You are currently viewing our desktop site, do you want to visit our Mobile web app instead?
 Registered users can save articles to their personal articles list. Login here or sign up here

Would you rather get Absa’s interest rate, or its dividend?

You can currently get a higher yield from the share than you would in a notice account.

If you took R20 000 to Absa and asked them to put it in a 90-day notice account, you would get offered an interest rate of between 5.65% and 5.95%. If you took that same R20 000 and invested it in Absa shares, you could expect a starting dividend yield of around 7.15%.

“And because of the nature of equities, we would like to believe that Absa will also grow its dividend ahead of inflation,” says Andrew Vintcent, portfolio manager at ClucasGray Asset Management. “But you won’t get any growth out of cash in the bank.”

Absa may not be everyone’s favourite stock, but this is an eye-catching anomaly. A starting yield higher than the rate you can get from cash is a rare phenomenon.

‘Too good to ignore’

What is even more telling is that Absa is not an extreme outlier. Nedbank is offering a dividend yield of 5.5% and Standard Bank 5.65%, both of which are in line with notice deposit rates. Vintcent says that these kinds of numbers “feel too good to ignore”.

“Our banks generate a return on capital in the high teens,” he explains. “Even Absa, which has been out of favour, has a return on equity of around 17%. That means that they are generating new capital every year.”

In an environment where advances growth is strong, which would be a positive story, these banks would have to hold on to some of this capital to meet regulatory requirements. However, if credit growth is weak, as it has been in South Africa, they are not required to hold that much, and they could be in a position to reward shareholders through increasing dividends.

In other words, the margin of safety for investors is extremely attractive. If the economic environment improves, earnings are likely to improve, and share prices could follow. If it doesn’t, investors can still expect handsome dividends.

Broader market

These bank stocks tell a particularly interesting story, but they are not alone. Dividend yields are elevated across the market.

To illustrate this point, ClucasGray put together a theoretical portfolio of eight shares that have been listed for at least 20 years. These are not companies that the firm necessarily holds in its funds, but they are indicative of the overall market as they cover a range of domestic sectors. The eight counters are: Foschini, Truworths, Sanlam, Absa, Standard Bank, Massmart, Imperial and Aspen.

The blue line in the below graph shows the dividend yield for South African banks. The red line is the dividend yield on these eight stocks.

Source: Iress, ClucasGray Asset Management

Not only are these yields elevated, they have been rising rapidly. The risks to investors would therefore appear to be declining, rather than increasing. Vintcent uses industrial counters as an example.

Opportunities

“We have recently been buying Imperial, and post the unbundling of Motus, have been adding to our positions in both,” says Vintcent. “While earnings prospects may not be exciting for either, the valuation is extremely compelling. On our estimates, Motus was trading post unbundling on a price-to-earnings multiple of less than 8x, which for a dominant player in the South African vehicle and ancillary industries is inappropriate.”

It is true that vehicle sales in the country have been pretty flat for the last six years. The chart below shows the 12-month change in vehicle sales since 1991, and one can see how tepid the most recent period has been.

Source: Iress, ClucasGray Asset Management

However, Vintcent believes that this weak macro picture is already more than reflected in the prices investors are being asked to pay. In fact, he feels that too much negativity is now priced in.

“This economy hasn’t been tough for two quarters or two years,” he points out. “It has been an economic grind for seven years. The earnings bases of these domestic names have already absorbed a period of protracted economic weakness. The potential is that investors are being asked to pay low multiples for what could turn out to be trough earnings.”

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

AUTHOR PROFILE

COMMENTS   32

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

Interest rates are guarenteed and has no risk, share prices and dividends are not and carries risk. The way the markets are at the moment, shares are very risky.

And if your interest rate DOES NOT BEAT INFLATION?? That’s a GUARANTEED LOSS! So much for your argument

You are reading with eyepatches, take them off. There are no “AND IFS” in my comment!

Interest rates are not guaranteed – they are linked to prime. So not a 100% sound argument. Also note that Absa charges deposit and withdrawal fees – so depending on the duration of your investment, you need to factor in around %3.5 if comms. Since we are only talking R20k here for comparison purposes – the tax rate comparison is irrelevant (first R23k of interest being tax exempt) but if we were talking of say R500k – then you would likely be paying tax at your effective tax rate (probably closer to 35%) vs 20% dividend WHT.

Let’s leave the risk element out of the equation here – that is the whole point of shares – being higher risk. The point in the article is that you can get a higher yield in dividends vs a simple fixed income savings account. There is a fair amount of merit in this argument.

“In fact, he feels that too much negativity is now priced in.”
Oh really? It’s going to get even worse. The economy is headed for the scrap heap with the ANC permanently in charge… of looting municipalities, provinces, national government, banks, PIC, SOEs, property, ever higher and more and more taxes…

We’ll know the end has arrived when the ANC starts looting your pension fund by forcing you to “invest” in junk government bonds. Watch… it’s coming.

If you were around in the late 1970’s, you might remember the Defence bonds of PW Botha to fund a war he didn’t win. SWAPO got Namibia and ANC got RSA. But both pension funds and private taxpayers were forced to invest. And RSA ended up almost bankrupt towards the end of Afrikaner Nationalism!.
There are always 2 sides to every story.

For sure, I have a copy of SARS’ Individual Tax tables from 1980. The maximum marginal tax rate was a scary 55% (over R30,000 p.a….which was like a CEO salary back in the day 😉 Yes, fifty-five percent tax bracket!

Lost the war as result of NP Govt than ran out of funding to carry on costly war. The last straw was when Fidel Castro’s men made a ‘stand off’ north of SWA border, with est 20,000-50,000 men to potentially escalate war to a new costly level (USSR funded part). NP Govt could not afford it. At the time, many SAfrican families had little clue that a full scale war was waged around Cuito Cuanavale in 1987-89…was kept off the voting public’s mind…as the war became unpopular back home.
SA was full junk status at the time. Unable to secure loans / effect of sanctions, etc.

Fast forward to 2018. Now we realise SA does not need sanctions or a war to (similarly) bring the Govt to it’s knees. You just hand it over to qualified people with good intentions & “let it go”. Will implode on it’s own, no matter how hard the ANC try to steer clear. (I don’t say so…RW Johnson does)

South African citizens of all races are going to fix this country and its economy, not any current political party or government. Politicians in SA have shown very clearly that most of them are not leaders or even potential leaders of SA. If you are waiting for the government or a political party to fix what is wrong, you will wait forever. Fix it yourself and stop whining. Get out there and work towards a positive solution. Invest in your country and help to make it a success. The markets will turn, and if you are not in the market, you are going to be another latecomer.

The same thing happened in Australia with the big 4 banks. You could borrow money cheaper than the dividend yield. A lot of folks though that they had a free money pump. Borrow and invest and the dividends cover the interest. Then the share price collapsed 20%. The dividend yield still covers the interest on the loan.

Didn’t read past the first bit if I’m being honest, you are comparing a fixed income product to dividends. The risk profile is very very different and they are priced accordingly. Current dividend yield is not a fixed indicator of future yield (dividend payout and share price will fluctuate) but the 90 day notice account is almost risk free.

Borderline unethical to tell ppl to go invest in the shares rather than the fixed income products

I disagree totally. You are right the dividend yield is not a guarantee, it could go up or down. The likely-hood of a bank like ABSA not increasing earnings is unlikely. You are looking one sided. if the bank goes under you could loose your investment. see VBS. with a fixed investment after a year you still have your capital its earned interest BUT the buying power has reduced so you are no better off. In shares or unit trusts you have the investment AND the dividends. shares move up and down yes but if you track a good share over a period of longer that a year you will see that they usually climb. ABSA was issued at R2.00 now at R150.00 plus and you are earning more than R2.00 per share per dividend. Some risk?????
As for ethics it is totally ethical. shares, Fixed Deposits, Unit Trusts are all investments. Pyramid schemes are unethical.

“likely-hood of a bank like ABSA not increasing earnings is unlikely.” The likely-hood of your 90 day notice account interest not being honored is close to 0. The likely-hood of ABSA’s earning decreasing is much higher than that.

“You are looking one sided. if the bank goes under you could loose your investment. see VBS”

Poor argument, firstly VBS is not comparable at all to ABSA, African Bank maybe but even that is a stretch, they are two completely different types of banks. Also, your argument holds not water, if the bank is liquidated then you have a much higher chance of retaining some of your investment as a depositor instead of a shareholder.

The ethical comment relates to the fact that this article implies that people should invest in the stock instead of the fixed income product because the returns are higher without highlighting anything else. Interesting thing to point out as these two yields are usually closer to each other but something listed under equities/investing should really go into more detail for the average retail investor who runs off to buy ABSA shares with their kids education money.

The article does not tell anyone to do anything. It simply points out the anomaly.

The headline here is “Would you rather get Absa’s interest rate, or its dividend?”

What you say that suggests to the average person?

Neither,

Invest 95% your money in government bonds yielding 9%+ and 5% in Long dated call options on ABSA shares.

If shares go up, you get handsomely paid.

Lowest potential return: around 4%
Highest potential return: around 15-20%

disclaimer: Some T&C’s may apply

Historically speaking shares are better than bank rates, that have not beaten the REAL: inflation rate in over 20 years. Why do people save @ 5% and pay a bond at 9%– car @ 12% –and credit cards @ 19%.
By the way you do not get interest on your bank account until you leave about R 28,000 in there EVERY MONTH. OR you fees will eat the pittance they call interest. Dr. Debt

How does one buy government bonds? How much are they?
Can one lose one’s money on a government bond/s

Will appreciate advice thanks.

@bobby23.

An easy read article I randomly picked up (out of date 2010, but same principles still apply):

https://www.fin24.com/Markets/Traders-Desk/Lowdown-on-retail-savings-bonds-20101022

One risk is that SA is currently in a mild, but steady, upward interest rate cycle. You don’t want to be locked in over say 5-yr or longer term, when a better rate may be offered sooner. Your money, while invested, is tied down, making it inflexible.

(Same issue with 5-yr fixed deposits…like ABSA’s one. The rate appears great now, but if rates keeps on increasing, it will start to lose it’s sparkle before the 5 yrs term is over)

RSA Retail Savings Bonds has no charges or commissions, but early withdrawal penalties do apply.

You do also have the option to “reset” the interest rate once during the duration of the RSA retail bond period, after 12 months have lapsed, that may mitigate a huge jump in the interest rate, but do agree that I would not fix for too long a period.

Some ETF’s also offer exposure to government bonds (e.g. Satrix ILBI)

In this example, I’d honestly rather take interest rates, reason being and correct me if I’m wrong –

A dividend yield of 7.15% per annum would still have to incur a 20% dividends tax which reduces your yield to roughly 5.7% . Additionally on sale of your shares you could incur CGT on capital gained at a maximum effective rate of 18% for individuals (albeit the first R 40k is tax free). Share price is not guaranteed to stay the same or increase and dividend yield is not guaranteed to stay the same or increase either.

If I’m able to receive a guaranteed interest rate of 5.9% with the first R 23 800 of interest received being tax free (for persons under the age of 65) I’d probably be better off considering all taxes.

If I’m looking to purchase shares and participate in dividend yields and capital growth I’d rather look at a Section 12J venture capital company. At least with them I’d receive a 100% tax deduction on my investment to get some loot back from SARS whilst investing in local SME’s with plenty of room for growth instead of large institutions who are privy to staggered growth and instability.

And the actual dividend yield is only 5.53% less 20% = 4.42%. Many of these Moneyweb articles are misleading because the numbers they quote are false. Do your own research and you will find this.

If the 7.15% is nett in your pocket – ie after tax (that interest would be taxable)
AND
if the Absa share price is unlikely to fall much,
THEN
yes, the div makes much more sense
BUT
if you have debt then both options are dumb as reducing debt is effectively a prime plus after tax yield

I could be dead wrong about this, but if we’re not in a bear market and ABSA and other banks (highly liquid stocks) are trading at such a massive discount, something is not right.

When it’s too good to be true in the stock market, it often is.

There must be something smart money is aware of (bad debts, overexposure to property or similar) that has pushed the stocks so low.

On that note – best to play this by the option market in my opinion – minimal losses, higher potential payout. Buy a few stocks if you’re young and idealistic 😉

A tough call if I can invest for 5 years with Nedbank Green Bonds and get 10.69% per annum, paid on maturity. The risk is quite low and my capital is intact. Are you saying investing in Absa shares is a better proposition over 5 years, for a pensioner?

In same position. Absa offering 13% for 5 years. Am in a quandry.

The 13% is only payable on investments of R100,001 or more, but, more importantly, if you take the lump sum interest at the end of 5 years you could end up paying a lot of it in taxation as you may far exceed the tax free threshold on interest, whereas if you take the alternative of 10.05% payable monthly your tax burden may be substantially less.

What I would like to know is where you get your information on the ABSA dividend being around 7.15%. Based on current data the historical dividend is 5.53% so your article is totally misleading. I have commented on your erroneous reporting before because you are misleading the public.

Oh yes ! And what about the 20 percent tax on dividends ? With a possibility of it rising to 25 percent come budget-day !

Load All 32 Comments
End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: