High-yield stocks in demand given soft interest rates: DMG

They also offer growth prospects from business expansions

WITH interest rates set to remain soft, stocks with a high dividend yield are expected to pack a hard punch.

According to DMG & Partners analyst Leng Seng Choon, such stocks are going to become more attractive to investors as interest rates in Singapore and the US stay low.

Despite remarks made by US Federal Reserve chairman Ben Bernanke earlier this month that further interest rate cuts are unlikely, high US unemployment could keep rates down.

And with local deposit rates starting at 0.325 per cent and capped at one per cent, stocks with dividend yields of more than 3 per cent look significantly more enticing in comparison.

Mr Leng pointed to stocks like ComfortDelGro and Suntec Reit, with current dividend yields of 6.6 and 5.1 per cent, respectively.

‘Apart from their higher yields compared with fixed income instruments, these stocks also have growth prospects coming from business expansion,’ said Mr Leng.

Local interest rates are expected to stay low despite the spike in Singapore 10-year government bond yields to 3.6 per cent.

‘The spread of the US 10-year bond yield over the Singapore equivalent is now 40 basis points, significantly lower than the 110 basis point average over the past five years,’ said Mr Leng. ‘We see the likelihood of further spread-narrowing as very low and this points to limited upside for Singapore 10-year government bond yields.’

The US 10-year government bond yield has risen from 3.3 per cent to 4 per cent since mid-March this year.

Its Singapore counterpart has recorded a swift rise from 2.3 per cent to 3.6 per cent over the same period, which Mr Leng said could be due in part to inflation concerns here.

‘We note that the current 3.6 per cent yield on Singapore 10-year government bonds may lead to some switching out of dividend yield stocks to these bond instruments,’ he said. ‘But stocks that offer high dividend yield remain interesting, particularly if they have accompanying growth prospects.’

The spike in the 10-year government bond yield is not expected to spill over into Sibor rates, Mr Leng told BT. ‘Even in a hypothetical scenario of the US Fed Fund rate rising, the current narrow spread provides scope for the three-month Sibor to remain soft.’

The spread between the US Federal Funds rate over the three-month Sibor rate is now 0.7 of a percentage point, against a three-month average of 1.5 percentage points.

The low rates paid by other fixed-income instruments like time deposits are also expected to continue, further fuelling the attractiveness of high-yield stocks.

‘As long as Sibor rates are low, time deposit rates will stay low,’ Mr Leng said.

Buy Stocks with Good Earnings, Yields: Analysts

Recommendations include Reits, conglomerates, telcos, banks, SPH

IN THE wake of the market downturn and continued uncertainty due to the sub-prime crisis, analysts are urging investors to pick up stocks with strong, visible earnings and high yields.

Among the locally listed companies the analysts recommend are business trusts and Reits, conglomerates, telecommunications firms, and even banks. And most appear to like Singapore Press Holdings.

The recent selldown has ‘thrown open more opportunities to invest in value stocks, especially those that have been on an uptrend until July 2007’, said OCBC Investment Research’s Carmen Lee in a report last week. ‘One area we are focusing on now is higher-yielding stocks.’

Ms Lee said several of the blue chips are still offering fairly good returns, based on OCBC’s estimates. Among these are SPH, which at a price of $4.36 would give a projected dividend yield of 5.2 per cent. Another is ST Engineering, which OCBC expects to yield 4.6 per cent in dividends based on a price on $3.70, with projected earnings growth of 16 per cent.

SPH closed at $4.34 last Friday, while ST Engineering closed at $3.80.

In another report, Citigroup’s Lim Jit Soon said that feedback from a marketing session in Hong Kong suggested investors are ‘generally focusing on markets that have better earnings prospects’.

Another emerging theme: ‘avoiding companies with direct exposure to the US’. But while many investors agreed that the sub-prime crisis will continue to unwind, they were also hopeful that lower US interest rates – which another Citi report said is a distinct possibility and has been ‘well-flagged’ – might improve sentiment.

Investors are looking to position themselves in sectors that might benefit sharply from lower US interest rates, with some looking towards Reits and other yield plays like SPH and Rickmers Maritime, said Mr Lim.

Citi continues to recommend sectors with good earnings visibility. It has ‘buy’ calls on Singapore Telecommunications for its defensive cashflows in mature markets of Singapore and Australia, as well as organic subscriber growth in emerging markets in South-east Asia and India.

Citi also likes DBS, which it said is trading below historical valuations. DBS’s main risk from the sub-prime crisis is a fall in capital-market related fees, which formed 23 per cent of 1H07 revenues, it said.

OCBC said market sentiment for trusts and funds is ‘likely to stay muted’ but at current prices they represent ‘good opportunistic buys’ as they have ‘guaranteed payouts for the next 12-18 months’.

It recommends Babcock & Brown Structured Finance, which it said has an ‘assured yield of more than 10 per cent for 2008.’ Another is ‘yield gem’ First Ship Lease Trust, which – based on a price of US$0.87 – is offering annualised half-year yields of over 10 per cent until 1H09.

UOB Kay Hian also likes SPH for its high dividend yield, as well as AusGroup, Cosco and SembCorp Marine for high earnings growth, and OCBC for higher loan growth potential.

Reits could be attractive if expectations of US monetary easing pan out, but banks are unlikely to outperform until third-quarter results are released, it said.