Find yield in economic rents

It is pretty quiet in the analyst community, just as there is a somewhat gloomy mood in the market. There seems every reason to adopt a defensive approach, concentrating on yield. The after tax bank yields look reasonable because of the franking, but that comes with the risks to the residential property market and whole sale funding exposures, about which we need no reminding. RBS suggests looking beyond franking:

We continue to recommend investors maintain exposure to quality, high yielding stocks in a falling interest rate environment. June is distribution season with utility stocks and REITs paying yields above 6%. While most distributions are not franked, they are attractive and can provide regular and sustainable income flows for investors. Our key calls are Sydney Airports and APA Group in the utilities sector and BWP Trust and Cromwell Property Group in the property sector. The ex  dividend dates are before 30 June so now is the time to Buy these names.

RBS likes some AREITS and utilities:

Not all property is the same

We believe AREITs are now entering a relatively stable period where stock values are predominantly based on operating earnings, with swings in capital values likely to be more fundamental rather than sentiment driven. Our preferred property exposures are higher grade office and industrial assets. The AREIT sector looks to continue to offer a relatively defensive asset with an average yield of around 6.5-7.0%. Our key yield picks in the AREIT space include GPT Group and BWP Trust at the large end and Cromwell Property in the small/mid caps. We believe these groups have stable income stream and strong cash flows which will underpin distributions going forward. Utilities usually offer near monopolistic structures.

Sydney Airport a great example

A great example of a monopoly asset is Sydney Airport and at its recent AGM management noted that it is well placed to achieve traffic and earnings growth in a period which saw four natural disasters and two airline groundings. Looking forward, Sydney Airport re-confirmed 2012 distribution guidance of 21cps with the distribution to be covered by net operating receipts. With earnings growth expected to continue outperforming traffic growth over coming years, we expect distributions to start growing again in 2013.

Yep, the old monopoly play. Not bad in tough times when economic rents are more reliable and genuine options for new growth are hard to find. It is the other side of the poor productivity stats, a lack of real innovation.

SB_120521_Yield June is All About Distributions

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Comments

  1. Karl FitzgeraldMEMBER

    Surely the biggest play in the rent seeking monopoly market is the upcoming ‘Digital Dividend’ where we will auction off what were once the public airwaves. The 4G spectrum is known as the water front real estate of the telecommunications asset class. Since the advent of the iphone the EMS has skyrocketed in value. Selling such resources ad infinitum does not make sense.

    But yet we sit back and wonder why politicians pawn themselves to vested interests in order to finance their campaigns so they can pay the spectrum monopolist for the right to advertise on what were once known as the public airwaves.

    A digital dividend for some. Would love to see your analysis of this issue.
    http://www.minister.dbcde.gov.au/media/media_releases/2010/062