We analyse fundamentals of dividend yield stocks ahead of reversing yield compression. On this basis, we like SingTel and SATS. Negatively impacted stocks are SIA Eng and StarHub.
• High yielding stocks have done well. Since the Global Financial Crisis (GFC) in 2008, an abnormally low interest rate environment has prevailed. This resulted in outperformance of high dividend yield stocks as yield compression set in. On a ytd basis, components of our basket of yield stocks have generally outperformed the FSSTI.
• Beware of reversal of yield compression. Given expectations of rising US interest rates later this year, we analyse the potential impact on yield stocks and highlight downside risks, particularly for stocks which are trading significantly lower than the historical spread over risk-free rates. On this basis, StarHub and ComfortDelGro may have the most downside risks, but we note that the latter could raise its payout significantly and the market is also pricing in the possibility of a special dividend in FY16. Conversely, stocks that are trading above mean spread over risk-free rates would benefit from mean reversion and these include SingTel, SATS and SPH.
• Slicing and dicing the high yielders. Other than mean reversion to historical spreads, we also analyse dividend payout, price/cashflow and other financial matrix to see if there is sustainability of dividends or upside to payout. Our analysis indicates SingTel and SATS to be the most compelling.
• Yield an important component of total market returns. Despite concerns over the potential reversal of yield compression, we believe selected yield stocks will remain favoured. This is because our study shows high dividend yield stocks accounted for about 18% of total market returns over the last decade in Singapore. Hence, even with an expected rise in interest rates, we think investors should still maintain selected high dividend stocks in their portfolio for steady returns. Also, yield stocks with solid growth prospects will also be better positioned to mitigate rising rates.
Risk adverse investors could opt for dividend stocks that are less correlated with interest rates. This includes SingTel and SATS, which are our top dividend yield picks. Another low beta but safe alternative is SPH, but our entry level is S$4.00. (Read Report)
Source : UOB KayHian Research