Absa’s interest rate vs dividend
EXPERT: ‘THESE KINDS OF NUMBERS TOO GOOD TO IGNORE’ You can get a higher yield from the share than you would in a notice account.
You can get a higher yield from the share than you would in a notice account.
If you took R20 000 to Absa and asked them to put it in a 90-day notice account, you would get offered an interest rate of between 5.65% and 5.95%. If you took that same R20 000 and invested it in Absa shares, you could expect a starting dividend yield of around 7.15%.
“And because of the nature of equities, we would like to believe that Absa will also grow its dividend ahead of inflation,” says Andrew Vintcent at ClucasGray Asset Management. “But you won’t get any growth out of cash in the bank.”
This is an eye-catching anomaly. A starting yield higher than the rate you can get from cash is a rare phenomenon.
‘Too good to ignore’
What is even more telling is that Absa is not an extreme outlier.
Nedbank is offering a dividend yield of 5.50% and Standard Bank 5.65%, both of which are in line with notice deposit rates.
Vintcent says these kinds of numbers “feel too good to ignore”.
“Our banks generate a return on capital in the high teens,” he explains.
“Even Absa, which has been out of favour, has a return on equity of around 17%. That means that they are generating new capital every year.”
In an environment where advances growth is strong, which would be a positive story, these banks would have to hold on to some of this capital to meet regulatory requirements.
However, if credit growth is weak, as it has been in South Africa, they are not required to hold that much and they could be in a position to reward shareholders through increasing dividends.
In other words, the margin of safety for investors is extremely attractive. If the economic environment improves, earnings are likely to improve, and share prices could follow.
If it doesn’t, investors can still expect handsome dividends.
Broader market
These bank stocks tell a particularly interesting story, but they are not alone. Dividend yields are elevated across the market.
To illustrate this point, ClucasGray Asset Management put together a theoretical portfolio of eight shares that have been listed for at least 20 years.
These are not companies that the firm necessarily holds in its funds, but they are indicative of the overall market as they cover a range of domestic sectors.
The eight counters are Foschini, Truworths, Sanlam, Absa, Standard Bank, Massmart, Imperial and Aspen.
The blue line in the graph shows the dividend yield for South African banks. The red line is the dividend yield on these eight stocks.
Not only are these yields elevated, but they have been rising rapidly.
The risks to investors would therefore appear to be declining, rather than increasing. Vintcent uses industrial counters as an example.
“We have been buying Imperial, and post the unbundling of Motus, have been adding to our positions in both. While earnings prospects may not be exciting for either, the valuation is extremely compelling. On our estimates, Motus was trading post unbundling on a price-to-earnings multiple of less than 8x which, for a dominant player in the South African vehicle and ancillary industries, is inappropriate.”
Our banks generate a return on capital in the high teens.
Andrew Vintcent ClucasGray Asset Management