The likelihood of an interest rate cut has increased today with a lower than expected inflation figure.
This has seen good buying support especially for the higher yielding stocks. The consequences from our perspective of a further interest rate move are as follows:
- It will place further pressure on the A$. A pullback in the A$ would provide relief for a range of companies including those that operate offshore and those that compete with importers.
- It will provide stimulus for the housing market given improved affordability and be helpful for other domestic companies.
- It may well encourage further interest in higher yielding stocks however we caution that these stocks are beginning to look expensive and do not seem to offer the best risk adjusted return in the market.
In other news during the week Woodside announced they will pay a special dividend and lift their payout ratio. This is likely to lift their dividend yield to 6.5%. The market liked this move and lifted the stock 10%.
While we do not see a simple lifting of a payout ratio as a creation of value, we like the fact that it signals management will be disciplined with their capital allocation and will need to justify to shareholders future decisions.
We see this step as a good road map for the new CEO’s at BHP and RIO who will be looking to make a mark. They are not in as good a position as Woodside to make this move as yet. However cost cutting and selling assets will place them in a position to do so in the coming year or so. The question is when will the market begin to buy on anticipation? This is a difficult question to answer however there is value there at present.