F
ewstocks,asa group,havemadeso
muchmoneyforsomanypeopleas
ourbankshaveoverthepastthree
decades.Manya retireeportfolio(andnot
a fewinheritances)havebeenswelledby
thesimpleactofputtingmoneyintobank
floatsandreinvestingthedividends.Inthe
past 25 years,theaveragesharepricegain
forourbigbanksis 420%,meaning
$10,000hasbecome$52,000.
Butad d backreinvesteddividendsand
your$10,000investmentis nowworth
morethan$200,000.Talkaboutthepower
ofbothcompoundingandreinvestingyour
dividends.It’snowonderthatmanyinves-
torshaveportfoliosinwhichbanksare
50%,60%ormoreofthetotal.It’sa dan-
gerouslevelofconcentration,butit’sa nice
problemtohavewhenit’scausedbydecades
ofdividendsandsharepriceincreases.
Thepastfewyearshaven’tbeenso
kind,ofcourse.Evenafterdividends,bank
shareholdersareintheredoverthepast
12 monthsorso,whilethey’vereliedon
dividendsalonefora positivereturnsince
2016.Fallinghousepriceshaven’tbeenkindBEST IN BREED Scott Phillips
Investorswoulddowelltoreassesstheirloveaffairwiththebanks
B
ScottPhillipsis TheMotleyFool’schief
investment officer. You can reach him
on Twitter @TMFScottP and via email
[email protected]. This article
contains general investment advice only
(u n der AFSL 400691).Strike the right balance
and the potential changes to franking cred-
it refunds don’t help either.
Still, as the largest single sector of the
ASX, financial companies deserve a look.
And it’s not just the big four banks, either.
There are the smaller banks, insurance
companies, mortgage brokers, collection
agencies, payday lenders and non-tradition-
al lenders, too.
The breadth of different business models,
and the differing goals among investors,
make this a challenging sector to review.
How do you compare Cash Converters,
QBE and Commonwealth Bank? Especially
when some investors are untroubled by
share prices and happy to just receive a
steady flow of dividends, while others
are looking for capital growth.
For our purposes, we’ll look for total
shareholder return (capital growth plus
dividends) and emphasise quality. The for-
mer means we need to find a business with
a high probability of decent profit growth.
And the latter stops us buying the share-
market equivalent of lottery tickets – a veryFoolish takeaway
Putting our criteria together, one name
bubbles to the top. Accordingly, my pick
of the ASX financial services sector is
Macquarie Group (ASX: MQG). It’s not as
simple a business as one of our domestic
banks, to be sure, but it has both a reputa-
tion for making money and experience of
innovating across both geographies and
business lines as circumstances require.
Its executives and employees have
plenty of skin in the game, and it deserves
its moniker “the millionaires’ factory”. It
simply isn’t tied to a single market or asset
class the way our other large banks are
and offers impressive diversification.
To b e f air, it’s also higher risk than those
banks, but the returns on offer make it a
risk worth taking.low probability of a big win and a much
higher likelihood of losing money.
Plus, given the risk that financial institu-
tions take on and the ever-present possibil-
ity of a good old-fashioned bank run (not
to mention the fact that even one of the big
four, Westpac, went close to going broke
back in the early 1990s), it behoves us to
make quality a top-drawer criterion.
For customers and investors alike, rep-
utation matters in financial services. An
insurer needs a reputation of “reserving”- putting money away for claims – ade-
quately. And a bank must lend prudently,
for similar reasons. Investors should also
look for companies with either inexpen-
sive shares (on a valuation basis) or good
growth potential. Ideally both.
Best in Breed’s tips so far
SECTOR STOCK ASX CODE
Banks Macquarie Group MQG
Resources South32 S32
Consumer staples Treasury Wine Estates TWE
Discretionary retail Premier Investments PMVBANKS