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