These past few weeks have been marked by a raft of capital raisings and dividend cut backs as companies struggle to lower their debt burden and shore up their balance sheets. The massive rush by so many companies to follow this path reveals the concern they must have over slowing growth, difficult funding and the uncertainty over how long these tough conditions will persist.
In almost every case, the capital has been raised through heavily discounted share placements which have led to massive drops in share price. Qantas is a case in point with shares dropping by 18% the day after the capital raising was completed.
What’s interesting to note though is that all placements have been extremely popular and in most cases have been oversubscribed. This demonstrates that the institutions understand that raising additional capital is the prudent thing to do, even though it will mean a bit of pain in the near term. Moreover, they understand that when the good times return, these companies will be better placed to recover and that, from a longer term perspective, it would be a mistake to miss out on these current opportunities. In addition, if the instos are currently already a shareholder, failing to participate in the share placement would mean a dilution of their existing holdings.
They also know that even with the scaling back of dividend payments, participating in discounted share placements exposes them to exceptional yields. On average, those that participated in the recent raft of placements have locked in yields of approximately 11% in the first year! And that’s AFTER accounting for the drop in dividends per share.
I think there is something long term investors can learn from the institutions. As long as the business remains viable with reasonable long term prospects, these hefty share price drops should be seen as a gift from heaven. And I would argue that most of these stocks, such as Wesfarmers, Westfield, Qantas, and Lend Lease will be around long after you and I.
Consider the case with Qantas. It cut its interim dividend by 2/3rds, and if we assume they do the same for the final dividend that’s an annual payment of 12 cents per share. Given that the price dropped to $1.87 after the capital raising, that presented investors with an opportunity to receive a 6.5% yield – fully franked.
But what about investors who had the misfortune of getting in prior to the big drops? If you purchased Qantas shares 6 months prior to the cut in dividends you would still be on a yield of around 3.5%, which is pretty much just under the long term average for the market. Besides, all this just demonstrates the need to make regular investments into the market. Not so much for the purposes of dollar cost averaging (although that has real benefits in a falling market) but more so because at any given point we only have so much we can afford to invest. If we invest as we save we act to continually build our holdings and build our wealth consistently. Think of it as a form of saving that has exciting growth and income potential.
Let me make the point that I’m not trying to sugar coat the current situation. Of course it would be better if companies weren’t forced to lower the dividends and didn’t need to raise any cash. But the fact is that we can make the best of a bad situation and turn adversity into advantage. As long as these companies weather the storm and go on to greater prosperity, as most of these big blue chips most surely will, then the best strategy is to stay resolute and continue to build our portfolios. There’s no doubt it will be a scary ride, and the light at the end of the tunnel could be some distance off, but in years to come you will be glad you did.
Finally, let me add that if you are able to generate some returns through shorter term trading in the meantime, fantastic. But that doesn’t mean we should forget about our longer term portfolios. To learn more about building wealth over the long term and making the most of the current situation, go to www.dividendkey.com