Going Down Under for rich resources and dividend yields
Australia has been hit hard by nature, but its natural resources will carry it through, says a U.S. expert who likes four dividend stocks.
These are tough times in Australia.
But this is a resilient nation, and a wealthy one. And it is going to be even wealthier.
The floods that devastated northeastern Australia are the largest and latest in a series of setbacks that have jarred the country’s economy.
Yet Australia’s vast natural resources and its presence on the doorstep of Asia’s fast-growing economies make good times almost inevitable.
One U.S. expert who is always on the search for high yielding dividend stocks reckons that Australia isn’t too far to go to strike it rich.
We have quoted Mr. Roger S. Conrad a number of times, usually in his capacity as a leading American expert on Canadian investments. But apparently any thriving, resource-rich Commonwealth country is fair game for this analyst.
Writing in Personal Finance, he recommends four Australian stocks that he expects to profit from the Asian economic boom — and pass those profits on to investors in the form of increasing dividends.
Where the good news starts
The floods in Australia are first and foremost a human tragedy, with many lives lost and homes destroyed. Livelihoods have also been threatened. One third of the nation’s mines were shut down and a large part of its harvest was wiped out. Food prices have soared.
Last spring’s proposed 40 per cent tax on mining “super profits” is scarcely on a scale with such a tragedy, but it created anger and uncertainty in the industry. It has since been scaled back.
There was also a threat that is hardly unique to Australia — inflation and rising interest rates. But that’s where the good news starts.
The country’s consumer price index rose a mere 0.4 per cent in December, reports Mr. Conrad, the smallest increase in 10 years.
The best news, he says, is Australia’s track record. It was the only nation to avoid recession in 2008-09. Its stock market soared in 2009.
It has since cooled off. That means there are some excellent bargains available, in this analyst’s opinion.
30 to 50 per cent returns
Australia has a lot of what Asia needs. It is the leading exporter of coal in the world, and it produces important quantities of oil, natural gas and uranium. It has rich deposits of alumina, bauxite, copper, iron ore, lead, manganese, mineral sands, nickel and zinc.
And there’s agriculture as well. Australia produces large quantities of veal, lamb, sugar, beef and cereal grains.
More than 80 per cent of the nation’s resources are exported. Mostly to Asia. Because the U.S. is not a big market, the appreciation of the Aussie dollar against the greenback is not a problem (as it often is in Canada).
Over the next year, Australian stocks should work their way back to their 2007 heights, says Mr. Conrad. That should translate into total returns of 30 to 50 per cent for the four stocks he recommends.
He does set out a few ground rules. Australian firms usually pay dividends twice a year, in the spring and fall, not quarterly. There is a withholding tax on dividends for foreign investors (there are a few qualifications and exceptions in the Canada-Australia tax treaty).
Three of these stocks trade on the Over the Counter board in New York. The analyst notes that it’s worth checking with a broker to see whether it’s cheaper to trade in New York or with the Australian exchange.
Opportunities coming
We begin with a name that is almost as famous in Canada as it is in Australia. BHP Billiton (NYSE/ASX-BHP) was in the news daily during its failed bid for Potash Corp. of Saskatchewan (TSX-POT).
Fertilizer or not, BHP is the world’s largest mining firm. Its coal output has been cut by 30 per cent due to the floods. But iron ore output, which is far more important to the company’s earnings, should double by 2013. Its copper production is up 11 per cent and yes, Mr. Conrad adds, it has “moved to develop a potash mine in Saskatchewan.”
Buy this giant up to US$95, he says. It trades today at $94.05 and its yield is the least of these four stocks, at 1.9 per cent on a $1.80 payout. But it is a very solid dividend.
The world’s largest contract miner is Leighton Holdings (ASX-LEI; OTC-LGHTF). Looking at the opportunities, a Spanish conglomerate jumped in to snap a 54 per cent interest in Leighton.
The opportunities will come as the floodwaters recede. Leighton received a six-year contract extension from American coal giant Peabody Energy (NYSE-BTU) to extend the Burton Mine in Queensland. It has also signed on to build and operate a coalmine in India. This shows that “management is still on the ball,” says the analyst.
All the bad news has been priced into the stock, he asserts. Buy it up to US$33. It is moving in that direction, at $32.45. It yields a robust 4.8 per cent on a dividend of $1.52.
Out of the mines and into the air, Mr. Conrad recommends Auckland International Airport (ASX-AIA; OTC-ACKDY). This company collects all the key income from the nation’s largest airport. It recently signed a big contract linking it to China Southern Airlines out of Hong Kong and Thai Airways International.
“With ample dividend coverage and rising cash flow,” the airport is a buy up to US$17.50, says the analyst. It, too, is close to that target at $17.25. It yields 3.3 per cent on its $0.58 payout.
Telstra Corp. (ASX-TLS; OTC-TLSYY) has a thumping dividend yield of 9.1 per cent, but there was fear of a dividend cut from the present level of US$1.35. Australia’s largest telecom suffered a good deal of damage to its network in the floods.
It is also negotiating with the government, which plans to build a new broadband network with Telstra’s assets. There are “signs of progress” in the talks. The stock had already priced in the feared cut, but the company announced last Thursday that it would maintain the dividend.
Telstra is a buy up to US$15 for more aggressive investors, says Mr. Conrad. It trades now at $14.69.
In some ways, resource-rich Australia is a mirror image of Canada. And some high yields from Down Under might be just the thing to buck up the returns in a Canadian portfolio.
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