BBI 0.00% $3.98 babcock & brown infrastructure group

excellent yield. this is why

  1. 251 Posts.
    This is why BBI has had a steady downtrend over the last 12 months, and why it is now an excellent buy and is paying excellent dividends.

    Interest Rates, Macro Risk and Irrationality.


    Interest Rates
    BBI and TCL (and a few others) are low risk, regulated, reliable steady dividend stream earners. They basically function like an Annuity (consider a Term Deposit if you like).

    This strong correlation is perfectly illustrated by the downtrend in the last year that you pointed out. Over the same period, the RBA has been steadily increasing the cash rate.

    What does this mean? this mean Investors expect more % return for their money. For example, you would therefore expect more % interest from your Term Deposit, and likewise for any other annuity or investment providing a steady income return on your capital.


    Macro Risk
    When there is increased macro risk, such as the global credit environment, investments when compared to Government Bonds (which are as safe as a guarantee that you will get) demand more return for the higher perceived or actual risk, otherwise you may as well just go and invest in Government Bonds - your moneys safe. So this 'risk premium' is what you expect and deserve for investing elsewhere. As everything is considered riskier than before when compared to Govt Bonds investors expect a higher % return. So these companies, BBI and TCL (and others) will experience one of two things:
    1. Pay more dividends so the % return is equal to the risk premium expected for such stocks.
    2. The share price reduces until the % return is equal to the risk premium expected for such stocks.


    Irrationality
    So if you have read this far you will understand that BBI and TCL (and others) needed to be slightly rerated for the above two reasons, and rightly so.
    Kick in some fear and panic and they will be excessively re-rated giving them an unrealistic and undeserved risk premium and a higher than deserved yield. This happens when the perceived risk is higher than the actual risk, or generall sharemarket panic occurs, or other factors such as a general sharemarket downturn forcing margin calls.


    All this is good if you want a bargain! (in the sense of it provides and excellent return for the actual risk which is lower than what is currently being reflected in current yields).



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