How to assess dividend sustainability?

 

For an investor, dividend sustainability more important than mere high dividends given the long-term interests and benefits. This can be better understood from the following:

Understanding the dividend payout ratio: Dividend payout ratio is a key metric for investors as it represents a ratio of profit shared with shareholders. The balance of profit is kept in business to invest for future. The dividend payout ratio is one of the tools to anticipate or assess the dividend sustainability. In case of growing company, the ratio is very low or may be zero as company wants to invest more in business to grow but in the case of mature businesses the dividend payout ratio is generally high. Thus, the trend in payout ratio indicates the future dividend payout for the company. A steadily rising ratio could indicate a healthy business state or maturing business while a spiking dividend payout ratio sometimes may indicate that the dividend is heading into unsustainable territory. Many companies set a target for their payout ratios. They define it as a percentage of sustainable earnings or cash flow. Typically, companies with best long-term record of dividend payments have stable payout ratios over many years.

Consistency in dividend payment: Consistency in dividend payout is important as the same is indicative of company’s willingness to distribute profit to the shareholders. Sometimes the company pays more than 100% of their profits to reward their shareholders, which gradually might result into lower payout in coming years.

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Trend for Dividends and Profits (Source: Reserve Bank of Australia)

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Strong cash flows generally enable firms to give more dividends: Some companies generate good amount of cash flows over and above the need for reinvestments. Such companies pay dividend at a comparatively good rate. This may not be the case always. Healthy businesses are known to be associated with large amount of cash flows and earnings. The dividend amount should be covered by the amount of cash coming into business for looking at sustainability. As experts have analyzed, the dividend sustainability sits on the cash in hand instead of subjective earnings accrual number. Companies with high earnings but with low cash flow thus fail easily in terms of paying dividends while company with comparatively low earning but good cash flow will be able to pay high dividend. Cash flow may also be impacted by depreciation and non-cash charge against earnings. It has been seen that many capital-intensive companies like telecommunication companies, real estate investment trusts have low earnings but high cash flows.

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Sources and Uses of Cash Flows (Source: Reserve Bank of Australia)

Free cash flow is a better indicator: Considering the flaws of cash flow, the better indicator is free cash flow which indicates for the cash flow available to pay out in dividends post the settlement of all other claims on the company’s cash flow. Good free cash flow generating companies would determine dividend sustainability. However, dividend sustainability on free cash flow doesn’t work for REIT and Master Limited Partnerships (MLPs). This is because their business models are based on constant and massive capital expenditure. The massive capex is funded by equity and debt issuance, which allows the business model to maintain the necessary cash inflows.

Cyclicality of business: Companies in cyclical sectors like resources and energy typically have lower payout since the earnings fluctuate considerably as per the economic cycles. In high price environment for commodities, the cash flow and earnings are high while with fall in commodity prices the profits as well as cash flow are poor, which is likely to take a dent on dividend. Best example is oil – oil companies are now suffering due to fall in prices, which also have pressurized their dividend payments.

Blue chip companies generally deliver better dividends: Blue chip companies often increase their dividends year after year with their steady earnings growth. Their payout ratio remains stable over extendable periods.  The healthy business growth year on year is a good indicator of rising profits and earning healthy cash flows. This is also an indicator of sustainable dividend payout.

Dividend payout from reserves: Dividend payout from reserves to inflate stock price is another strategy that has come into light. Sometimes, a company pays dividend out of their reserves and not from their earnings or healthy cash flows. However, this may be a dangerous sign and indicates that the dividends are unsustainable.

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Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

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Five reasons why Australian investors are addicted to dividend-paying stocks

Given the ongoing market volatility with cyclical impacts from the commodity prices, many Australian investors resort to stocks that pay decent dividends on a consistent basis. Key reasons for this addiction for dividend-paying stocks is better understood from the following:

Avenue of Income Stream: The investors want to build long term wealth and for this investors accumulate stocks of well managed companies with sustainable business that give them a steady, growing stream of dividends. Dividends are paid from the earnings or the profit added to the reserves. Many Australian companies give better proportion of the earnings as dividends to the shareholders. On an average, dividend payout ratios are generally healthier in Australia as compared to major global market. The investor demands for stocks paying decent dividends to get the income stream are supported over the years ahead as more baby boomers retire and then they focus on the income generation. They are less risk averse and gain patience while investing in the stock.

Linked to Interest rates and Tax benefits: First of all, the low interest rate environment in Australia kicks off well with the dividend stocks and many investors thus have started eying for such stocks in today’s scenario. Australian companies can also attach franking credits to the dividends to indicate the amount of tax paid by the companies already thus saving investors from paying taxes, which averts double taxation. Double taxation primarily means calculation of tax twice, once in the hands of companies and again in the hands of investors. The corporates get encouraged to give decent dividends to shareholders as opposed to irrationally hoarding earnings. The Interest on corporate debt never suffered from double taxation as it is paid out of pre-tax corporate earnings. And all such concessions encourage savings in the face of Australia’s relatively high marginal tax rates.

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Australia dividends and earnings (Source: AMP, Thomson Reuters)

Reflect Corporate Confidence: The high dividend payouts indicate higher corporate confidence about future earnings. The high dividend payouts are generally a positive sign as they indicate earnings are backed by cash flow. The companies give dividends from the retained earnings that is when the profits are ploughed back to the reserves and show the visibility of the future earnings. The stock market also reacts positively to the company which has strong earnings visibility and shows corporate confidence.

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Provide Sense of Security: The decent dividend yields provide security during uncertain times, that is when the market is continuously falling for a longer time, like when there is huge fall in the prices as seen recently in the case of Brexit. The dividends provide a stable contribution to the total return from shares over time, compared to the annual volatility in capital gains. Dividends are good for investors as decent dividends reflect for the good earnings growth, they provide a degree of security in uncertain and volatile times, they are likely to comprise a relatively high proportion of returns going forward and they provide a relatively stable and attractive source of income. The investors trend to carefully watch out for ‘defensive’ ASX stocks. In such scenario, we have seen in the past that stocks of the big four banks, including Australia and New Zealand Banking Group and National Australia Bank, along with companies like Woolworths Limited are considered as source of high yields and income.

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Comparison between deposits and shares (Source: RBA, Bloomberg, AMP Capital)

Many-a-times better than Bank Deposits: Dividend can give better returns than the bank deposits. The investing to get the dividend income can be compared to the investing for income from bank term deposits. Some companies have given steady income to investors as they have consistently given back a significant chunk of their net profits like 25% of the net profit to shareholders in the form of dividends while some bank deposits have given the return of 5%.

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Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

 

 

 

 

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Upcoming Dividends – 03/08/2016

Dividend Definition

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it can re-invest it in the business (called retained earnings), and pay a fraction of the profit as a dividend to shareholders. Distribution to shareholders can be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase.

Fully Franked Dividends

A share dividend on which the company has already paid tax. This means shareholders are entitled to a credit for the amount of tax the company has already paid. This credit is known as an imputation credit or franking credit.

Dividends can be fully franked (meaning that the whole amount of the dividend carries a franking credit) or partly franked (meaning that the dividend has a franked amount and an unfranked amount).

Upcoming Dividends

Here is a list of the upcoming dividends :-

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Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

Dividend Lists Dividend News Latest Dividend news Uncategorized

Upcoming Dividends – 21/07/2016

What is a ‘Dividend’

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.

What is a franking credit?

Franking Credits also known as Imputation Credits are a type of taxcredit that allows Australian Companies to pass on tax paid at the company level to shareholders. The benefits are these franking credits can be used to reduce income tax paid on dividends or potentially be received as a tax refund.

What is a fully franked dividend?

 A share dividend on which the company has already paid tax. This means shareholders are entitled to a credit for the amount of tax the company has already paid. This credit is known as an imputation credit or franking credit.
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Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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Is the recent surge in global dividends a bit alarming?

Importance of Dividends

Dividends are generally being paid by higher quality companies which have good cash flow, occupy a strong position in their relative industries, and provide stable returns in times of volatility. Additionally, they are attractive to long-term investors who have the capacity to ride out volatility periods as during a downturn they balance the investors’ portfolio by reducing selling pressure.

 

In a stock market, high dividend paying stocks are considered as dividend growth stocks and investors seek to maintain their profit portfolios with the help of balancing growth stocks along with other stocks. However, looking from the other side the story may be a bit different. According to a global equity strategist at Citi Research, investing in companies that pay higher dividends despite falling earnings poses a risk as these dividends are not sufficiently covered by profits earned over a period of time.

 

Latest Global Statistics

In 2016 (year-to-date), the Dow Jones US Dividend Select Index (INDEXDJX:DJDVP) surged by more than 8.54% while the Dow Jones Global Select Dividend Index (INDEXDJX:DJGSD) surged 2.45% compared to negative returns of many equity markets. Within the S&P 500, the top 100 highest yielding stocks have gained 3% this year while those with no dividends have eroded more than 4%.
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INDEXDJX:DJDVP Daily Chart (Source: Thomson Reuters)

 

In the past one year, the world’s listed companies have paid out more than half of their profits in the form of dividends pointing to an unusual situation that indicates widespread economic weakness. As per data from Citi, in two years the proportion of profits paid out as dividends by companies within the MSCI World index soared to 51% from 43% higher than the long-run median of 46%. According to J.P. Morgan calculations, annual income available from the Barcap Multiverse Bond index is 1.7%, a record low level. Also, the firm calculates dividend yield on global stocks as 2.7% and rising to 3.4% with the inclusion of net share buybacks.

According to a recent report from Chicago-based Henderson Global Investors, in the year 2015 global dividends increased by 9.9% to $1.15 trillion with most of the growth dented by strengthening U.S. dollar (reduction of almost $104 billion). Looking ahead to 2016, dividend forecast for the year is narrowed by $10 billion to $1.17 trillion led by cuts in the commodities sector. As a global trend, U.S. and Commonwealth countries pay the highest dividends. Meanwhile, Japan recorded a 19% increase in payouts in 2015 while China posted its first annual decline of 1.5% in dividends.

Global Shift towards High Dividend Payouts

With the past few years highlighting unsatisfactory dividend yields, companies have shifted their focus on being high dividend paying in order to return the maximum possible to shareholders. Notably, energy companies which have been hit significantly by falling oil prices are the ones whose dividends exceeded the profits of these companies. The global trend in recent times reflects that income focussed investment funds have gained popularity as investors are looking at higher return to shareholders.

In 2015, reforms to the Tokyo Stock Exchange’s corporate governance code were also followed by rising dividends. On the other hand, in February 2016 Larry Fink, chief executive of asset manager BlackRock, wrote to chief executives of U.S. companies highlighting the growing proportion of profits paid out to investors and urging each to lay out a strategic framework for long-term value creation.

 


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Australian stocks and dividend analysis

The Australian stock market has rebounded from its February lows and has gained about 9.8% since March 02, 2016 as of May 30, 2016. This indicates that the market is only slightly lower from its 2015 high levels. The Australian companies have paved an attractive pathway for investors while boosting stock prices which is through pushing dividend payout ratio higher. In the past, the companies that paid 60% to 70% of their profits had now increased the ratio to 80% to 90%.

However, there are a few risks attached to this strategy which include benefits to the companies in the short term by diverting the funds from long term reinvesting for future to the shareholders. Also, if the economic growth softens, these companies may not be able to increase payout ratios higher than 90% level. A threat to the Australian companies is higher as according to data compiled by Bloomberg wherein payout ratio exceeds 100% for these companies as with every $100 of profit generated the payout stands at $118 in dividends.

Reserve Bank of Australia recently commented that these high dividend payouts maybe living on borrowed time which in the longer run may pose a threat to the economy. In 2015, Australian-domiciled listed companies announced dividend payments of $78 billion which accounted for 81% of the underlying earnings of these companies and 4.8% of their capitalization as of June 2015.

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Ten ASX Companies with High Dividend Yields (Source: Thomson Reuters)

 


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U.S. Earnings Quarter and Dividends

The 2016 first quarter of earnings season for U.S. companies has revealed some softness for the economy since 2009. However, analysis reveal that this would be the best quarter on record for dividend payments. As per a Goldman Sachs report, with the S&P 500 earnings per share are expected to decline by 1% year-over-year and dividends per share to rise by 4.6%. Furthermore, on a rolling four-quarter basis, dividends per share grew by 7.5% to $43.88, establishing a record level. In 2016, the strongest sectors of the S&P 500 are those which have offered relatively higher dividends and not slashed payout ratios for the past five years.

In the first quarter of 2016, for the entire U.S. stock market, 919 companies increased their dividends, almost 8% less than the same period a year ago, as per a report by S&P Global Market Intelligence. Meanwhile, for the last four quarters, 2,733 companies increased their dividends, 15.3% fewer than in the previous four-quarter period. Interestingly, the dividend yield on S&P 500 was higher than the yield on the U.S. Treasury 10-year note. According to data from FactSet, in the past 5 years the 10-year Treasury note was yielding 1.78% as compared with an average dividend yield of 1.96% for S&P 500 stocks.

All in all, a very prudent approach should be taken at this time to invest in companies which should entail looking at company fundamentals as well as dividend pay-out scenarios.


 

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

 

Basics of Dividend Investing Dividend Investing Dividend Lists Dividend News Latest Dividend news Uncategorized What is dividend Quality ? What we like about dividends?

LATEST DIVIEDEND NEWS – 27/10/2015 – NEWS

The biggest float of 2015, Link Group, buoyed the market after shares in the $2.3 billion superannuation administration services company hit the boards at $7.10 – a healthy 11.5 per cent premium to the $6.37 offer price – which raised $947 million for the company’s owners including buyout specialist PEP. They closed at $7.07. Woodside Petroleum dipped 2.5 per cent to $30.30 after making it clear it has not closed the door on a potential increase in its $11.6 billion takeover offer for Oil Search. Among the big miners, BHP fell 0.9 per cent to $24.34 and Rio Tinto lost 1.8 per cent to $52.81. Blue-chip Telstra gained 0.2 per cent to $5.52.    To read the complete report click here 

Latest Dividend news

Australian Dividend Stocsks News 26/10/2015

The benchmark S&P/ASX 200 index was up 1.6% , or by 87.8 points, to 5351.6 points on Friday. ANZ gained 1 per cent for the week to $28.90, Commonwealth Bank put on 1.2 per cent to $77.35, National Australia Bank added 1.9 per cent to $32.44 and Westpac lifted 1.7 per cent to $31.56.  BHP Billiton fell 1.6 per cent for the week to $24.59 as chairman Jac Nasser said the mining giant would consider taking on debt in the short-run to cover its policy of increasing dividend payouts each year.

Rio Tinto lost 0.5 per cent over the week to $53.39. Fellow blue-chip Telstra firmed 2.6 per cent for the week to $5.58. In the mining sector, two of the largest Cooper Basin plays, Drillsearch and Beach Energy, will merge to create a $1 billion-plus listed entity that will be 20 per cent owned by billionaire Kerry Stokes. Drillsearch rocketed 26 per cent on Friday to 83 cents while Beach firmed 3 per cent to 69 cents.  Santos, the target of a rebuffed $7.14 billion takeover approach from private fund Scepter Partners, has lowered its production forecast for the full year and further reined in capital spending as it defers development because of slumping oil prices.  To read the complete report click here


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