Australian Investments: Profit “Down Under” In the Land of High Dividends

by Dr. Mark Skousen, Advisory Panelist, Investment U
Wednesday, January 10, 2007: Issue #626

There’s been lots of talk about the Asian boom, but lost in this bull market is the tremendous stock market rally in Australia. The Asian boom is really, in a broader sense, the Asia-Pacific boom, which includes Australia’s thriving economy and its strong Australian dollar. So in this issue, I decided to discuss how Australian investments will prove to be very profitable this year for some investors. Let’s take a look

The Australian bull market has benefits from two major trends since 2001:

• First, Australia is a commodity-based economy, and Asian demand for Australian agricultural products and commodities in general has boosted prices and profits down under. This trend is likely to continue.
• Second, the Austalian dollar has gradually strengthened against the American dollar.

But now there is a third reason, one that will undoubtedly propel Australian stocks to record levels this year

Australia Wants Your Investment Dollars

In a bid to encourage foreign investment, the Australian government is deregulating its media industry. Over the past year, private equity investment in the country has exploded from $1.4 billion in 2005 to $21.3 billion in 2006, according to Bloomberg. Indeed, talk of mergers and takeovers is heating up dramatically.

The iShares MSCI Australia Index Fund (AMEX: EWA), which has substantial positions in media companies, is bound to benefit. I’ve been recommending it for more than a year now, and its performance has been nothing short of astonishing. The ETF is up nearly 180% since the start of 2001, and it climbed 30% last year. Take a look at EWA vaulting over its S&P 500 rival.

Australian Investments The Incredible Dividend Machines

There’s another good reason to invest down under: Australian companies tend to pay very high dividends, 4.1% on average, more than twice the U.S. dividend yield.

Last year, EWA companies had a payout ratio of 62%. In other words, they paid out an average 62% of their earnings in dividends. Why? Because in the 1980s, the Australian government eliminated the tax on dividends, effectively ending double taxation of corporate profits. Australian investors began to demand more stock dividends.

Is Congress listening? Thankfully, our Congress lowered the dividend tax rate to 15%, and dividend yields are increasing, but they could benefit from the total elimination of double taxation of dividends. Will the new Democrat-controlled Capitol Hill respond favorably to this sound idea?

The conventional wisdom is that high dividends mean slow earnings. But this is not necessarily the case. Between 2001 and 2006, firms in the Australian EWA collectively grew earnings at a compounded annual rate of 19.1%, compared to 14.2% for firms in the S&P 500. There is no evidence of high dividend payouts resulting in slow earnings growth.

I say invest your money wisely in the Land of High Dividends. EWA is a good place to start. (Note that EWA’s dividend yield is around 3%, due to its annual administrative fees.)

Good trading, AEIOU,

Mark

Today’s Investment U Crib Sheet

• Australia’s benchmark S&P/ASX 200 Index broke through its all-time high – twice – in the last week of trading in 2006. It climbed 19% last year, besting its 2005 return of 17.6%. New Zealand shares had a great year, too, hitting an all-time peak.
• Two companies account for nearly 10% of the Australian stock market – BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RTP). BHP shares are up 220% in the last five years. RTP is up 150% over the same period.

• An Australian Dollar Play on China’s Growth
• Dividend-Paying Stocks: 5 Pharmaceutical “Cash Machines”
• Stock Dividends: The Difference Between Success and Failure

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