Investing in a foreign market can be intimidating. Where do you even start? What do you need to know? In today's episode of MarketFoolery, special guests Andrew Leggett and Ed Vesely join us from Motley Fool Australia to guide listeners through the wilds of the Australian Stock Exchange.
Tune in to find out what a non-Aussie investor looking for some international diversity should know about the ASX. Learn about the role of dividends in Australia's market, and why dividends and growth are far from incompatible; how to make screens work for you; two ASX stock picks from Andrew and Ed that you might want to add to your radar; and much more.
A full transcript follows the video.
This video was recorded on Nov. 6, 2018.
Chris Hill: It's Wednesday, November 7th. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio today, two special guests. As I mentioned on yesterday's show, it's Foolapalooza, so we're not talking about the election results, because we're actually taping this on Tuesday. With me in studio, from Motley Fool Australia, Andrew Leggett and Ed Vesely. Gentlemen!
Andrew Leggett: It's good to be here.
Hill: Thank you for making the trip.
Ed Vesely: Thanks for having us on.
Leggett: I'm glad to be here.
Hill: On a scale of one to ten, Andrew, how would you measure your sleep deprivation right now?
Leggett: I think I'm about an eight. It could get worse. I got here Sunday night, and have barely made it past 2:30 or 3:30 before waking up. It can be worse, and it probably will. I'll get over it just in time for me to go home.
Vesely: I think I do this a bit better. We were off on Friday, so we've had the weekend to get over the flight.
Hill: So, your sleep deprivation --
Vesely: It's much lower. I feel pretty good.
Hill: -- is a five or six. I want to get to some stocks in a minute. But let me just start with dividends. This is something, Ed, that we were talking about earlier. One of the services in Motley Fool Australia that you work on is our dividend service. I'm curious how you as an investor view dividend cuts. That's something that's come up on our show recently, certainly in the form of major bellwether companies like General Electric. When you see a company cutting their dividend, what goes through your mind as an investor?
Vesely: Well, you've got to look at the payout ratio. If it's high to begin with, it's OK to be cut. It has to be a sustainable dividend. Telstra, TLS on the ASX, is a good example, the largest main telco in Australia. It's had a bit of a rough trot. Competition's increasing. There's this National Broadband Network in Australia, which is affecting margins. I won't go into the thesis too much, but effectively, it's cut its dividend from around $0.31. It was over $0.30, I haven't got all the figures here. Now, it's down to $0.22. The stock price has been smashed. It hasn't been a great return for Motley Fool members. There's also the prospects for further dividend cuts. There's a lot of bad news. But I think that's actually built into the price. When I started on the service, I had to look at the Telstra announcements that came out, and I thought, I'll be brave. It was about $2.70. It's about $3.10. I thought, I'll maintain a buy on that, only because I think all the negative news is out there. If it's going to get any worse, it could, but the price is so low it's possibly toward the bottom end of its range. We'll see what happens. There's one less competitor in the Australian market now. There was a merger between Vodafone and TPG. That'll be a strong competitor, but it's one less competitor, so hopefully there's going to be some more rational pricing. The whole industry is suffering, it's pretty hard. Telstra does have its advantages, though. It's the biggest telco in the country. It has to scale. It has financial firepower behind it. It's definitely not going out of business. At this stage, it's still a buy on the scorecard.
Hill: Andrew, as a growth investor, someone who likes those smaller, Rule Breaker growth stocks, does it immediately turn you off when you see a company paying a dividend? Let me put it this way -- most of the growth investors that I've come to know, it's not that they hate dividends, it's that it's probably the last thing they'd like to see the company do with the money. They'd rather see them deploy in other ways.
Leggett: I'm not a hater of dividends. If you are, the ASX is actually a really difficult place to invest on. The market is dominated by what we call superannuation funds, probably similar to what you guys have in 401(k)s and things like that, or big pension funds might be another good comparison. They're largely investing for people that, when they retire, get an income stream. So, they're very focused on dividends. If you actually want to be a popular stock in Australia, paying a dividend is a very good way to get a lot of the big money in. There's very few that will decide, "We're not going to pay any." I would argue some pay dividends too quickly. That's probably the growth investor coming out. I would prefer to see them reinvest more. But it's just the nature of the market. You tend to get the investors that you want. If you want the big superannuation funds -- I don't know the size. Ed, you probably know the size of the superannuation industry.
Vesely: It's close to $3 trillion, some $2.3 trillion.
Leggett: In Australian terms, that's an extremely large amount. Then paying a dividend is a very good way to attract that.
Hill: We were talking this morning. We have dozens of listeners. I don't know if you know that.
Vesely: That's good!
Hill: And most of the dozens or here in the United States. But we always get email from people who are looking to diversify outside of the United States. Australia, English-speaking, stable economy, a lot of the large macro things that we like to see as an investor.
Vesely: Allegedly stable.
Hill: [laughs] Yes. You were saying you're turning over your prime minister with great frequency lately?
Vesely: Oh, there have been a few. I was just thinking about the statistics on this. We've had three prime ministers from 1983-2007. That was Bob Hawke, Paul Keating, and John Howard. From 2007, we've had five individuals. There was one prime minister, Kevin Rudd, who was there twice. We've had six different prime ministers in the last ... how many years is that now?
Leggett: About five in six years. And we've only had a couple elections. I'd argue we're just making the process more efficient.
Vesely: There's another election coming, there'll be another one. Possibly.
Hill: But in terms of the overall market, Andrew, you were saying that you have basically 2,000 stocks in the Australian stock market. And if you're a U.S. investor, who for the first time is thinking "I'm going to look at Australian stocks," it sounds like your advice right out of the gate is cut half of them.
Leggett: Yeah. Australia is obviously a very small country with a small population. The vast majority of our businesses are very focused on the domestic market. There's only a few that do international markets really well. Just out of curiosity, I ran a screen to see the numbers, and there were just over 2,000 stocks on the ASX. Then I put in what seems like a pretty generous thing of, "show me all the companies that have revenue above zero -- "
Vesely: That's a good start.
Hill: [laughs] Wait a minute, revenue above zero?
Leggett: Yep! And the number halved. There a lot of companies, for example, that are nothing more than holes in the ground in the Western Australian desert in the hope that one day, they dig something, or someone buys something to dig something, and get some type of mineral that's worth something out of there. And they have no real business, other than just owning a stake in the ground.
Vesely: Yeah, a resource that hasn't been dug up yet.
Leggett: It's a very simple tool, and a very good way to cut down on the amount of time, if you're interested in looking at the Australian market. Although there's 2,000, you can easily get rid of half. You could probably get rid of more than that.
Hill: Before I let you get out of here, and in the case of Andrew, probably go take a nap, Ed, I'll start with you. Having just established that at least half of the stocks on the Australian Stock Exchange are not worth a U.S. investor's time to look at, what is a stock that you would recommend people take a look at? It doesn't have to be like, "I think this is a screaming buy." Just something like, "Here's an idea to check out."
Vesely: The good thing is, despite the market being weighted the way that Andrew just described, there's actually a lot of good businesses on the ASX. You just have to find them. There's one company I've looked at for the dividend investor service, which is Collins Foods. Effectively 85% of its revenues are from KFC Restaurants. Everyone knows about KFC, previously known as Kentucky Fried Chicken. Look, at face value, it doesn't seem that great. Fast food is pretty competitive. What's the competitive advantage of something like KFC? Well, the company itself has expanded to 222 restaurants around the country. That's about 35%. They're not the only franchisee. They pay Yum! Brands the rights to expand their restaurants, using the KFC brand. But what they've done recently is expanded into Holland and Germany. Now, that's risky, in a way. They're exporting an American fast food brand to Western Europe. KFC, similar to McDonald's and Domino's Pizza, is it really going to take off? It sounds risky. But it's also an opportunity, because the recall of the brand and familiarity with the brand is just not that high there. They've established 35 restaurants there just in Western Europe, in Germany and Holland. That's a significant degree of scale. They bought these portfolios of restaurants from a number of vendors, and they're looking at integrating all that, effectively sharing the costs over a larger asset base and driving some scale. They'll probably look to expand that over time.
The other major part to Collins Foods in Australia is, it's a well-managed company. They've got the first right to sell Taco Bell in Australia. They've opened one restaurant in Brisbane. Now, it's only one. It's been operating for about 12 months, and it's done very well. I actually took Jason Moser's advice. He says on the ground research is the way to go, so I thought, "They're in Brisbane," that's where I'm from, "so I'll go down there and check it out."
Hill: How was it?
Vesely: It was very busy. I had to wait. I had to wait a long time to get in. The drive-in was six or seven cars constantly going in and people buying their food there. I've been there three times just to check it out. Look, the food is OK. A good value.
Hill: It's Taco Bell.
Vesely: It's Taco Bell. I've read some of the Google reviews, people are flying in from Melbourne, Sydney, and North Queensland just to try it out. But, they're expanding that to 50 restaurants between now and the next four years. We'll see, it's a bit of a wild card.
It's expensive. It's about 24X trailing earnings at the moment. They have to get the growth just to keep that price up. Unfortunately for buyers today, it has risen about 20% or so in the last few months. It has, fortunately, been a good pick in the last few months.
Hill: What's the ticker for Collins Foods?
Vesely: That's CKF on the ASX. I'm not saying it's necessarily the cheapest stock out there, but it does have some interesting prospects.
Hill: I just like that Taco Bell in Brisbane is driving airline traffic. [laughs] Basically, it's driving tourism. Andrew, what about you?
Leggett: A company that I actually own, that I think might be of interest particularly for an American audience, is a company called Afterpay Touch, or what we just call Afterpay. The ASX code is APT. The reason I think this is interesting is because they've just expanded into the U.S. So far, they've had a bit of momentum going. It might be a company that some of the dozens of listeners that we have might start seeing around, whether, mainly to start with, on online retail sites, but if it's anything like Australia, potentially in most retail stores.
What it actually allows you to do, the term is "buy now, pay later." Let's just say we walk into an Urban Outfitters, who's one of the people that first signed up to use Afterpay in the States, I buy a pair of jeans, I go up to the counter and/or their website, and I say, "I want to Afterpay this." I get to take those jeans home, but I pay for it over four equal installments over eight weeks after I purchase that. So, it allows customers to smooth their purchases over a large amount of time. In Australia, they've found it also increases retail traffic. At the end of August, it had about 150,000 U.S. subscribers. I've heard rumors that they may be on track to 500,000 by December. I've looked at Google Trends traffic, that's going up. Everything seems to show that momentum is on the up them.
It's a really interesting play. The share has been a very rocky one. A year and a half ago, they were around $2. Back in September, they hit a high of $20. That's a pretty substantial increase in the short-term. I think everyone who owned during that time, including myself, has been happy with that performance. It's fallen almost half, though, in the last couple of months, mainly on fees of Australian regulation.
But truth be told, I wouldn't even classify Afterpay as much of an Australian stock anymore. Its success is going to be driven by how successful it is in America. The more successful it is in America, the less important the Australian business becomes due to the size of the retail markets. There's potentially a large range of valuation, but it could either be very cheap at the moment, or very expensive. It'll all fall on how it does in the States. Also expanding into the U.K., but that's a much earlier process.
Hill: If you want to read more from Andrew Leggett and Ed Vesely, you can go to The Motley Fool's site in Australia, which is fool.com.au.
Vesely: You've got it. Don't forget the .au.
Hill: Fool.com.au. I don't want to get in trouble. [laughs] Long-term listeners know this -- historically, I struggle with the URL in Fool Australia. Thanks for being here. I know you guys are busy, and also battling sleep deprivation, all kidding aside. I appreciate you coming in.
Leggett: It's not a problem.
Vesely: It's been a pleasure.
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Steve Broido. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.
