I've read some brilliant analysis over the last week about the convergence in yield among many stocks on the ASX. The theory is that a number of major stocks on the ASX are being priced on their yield and yield sustainability.
Yield Convergence Example
A great example of this is the convergence of the dividend yields of five major ASX stocks, Telstra Corporation Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES), Commonwealth Bank of Australia (ASX: CBA), BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
The analysis found that the forward dividend yield of each company has converged from a range of between 1.9% and 10% in 2010 to a very limited 4% to 6% range now. This range, in the current low-rate environment, appears to be the going rate for stocks with little growth prospects but a reasonable chance of maintaining their dividend payout.
Banks Also Fit the Mould
The banks, as is probably expectedly, also fit broadly in this range with only one offering a significantly higher yield. The issue I find is that this obsession with yield has to end at some point and then companies with better growth prospects will reign. The banks have a forecast forward yield of 5.5% and price to earnings ratio over 16, which seems expensive to me given the limited upside risk and potential downside.
Here are eight companies that I like for their growth prospects, yield and forward price to earnings ratio:
- Greencross Limited (ASX: GXL)
- Super Retail Group Ltd (ASX: SUL)
- Alumina Limited (ASX: AWC)
- Amcor Limited (ASX: AMC)
- Computershare Limited (ASX: CPU)
- QBE Insurance Group Ltd (ASX: QBE)
- FlexiGroup Limited (ASX: FXL)
- Sonic Healthcare Limited (ASX: SHL)
The eight companies above all offer yields between 3% and 7% and offer significantly higher earnings per share growth rates than the big four banks and the companies mentioned above. Some, like QBE and Greencross, are expected to grow earnings by over 50% in the next two to three years. Sonic Healthcare is expanding into Europe, and Amcor's dominance of its packaging market will ensure it continues its sustainable growth rate.
