Tuesday 22 August 2017 by Mark Bayley Opinion

Telstra shares fall by over 10% – bond investors say meh!

Last week, Telstra shocked the equity market and changed its dividend policy. That sent shares sharply lower but Telstra bonds were largely unmoved

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Last week, Telstra reported its full year results and announced that it was cutting its dividend payout ratio to 70-90% from 100%.  That shook equity investor confidence and sent shares sharply lower.  The shares dropped by nearly 11% – their biggest fall in over eight years – and wiped approximately AUD5.5bn off Telstra’s market value.

Meanwhile, Telstra’s investment grade rated 4% bonds due 19 April 2027 barely moved.  After the results, Moody's stated that Telstra’s results were “within expectations, from both an operational and financial metrics perspective, and therefore continue to support its…   …issuer rating.”  From a credit perspective, it was such a non event that S&P hasn’t even commented on these results.

This contrasting response between bondholders and shareholders should succinctly reinforce to investors the benefits of holding bonds versus equities in portfolios.

It was only a few weeks ago that I attended an investor conference where one of the speakers was pushing the benefits of holding Australian equities for income and offshore equities for growth.  No, no, no and no!

Do I sound sufficiently angry and exasperated?

If you want relatively stable income, in my opinion, it must be bonds rather than equity. Those Telstra shareholders that expected a set and forget investment got a rude awakening; not only was their future income hit but so was their capital – a double whammy!  How long will it take to regain that capital loss?

In the investment grade, corporate credit market, it would be rare to see a bond lose 10% of its value in a day.  Corporate bonds provide a safer income stream than dividends from equity in the same company.  If you want to gamble on the future dividend policy of a company – and your own income – you may as well head down to the casino.

Trade ideas

Given the current elevated level of several global equity markets and their respective P/E ratios, now may be a good time to take advantage by moving some exposure out of equities and into bonds of the same company.  If you share this view, then these are some of the corporate bonds that we have available:

Company Currency Rank Credit rating  Coupon type  Minimum parcel size  Maturity date Yield to worst* 
Asciano Finance AUD Senior unsecured BBB- Floating 10,000 12 May 2027 4.51%
Aurizon AUD Senior unsecured but guaranteed by Aurizon Network and certain of its subsidiaries 
BBB+ Fixed 10,000
21 June 2024 3.67%
BHP Billiton  USD Subordinated non call 5 fixed rate reset notes
BBB+ Fixed
200,000 19 October 2025c* 4.29%
Newcrest  USD Senior unsecured BBB- Fixed
10,000
15 November 2021 2.84%
NextDC  AUD Senior unsecured
N/A Fixed
10,000
9 June 2021 4.98%
NRW Holdings  AUD Senior secured full amortising notes
N/A
Fixed
10,000
19 December 2020 5.65%
Sunland Capital   AUD Senior unsecured N/A
Fixed
10,000
25 November 2020 5.42%
Qantas  AUD Senior unsecured N/A
Fixed 10,000
19 May 2022 3.47%
Virgin Airlines  USD Senior unsecured B- Fixed
10,000
15 October 2021 6.27%

Prices accurate as at 21 August 2017 but subject to change; indicative only
All DirectBonds listed are wholesale only
*c = call date

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