Australia’s largest companies are holding truckloads of cash – which bodes well for investors seeking lucrative dividends and franking credits over the coming years.
There’s currently around $170 billion of cash held by Australia’s listed companies, and the good news for income seekers is that fewer companies intend to use this cash to acquire other companies or pay off debt (the average gearing level, at 20%, has halved since the GFT).
Recent legislative changes covering dividend payments also make it easier for well-capitalised companies to increase dividend payout ratios.
This year, dividend payout ratios are historically low. Based on an aggregate dividend yield of 3.8 per cent, the amount of cash returned to shareholders for full year 2010 is expected to be down on last year’s 4 per cent. Nevertheless, the longer term outlook for investors expecting higher income from stocks is encouraging with consensus aggregate dividend yields at 4.7 per cent and 5.2 per cent for 2011 and 2012 respectively.
When The Bull asked two analysts and a fund manager which stocks they thought were best positioned to return more cash to shareholders – here’s what they said:
1) Greg Goodsell, Analyst, The Royal Bank of Scotland
Theme: Follow the cash
Greg Goodsell, analyst at The Royal Bank of Scotland says investors looking for good dividend payers in 2011 should seek out large companies holding the biggest franking credit balances. He estimates that the $37 billion in franking credits held by the S&P/ASX 100 could reach $60 billion or more by 30 June 2012.
Goodsell notes that Woolworths’ (WOW) recently announced plans to return $700 million to shareholders through an off-market share buy-back – following its 10.1 per cent increase in full-year profit – suggests that those with surplus cash are better positioned to share it than they were last year.
“S&P/ASX 100 stocks are also generating franking credits 33 per cent faster than they’re distributing them,” says Goodsell. “This translates to a lot of tax that could be saved by retail and superannuation investors if they can get hold of the credits.”
Top ten S&P/ASX100 franking credit balances
|STOCK||2010 F FRANKED DIVIDEND $M||YIELD %|
|BHP Billiton (BHP)||5,254||2.54|
|Commonwealth Bank (CBA)||4,333||6.0|
|National Australia Bank (NAB)||3,167||6.46|
|Rio Tinto (RIO)||2,854||1.45|
2) Angus Gluskie, Director, White Funds Management
Theme: Banks, infrastructure-stocks and miners
With improved earnings, bad debts behind them and much of their capital requirements well satisfied, Angus Gluskie, director of White Funds Management expects NAB, Westpac and ANZ to take their cue from the Commonwealth Bank of Australia (CBA) and return more of their cache of franking credits to shareholders when they report later in the year.
Having also weathered the GFC relatively well, Gluskie expects Macquarie Bank (MBL) to also boost its dividends, but not as quickly as the big-four.
With their fortunes buoyed by a recovering economy and improved balance sheets, Gluskie says infrastructure stocks like Asciano (AIO) and MAP Group (MAP) could also surprise in the dividend-stakes. Even though large-cap miners BHP and RIO have plenty of acquisitions to contemplate, Gluskie says they’re also well positioned to increase dividend payouts and/or return surplus cash some other way. “A lot of cash may not be returned via dividend, so trying to gauge gross yields remains tricky,” he adds.
|STOCK||DIVIDEND YIELD %|
|Commonwealth Bank (CBA)||6.0|
|ANZ Banking Group (ANZ)||4.87|
|National Australia Bank (NAB)||6.46|
|Macquarie Bank (MBL)||5.5|
|MAP Group (MAP)||6.40|
|BHP Billiton (BHP)||2.54|
|Rio Tinto (RIO)||1.45|
3) Kien Trinh, Quantitative Analyst, Patersons Securities
Theme: Domestic cyclicals
Kien Trinh, Quantitative Analyst with Patersons Securities, says domestic cyclicals are a possible target for dividend seekers. Domestic cyclicals are less impacted by ongoing uncertainty in global markets and currency movements, and many have outperformed market expectations this reporting season.
“As an added bonus, domestic cyclicals also offer franking credits,” says Trinh.
He says investors predominantly chasing ‘income-plays’ should look to high-yielding stocks like Tatts Group (TTS), while those looking for ‘growth and yield’ should look to the ‘big-four’ banks, and mining services providers like: Monadelphous Group (MND), Alesco (ALS), Leighton Holdings (LIE), and Bradken Ltd (BKN).
While many companies will spend surplus cash gearing up for the anticipated growth in 2011, Trinh recommends keeping an eye on stocks that now appear to be ‘ex-growth’. With limited opportunity for acquisition, he expects stocks like Woolworths (WOW), QBE Insurance (QBE), Tatts Group (TTS) and possibly CSL Ltd (CSL) to keep dividend payments high.
“They could also do more by way of ‘buy backs’ while share prices look cheap,” he says.
|STOCK||2011 DIVIDEND FORECASTS|
|NET YIELD %||GROSS YIELD %|
|Tatts Group (TTS)||9.0||13|
|Alesco Corp (ALS)||7.4||10.5|
|National Australia Bank (NAB)||7.0||10|
|David Jones (DJS)||6.8||9.5|
|Western Australia News (WAN)||6.3||9.0|
|Monadelphous Group (MND)||6.2||8.9|
|Commonwealth Bank (CBA)||6.0||8.5|
|ANZ Banking Group (ANZ)||5.8||8.2|
|Hills Industries (HIL)||5.4||7.8|
Source: Patersons Securities