It’s been about two years since I first invested in Australian issues, choosing to take a slow approach while I obtained some practical experience first hand. Certainly many of the yields are good, but the economy – much like Canada – is resource based. Then there’s the whole franking deal. Plus the foreign exchange conversion – but this has been relatively stable at 75 – 80 cents per USD. Add to that, until recently the selection was limited to ADRs or using a cost prohibitive foreign desk.
Last month, Buy-Hold-Long detailed some of his recent purchases. In the comments, both Two Investing and Time In The Market indicated an interest in his selections. As did I. His response was, “If you do research on them and are happy with them be sure to let me know your thoughts…” Well, my thoughts go beyond a paragraph so I figured I’d weigh in via my weekly missive. First I’ll lay the groundwork with franking and LICs. Next I’ll share my view on one of his buys. Last, I’ll present a non-ETF option for US investors. (and BHL – I’m really not picking on you 🙂 )
In a nutshell, if an Australian company is profitable, pays taxes, has no losses carried forward an Australian shareholder may receive a credit to apply to their tax bill (franking). Foreign shareholders do not receive franking credits but also do not have Australian withholding tax applied when franking is declared. What I’ve experienced (as a US investor) is no withholding when the dividend is at least 75% franked. Otherwise, there is a 15% withholding as a tax treaty is in place.
LIC (Listed Investment Company)
The closest comparison in the US would be a Closed End Mutual Fund or perhaps an ETF. These funds invest in multiple companies, collect and distribute dividends (and franking credits) and collect a fee on behalf of the manager. The primary benefit is diversification while the potential downside is the quality of the investment manager. I have not found a LIC that is open to non-residents of Australia and/or New Zealand.
BHL’s Recent Buys
LICs are a popular vehicle for Australians with Dividends Down Under and Undergrad Investing holding LICs as well. I didn’t analyze Future Generation Investment Company (FGX.ASX) but did some digging into WAM Leaders LIC (WLE.ASX). Wilson Asset Management does have a good track record and tends to earn their fees with their results. But digging into their holdings (pg 54) raises a few questions:
- How do the UK, US, Ireland and Papua New Guinea holdings impact the franking credit,
- Probably a timing issue, but Morningstar has their newest (and largest) holding as CIN.ASX which is not in the Year-End report,
- Carlton Investments Limited (CIN) and WLE hold ten of the same issues in common magnifying exposure to certain companies such as Rio Tinto, BHB Billiton, and others. This could be either good or bad but certainly reduces the anticipated diversification.
An Option For US Investors
32 of the 52 WLE.ASX holdings trade in the US as either ADRs or in the OTC (pink) market. I’ve ignored the two that suspended their dividend, the OTC (grey) and non US listed stocks. Issues from this list would currently meet the WAM Leader’s criterion and when looking to diversify could be worthy of consideration. If buying, check your broker’s price schedule as some pink sheet issues carry premium pricing.
Potential Australian Stocks for Consideration
|Aust. & N.Z. Banking Group||ANZ/ANZBY||5.19%||Financials|
|BHP Billiton Limited (UK)||BHP/BBL||4.59%||Materials|
|Commonwealth Bnk of Aus.||CBA/CMWAY||8.45%||Financials|
|Computershare Limited||CPU/CMSQY||2.48%||Inf. Technology|
|CSL Limited||CSL/CSLLY||2.1%||Health Care|
|Healthscope Limited||HHO/HHCSY||3.83%||Health Care|
|Incitec Pivot Limited||IPL/INCZY||1.2%||Materials|
|Insurance Australia Group||IAG/IAUGY||5.2%||Financials|
|James Hardie Ind. (Ire.)||JHX/JHX||4.86%||Materials|
|Janus Henderson Grp (UK)||JHG/JHG||3.68%||Financials|
|Lend Lease Group LLC||LLC/LLESY||3.64%||Financials|
|Macquarie Group Limited||MQG/MQBKY||7.4%||Financials|
|Metcash Limited||MTS/MHTLY||4.61%||Consumer Staples|
|National Australia Bank||NAB/NABZY||6.13%||Financials|
|Oil Search Limited (Papua)||OSH/OISHY||1.35%||Energy|
|OZ Minerals Limited||OZL/OZMLF||3.66%||Materials|
|Qantas Airways Limited||QAN/QABSY||3.39%||Industrials|
|QBE Insurance Group||QBE/QBIEY||7.18%||Financials|
|ResMed Inc (US)||RMD/RMD||1.81%||Health Care|
|Rio Tinto Limited (UK)||RIO/RIO||5.73%||Materials|
|Sims Metal Management||SGM/SMSMY||4.7%||Materials|
|Suncorp Group Limited||SUN/SNMCY||8.46%||Financials|
|Westpac Banking Corp.||WBC/WBK||5.55%||Financials|
|Woolworths Limited||WOW/WLWHY||8.07%||Consumer Staples|
|NOTE: Yield as of 7 October 2017|