Feeling like a cork bobbing around in the Ocean?

We are well into the reporting season and one that has produced a mixed bag of results. If we were achieving these earnings levels 18 months ago we would all be ecstatic. But as we have been enjoying the good times even more good news can be so easily diluted. Some results have been outstanding and the market has rewarded accordingly. But disappoint, then it’s off to the doghouse.

So I am not surprised that much of the mail I currently receive has a confused theme to it if not a very frustrated tone. Understandable.

At this time many companies go ex dividend and apart from the emails I receive asking the question ‘is it worth buying XYZ as it has a great dividend?’, I also know from years long gone that many investors do seek to buy ‘cum’ dividend. Chasing dividend can be fraught with danger.

The argument I am about to put forward applies equally to tax timing issues as it does to dividend timing.

First principle is that your decision to buy must be based on sound logic. Your decision must have intrinsic value in its own right and one would assume your decisions are based on the primary aim of buying for capital growth. I often hear the argument of those advising retirees: ‘to buy a dividend stream’ but I can hardly accept that is sound advice if there is a prospect that the stock might fall in price! Even retirees should at worst be going into ‘capital secure’ stocks and be cognisant of where we are in the cycle.

If a stock is weak, when it goes ex-dividend the thousands of investors who have been hanging on for the dividend sell like crazy. Case in point is CBA – how I like to beat up the banks – which went ex dividend 104 cents August 16 and on that day the stock fell $1.33 and a further 62 cents over the next couple of days – losing almost $2 in three days! Once the weight of sellers declined pressure eased and the stock recovered – and in the case of CBA probably temporarily!

Contrast the CBA situation with WES which also went ex div on August 16 to the tune of 92 cents. The stock is now past its pre-dividend price as it is still sought after.

The last few weeks have been topsy turvy and yes one can be excused for feeling something like a cork floating around in the ocean. As long as you can still see the headland and you are heading in that direction then maybe you are in good shape.

It is times like these though when it is not so easy to interpret the signals – even the Fund Managers are confused. Take PMN (a share held in SharesBulletin Portfolio for two months for a profit of 13.7% - www.sharesbulletin.com.au ) on Wednesday it fell 5% to $3.85 and finished up over 3% at $4.21 on the same day. HHG marked up 3% also on Wednesday, on the back of a fair result was at the time of writing on the Thursday marked down 8%! Work that one out!

Enjoy the ride!

Tom Scollon
Editor