Written by Tim Boreham, Tim Boreham. Clime Asset Management’s Chief Investment Officer, John Abernethy was quoted in the following article, published in The Australian on 7 February 2015.
IN a three-horse field, Commonwealth Bank is the pundits’ ­blue-chip choice to breach the $100-a-share level as investors pursue thoroughbred returns in a low-rates climate.
Also sprinting up the straight are plasma products house CSL and hearing device maker Coch­lear, which investors are valuing for their defensive attributes and a bias to the US economy.
Ahead of their interim profit disclosures next Wednesday, CBA and CSL shares closed at $92.98 and $88.45 respectively. Shares in Cochlear, which reports next Tuesday, closed at $86.39.
The banking sector’s momentum since Tuesday’s official rates cut has instilled CBA as informal favourite for the next $100 hero.
Arguably $100 is an arbitrary number in valuation terms. “It’s all good fun and games but not much else,’’ says one fund manager.
Still, there’s corporate kudos at stake — and attendant dangers as well: unlike their US counterparts, Australian retail investors tend to be dismissive of “expensive” high-value shares — no matter how perversely.
“I still speak to people who say, Do you think a stock expensive at $60?’’ says Lincoln Indicators chief executive Elio D’Amato.
“They are not asking about the price-earnings multiples or future cashflow expectations under­pinning the stock.’’
D’Amato attributes this to Australia’s traditional gaming culture: investors are more attracted to cheap penny-dreadful stocks, which, most of the time, are cheap for a reason.
He adds market globalisation mean investors are becoming more comfortable with the notion of Google shares fetching $US500 apiece or — at the extreme end — Berkshire Hathaway shares changing hands for a cool $US224,000.
A $100-plus share price can also mean the kiss of death, with past triple-digit dazzlers hitting strife soon after cracking the ton.
Spurred by what then looked like insatiable demand for iron ore, Rio Tinto shares peaked at $157 a share in 2008 — but management had little time to enjoy the panoramic view from the top.
A huge rights issue — and the disastrous Alcan purchase — saw the stock plunge to a low of $23 and it is unlikely to trouble the scorers in the near future.
It’s also often forgotten that shares in Incitec Pivot briefly hit $200 in 2007, with the fertiliser maker’s valuation then muddied by a 20-for-one share split and the takeover of explosives maker Dyno Nobel in 2008.
As with a tiring batsman in the nervous 90s, things can turn sour before the magic level is reached.
Take Macquarie Group, which peaked at $98 in May 2007 before the global financial crisis wrought havoc on the financially engineered business.
For funds manager Perpetual, the high watermark was $84.58 just days before the local market hit what remains its highest high.
Real value hinges on the ­degree to which share valuations are supported by earnings and dividend — perhaps with blue-sky potential thrown in.
The fewer the shares on issue, the higher the earnings per share and dividends per share: there’s no difference if a company has 1000 shares at $100 apiece, or 100,000 shares valued at $1.
Still, lingering retail value perceptions have forced the hand of boards in the past — and may do so again. In October 2007, CSL ­instituted a three-for-one split after its shares hit $109, “to ­increase the liquidity and affordability of the shares to retail ­investors’’.
Another bifurcation has not been ruled out, with the board “periodically’’ reviewing the share structure.
“If a decision was made to go down that path, the ASX would be the first to know,’’ a CSL spokeswoman said.
If anything, says D’Amato, Australian investors are more comfortable with the other ­extreme: speculative resource ­explorers with derisory market capitalisations.
But Phillips Capital client adviser Michael Heffernan says ­clients are becoming more accustomed to “expensive” shares.
“I don’t think it’s quite the case now,’’ he says.
“I get the odd client who says, ‘that’s a bit dear’, but they know when they invest in the CBA they get their 5 per cent dividend.
“There’s more substance to a $100 stock now than in 2007, when it was all speculative.’’
Clime Capital chief investment officer John Abernethy expects more $100-plus shares to emerge. “It’s the natural result of good companies continuing to grow.’’
He’s no fan of share splits given they bestow little benefit on a company’s long-term holders.
“They are more to appease day traders who want to transact on small turnover,’’ he says.
CBA, meanwhile, is tight-lipped on the prospect of a share split ahead of next Wednesday’s interim result.
But at its annual meeting November, one shareholder dubbed the prevailing share price of $80 as “scary” for retail investors.
“I agree it is a big number,’’ chairman David Turner responded. “It would be awfully nice if the share price was $100, then it would be sort of easy arithmetical.
“But why don’t we look at it (a potential share split) and by this time next year we will have a better view.’’
CBA — dubbed the world’s most expensive bank — still yields about 5 per cent.
But on Bloomberg consensus data, 19 brokers ascribe an average “target price” of $83 per CBA share, with 12 of them rating the bank a “hold” and only three a “buy”.
If this collective wisdom is on the money, CBA could yet succumb to the nervous 90s syndrome that afflicted companies such as Macquarie.
What’s for sure, the highest share price benchmark of notorious nickel play Poseidon — which hit $280 a share in 1970 before collapsing — is likely to remain intact for years to come.