The Valor Blog.
Investment News and Views, Direct from Our Team.

Melting Ice Cubes

A number of companies with the highest dividends are likely melting ice cubes.

A dividend yield of 6% may look attractive, however if this dividend is being paid by a declining company with large debts, it may not last very long.

This is the most common mistake I see with dividend investors.

It is often far better to buy a slightly lower, yet growing dividend.

Valor strongly believes that the “best time to buy is the point of maximum pessimism”, as per Sir John Templeton’s investment thesis. The only issue with this thesis is that the pessimism is often warranted.

It takes considerable training and independent thinking to work out which businesses are in terminal decline and which are temporarily depressed.  


After recent significant price falls, we recently attempted to analyse AGL. AGL has grown revenues at roughly double every decade for 20 years. If history were to go by, you would consider this a very good investment. The issue we found with AGL is the future is likely less rosy. Their reliance on coal fired power stations in a world of ever increasing renewables leaves them at risk of disruption.

New power technologies (wind and solar) are already cheaper than old generation coal and gas. The main issue with renewables is that when the sun is not shining or the wind is not blowing, they can’t provide base load power without storage. During peak renewables periods, that is, bright sunlight and good winds, increased supply reduces pricing levels. Whilst renewables have historically been a relatively small part of grid power, this wasn’t a problem. As renewables increase, they will eat away at AGL’s profits during these periods.

Over the coming decade, we expect an s-curve adoption of battery storage (both home storage and grid storage). When this happens, traditional electricity companies may have their profit margins further compressed.

Source: Eikon


For many years, Telstra was the perennial dividend favourite for retirees. Telstra is likely a melting ice cube.

With increased competition forcing pricing for internet and mobiles to fall, Telstra has been squeezed with rising costs. Their profit decline over the last 5 years tells the story:

A 5% dividend yield today may not compensate for profit declines of this magnitude.

Source: Eikon


The European banking index recently traded below 1988 prices. This extraordinary level of poor performance by a sector highlights the risks in investing.

In 2015, we took over a balanced portfolio that was well approximately 60% invested in banks and bank hybrids. This portfolio would have had enormous losses over the following years. This type of portfolio was not uncommon.

The direction of interest rates over the coming years has never been more uncertain. It is likely in the short-term that they stay lower. If the RBA pushes rates further lower, this compresses bank margins. Aussie dividend investors who have profited handsomely from ever rising bank dividends over the last few decades may be disappointed.

Source: Eikon

If we have even moderately higher rates in Australia, our extreme household debt levels would be tested, which may be a worse scenario for the banks. It is this bind, that lead me to describe the Aussie economy being in coffins corner:

Source: Flightdotcom