"Eat up" part of your capital
ONE OF AN ASSET MANAGER’S most important arguments when he puts together a portfolio – they call it asset allocation, especially for those on the point of retiring – is you can’t eat up part of your capital gain every month. That’s why you have to invest a large share of your assets in an interest-bearing asset, such as SA retail bonds, with an annual interest income of 8%. No, there’s another – much better – way one of my mentors in the days of yore, Harry de G Laurie, the first GM of investments at Sanlam, often wrote in Finansies & Tegniek, one of Finweek’s predecessors, in years gone by.
For years Laurie wrote an investment column loaded with wisdom. Laurie’s argument (or evidence) he always looked for was in the then big Rembrandt Group, which still included tobacco and Richemont. The share was always one of the best buy-and-hold investments available on the JSE. But its dividend yield was inevitably so low widows and orphans couldn’t live off it. At any rate, that was the argument by us youngsters at the time who were always searching for reasons to sell Rembrandt and look for better dividends elsewhere.
Laurie said no. Buy ordinary Rembrandt shares – even for the poorest widow who needed every cent of income every month. If the dividend was too low, you could sell some of the shares every month or every quarter. The price of those remaining shares would rise enough so you’d never lose capital and your income would keep increasing. In fact, Rembrandt’s capital growth plus dividends were always higher than even the high interest rates at the time.
I recently wrote we pensioners would be advised to take a bit more risk and should especially make a point of not listening to the investment advice that says, for example, at the age of 65 you should keep 65% of your assets safely in interest investments. The advisers are apparently compelled to do so, but fortunately you still have control over your own assets, even if you are older than 65.
We took Laurie’s proposal – “You should eat some of your capital gain if the dividend is too low” – and tested it on Sanlam’s ordinary shares. After all, Sanlam is the place where we’ve been saving for our retirement for many years. Let’s start with a R1m investment in RSA retail bonds. The State guarantees a minimum interest of 8%/year over the next five years. That’s a total income of R400 000. And you’re guaranteed your R1m back – that’s a guarantee by the State.
Alternatively, you can use the R1m to buy 36 000 ordinary Sanlam shares at their current price of 2760c. For the financial year to year-end December 2010 Sanlam earned a profit of 203c/share and out of that a dividend of 115c/share was declared. The share is therefore trading at 13,6 times its historical profit and its historical dividend yield is 4,1%/year.
The analysts’ views as collected by McGregor BFA state Sanlam will achieve a profit of 242c/share this year and that a dividend of 125c will be declared. That already improves its dividend yield to 4,5% on its current price. They go on to predict Sanlam will earn 280c/share for its financial year to 31 December 2013 and from that a dividend of 144c/share could be declared. We took the liberty of using the rate the analysts predicted for the next three years and applied it to Sanlam’s profit up to December 2015, which coincides roughly with when the alternate investment in retail bonds will become payable.
According to that calculation, Sanlam will achieve a profit of 325c/share by December 2015 and, if the same policy is followed as in the past, a dividend of 165c/ share should be declared for 2015. That
THE LATE ANTON RUPERT