24 October 2024
Housing crisis taking down much of the Chinese economy.
Not only are there huge numbers of high-rise apartments in partially built high rise buildings stranded by bankrupt property developers, but the emergence of the declining population is creating surplus housing in cities where the population reduction is most evident. Demand for housing is declining in line with, or even ahead, of the decline in population and with it a reduction in housing value. Until recently, housing was the main investment for much of the Chinese population, including rental property investments. Now vast numbers of Chinese are experiencing a reduction in the value of their property assets with worse to come as the population decline is now unavoidable. Demography is destiny. To further increase the problem, there is huge unemployment—particularly youth unemployment. The unemployed are not in a position to start families nor buy houses. Those who can buy are able to see the advantage of waiting to buy in a falling housing market. Those with investment properties are trying to sell before the market declines further. Declining population has significant long-term economic impact. As the erstwhile one child per family policy resulted in many more males being born than females the effect cannot be quickly reversed; if at all. The demographic impact will boomerang through the generations and with it the associated economic problems.
Capital growth in Australian shares.
The total return of share investments is a mixture of capital growth and dividend income.
Recent dividend yields can be determined by looking up the individual share. However capital growth is most meaningful if looked at it over the long term. Some groups of shares and their capital growth are:
Our four major banks
Compound annual growth of Australia’s four major banks calculated over 20 years to 12 October 2024 is:
ANZ 2.05 percent
CBA 1.46 percent
NAB 1.17 percent
WBC 1.79 percent
Our four major bank dividends
The low capital growth rates are illuminating however they have been steady franked dividend payers. We currently do not own any of the four. Their recent annual dividends grossed up with franking credits are:
ANZ $$2.53 = grossed up yield of 8.06%
CBA $6.64 = grossed up yield of 4.75%
NAB $2.40 = grossed up yield of 6.24%
WBC$2.31 = grossed up yield of 7.28%
ARB versus Bapcor.
Compound annual growth over 20 years calculated to 12 October 2024 is:
ARB 12.38 percent
Bapcor 5.05 percent.
The difference over 20 years is that an equivalent investment in ARB will be 3.85 times as large as one in Bapcor. While Bapcor is sometimes compared with ARB, the long-term performance of ARB is far superior which is a reason we have been a long-term holder of ARB but have avoided Bapcor. ARB has a strong balance sheet with zero net debt and the characteristics of a well -managed company.
The Fairfax disrupters.
20 or so years ago the major Fairfax newspapers, the Melbourne Age and the Sydney Morning Herald, had huge advertising supplements on Wednesdays and Saturdays with motor vehicle, real estate and employment supplements. This advertising was extremely lucrative, and the advertisements were referred to by financial analysts as Fairfax’s “rivers of gold”. Changing technology created opportunity for disruption and Fairfax’s management were asleep on the job. New companies were started up to capture the advertising business in the form of Car Sales, now known as CAR Group (CAR), Real Group (REA) and Seek (SEK) to target the advertising revenue attached to automotive, real estate and employment advertising. The Fairfax board did not realize what was occurring until it was too late to have its advertising run on parallel Fairfax owned websites before it had migrated to the new disruptors. How have the three disrupters fared?
CAR has achieved compound annual growth of 18.37 percent over 15 years as a listed company.
REA has achieved compound annual growth of 31.61 percent over the past 20 years as a listed company.
SEK has achieved compound annual growth of 13.12 percent over 19 years as a listed Australian company.
We own CAR and regret not buying REA.
The formerly Fairfax-owned Age and Sydney Morning Herald have long since dwindled to tiny shadows of their former glory days and are now part of a much diminished Nine Entertainment Co Holding Ltd Group.
Pharmaceutical/Health.
Our two favorite stocks in this area are:
CSL with compound annual growth over 20 years of 18.75 percent and,
Cochlear with compound annual growth over 20 years of 13.12 percent.
Resource heavyweights.
BHP has CAGR of 7.02 percent over 20 years to 12/10/2024
Rio Tinto has CAGR of 7.37 percent over 20 years to 12/10/2024.
A future in SMSF administration support.
HUB 24 which provides software support services to administrators of self-managed superannuation funds and portfolios has had CAGR of 14 .25 percent to 12/10/2024 for the 17 years it has been a listed company. It recently reported continuing further substantial growth in the assets and the number of funds administered through its platform. We own this stock.
Commercial Real Estate.
The Covid-induced working from home phenomenon has had a huge hit on office accommodation with recent reports of a 20 percent reduction in Melbourne central business district valuations. Niche opportunities are occurring elsewhere e.g. data centers.
Joined at the hip.
Washington H Soul Pattinson (SOL) has long held a major share-holding in Brickworks (BKW) while Brickworks has long held a major shareholding in SOL. The arrangement has long been contentious as it enables each to vote shares in the other and cements control by the Milner family, specifically Robert Milner.
CAGR over 20 years to 12/10/2024 for SOL 7.14percent and for BKW is 4.7percent.
Our most successful investments medium to long term.
These are:
1. ARB Corporation Ltd
2. Car group Ltd
3. Hub 24
4. Cochlear Ltd
5. CSL Ltd
6. I Shares S & P 500 exchange traded fund.
Readers must do their own research and source their own advice. Readers are strongly encouraged to dial up the ASX 200 or the All Ordinaries as an entry point to basic information about shares in which they have an interest. Look at the summary information, but do also dial down through annual and half yearly reports and company announcements. Above all, keep in mind that there is no such thing as a risk-free company investment. Diversification can spread risk and return but cannot guard against major events such as a pandemic or a global financial crisis. However, overwhelmingly companies with strong business models survived short term significant share price falls over a period of about 20 months at the time of the global Financial Crisis and recovered strongly. As such, a key lesson was to be in the market for extended periods.
Hamas, Hezbollah and Houthis v Israel.
The underlying force is the desire of Iran to supplant Saudi Arabia as the dominant force in Islam by uniting the Muslim world against Israel. Thus far Saudi Arabia, Egypt and various Gulf states have sat by passively, apparently content to see Israel successfully defend itself against Iran inspired Hamas, Hezbollah and Houthis attacks which occurred subsequent to the Hamas atrocities of 7 October 2023.
Our Australian Labor government has forgotten that it was then Labor Foreign Minister Dr H V Evatt who championed the creation of the modern state of Israel by United Nations vote. There are historical Jewish claims to the land dating back over 3,000 years. Evatt was for a time head of the United Nations.
The recent attack on Houthi deeply embedded weapons stores by USAAF long range stealth bombers flying from a base in the United States and return not only struck at the Houthis who have attacked international shipping in the Red Sea approaches to the Suez Canal but was a strategic message by the US to Iran. The use of deep penetrating munitions which can only be carried by USAAF stealth bombers is a classic demonstration.
Dental study groups and student groups.
I still have a stock of my book Financial Success for Dentists. I am able to fill large orders at significantly marked down prices for bulk orders. All payments are via donation to the charity we support, The Delany Foundation. All printing and distribution costs are met by me.
Who are the residential real estate investors?
According to Australian tax office data 64,529 school teachers are property investors, of which 28,502 are negatively geared. 55,519 registered nurses are property investors, of which 27,639 are negatively geared. 15,412 police are property investors, of which 8975 are negatively geared. 15,738 truck drivers are property investors with 7,614 negatively geared.
Very few wealthy investors own residential rental properties with most concentrating on their own homes and business/practice premises.
Impact of Victoria’s financial mismanagement.
The normally slightly left leaning Australian Financial Review lambasted Victoria’s financial management in its editorial of 18 October 2023. Victoria now has $188 billion of debt and growing largely caused by a poorly executed infrastructure building boom. The Victorian government has tried to plug holes in its budget by hitting business and property owners. Increased land taxes via lower tax thresholds, payroll taxes on the top 4,000 supposedly big businesses a new tax on Airbnb premises and temporary levies for mental health.
The inevitable result of these actions by a government devoid of business experience is a self-defeating reduction in business confidence. There is a frightening level of business insolvency and despite Victoria’s debt continuing to rise, the Victorian Government is pressing ahead with its enormous Suburban Loop project which is not endorsed by Infrastructure Australia.
As I have said previously, wild horses could not drive me to invest in a residential rental property in Victoria as I watch friends struggling with businesses. Even popular dentists report slowing appointment books.
The art of taxation is to judge finely the appropriate level which a community can sustain and control government spending to match.
Labor’s proposed tax change to superannuation balances above $3 million.
The changes have passed the House of Representatives but are yet to pass the Senate. It is best to wait until this has occurred before making changes. As things stand, the changes are due to apply from 1 July 2025 but the timing of superannuation returns means that it would be applied to individual balances above $3 million measured at 30 June 2026. Those in this position should wait until the situation is clear.
When is marketing expense not worth the cost?
Having observed the financial performance of a multitude of dental, dental specialist and veterinary practices over the past 37 years I have always been alert to the differences between the most successful practices and the mediocre performers. One thing that is abundantly clear is that best performed practices are conducted by professionals with excellent interpersonal skills. Furthermore, these practices have low expenditure on marketing but overwhelmingly attract patients by personal referral and are successful in bonding them to their practices. They are successful in having staff share their values, but staff who don’t share their commitment rarely last. The assistant dentist who cannot achieve sufficient follow-on appointments to finish necessary work or who after a reasonable time in practice is not receiving personal referrals self identifies as a practice destroyer. Conversely the young dentist who exhibits strong patient relationship skills and has good follow-on appointments and in due course personal referrals self identifies as a practice builder. Over time practice builders are encouraged and practice destroyers find that they are the lowest priority when a practice receptionist is fitting new patients to dentist appointments. Exactly the same occurs in veterinary practice. Owners conversing while walking their dogs in the park happily talk about vet practices which meet their approval. No amount of electronic promotion by marketing types can induce those with happy dentist and vet relationships to change practices. Nor can any amount of internet related promotion stop patients leaving a dental practice if they are unhappy with the chairside manners of a dentist nor a dog owner who is unhappy with the way a veterinary consultation is conducted.
Successful practice owners keep the appearance of their premises up to a standard expected by long term clients. When practices begin to look sub-standard existing patients may be willing to continue to use it but stop referring their friends from a fear of their being embarrassed. When a practice owner recognizes the need and refreshes the appearance of their practice normal referral patterns are re-established. Having an interior decorator re-do their waiting room is likely to be money better spent than engaging some marketeer to create more presence on the internet.
On countless occasions when dealing with a new veterinary or dental client on first perusal there was a substantial expenditure on marketing. My next question was “What proportion of new patients come via referral from existing patients?” In most cases on checking sources of patients they realized that they should re-direct their spending priorities. Operating personal service relationship businesses is different to promoting supermarket specials.
Simple clean websites with basic information including contact details, pictures of practice, location and parking are adequate. I am yet to meet a practitioner who got rich by spending heavily on elaborate websites.
Regards to all.
Graham Middleton
grahamgeorgemiddleton@gmail.com
General advice and need to confirm.
As I sold out of an accounting and financial services group, of which I had been a founding partner, on 30 June 2020 I am no longer licensed. The above is general advice and should be confirmed with a currently licensed investment adviser. One I would recommend to you is Campbell Thompson at Ord Minette who is both courteous and experienced. His number is 0407 839 229. His assistant Simone Shelton 0402 085 892 is a helpful person also. If you are after simple transaction advice, they are ideal. I use them but have absolutely no financial interest in any services that they provide to others.
My Financial interest.
I have no financial interest in the advice I provided and seek no fee. I am secure financially and I seek no personal remuneration. If you find it worthwhile you are able to acknowledge it by making a tax-deductible donation to the registered charity which I support, the Delany Foundation who, I am confident, will apply it to worthy use.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
To Obtain a Copy:
· Go to the Delany Foundation website at http://www.delanyfoundation.org.au
· Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
· Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address
· A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
Please Pass On
If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly by email at graham.george.middleton@gmail.com and by mail at Graham Middleton, 37 Charteris Drive, Ivanhoe East, VIC 3079.
