Bank­ing Stocks:

Think long-term value

Finweek English Edition - - CONTENTS - ed­i­to­rial@fin­week.co.za Schalk Louw is a port­fo­lio man­ager at PSG Wealth.

ifind fash­ion trends to be quite amus­ing. In the early 1990s, pais­ley shirts formed part of al­most ev­ery man’s wardrobe. Ten years later we couldn’t be­lieve that we just had to have those hor­ri­ble curls and swirls, but at the time it was a fash­ion trend and we didn’t dare to be dif­fer­ent. To­wards the end of 2011, how­ever, pais­ley started to make a come­back and sud­denly some started to re­gret the fact that we got rid of those ugly shirts. It’s all about do­ing your home­work and buy­ing those items be­fore they be­come trendy and it’s no dif­fer­ent on the stock mar­ket.

Roughly five years ago, the global quan­ti­ta­tive eas­ing started to have a pos­i­tive ef­fect on shares world­wide, and bank shares, for ex­am­ple, grew by more than 150% be­tween mid-2010 and mid-2015. Af­ter sev­eral in­ter­est rate hikes these past few months, how­ever, this sec­tor has now lost nearly 30% of its value fol­low­ing last year’s peaks and many are left won­der­ing whether this may be only the be­gin­ning, as bank shares’ priceto-book ra­tios are still trad­ing on the more ex­pen­sive side.

Be­fore we tackle that ques­tion, I think we should first ask our­selves why we as in­vestors should con­sider an in­vest­ment in shares in the first place. Should it be be­cause we find a par­tic­u­lar share price to be at­trac­tively low in the hopes of it grow­ing to new heights in the fol­low­ing years? The an­swer is no. Shares should be bought with the main goal of pro­vid­ing you with a grow­ing pas­sive fu­ture in­come. Most of us in­vest with the in­ten­tion of re­tir­ing with the cap­i­tal we’ve saved dur­ing our ca­reers. But if you buy shares with the in­ten­tion of sell­ing them at a profit within a short pe­riod of time, you are not an in­vestor; you are a spec­u­la­tor and a gam­bler.

If we con­sider an in­vest­ment in the top five SA bank shares (Absa, FirstRand, In­vestec, Ned­bank and Stan­dard Bank) five years ago (2011), you could have pur­chased a 4% div­i­dend yield in these shares (be­fore div­i­dend tax at 15% cur­rently), in an en­vi­ron­ment where money mar­ket traded at around 5.3% (be­fore a max­i­mum in­come tax rate of 41% cur­rently).

What’s re­mark­able about this is that this in­come didn’t stay put at 4%, be­cause as these banks’ rev­enues grew, their div­i­dend pay­outs (in­come) rose by a whop­ping 20% per year. This is an ex­tremely im­por­tant point. As men­tioned be­fore, value in­vestors like War­ren Buf­fett strongly be­lieve that a good in­vest­ment shouldn’t be based on a share’s con­stant growth in price, but rather on the con­sis­tent growth of div­i­dend pay­outs over time (its in­come-gen­er­at­ing abil­ity).

When we take a look at the top five SA banks’ div­i­dend his­tory, we will see that they have both an ex­cel­lent profit- and div­i­dend pay­out his­tory. I am well aware of the neg­a­tiv­ity sur­round­ing banks and the neg­a­tive ef­fect of re­cent in­ter­est rate hikes, pos­si­ble bad debts and the drop in our lo­cal and global economies.

But we have to start buy­ing again be­fore this trend makes a come­back and the time is now. Just as cloth­ing stores have end-of­sea­son-sales, you can now buy these shares at a 30% dis­count ver­sus prices 11 months ago.

Re­mem­ber, shares are bought as a long-term in­vest­ment (seven to 10 years). Those who in­vested R100 in banks 20 years ago, would have earned ap­prox­i­mately R2 (2%) on their cap­i­tal in the first year. Today, 20 years later, that an­nual div­i­dend in­come (be­fore 15% div­i­dend tax) would have grown to R45 on their orig­i­nal cap­i­tal. This means that their in­come grew by 17% per year while the av­er­age wages in South Africa only in­creased by 9% over the same pe­riod. The ic­ing on the cake is that bank share­hold­ers also earned an ad­di­tional 10% per year in cap­i­tal growth over this pe­riod.

Don’t bank­rupt your­self in an at­tempt to fol­low trends. Be proac­tive and buy value over the long term. This doesn’t mean that banks may not suf­fer more over the next six months, but see this weak­ness as an op­por­tu­nity rather than a threat.

If you buy shares with the in­ten­tion of sell­ing them at a profit within a short pe­riod of time, you are not an in­vestor; you are a spec­u­la­tor and a gam­bler. But we have to start buy­ing again be­fore this trend makes a come­back and the time is now. Just as cloth­ing stores have end-of-sea­son­sales, you can now buy these 30%shares at a dis­count ver­sus prices 11 months ago.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.