Recent changes to the Blended Australian Equities Portfolio
Purchased Northern Star Resources Ltd (NST)
We recently added Northern Star (NST) to the portfolio following a correction which saw its share price decline more than 25% from its peak in late July, while the gold price declined by just c.4% in AUD terms and actually increased by more than c.4% in USD terms. The share price of NST and other gold stocks had moved ahead of the gold price so this decline unwound some of this relative outperformance which had reduced the margin of safety in the sector.
We favour gold miners with diversified operations, low sovereign risk, strong free cashflow generation, low gearing and organic growth prospects. We try to minimise sovereign, financial and operational risk for an exposure which should offer uncorrelated risk diversification for the portfolios. NST’s balance sheet is net cash and it has operations in Australia (WA) and the US (Alaska), with considerable exploration potential and production growth through relatively modest capital expenditure. Its dividend yield is less than 2% but the payout ratio is only c.25%, so there is capacity to grow dividends at a faster rate than earnings in the future.
Purchased National Australia Bank (NAB)
The prospect of further interest rate cuts by the Reserve Bank of Australia has garnished the appeal for higher dividend yielding companies. We have re-introduced National Australia Bank (NAB) after an extended absence in the Australian Income Portfolio. A rejuvenated board and management team and the rebasing of its dividend to more sustainable levels should provide impetus for NAB to deliver more sustainable investment returns. In its most recent quarterly result NAB delivered “slightly higher group margins”, a commendable outcome in the current challenging banking environment. While loan growth is expected to remain at historically low levels, we feel that the regulatory imposts are now adequately recognised, and impairments have remained largely benign.
NAB is trading at 13.5 times FY20 price earnings ratio and a dividend yield of 6%, fully franked. NAB’s action at its 1H19 result to reduce its elevated payout ratio provides confidence that its dividend is now sustainable, providing investors with an attractive dividend yield.