Teaser Picks Revealed from the new Australian Edge Newsletter

Part one: we look into the "8 income wonders from down under"

By Travis Johnson, Stock Gumshoe, October 4, 2011

The folks at Investing Daily (which used to be called KCI) brought us one of the first foreign investment newsletters that many retail investors probably heard of, the income-focused Canadian Edge that Roger Conrad used to ride the great wave of Canadian royalty trust investing in the golden age of that investment (that being the early 2000s, before the trusts were “busted” in the “Halloween Surprise” a few years back — they were phased out and effectively lost their special status this year, though many of them remain as very good dividend-focused companies).

And now, with Australia all the rage — a country that in many ways has a similar income-focused market and similar resource-based economy to Canada — they’re introducing a new letter. The title? You guess it, Australian Edge, put together by Roger Conrad and David Dittman. They say they’ll be focused on similar kinds of things — dividends, lots of natural resource-related companies, a couple recommendations a month, weekly updates, etc. etc. This is a charter subscription they’re trying to sell us now, which is code for “we don’t have a track record yet,” and it’s a bit on the pricey side at $695, quite a bit more than Conrad’s other letters … so since they’re launching with this tease about their eight “income wonders from down under” let’s just check it out and see if we can identify ’em for you for free, Gumshoe-style.

OK? Great.

You already know the backdrop, in all likelihood — Australia is a big supplier of many commodities, everything from wheat to liquefied natural gas (LNG) to coal to copper to gold to iron ore to uranium … if you dig or drill for it, they probably produce it, and in most cases they don’t use that much of it with their relatively small population and manufacturing base, so they dominate the export market in some critical natural resources. And their ports are often closer to China than many other big producers like Canada or Brazil, so they get a small shipping cost advantage. That has led to some huge performance in recent years not only for the Australian dollar, which rebounded dramatically to generally hurt their exporters, but also, over a longer term, for the big Australian multinational miners like BHP Billiton (BHP) and Rio Tinto (TIO).

(Though both of those diversified nat. resources mega-stocks have gotten clobbered recently on fears about Chinese and global slowdown and are both looking dirt-cheap near their 52-week lows at the moment.)

So … a strong currency, low national debt, a tradition of generally high dividend payouts compared to similar sectors in the US, and a well positioned country for global resource demand. That’s the “buy Australia” argument.

Or, if you want the more feverish pitch, here’s how the Investing Daily folks put it:

“As Nations Around the World Battle for Which Economy Will Collapse First… as Debts Multiply to Infinity… and Currencies Head to Zero…

“I Would Like to Introduce You to an Alternate Reality.

“Today, You Are Going to Escape the Perils of Investing in America as You Capture One Windfall After Another In… The Lucky Country

“You’re About to Be Taken on a Whirlwind Adventure to the Place Fortune Magazine Calls ‘A Land of Boomtowns and Billionaires’ ….

“Imagine getting 7% currency appreciation… 7% dividend yield… and 70% (or more) capital gains….”

What, then, are the eight Australian picks teased? Let’s take a look at the clues:

INCOME WONDER #1—This high-tech company is one of Australia’s best-known brands. And with more than 20 million accounts, they serve nearly every home and business in the country. This safe blue chip pays just under a 10% yield!”

That one, sez the Thinkolator, must be Telstra (TLSYY for the US ADR, TLS at home in Australia). The trailing dividend for that ADR is indeed about $1.41, and the current price is just over $14 so the 10% is accurate enough.

Telstra is the major telecom company in Australia, fixed-line and data/pay tv as well as wireless, and it has slowly been privatized over the past 15 years or so (the government still controls about 10% of the shares). In general concept, not unlike buying AT&T in the US — big ($35 billion-ish in this case), huge installed base, large network of fixed-line telephony that may drag down growth compared to gee-whiz mobile-only operations, but helps to make them quite steady cash generators. And, of course, a way higher yield. Don’t know a lot else about Telstra, but if you do feel free to share … more to cover, so let’s keep moving …

“INCOME WONDER #2— This ‘income wonder’ has been operating for 170 years and is as reliable as they come. They are Australia’s leading green energy company, as well as the largest gas and electric retailer in the country, with more than 6 million customers. This company holds extremely solid long-term energy infrastructure assets which allow them to pay a safe and lucrative dividend.”

That sounds like it must be AGL Energy (AGK in Australia, AGLNF or AGLNY on the pink sheets, where volume is usually quite low). This is a major utility company in Australia, where the sector is somewhat segmented but they are certainly one of the bigger players, they are reported in some places to have six million customers (combined gas and electric), and they are one of the original publicly traded Australian companies with a founding just over 170 years ago. They do claim to be Australia’s largest “green energy” company, but that’s because they’re a large utility with a green focus, not because they’re only selling windpower and rainbows — renewable energy is certainly a focus and, like in the US, comes with government mandates and subsidies, but AGL Energy is not a “pure play” on green energy, their biggest business seems still to be distribution of natural gas.

Latest price for the US ADR is just over $13, and the trailing yield (they pay twice a year, which is typical) is about 4%. Pretty similar to large diversified US utilities, actually, I suspect this is one of the picks they slot into the “conservative” folder.

“INCOME WONDER #3— This company controls $8 billion of natural gas transportation, storage and distribution assets, with 23,000 km of pipelines spanning every state and territory in the country. They also own large interests in three up-and-coming energy giants. With 95% of their revenues derived from contracted assets, the 9% dividend is safe and stable.”

Thinkolator sez: This is APA Group, whose stapled (debt + equity) shares you can buy at APA in Australia or APAJF on the pink sheets (again, light volume on the pinks for this one — there isn’t necessarily anything terrible about light volume if you use limit orders and buy to hold for long-term dividend income, but you can’t generally reinvest dividends easily for pink sheets stocks and they’re also tough to sell in a hurry when volume is light, so be careful).

I don’t think I’ve covered APA Group before, but they do operate a huge gas pipeline and distribution network, and the assets they operate are valued (they say) at $8 billion, though they aren’t sole owners of it all. The shares closed at A$3.98 in Australia overnight, and the trailing distribution payment (I have no idea what tax treatment would be, this is part equity income/part interest payment on debt from what I can tell) was 34 cents (Australian dollars, naturally) in the last fiscal year, so that is a yield of about 8.5%. Not bad.

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They do also own some other assets, most of them look like they’re investments in related funds and pipeline projects. Looks quite similar to the company Peter Schiff touted a few times over the years and that Roger Conrad also pitched for his Big Yield Hunting newsletter a while back, Duet Group, which I think is a bit riskier (higher leverage, maybe?) and carries a higher yield.

So that’s three for you — sorry to be a tease, but how about five more tomorrow? If you’ve got any thoughts about investing in Australia, or want to pitch your favorite ideas before I get to unveil the rest of Conrad and Dittman’s picks, feel free to shout out with a comment below. And, of course, if you’re one of those “Charter” members of the service, click here to review it for us so we can get a sense of whether or not folks like Australian Edge.



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terry Bonner
terry Bonner
October 4, 2011 7:40 pm

Hey, I like the highlighted text. Now it is easy to see what are their claims and what are your comments.

October 4, 2011 7:59 pm

The primary concern that I have about Australia is the tax withholding for foreign investors. I have avoided buying pink sheets listings in the past because the Australian tax rate made investing in the Australian company(s) of interest yield a lower return than for US or Canadian companies. The tax rate might not make a difference for investors with ‘real’ money but at my personal tax rates and investable cash levels, the Australian tax withheld is/was punitive. This might not be true of ADR’s. I need to do some refreshers on all this.

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