Aussie punters seeking a safe haven investment have enjoyed the advantage of stuffing their money into term deposits offering relatively high rates compared to elsewhere. However the problem with this strategy is that the RBA has slashed the cash rate by 1.2% over the past year and more cuts may be in the offing. While still higher than rates in most of the industrialised world, the possibility of further cuts means it may be time for investors to look to the ASX for higher yields.
As the RBA has cut the cash rate, term deposit rates have dropped, although not by the same percentage decline. Although this table is outdated it nevertheless demonstrates how term deposit rates have declined as the cash rate fell to 3.5% in early June 2012:
Term deposit rates vary according to term length and deposit amount, however on average, bank deposits are currently returning around 3.5%.
However, given the relatively poor share market performance over the last two years, investors with a little more risk tolerance might consider stocks that not only have high yields, but also have high growth prospects.
To find candidates with depressed valuations, high yields and high growth forecasts, we used a stock screener with the following criteria:
– Dividend yield of 6% or better
– P/E ratio of 15 or under;
– P/EG under 1.0
– 2 year EPS growth forecast of 15% or better.
Here are 8 stocks ranked by dividend yield:
Before we examine valuation and growth, let’s first look at not just the current yield, but the “quality” of the dividend. Quality means a consistent history of dividend payments over the last ten years along with payout ratios of less than 70%. The payout ratio is the percent of earnings paid in dividends and excessively high payout are indicators a company may be unable to continue with the dividend.
In an ideal world dividends should increase over time although in the current less than ideal environment a history of dividend payments that are reasonably consistent passes the quality standard.
Here is how these 8 companies have fared on dividend quality (click link for stock data):
1. Bradken (BKN) has paid dividends every year for the past nine years with the lowest yield of 2.9% back in 2007 and yields between 4% and 5.3% with the current yield of 8.93% being the highest. The current payout ratio is 52%. BKN’s payout ratio exceeded 70% twice over the nine year span; 84% in 2005 and 75% in 2011.
2. Transfield Services (TSE) has paid dividends every year for the past decade with the current yield of 8.54% the highest. However, the dividends are not fully franked, leaving a tax adjusted yield this year of 4.7%. The yield for the last five years has been above 4% every year. The payout ratio was in line until this year when it reached 98%. That bears watching.
3. Nuplex Industries (NPX) has paid dividends every year for ten years with the highest yield the current 7.9% and a low of 4.6% in 2004. Dividends are not fully franked, leaving a tax adjusted yield for the year of 4.3%. The current payout ratio is 65% with only one year ecxeeding 70% – 76% in 2007.
4. Australand Properties (ALZ) has a ten year track record of dividend payments over 7% yearly, with the highest at 43.1% in 2008. However, the dividends are not fully franked, leaving a tax adjusted yield this year of 4%. ALZ is a property trust so high payout ratios are expected. The current payout ratio, however, is a little high at 111% and bears watching.
5. Chandler Macleod Group (CMG) has failed to pay dividends in three of the last ten years. With this year’s high of 6.92% the company’s average yield over the seven years in which dividends were paid is 4.7%. The current payout ratio is 73%.
6. New Zealand Oil & Gas (NZO) has averaged a 5.07% yield over the last five years. The current payout ratio of 121% is not a good sign, considering last year’s payout was only 26%.
7. QBE Insurance (QBE) is another stock with dividends not fully franked, reducing the yield after taxes to 4.7% for this year. The company has paid dividends every year for the past decade with a high yield of 7% in 2010 and a low of 3.3% in 2006. This year’s payout ratio of 142% is out of line, following a 109% payout last year. Prior to 2010 payout ratios ranged between 51% and 66%.
On the basis of high quality dividend yield, Bradken, Chandler Macleod, and New Zealand Oil and Gas look promising. But what about valuation and growth? The following table looks at forward looking numbers for the 7 stocks:
We included an (*) as a reminder of the three stocks with fully franked dividends. One of the benefits of using stock screeners is you can occasionally uncover a hidden gem. Based on the numbers, it looks like little known Chandler Macleod (CMG) might qualify as a sleeper stock; off the radar screen of many investors.
None of our major analyst firms cover this company and the only two analysts that do both have STRONG BUY on the stock with a target price of $0.49. Here is how the share price has performed year over year against the ASX XJO:
Chandler Macleod Group (CMG) has sixty offices in Australia as well as Indonesia and Singapore. The company is in the human resources business, specialising in recruitment, outsourcing, and human resource consulting. Given current economic conditions, this is a challenging business.
However, the company has performed well with the Full Year 2012 results released on 15 August 2012 showing a 32% increase in revenue; a 45% increase in profit after tax; a 25% increase in earnings per share; a 35% increase in operating cash flow; and a 33% increase in its fully franked dividend. The company expects to increase revenue from Asian operations by a minimum 20% over the next three to five years. With a low forward P/E of 7.17; a tantalisingly low 5 Year P/EG of 0.10; and a 2 year forecasted earnings growth of 30%, this is a stock that belongs on your radar screen.
Another attractive choice is New Zealand Oil and Gas (NZO) which trades on the ASX as well as in New Zealand. The stock is trading around $0.68 with a book value per share of $0.72. The New Zealand based company has oil and gas production and exploration assets in New Zealand, Indonesia, and Tunisia. Full Year 2012 financial results showed a 9% increase in revenue and a stunning 126% increase in net profit after tax, moving from a $76 million dollar loss in 2011 to NPAT of $19.9 million in 2012. Here is how the share price has performed year over year:
Bradken Limited (BKN) manufactures and markets a variety of products to the mining, freight rail, steel making, smelting, transport, cement, oil & gas, power generation and sugar industries. The company has 34 manufacturing and service sites across Australia, New Zealand, Canada, China, Malaysia, South Africa, Indonesia, South America, the United Kingdom, and the United States.
Although the company’s full year report showed a 26% increase in revenue and a 15% increase in NPAT, earnings per share barely moved, ending at $0.607 vs. a year ago $0.605. At Bradken’s Annual General Meeting management offered little optimism for the coming year, citing softening market conditions. Following the meeting, analysts at Deutsche Bank, RBS Australia, Macquarie, BA Merrill Lynch, and UBS cut target prices for BKN, but only RBS Australia downgraded the stock to HOLD from BUY. The other firms maintained Buy or OVERWEIGHT ratings in the belief the depressed share price is undervalued. Here is the price chart:
Bradken should serve as a reminder to all investors that current yield is a function of current share price and a stock as beaten down as BKN will reflect a higher yield because of the fall in share price, not an increase in dividend payments.
Although Transfield Service (TSE) has a tax adjusted yield of 4.3%, the 2 Year Forecasted growth of 32% along with a low forward P/E of 9.96 and a 5 Year expected P/EG of 0.32, this stock is worth a serious look. Note the price to book ratio of only 0.81. As of the most recent quarter, the book value per share is $2.03 while the stock is trading around $1.64, close to the 52 week low of $1.57 and far behind the 52 Week High of $2.59. Here is the company’s year over year price chart:
Transfield offers a wide variety of services to diverse sectors. They provide asset management, consulting, engineering, construction, and operations and maintenance services. The company’s clients include businesses in the resources and energy sectors, the property sector, industrial and infrastructure companies, and the defence industry.
The company’s full year 2012 earnings were mixed with a 13.9% increase in operating revenue, but an 8.7% decline in NPAT. TSE is global in scope so the company is struggling with challenging macroeconomic conditions everywhere. On 30 August 2012 Credit Suisse downgraded the stock to NEUTRAL from OUTPERFORM. Macquarie, RBS Australia, and JP Morgan cut price targets on the stock while maintaining NEUTRAL recommendations.
No matter the numbers, QBE Insurance (QBE) is one to view with caution. Forget about what the analysts say. QBE Insurance Group is our largest international general insurance and reinsurance group and one of the top 20 insurers and reinsurers in the world; and as such the company is exposed to the risks posed to the industry by climate change. Ideologues will argue about the science of global warming back and forth but as an investor you should take a dispassionate view and listen to the warnings being expressed by three of the world’s largest reinsurance companies – Munich Re, Swiss Re, and the AXA Group. Check the company websites for each and you will learn all agree climate change is real and global warming from human activity is a contributing factor. These are not wild-eyed environmental groups. These are for-profit companies that sell insurance to other insurers to protect against catastrophic losses. Stay away from casualty related insurance companies. Climate change may prove to be a “hoax” but what about the investing risk if it is not a hoax?
Australand Property Group (ALZ) is another stock on the table trading below its book value per share of $3.46. The current share price is about $2.96 with a 52 Week High of $3.13 and a 52 Week Low of $2.19. Australand is a diversified property group comprised of a property trust and a holding company. ALZ is involved in developing residential land, housing, and apartments, as well as the development of and investment in income producing commercial and industrial properties. The company also provides property management services. Despite concerns about the property market here, the stock has outperformed the ASX XJO year over year. Here is the chart:
The final share in the table is Nuplex Industries (NPX), one of the world’s largest manufacturers of polymer resins. The company’s resin coatings and composites are vital ingredients in a wide variety of consumer products and construction products. Operating in 11 countries, the company is suffering from weak demand in both global manufacturing and construction.
Full Year 2012 results showed a meager 2.8% increase in revenue but a 6% decline in NPAT and a 7% decline in earnings per share. None of our major analyst firms cover this company, but market participants like what they see, despite the dismal results. Here is the company’s puzzling year over year share price chart: