Handsome yields, but ASX blue chips ‘stretched’

Crucially, the banks have not been a drag on the market.

At the same time as many investors were looking the other way – at the public humiliation of Westpac – the ASX 200 has finally swung upwards to a new record achieved largely on the back of fresh momentum on Wall Street, which broke its own market records earlier this week.

The uplift in shares is coming almost exclusively from investors looking for higher yields.

The Australian sharemarket is, quite simply, the best-paying dividend market in the world on both a comparative and historical basis.

With the ASX offering an average dividend rate of 4.5 per cent, it is offering double the paltry 1.9 per cent dividend rate offered across Wall Street.

The yields are handsome in anyone’s books, but a closer look at the numbers also shows our blue chips are among the most stretched when it comes to finding the resources to fund payments at these levels.

According to a report released just a few days ago from the London-based fund manager Janus Henderson, our dividend payout ratios are running at 70 per cent and the rest of the world operates at around 60 per cent.

Put simply, these ratios tell us that the high dividends underpinning this late-phase bull run on the ASX are not sustainable.

They will have to be reduced in the months ahead.

In fact that process might have already started, as some of the most powerful players in the dividend market such as Telstra, Westpac and NAB have recently cut dividends.

The rush to buy Australian shares pre-Christmas could certainly not be attributed to our corporate earnings, which grew less than 2 per cent in the most recent results season.

Nonetheless, as an investor, when you are looking at cash rates of less than 1 per cent and hearing that the Reserve Bank of Australia has the capacity for “two more cuts” there is every reason to reassess the value of these dividends even if they were to be lowered.

The essential feature for local investors is that even post-dividend reductions, our blue chips still offer close to 6 per cent. With our franking system, those dividends can be worth more than 8 per cent after tax adjustments are taken into account.

No wonder we have floated to 6850, a strong advance on the last S&P/ASX 200 record of 6845 set in July and perhaps we have finally cleared the pre-GFC record of 6828 which stood for more than a decade.

Usefully, this latest jump in the ASX 200 has been based across diversified industrials, with some standout support from CSL and Telstra.

CSL is now a top 10 stock, racing higher than almost anyone might have expected.

READ MORE: Why I love CSL shares | NBN still too costly, says Telstra’s Penn | NAB untouched but wary of Austrac investigations

A year ago, the global blood products company was trading at $180. On Wednesday, it was trading at $280 with a high profile “target” of $300 pinned on the company by Goldman Sachs.

On an entirely different note, Telstra is stabilising and a confirmation of profit guidance lifted the stock around 3 per cent on Wednesday.

On a more speculative note, there is also a new energy among some of the market’s hottest stocks. Appen has been upgraded, while Afterpay’s long-time supporter Bell Potter has exceeded even its own high hopes with a target of $49.35 for the buy-now-pay-later, which is currently trading at $32.

Crucially, with the banks often representing around a third of the entire index by capitalisation, they have not been a drag on the market despite the bloodbath of negative publicity surrounding Westpac’s regulatory woes.

The total return for banks this year is about 13 per cent, made up roughly half-and-half by dividend payout and rising share prices.

What’s more, it only took hours after the announced departure plans of the bank’s CEO Brian Hartzer and chairman Lindsay Maxsted for brokers to start reassessing.

UBS moved midweek to upgrade its rating on the bank from “sell” to “neutral” as the recent drop in the Westpac share price brought it into line with the broker’s valuation of $24.50.