In March 2012, I wrote an article titled "How high is too high" showcasing two stocks, Unilever Caribbean Limited (UCL) and West Indian Tobacco Company Limited (WCO) - stocks that are synonymous with high and consistent payout ratios and above average dividend yields. Fast-forward to August 2012, these two stocks would appear to fall under the category of inelastic goods as prices peak to 52-week highs each trading day. Investors both locally and abroad have been piling into dividend stocks given the relatively low global interest rate environment and are willing to pay a very high price purely for yield.
Year-to-date as at 30 August 2012, the Trinidad and Tobago Composite Index (TTCI) is up 5.67 per cent with UCL and WCO recording a price appreciation of 27.57 per cent and 19.82 per cent respectively. Rounding up the top five best performers over the period are One Caribbean Media Limited (h39.13 per cent), Guardian Holdings Limited (h37.59 per cent) and Scotiabank Trinidad and Tobago Limited (h24.68 per cent).
More and more, local investors are venturing into the local equity market hoping to capitalise on high yielding stocks in a bid to shore up returns. The timing of this initiative comes at a high cost evident from wider than usual bid-ask spreads for some stocks and the lack of availability of others. WCO's bid-ask spread measures TTD5.40 with 14,282 shares being demanded at a bid price of TTD73.60 while offers stand at TTD79.00 for 1,000 shares. At a trading price of TTD73.51, WCO's trailing P/E ratio is 21.10.
A quick glance at Table 1 shows the dividend yields based on the stocks' trailing dividend and closing price as at 30 August 2012. Though attractive, investors must realize that some 'high' yields are coming at a high cost. The illiquidity of a stock plays a major role in its price movements along with the fundamentals of the company. Investors viewing these high-yielding stocks as too expensive, can look at companies using cash in other strategic ways, namely, stock repurchases, making acquisitions or reinvesting in their business.
SBTT's consistent dividend payments and yield has made this stock one of the more demanded stocks on the exchange with limited supply available on the market. The illiquidity of this stock has seen its stock price continue to rise leading to marginal declines in the Company's dividend yield. Year-to-date, SBTT's stock price is up 24.68 per cent trading at TTD62.75.
Though it remains 'the most expensive' stock on the exchange, RBL's share price continues to appreciate with a trailing EPS 3.4 per cent above that declared in 2011. As at 30 August 2012, bids for RBL stood at TTD101.71 for 10,000 shares with no offers on the market.
AMCL's share price continues to increase marking a gain of 31.25 per cent over the past five years to its current trading price of TTD63.00. The illiquidity of this stock has resulted in significant stock price appreciations as demand remains strong. As at 30 August, there were no offers on the market.
The recent price appreciation seen in AHL has resulted in a year-to-date return of 6.84 per cent at a current trading price of TTD8.28.
The hunt for yield is a global phenomenon as seen by the increase in the iShares Dow Jones Select Dividend Index exchange traded fund that reached a three-year high of USD57.82 a share yielding 3.56 per cent, reportedly "less than the long-term historical average for the entire stock market". Continued stock price appreciation in stocks such as WCO and UCL for the rest of 2012 should come as no surprise to the market. As investors continue their chase for yield, some are willing to buy at any cost at arguably inflated prices. As it stands, the old adage never fails…the higher the risk, the higher the return…
All information contained in this article has been obtained from sources that First Citizens Investment Services believes to be accurate and reliable. All opinions and estimates constitute the Author's judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by First Citizens Investment Services in any form whatsoever.
First Citizens Investment Services and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed shall be construed to be, or constitute an offer or a solicitation to buy or sell.