Stocks: When in doubt go defensive

  • Markets Premium
  • Saturday, 08 Feb 2020

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When in doubt, go defensive.

Amid the uncertainty and volatility plaguing the equity market, especially now with the novel coronavirus outbreak driving fears, investors may find comfort in dividend-paying stocks.

Their appeal is simple: Dividend payers provide investors with regular income regardless of the prevailing market conditions. According to analysts, dividend-paying stocks are “safe havens” in uncertain times, as return from these shares can potentially mitigate portfolio losses when stock prices decline in a general market selloff.

“With yields helping to limit their downside risk, these stocks tend to be less volatile. As such, they tend to perform relatively better than the general market in uncertain times, ” one analyst with a local brokerage explains.

Against the backdrop of declining risk-free rates, and related decline in cash yields as well as funding costs, Maybank Investment Bank (MaybankIB) Research says dividend thematic for the equity market will remain increasingly powerful, especially as the earnings growth (or capital gains) outlook remains highly uncertain.

“Average KLCI dividend yield (around 3.5%) now exceeding the benchmark 10-year Malaysian Government Securities yield (around 3.2%) is indicative of the relative attractiveness (or undervaluation) of equity market high-dividend-yield stocks over the alternatives of bonds and cash, ” MaybankIB says in its recent note to clients. Similarly, CGS-CIMB Research, which advises investors to be nimble in their investing strategy due to the constantly changing business landscape, has identified “high dividend-yield stocks” as one of the five trading themes for 2020.

“We are of the opinion that investors may opt for defensive stocks that offer good dividend yields in view of the volatile market conditions and our expectation that interest rates could be cut by 50 basis points (from 3%) in 2020, ” the brokerage explains.

But with so many dividend-yielding stocks on Bursa Malaysia, how should one pick?

As a general guideline, say analysts, the companies have to be fundamentally sound, with inexpensive valuation, while the dividend yields have to higher than the average KLCI dividend yield of 3.5%.

For MaybankIB, its dividend stock picks are those with a cash yield of more than 4%, and sound dividend-relevant parameters, such as dividend frequency, payout ratio, free cash flow yield, net gearing and net debt to earnings.

With that, its top 10 yield picks with “buy” ratings, are banking group RHB Bank Bhd and AMMB HOLDINGS BHD; energy company Malakoff Corp Bhd; media company Astro Malaysia Holdings Bhd; highway concessionaire Litrak Trans Kota Holdings Bhd; real estate investment trusts (REITs) MRCB-QUILL REIT (MQREIT) and YTL Hospitality REIT; auto manufacturers/distributors BERMAZ AUTO BHD (BAuto) and MBM RESOURCES BHD; and gaming company BERJAYA SPORTS TOTO BHD (BToto).

“As would be expected in a dividend portfolio, REITs are key picks, with the potential to also boost earnings and yield via debt refinancing, ” MaybankIB explains.

“The auto manufacturers/distributors also make the list, notwithstanding potential earnings drag from foreign-exchange volatility, as low price-earnings-high payout combinations make for high dividend yields, further supported by net cash balance sheets, ” it adds.

Some banks are also in the list, as RHB and AMMB, are both trading below book, and they have delivered rising earnings and strengthened balance sheets, with high capital levels underpinning yield expectations, MaybankIB says.

As for CGS-CIMB Research, the criteria for its stock selection are companies that are rated “add” under its coverage, and those that offer dividend yields that are higher than the average dividend yield for KLCI at 3.5%. From the criteria, its Top 10 dividend-yield plays are BAuto; Star Media; Astro; AMMB; IGB REIT; water services group Taliworks Corp Bhd; technology company UCHI TECHNOLOGIES BHD; energy company Gas Malaysia; mattress maker Lee Swee Kiat Group Bhd (LSK) and industrial rubber hose manufacturer Wellcall Holdings Bhd.

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