markets in general–Australia’s included–were at a somewhat lower level. In mid-July our Conservative Holdings were up roughly 19 percent for the year, while the Aggressive Holdings were actually down by more than 10 percent.

For more on Portfolio dividend growth, total returns and the state of our Holdings, see Portfolio Update.

In Focus

Forty-nine companies under How They Rate coverage raised dividends during the recently concluded earnings reporting season Down Under.

Most Australian companies’ fiscal years run from Jul. 1 to Jun. 30. They typically report earnings twice a year, in February and August. Most also declare dividends when they announce earnings–interim dividends when they report fiscal first-half results in February, final dividends when they report full-year results in August.

Dividend growth is not an infallible measure of company health, but it’s pretty good. Boosting a payout is management’s best commentary on the ability of its underlying business to continue to grow.

Here’s a look at six companies in four AE How They Rate coverage sections that recently announced higher dividends.

Sector Spotlight

Ramsay Health Care Ltd (ASX: RHC, OTC: RMSYF) is Australia’s largest private hospital owner, and it has operations in the UK and France as well. It has 117 hospitals around the world, with around 10,000 beds, and employs approximately 30,000 people.

Twenty-two thousand doctors are attached to its service, and Ramsey is approaching 3 million patient days per year. All this put it in good position to capitalize on one of the surest trends alive, rising health care costs.

Most impressive about Ramsay is that it’s never failed–never–to boost its interim or its final dividend from one corresponding period to the next.

On Aug. 23, 2012, Ramsay followed through on this promise, announcing a 16.9 percent increase to its final fiscal 2012 dividend, to AUD0.345 per share from the AUD0.295 it paid for a final dividend in fiscal 2011. That brought the full-year dividend to AUD0.60, up 15.4 percent from the AUD0.52 per share it paid in respect of fiscal 2011.

Based on its consistent dividend growth and long-term prospects, St. Leonards, New South Wales-based Ramsay Health Care is a member of the AE Portfolio Conservative Holdings.

Ramsay Health Care is under one of our September Sector Spotlights.

“It’s almost implicit in its strategic focus that M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF),” I wrote in a Sector Spotlight in the Dec. 16, 2012, issue of AE, introducing the company to the Portfolio’s Conservative Holdings, “is on constant lookout for opportunities to add services that it can include in tailored packages for its small and medium-sized businesses in Australia and New Zealand.”

In April 2012 M2, then the No. 7 telecom in Australia, finalized negotiations on its acquisition of Primus Australia, then No. 8 Down Under, to create the fifth-largest such company in the country. It was described by M2 management at the time as a “transformative” deal, one that would reshape the acquirer’s business model and expand its opportunities for growth–on which score it had already had considerable success–in the age of the National Broadband Network.

Based on M2’s forecast for fiscal 2013, this bold choice of adjective–“transformative”–has proven apt, if only for what it’s implied for the top and bottom lines: Management guided to fiscal 2013 EBITDA of between AUD108 million and AUD118 million, 79.7 percent to 96.3 percent higher than fiscal 2012. M2 expects fiscal 2013 net profit of AUD43 million to AUD48 million on revenue of AUD610 million to AUD650 million.

M2 Telecommunications–with a raised buy-under target-is the subject of this month’s other Sector Spotlight.

News & Notes

The RBA’s Rate Conundrum: Central bank stimulus in the US and Europe will put upward pressure on the Australian dollar. That’s good for US investors who own dividend-paying Australian stocks, but it creates problems for the Reserve Bank of Australia.

The RBA on China, Australia and Iron Ore: In a Research Discussion Paper published Sept. 4, Chinese Urban Residential Construction to 2040, the RBA set out a compelling case for the continuation of Australia’s resource boom for decades.

A key conclusion: The urban population of China will reach almost one billion by 2030 from its current level of 691 million and then stabilize. This has profound implications for the demand for steel and iron ore.

The Dividend Watch List: The Dividend Watch List includes updates on How They Rate companies that announced dividend cuts during the recently concluded earnings reporting season Down Under, lowered earnings guidance in recent weeks as well as those that cut payouts during their most recent 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 109 individual 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
• 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
Co-Editor, Australian Edge