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Economics & Markets

Why there’s value to be found in income stocks

By Dermot Ryan
Sydney, Australia

Despite some dips and stumbles, there have been strong returns to report over the year for investors on the hunt for income, particularly when franking credits are factored in.

In short, it was a mixed bag

The past 12 months have been buoyant for Australian equities. Of course, there have been challenges – global trade fears continue, and recently we saw a dip in the trading session. It was the fourth hard fall of the year and more than 95 per cent of stocks were left in negative territory.

Despite this, there have been very strong returns over the year and some very good franking which has been excellent for investors.

However, there has been a lot of variability in growth across the equities market. Several sectors, particularly more concept-style stocks such as technology and some areas of healthcare, have risen well ahead of the rest of the market.

Price-to-earnings multiples for growth stocks have undergone a very sharp re-rating, where multiples have increased at a faster rate than profits.

There appears to be a significant opportunity remaining in income stocks. If we look at price-to-book valuation, we can see that there’s been a significant divergence between growth and income over the past six years. Income stocks haven’t rallied as much as growth stocks over this time, so we think there’s a good opportunity for investors to take advantage if they do begin to catch up.

Source: AMP Capital, Factset
Source: AMP Capital, Factset

Up to almost a third of the ASX 300 are now at, or nearly at, positive net cash levels. Balance sheets are relatively good across the board, particularly for companies that are able to deliver strong cash flows. We’ve also seen franking credits increasing throughout 2019, and both of these factors point to a promising environment for income stocks through 2010.

This will be especially true if the RBA cuts interest rates further, which at this stage it looks likely to do within the first few months of next year.

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Dermot Ryan, Co-Portfolio Manager, Income
  • Economics & Markets
  • Opinion
  • SMSF News
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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