Re: Telstra Share dilemma....
Hi Guys,
we have 20,800 TLS shares which we must sell before the end of August as we're going to buy a house. Our question is when to sell them?
I think that the cut off date (or whatever the technical term is) for receiving the dividend payment is around the 19th of August. Is the stock likely to increase in value towards the 19th or should we hang on to the shares to receive the dividend which would be about $3,000?
Any advice would be gratefully received so thanks in advance
Dave and Sal
Hi...I'm not giving advice, but here are some things to consider:
The strategy you are referring to is called the dividend run-up or the dividend drop. Stock prices do tend to run up (relative to the broader market) as they move into the ex-date. Beyond that, it's pretty much a wash. This was a detailed study into it conducted by the ASX a couple of years ago. It remains relevant.
http://www.asx.com.au/images/about/ASX_Ex_Dividend.pdf
Here are some key points. The abnormal return (return relative to the broader market) for stocks in the ASX 200 (at the time) with dividends and franking included appears as:
You can see the run-up is significant. After that, it rises less significantly and then peters out. This is an average, there is a wide variation around this outcome.
As this line is average, it might be helpful to point out that the effect is less prevalent for large cap stocks. Offsetting this is a tendency for this effect to be stronger for high yielding stocks and stocks that pay fully franked dividends. However, the most significant finding may be that this effect looks very weak for Telecommunications stocks in general. Overall, the conclusion I would draw from the data is to suggest that the dividend run up and follow through might be around half as significant from the chart.
Once again, a large variation around these findings will exist as a single outcome can do anything.
Other points to consider:
What is your tax rate? If it exceeds 30%, you are possibly better off selling before the dividend ex date as you prefer to receive returns in the form of capital gains (assuming you have held for more than 12 months).
Given that you are committed to buying a house and need to sell these assets to fund part of that purchase, you are essentially leveraging your position in TLS with after tax mortgage level of interest. Ask yourself if you actually want that.
Finally, let's say that TLS-AU can move +/- 5% between now and when you choose to sell it in late August. I'd be fairly sure that a loss of maybe $5k would be more painful to you than a gain of $5k. It would get more painful the wider the spread of outcomes. The return spread over this period could easily be +/-10%, just to give you an idea. Although the possibility of additional returns from the dividend run-up/drop effect does tilt the balance somewhat, ask yourself if you believe in the bird in hand view or not. Many people require a fair bit of incentive to take this choice and move in favour of risk, particularly if the impact is large and undiversifiable.
Overall, the street is fairly ambivalent about this stock. Few brokers believe it is a "BUY". Given the predominance of preference for BUY recommendations, this is a weak outcome. Earnings estimates in recent times have been ratcheting downwards. Target prices (which are normally above prevailing price) now approximates it.
All the best with your deliberations.