Looking beyond dividends may increase opportunities.

The demand for yield has stretched valuations of traditional high-yielding stocks. Malcolm Whitten, Portfolio Manager at Tyndall AM explains that looking at the total return to shareholders, not just the dividend, may help investors find better opportunities.

Record low bond yields and low interest rates on term deposits have been enticing investors into higher-yielding stocks.

Banks and telecommunications stocks have been major beneficiaries of this trend. In the process these sectors have become expensive with 12-month forward PEs now running at around the top-end of their ten-year average at 15 times. Where can investors find that much-needed income stream but not risk overpaying for it?

Non-traditional sectors also offer attractive yields

In an investment portfolio that is actively managed, diversification and risk management are paramount. In a share income portfolio, banking, telecommunications services and utilities companies will tend to have a large representation. Other sectors can also offer sustainable income opportunities.

Tyndall’s intrinsic value investment process identified a number of quality companies, beyond the traditional high-income sectors, which made a strong contribution to the Tyndall Australian Share Income Fund’s (‘Fund’) performance over the past year, both in respect of dividend yield and total return. These included holdings in such diverse names as Dulux Group, Woolworths, Woodside Petroleum, Henderson Group, Wotif.com and IAG.

Since its inception in November 2008, the Fund has delivered a total return of 10.7% p.a. (after fees), comprising a growth return of 5.8% p.a. and a distribution return of 4.9% p.a. (as at 31 August 2013). When including franking credits, the Fund’s holdings produced a grossed up dividend yield of 8.6% p.a. over the same period. Past performance is not an indicator of future performance.

Looking beyond the headline number

In achieving these returns, Tyndall doesn’t just focus on the headline dividend yield. It focuses on sustainable yields, earnings growth and potential capital appreciation using an intrinsic value process. The strength of a company’s balance sheet, particularly gearing levels, as well as franking levels and pay-out ratios are important indicators of the sustainability of a company’s earnings and dividend stream.

Understanding a company’s future operating cashflow and capital expenditure plans are a good way to ascertain the company’s capacity to return money to shareholders.

The most notable feature over the past five years has been an increase in returns to shareholders at the expense of future investment. This has been achieved through increasing dividend payouts as a proportion of earnings, as well as greater use of share buy-backs.

The challenge for portfolio managers is to find companies with future growth in operating cashflow, healthy balance sheets and the confidence to increase returns to shareholders.

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Disclaimer: This article was prepared and issued by Tyndall Investment Management Limited ABN 99 003 376 252 AFSL No: 237563 (“TIML”). The information contained in this document is of a general nature only and does not constitute personal advice. It is for the use of researchers, licensed financial advisers and their authorised representatives. It does not take into account the objectives, financial situation or needs of any individual. The Tyndall Australian Share Income Fund ARSN 133 980 819 is issued by Tyndall Asset Management Limited ABN 34 002 542 038 AFSL No: 229664 (“TAML”). Investors should consult a financial adviser and the information contained in the current Product Disclosure Statement available at www.tyndall.com.au before deciding to invest. TIML and TAML are part of the Nikko AM Group.

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Companies and shareholders need to understand each other’s objectives.

Addressing more than just near-term share prices is key to shareholder and company success according to the latest AMP Capital Corporate Governance Report.

The AMP Capital Corporate Governance 2013 mid year report states that responsibility falls both to companies to understand and also to shareholders to clarify their objectives before a mutually beneficial relationship can be established.

AMP Capital Corporate Governance Manager Karin Halliday says companies are under increasing pressure to deliver a complicated set of outcomes for their diverse shareholders.

“Companies and shareholders are not all the same, each have different objectives and different challenges. We’d all benefit from understanding each other’s position but to do that shareholders need to be clear about what they want and have a way to communicate that effectively,” Ms Halliday said.

“Shareholders must also give companies room to successfully balance short and long-term drivers of value.”

Ms Halliday warns that companies and shareholders who focus on the short-term may be sacrificing tomorrow’s growth for today’s gain. The report provides an update following the recent tragedies in the Bangladeshi garment industry where sustainable practices were overlooked for short-term reward.

The Corporate Governance Report is released twice a year and provides a summary of AMP Capital’s corporate governance activity. AMP Capital takes seriously its responsibilities as an investment manager, as an agent of shareholders in companies and as a steward of its clients’ assets.

The latest report includes an analysis of the first half of the 2013 proxy season, detailing the votes cast and the governance issues considered. Additionally it provides a snapshot of voting statistics for internally-managed global portfolios.

AMP Capital submitted votes on over 338 resolutions at 72 company meetings in the first half of 2013 in Australia. Of these resolutions 83 per cent were supported. AMP Capital either voted against, or specifically abstained from voting on around 16 per cent of resolutions including resolutions relating to remuneration reports and incentive plans.

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Dividends are on the rise with the average dividend across the equity market growing 6.4% over the last six months, according to recent data from Russell Investments, provider of the Russell Australia High Dividend Index (the index).

“This reporting season has shown companies are increasingly confident about their prospects and as a result are more inclined to return capital to shareholders, either via dividends or buy-backs,” said Scott Bennett, portfolio manager for Russell Investments.

The index, which forms the basis for Russell’s High Dividend Australian Shares ETF (RDV), comprises Australian blue-chip companies with a bias towards those that have a high expected dividend yield but also meet other characteristics including: a history of paying dividends; dividend growth and consistent earnings.

Russell has recently completed the semi-annual reconstitution of the index, which involves incorporating the latest reporting season data to rebalance the weightings of stocks within the index according to certain dividend and earnings factors.

Commenting on the outlook for dividends, Mr Bennett said: “The dash to dividends is likely to become an even stronger theme in the year ahead with more companies looking to return cash to shareholders, along the lines of BHP’s buy-back.”

According to Mr Bennett, dividend yields are now looking as attractive as term deposits. The average term deposit is now yielding 6.1% while the average dividend yield across the ASX is now 5.8% grossed up for franking credits, with the index yielding 7.3% grossed up for franking credits.

“The main advantage over term deposits is with Australian equities you get long term growth in dividends and also your capital,” Mr Bennett said. “The recent correction in equity markets has presented a good buying opportunity for longer term investors.”

Strong yielders

The index has seen a number of movements this half including Harvey Norman which has entered the index at a weight of 1.8%. This reflects its attractive 6.7% gross yield and solid dividend growth, although Mr Bennett says Russell index methodology has also taken into account the cyclical nature of its business.

Defensive companies such as Fosters and Coca Cola Amatil have also increased their weighting, as did the banking sector after three of the top four banks posted double digit dividend growth in the past 12 months. “The proprietary Russell index methodology does favour those companies with more defensive earnings characteristics,” Mr Bennett said.

“This half has really shown investors that dividends are on a steady growth path and as a result dividends are going to be a really competitive source of income compared to other investments,” Mr Bennett concluded.

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Under the proposal, AMP will acquire 100 per cent of AXA APH, merging AXA APH’s Australian and New Zealand businesses with those of AMP, and divesting AXA APH’s Asian businesses to AXA SA.

The Share Scheme is expected to become effective on 8 March 2011 when AXA APH lodges a copy of the Court order approving the Share Scheme with ASIC.

The Share Scheme’s implementation date will be 30 March 2011 and normal trading of new AMP shares issued to AXA APH shareholders under the Share Scheme will begin under the ASX code “AMP” on 31 March 2011.

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AMP Chief Executive Officer Mr Craig Dunn said the vote was a significant milestone for the proposed merger.

“A merged AMP AXA will bring together two of Australia’s longest standing businesses. It will deliver a new force in financial services by creating a company with the size and resources to be a strong competitor to the big four banks in wealth management.

“Today’s vote brings the competitive benefits of this merger one step closer for consumers and businesses in Australia and New Zealand,” Mr Dunn said.

Under the Scheme of Arrangement to give effect to the proposal, AXA APH shareholders will receive the equivalent of A$6.43 per share.

The second court hearing to approve the Scheme will take place on Monday 7 March 2011. If approved, the Scheme will become effective on 8 March 2011. , consisting of cash and AMP shares. AXA APH shareholders will also receive AXA APH’s 2010 final dividend of 9.25 cents per share.

Normal trading of new AMP shares issued to AXA APH shareholders under the Scheme would then commence under the ASX code “AMP” on 31 March 2011.

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In addition to receiving shareholder and court approvals, the merger also remains subject to various regulatory approvals, including from the Federal Treasurer.

It is expected that the transaction will be put to the AXA APH minority shareholders for their approval by the end of the first quarter of 2011.

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Underlying profit is AMP’s preferred measure of profitability as it removes some of the
impact of investment market volatility and is the basis on which the Board determines the
dividend payment.

Net profit attributable to shareholders was A$425 million, up 17.4 per cent from
A$362 million in June 2009.

The interim dividend has been set at 15 cents per share, 60 per cent franked with the
unfranked amount being declared conduit foreign income. The interim dividend represents a
payout ratio of 81 per cent of underlying profit.

At 30 June 2010, AMP’s regulatory capital resources above minimum regulatory
requirements (MRR) were A$1.4 billion, up from A$1.2 billion at the end of December 2009.
AMP’s performance against key measures was as follows:

Underlying return on equity: 27.4 per cent, compared to 31.6 per cent for 1H09, reflecting
a prudent approach to capital management.

Underlying profit: A$383 million, up 4 per cent.

Growth measures: AMP Financial Services net cashflows A$584 million, down from
A$865 million; AMP Capital Investors external net cashflows A$1.9 billion, up from
A$0.2 billion; value of new risk insurance business A$45 million, down A$2 million.

Investment performance: 64 per cent of funds under management met or exceeded
benchmarks in the 12 months to 30 June 2010.

AMP Chief Executive Officer Craig Dunn said the company’s solid result was bolstered by
robust core business performance, with disciplined cost control, profit margins holding up
well and building sales momentum from investment in growth initiatives.

“Our growth initiatives gained real traction in the half as we’ve moved decisively and
proactively to position ourselves well for the future.

“We have successfully introduced a fee-for-service model across our Australian planner
network well ahead of the industry, launched a market-leading product range that appeals to
a broader customer base, built on our expanded presence in Asia and introduced more
distribution channels, including a bigger presence in the IFA market.

“Customers of AMP Financial Services today can expect simpler, more transparent products,
designed and priced to suit most pockets, and offered by more professional financial
planners increasingly operating in a no-commission, fee-for-service environment,” Mr Dunn
said.

While continuing to invest in the business, the cost to income ratio fell slightly, by
0.2 percentage points, to 42.2 per cent while total costs increased by three per cent to
A$426 million, compared with the first half 2009.

Business unit performance

AMP Financial Services (AFS)

AMP Financial Services’ operating earnings increased five per cent to A$323 million
compared with first half 2009, demonstrating the resilience of this business and reflecting
higher fees because of higher AUM levels.

Controllable costs fell slightly in the half to A$261 million, compared with A$264 million in the
first half of 2009 resulting in a cost to income ratio of 33.6 per cent, an improvement from
35.0 per cent in the first half of 2009.

Significant achievements included reshaping the business through the removal of in-built
commissions from all new superannuation, pension and investment products, and the launch
of the market-leading AMP Flexible Super product range. Since its May launch, AMP

Flexible Super has delivered net cashflow of over A$260 million and now has total AUM of
over A$330 million.

These changes position AMP well, putting the company ahead of the regulatory curve and
other industry reforms. Importantly, these changes also broaden AMP’s appeal to new
market segments.

AMP planners are an increasingly productive and diverse advisory force with Australian AMP
planners more productive than the industry median and 11 years younger than the average
planner across the industry.

In Australia for the 12 months ending 31 March 20102, AMP Financial Planning was ranked
as the largest financial planning group by planner numbers and grew its planner numbers
faster than the industry over the same period.

Pleasingly, total AFS planner numbers remained relatively flat, falling by only 23 in the half to
June 2010 to 2,105, despite the very significant change program being driven through the
business.

In Contemporary Wealth Management, which includes the financial planning,
superannuation, pensions and banking businesses, operating earnings increased
16 per cent to A$150 million, as a result of higher investment related revenue linked to
higher AUM, and lower controllable costs.

Controllable costs fell by 3.6 per cent on the first half of 2009, with the cost to income ratio
falling to 41.7 per cent, which is the lowest cost ratio ever achieved by this business.
Return on equity remained high at 40.8 per cent, down from 42.0 per cent for the period to
June 2009, reflecting an increased capital base.

The average AUM for the half was A$51.5 billion compared with A$42.6 billion for the same
period in 2009. This reflects higher investment markets over the first half of 2009 along with
ongoing positive net cashflows. While discretionary cashflows remain subdued, there has
been good momentum in the new AMP Flexible Super product and Personalised Portfolio
service.

AMP Bank contributed operating earnings of A$21 million, up from A$18 million for the first
half of 2009. While deposits were strong, the operating environment was characterised by a
slow-down in home loan demand across the industry, as well as ongoing funding constraints
for second tier banks.

In Contemporary Wealth Protection operating earnings were down 12 per cent to
A$73 million from A$83 million for the first half of 2009. This reflects the ongoing incidence of
higher than usual income protection claims, consistent with a difficult economic environment,
along with an increase in life insurance claims.

Good sales momentum saw profit margins increase by nine per cent on the first half of 2009
to A$76 million and individual risk API increase by nine per cent to A$616 million over the
same period. This reflected increased consumer demand for risk protection products in an
uncertain economic environment, along with increased distribution through IFAs.

The cost to income ratio rose to 26.8 per cent, up from 21.9 per cent for the same period in
2009, reflecting the effect of less positive claims experience on operating earnings and an
increased investment in business and product development to grow sales, particularly
through IFAs. Sales in the IFA and alliances channel grew by 17 per cent on the first half
2009.

The return on equity for this business unit was 24.7 per cent, down from 31.7 per cent for the
six months to June 2009 reflecting lower operating earnings and an increase in capital
allocated to support new business growth.

The Mature business contributed operating earnings of A$68 million, down six per cent on
the first half of 2009.

The Mature business is one of Australia’s largest closed life insurance businesses with AUM
of A$17.6 billion compared with A$18.1 billion at the end of December 2009. The key
priorities for this business unit are to maintain capital efficiency, improve persistency
(customer retention) and improve cost efficiency.

Persistency remained broadly flat at 89.4 per cent for the six months to end of June 2010.
Costs also stayed broadly flat at A$28 million resulting in a cost to income ratio of
20.2 per cent.

The return on equity for the Mature business was strong at 35.5 per cent, although down
from 45.5 per cent for the six months to the end of June 2009, as a result of an increase in
capital allocated to support capital guaranteed products given ongoing volatility in investment
markets.

The New Zealand business contributed operating earnings of A$32 million, an increase of
39 per cent on A$23 million for the first six months of 2009.

This increase reflected lower controllable costs and a A$10 million turnaround in experience
profits, owing to better claims experience, improved lapse experience and recent changes to
the New Zealand corporate tax rate.

Profit margins were down by A$1 million to A$28 million, driven by increases in lapse rate
assumptions on risk products recognised as at December 2009 and lower margins on new
business owing to life tax changes.

Tight cost control in the New Zealand business saw controllable costs decrease to
A$24 million from A$27 million for the six months to June 2009.

The return on equity of this business unit was 25.1 per cent up from 20.5 per cent for the
six months to June 2009, reflecting higher operating earnings.

AMP Capital Investors

AMP Capital Investors contributed operating earnings of A$44 million, up slightly from
A$43 million for the six months to June 2009, representing a solid performance through
volatile market conditions.

Total AUM remained flat at A$95 billion reflecting strong external net cashflows that were
offset by negative investment returns from falling investment markets.

The Asian region contributed A$1.1 billion in external net cashflows, building on the success
of AMP Capital’s Japanese business.

Investment performance improved with 64 per cent of AUM either meeting or exceeding
investment benchmarks over the 12 months to 30 June 2010.

The return on equity for AMP Capital Investors was 50.4 per cent, down from 56.6 per cent
for the six months to June 2009, reflecting a higher capital base as internal debt used to part
fund seed pool investments has been replaced with equity.

Costs increased by 10.6 per cent to A$136 million compared with A$123 million for the
six months to June 2009. The cost to income ratio was 67.7 per cent, up from 65.3 per cent
for the same period in 2009.

The increase in costs was driven by investment in Asian expansion and operating platforms
that will improve business scalability, particularly as the business increases its off-shore
presence. It will also enable better risk management and improved investment performance.

Capital management

The dividend policy remains to target a dividend payout ratio of between 75 to 85 per cent of
underlying profits. The interim dividend of 15 cents will be 60 per cent franked.

The future franking rate is dependent on improved markets lifting taxable profit, which
generates franking capacity. As markets stabilise and the outlook improves, taxable profits
are likely to increase, enhancing AMP’s franking capability.

Shareholders will be invited to participate in the dividend reinvestment plan which will be
offered at a discount of 1.5 per cent.

AMP continues to take a dynamic and prudent approach to capital management, preferring
to hold more capital than less, given the continued market volatility, and until changes to
APRA’s regulatory capital framework become clearer.

At 30 June 2010, AMP’s regulatory capital resources were A$2.4 billion and were
A$1.4 billion above minimum regulatory requirements (MRR), up from A$1.2 billion above
MRR at the end of December 2009.

Group gearing remains low, at 15 per cent on an S&P basis, while underlying interest cover
is high at 12.3 times.

Outlook

Mr Dunn said that while AMP retains a reasonably positive economic outlook for Australia
and the Asian region, it continues to be cautious about the global economic outlook,
expecting ongoing market volatility and subdued investor confidence.

AMP remains one of the most efficient providers of wealth management in Australia with a
business model that allows significant flexibility to respond to changing consumer demands
and the changing regulatory landscape.

“We’ll continue to act proactively and decisively to reposition the company for growth,
capturing the opportunities that will flow from the changing wealth management market and
our targeted expansion into Asia.

“We’ll use our business strength and flexibility to continue investing in targeted growth
initiatives, while delivering robust financial returns,” Mr Dunn said.

Below are AMP Limited’s Q2 cashflows and AUM for the quarter ending 30 June
2010.

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The mid year Report outlines how the Global Financial Crisis brought to light numerous structural problems, resulting in various moves to strengthen remuneration practices. However, while some improvement is needed, it’s important to carefully assess any unintended consequences that may come from new hard and soft rules.

In fact AMP Capital Investors Director of Sustainable Funds, Michael Anderson identifies that with each company having its own unique characteristics it is difficult to find a remuneration structure that will be right for everyone.

“There are many remuneration methodologies that can be used and while each approach has its merits, there is no perfect tool that satisfies both shareholders and employees, and no one-size-fits all solution. It’s this balancing act that regulators and boards must consider and it’s no easy feat.”

Despite the complexity, AMP Capital Investors has a preference for performance hurdles that include a measure of long-term relative Total Shareholder Return (TSR). This model compares the performance of different companies’ stocks and shares over time by combining share price appreciation and dividends paid to show the total return to the shareholder.

“AMP Capital strives to invest in companies that will provide our clients with the best long-term returns, and in our opinion relative TSR typically provides the greatest alignment with that objective. As a performance hurdle, relative TSR is not only aligned with shareholder interests, but also has the added benefits of being easily defined, measured and communicated. While every approach has its problems relative TSR is one of the most robust in a wide range of situations.” Mr Anderson said.

The latest Corporate Governance report also examines gender diversity on the boards of Australian companies. The report identifies how discussions around board diversity are now becoming more focused on how to accelerate the progress of women into senior positions.

“As this focus on gender diversity continues, the selection of company boards will need to change. Having more women on boards has been linked with better performance and there have been many reasons cited as to why. Increasingly, shareholders will consider gender imbalance when engaging with the companies they choose to invest in,” Mr Anderson said.

The Corporate Governance Report, which is released twice a year, provides a summary of AMP Capital’s corporate governance activity. AMP Capital takes seriously its responsibilities as an investment manager, as an agent of shareholders in companies and as a steward of its clients’ assets. The latest Report included an analysis of the first half of the 2010 proxy season, detailing the votes cast and the governance issues considered.

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