A Look ‘Down Under’

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 🙂 )

FRANKING

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:

  1. How do the UK, US, Ireland and Papua New Guinea holdings impact the franking credit,
  2. Probably a timing issue, but Morningstar has their newest (and largest) holding as CIN.ASX which is not in the Year-End report,
  3. 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

COMPANY SYMBOLS YIELD SECTOR
Amcor Limited AMC/AMCRY 3.61% Materials
 Aust. & N.Z. Banking Group  ANZ/ANZBY  5.19%  Financials
 BHP Billiton Limited (UK)  BHP/BBL  4.59%  Materials
 Boral Limited  BLD/BOALY  3.56%  Materials
 Challenger Limited  CGF/CFIGY  4.09%  Financials
 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
 Monadelphous Group  MND/MOPHY  3.87%  Industrials
 National Australia Bank  NAB/NABZY  6.13%   Financials
 Nufarm Limited  NUF/NFRMY  2.08%  Materials
 Oil Search Limited (Papua)  OSH/OISHY  1.35%  Energy
 Orora Limited  ORA/ORRAF  3.89%  Materials
 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
 Seek Limited  SEK/SKLTY 3.61%  Industrials
 Sims Metal Management   SGM/SMSMY  4.7%  Materials
 Suncorp Group Limited  SUN/SNMCY  8.46%  Financials
 Westpac Banking Corp.  WBC/WBK  5.55%  Financials
 Woodside Petroleum  WPL/WOPEY  5.85%  Energy
 Woolworths Limited  WOW/WLWHY  8.07%  Consumer Staples
NOTE: Yield as of 7 October 2017
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4 thoughts on “A Look ‘Down Under’

  1. Very interesting Drog. As a non-Australian or NZ investor, it seems as you are left at a disadvantage. This may not be the worst thing as it encourages Aussies to invest in this strategy. Do you think your consensus on this stock would change if you got all the tax befits Australian’s did? Cheers

    Liked by 1 person

  2. Interesting question. If I could invest in WLE, I suppose it would depend on what investing phase I was in. If I was starting out, LICs provide good diversification. Since my holdings are pretty diverse, I’m more fee averse and would choose selectively. In fact, three of their companies made it onto my watch list.

    Assuming no changes in US tax law and a stable FX rate, there is probably a slight bias in your favor with local issues. My benefit would be with attaining a higher yield than is available in the states for comparable companies.

    Appreciate the comment!

    Liked by 1 person

    • Appreciate the reply. I agree that the dividend yield is quite low for such a large diverse LIC. But I believe this is more of a “safe” LIC as they invest mostly inside the top 200 Australian companies, obviously safety is never guaranteed with the stock market but that is where the diversity comes into play. If their previous performance is anything to go by, even using it as a guideline, then I believe this will be a winner over the long term, just have to give it time to get it’s legs before it starts running away!

      Liked by 1 person

      • With your franking advantage, I would foresee little downside unless the broader market takes a hit. What surprised me was their prospectus said flat out for Australian/New Zealand investors only. Which is why I investigated a US friendly partial alternative. If fees are reasonable then I see the attractiveness of partnering with Wilson.

        Thanks for the inspiration!

        Liked by 1 person

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