Australia’s golden era started years ago. When the GFC hit the US and the rest of the world, investors were left feeling gut-wrenched and totally amazed they’d lost so much in such a short period of time.
Here in Australia we were partly sheltered by tough banking regulations and investment laws. The biggest connection most Australians had with the US and Europe was through the iPhone 3 that had just been released a year earlier.
The Australian stock market quickly corrected itself after the GFC and the government began stimulating the economy — as poorly as it was carried out, it still had an effect. Soon our economy looked golden and international investors wanted to put their money into our mining, yield stocks, bonds and the Australian dollar. This pushed our blue chip stocks upward.
Now, it’s a different story. Foreign investors have started seeing greener pastures abroad as Australia’s mining boom ends, interest rates drop, and foreign banks recover. As a result, Australia’s attractivesness to investors has dimishished.
Stubborn mining stocks
The effect of lower commodity prices has yet to truly hit home for some of our biggest miners. Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) have been held high by a resilient iron ore spot price and a top-heavy share market. The effect of a lower dollar has been a good thing for our country’s biggest exporters but the dollar has remained high, currently around US 93 cents – not enough to offset a price fall in commodities.
Ramping up production is the only way these companies will be able to maintain revenue and profits, but margins will fall severely and investors won’t like it. If (for some, it’s a big if), iron ore prices drop as low as many are predicting, share prices will follow.
With an iron price around $105 to $115 per tonne and the current high amounts of deb,t I’d be willing to buy Rio shares between $40 and $46 – provided it can maintain debt levels and sell poorly performing assets such as its coal projects. As for Fortescue, it was only six months ago when it was trading around $3 per share, but if iron ore was to drop below $100 per tonne on a consistent basis, I believe it would be worth half that. At $2 per share however it would have a market capitalisation below $7 billion and pay a 5% fully franked dividend (based on the current full year 2013 10 cent dividend).
Bank stocks keep giving
Although bank stocks seem to shrug off the bears on their back, when the demand for high yield subsides, bank stock prices should follow suit. At current prices, I don’t think any of the big four are a good buy. In November last year, ANZ (ASX: ANZ) was trading as low as $23. At $25 per share it would have a 6% fully franked yield, based on a $1.50 full year dividend. In this Fool’s opinion, between $24 and $25 is a good buy price for ANZ. That represents a discount of only 5% from its low in June, so it’s not just a pipe dream.
Always a buy
Wesfarmers (ASX: WES), owner of Coles supermarkets, is always going to be expensive because of its relative safety, high yields and room for growth. If investors get the opportunity to buy below $32 per share, it will be a great stock to buy and hold forever — for the dividend and for growth. However, it might prove to be a pipe dream. At $32 per share it would have a yield over 5.5% fully franked and trade on 2013 earnings of around 16.
Buying an investment for the cheapest price is the best way to maximise return because it lessens the downside risks and boosts the upside. Knowing when a stocks is at its cheapest possible price is hard, if not impossible, but it’s easy to know when a stock isn’t at that price. Missing out on buying good stocks because of a few cents will make you lose sleep, so it’s best to set an acceptable price range rather than drop an anchor on a particularly price.
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Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.