Bank On Brokers Being Economical With The Truth

The Age

Saturday July 29, 2006

MARCUS PADLEY

TWO things to say to you as we enter the results season next week:

? Don't believe everything you read.

? Watch out trying to strip dividends.

On the subject of not believing everything you read let me take you back to this time last year and the Commonwealth Bank results. They were below expectations. The market wanted 32 per cent earnings growth. They only delivered 29.6 per cent. Downgrades everywhere. Disappointment. Some of the research actually said SELL. If the other brokers didn't say sell it was because they were too polite. The message was clear.

Since then the share price is up 16.6 per cent and the company has paid a 7.6 per cent yield including franking. Total return 24.2 per cent in less than 12 months. More than a resource-inflated All Ordinaries index. Yet here were the brokers saying sell. The lesson for mum and dad investors: you can do yourself a lot of damage reading broker research aimed at institutional fund managers.

The CBA is a very important stock for institutional brokers. It is the fifth most traded stock in the market this year by value and $34 billion of its shares have turned over in the past year. At a commission rate of 0.25 per cent that's $85 million worth of commission in CBA alone up for grabs. Brokers have to be in it, trading it, or they aren't doing their job.

You have to sympathise with some analysts. How much would they get paid to write the truth: "buy, and never sell".

Not as much as their more aggressive competitors, most likely. In a commission-based industry they have to perjure themselves to create trade. But fear not when you read that sell recommendation. The very brokers who tell you to sell will be telling you to buy in six months. Realise that most research is not written for you, it is written for institutional fund managers who are paid for relative, not actual, performance.

Mums and dads are after actual, not relative, performance. Yes, CBA may be a sell because BHP will perform better, but who cares? Just because BHP shareholders are going past in a Porsche is no reason to sell CBA. The risk is lower and the dividend higher.

Having said that, I will make the same comment I make to clients about research. The press often lambastes research for promoting corporate clients, lacking independence, being biased, having ulterior motives or simply being incorrect.

The truth is, any analyst who takes the time to do the work to produce research almost always has something interesting to say, even if they do have an axe to grind. There is always value in research, it just may not be in the recommendation or the target price. Other than that it is all worth the read.

So to dividend stripping.

It's the results season and time to start maximising those relatively huge Australian dividend pay-outs (relative to the yield on bonds and bank accounts). The basic principle of dividend stripping is to buy a stock before it goes ex-dividend and to sell it after it goes ex-dividend. The hope is to pick up the dividend, the imputation credit (franking) and a capital gain at the same time, or at least a capital loss which is smaller than the dividend gain (and you use the capital loss to offset gains elsewhere).

It creates a lot of commission for stockbrokers. Switching around in the bank sector is the most lucrative advice. In particular, switching out of any of the big banks and into the CBA. It is the only big bank with results and a dividend in the next three months.

There will be the regular article about dividend stripping in the newsletter this week. Whether you should do it and how to do it. The short version is this. To make it work you need two things. You have to keep your dealing costs to a minimum and you really need a rising sharemarket. We do not have a rising sharemarket. It won't be easy this year.

Marcus Padley is a stockbroker and the author of the daily sharemarket newsletter Marcus Today. For a free five-day trial of the newsletter, go to www.marcustoday.com.au