Scentre Group (ASX: SCG) shares, Qantas Airways Limited (ASX: QAN) shares and Rio Tinto Limited (ASX: RIO) shares appear fully valued to me.
Ultimately, due to the risks of buying a stock that is overvalued, I have each of these shares firmly on my avoid list in 2017.
Scentre Group
Scentre Group shares offer a dividend yield of 5.2%. The $22 billion company is the owner of Australia's Westfield shopping centres. Although the company does not appear grossly expensive looking at its meaty dividend yield and price to book ratio (currently 1.13x), I think there are more risks to the downside than many investors are factoring in.
Firstly, interest rates are on the rise, meaning the allure of a slow-growth defensive company loses its shine. Importantly, the valuation models used by analysts to calculate fair value estimates must also factor in higher interest rates.
Secondly, capitalisation rates on property, which are used by property valuation experts, could be near their cyclical lows.
Thirdly and finally (although I could go on), retailers are fickle and cyclical. Westfield charges retailers exorbitant rents for a spot in their malls. But if the economy takes a turn for the worst, more stores will close and hurt Scentre Group's revenue line. That's ok. Markets fall occasionally. But with expensive new centres popping up all over the place, Scentre Group must ensure it's not pushing retailers too hard, or they risk a very slow recovery. After all, their fate is tied to their retailers.
Qantas
Using analyst forecasts Qantas shares yield a dividend around 4%. However, I believe the Flying Kangaroo's dividend will prove to be low-hanging-fruit if any number risks materialise. Consider this, between it's 2009 and 2016 financial years Qantas did not pay a dividend. Why?
Why?
For one, fuel prices were high. That's a significant expense. Also, the competition was rampant. Finally, airfare prices were depreciating. That's a perfect storm for airline dividends. Looking ahead, I think it's only a matter of when not 'if' these external pressures return. Like Scentre Group, Qantas appears well managed, but it is tough generating a decent return in the airline industry.
Rio Tinto
Australia's largest iron ore miner by volume pays a dividend of 3.8% fully franked. That's impressive. However, I think Rio Tinto shares are fully valued.
Over the past 12 months, we have seen the prices of many commodities explode. Iron ore, coal, copper… the list goes on. These have been a result of the Chinese government's fiscal stimulus. However, I question the viability and sustainability of that spending going forward.
Rio Tinto is a hold — at best — in my book.
There will come a time to buy these three shares. However, with over 2,000 shares on the ASX — many of them paying great dividends — I don't have to buy Rio, Scentre or Qantas shares in 2017. All of us can afford to be picky and buy a portfolio of only the best dividend-paying shares.
