Two biggest yield plays may be ready for a trim
Telstra and CBA
AUSTRALIAN investors have become infatuated with yield. In recent times this has caused many to become mesmerised by the two biggest dividend plays in the market - Telstra and Commonwealth Bank - leading up to the final dividends for 2012. Both companies go ex their full-year dividends in mid to late August, which means investors wanting to collect the franking component could have, under the 45-day holding rule, started buying both stocks in the first week of July
In previous dividend periods this enticement has seen both stocks rally for about six weeks in the lead-up to the ex-dividend date. They actually peak about two business days before they go ex and then fall over the next week or so by more than their dividend.
Telstra is paying a 14¢ fully franked dividend in August, putting it on a yield of 3.7 per cent over a six-week period. CBA is not far behind with a $1.80-a-share dividend and a 3.3 per cent fully franked yield.
Both of sound attractive, but the bull market in yields has seen the stocks bolt out of the gate early this year. CBA has motored 10.3 per cent higher since late May while Telstra has risen 16.5 per cent since late March. This won't stop investors chasing the yield, but for those not hooked on franking, it might be wise to offload some of your stock in the week before both stocks going ex-dividend. It would seem to be a crowded trade and the stocks might suffer late next month. For the earnings growth Telstra is offering, it has become expensive at more than 12 times forecast earnings, while CBA trades at a premium to the other big banks.
Ten Network Holdings (TEN)
IN JUNE we wrote about the trading opportunity in Ten following the decision to raise $200 million through a 3-for-8 renounceable entitlement offer at 51¢ a share. Before the capital raising, the stock was trading at 64¢. Given the size of the issue, the theoretical ex capital raising price should have been about 60¢.
Investors aggressively sold the stock down to the issue price to help fund their component of the capital raising. At the time I mentioned that once the retail component was completed in early July the stock should start to head up again towards the 60¢ mark. Like all aspects of the market, events don't always turn out as you think and you must remain flexible.
The retail component of the issue, about 19.5 per cent, was received poorly. Only 21 million of the available 76 million rights were taken up, leaving 55 million shares to be placed with institutional investors who had already been stuffed with the stock. Instead of bouncing higher, the shares are trading 3¢ below the issue price at 47¢ and looking friendless.
At this point it is critical to keep a close eye on the stock. If the shares do not move higher in the next four to six weeks, it would be better to cut the trade and move on. Alternatively, if the share price continues to head south and falls below 45¢, then move aside and wait until some buying support emerges pushing the price higher.
Acrux Limited (ACR)
WE HAVE written several times about the progress of life sciences company Acrux. The company has been the superstar of the sector, proving that its Axiron product, distributed by Eli Lilly, has street credibility as it quickly grabbed 13 per cent of the $1.5 billion US market it is targeted at.
Axiron is a gel and spray delivery technique for testosterone replacement in older men. This is commonly referred to as ''grumpy old man disease'', and is dominated by Abbott Laboratories' AndroGel. This is an awkward product given the user has to lather the top half of his body in a gel and isolate himself from everyone for a period. In contrast, Axiron is much easier to apply.
More recently, Acrux said its patent application in the US for its underarm delivery product had raised a series of questions from the regulator, resulting in a 15 per cent slide in the share price. Since that shock, the stock has found buying support, edging higher as a result.
But investors should keep a close eye on the company. Not only are there question marks over the patent, which runs to 2017, there are also suggestions the overall market is becoming increasingly competitive as Abbott looks to protect its market share with its improved product.
Acrux is hoping to generate $40 million of revenue in the 2013 financial year but with price discounting and aggressive competition, this may be difficult to achieve. Investors will be eagerly awaiting an update from the company in the coming reporting season.
Former fund manager Matthew Kidman is a director of WAM Capital. email@example.com. The Age takes no responsibility for stock tips.