Big Super is flooding the stock market

While superannuation is undoubtedly an Australian success story, effectively turning Australia, which use to starve for capital to develop the country, to be the new Switzerland of the southern hemisphere. The country is now awash with super savings.

During the June quarter Australia’s super funds excluding self-managed super funds, received a record $57 billion in contributions and was some 13 per cent higher than in the same period in the previous year.

All up, after all outgoings were taken into account it was estimated that the super funds received $28 billion net of which some $12.8 billion, again a record amount, was pumped into the Australian share market.

It is tempting to see this as the sole reason why the Australian share market has performed so well this year with most indexes up about 20 per cent and the financial sector, which includes the big banks, up almost twice that amount.

That it is the sheer weight of money being pushed into the market quarter after quarter that is driving share prices ever higher.

However, I think it’s a combination of the number of high-quality, well-managed companies that are listed on the Australian stock exchange and the tax treatment of the way they pay dividends to local investors, that makes them hard to overlook.

Just focusing on the big banks for a moment, the Commonwealth Bank has had a stella performance this year, up by 46 per cent and yet even at these price levels it is achieving a fully franked dividend yield of 3.24 per cent with the franking credits adding perhaps a further 1 per cent to that return.

The ANZ Bank who’s share price is up some 25per cent this year is trading on a yield of 5.58per cent plus franking credits, the Nab up 35 per cent is training on a yield of 4.32 per cent plus franking credits and Westpac which is up some 53 per cent is still trading on a yield of 4.58 per cent plus franking credits.

When you focus on the sharp capital gains in the share price of all the big banks this year, it is easy to mount an argument that they are fully priced. But then when you look at their yields and the benefit of the franking credits which can add an extra third to their value, they are not so overpriced.

Then if you look to the future, it is likely that once the Reserve Bank gets inflation under control which it will sometime in 2025, that it will start to cut interest rates.

This is good news for the banks. Typically, as the Reserve Bank reduces the cash rate this is passed on immediately to the banks and reduces their funding costs. However, it can take weeks or months for this fall in the cost of funds to flow through to lower rates for bank customers.

So, this should mean that their lending margins will improve through 2025 and with that, increase their profit margins and this in turn should flow through to higher dividend payouts to shareholders.