The market is jittery evidenced by a dip below 4800 – a level not seen since January this year. If you’re searching for yield, you might like to check out dividend stocks amongst small caps – and in particular the hot IT sector.
The XIJ Information Technology Sector is up 12% in the past six months. The best-performing sector in the ASX over this period is Consumer Discretionary (XDJ) but IT stocks tend to be more resilient in the face of economic headwinds.
From a list of companies in the XIJ we chose 7 stocks paying generous fully franked dividends and good performance track records. One has a market cap of $529 million and the rest range from $114 million to $195 million.
We look at total average annual shareholder return over time; historical and projected growth in both earnings and dividends; actual grossed up yield for FY 2012; and two valuation measures, the P/E and P/EG ratios.
One of the pitfalls of looking at dividend yield figures is price volatility. Since yield varies with share price you can see wildly fluctuating yields over a matter of days. In addition, the raw yields you find do not reflect the benefits of dividend investing – franking credits. Grossed up yield takes franking credits into account.
Here we select yields actually paid in FY 2012.
Another issue easily forgotten is total shareholder return over time – a combination of dividend payments and share price appreciation. Dividends are great but in truth rather pointless if the share price drops resulting in a negative return on your dollar.
|Company||Code||Grossed Up Div Yld 20012 Actual||Total Avg Annual Shareholder Return (1Yr/3Yr/5Yr)||% Yr Historical Growth (EPS/DPS)||P/E|| P/EG|
|2Yr Forecast Growth (Earning//Dividend)|
|Dicker Data Limited||DDR||21.9%||150.8%/NA/NA||29.6%/78.7% (1 Year)||13.89||–||–|
Since it’s dividends we’re after it makes sense to look at year by year actual dividends paid in addition to the 5 year averages which can wash out fluctuations in payment. This final bit of data appears in the following table, along with analyst estimates for dividend payments in 2013 and 2014.
After analysing the table, two stocks stand out. One is a newcomer and the other is a potential turnaround story.
Dicker Data Ltd (DDR), a compueter hardware and software distributor, began trading on the ASX in January 2011 but the company has been in business for 34 years. In their short history DDR has posted some impressive numbers. GBST Holdings (GBT) provides software services to the financial industry in Australia, New Zealand and Hong Kong, specialising in securities transactions and fund administration. In August 2007 GBT was trading at around $4.50 and has rebounded a bit of late following the crushing impact of the GFC. The closing price for GBT on 06 May was $1.52 while DDR closed at $0.90. Both companies have performed well year over year. Here is a one year price chart, compared to the XIJ Information Technology Index:
While GBT continued paying dividends during leaner times the dividend was cut substantially after the GFC; it has risen since. The stock’s attractive features include its impressive 87.5% earnings and 13% dividends growth expected over the next 2 years. Its recent Half Year earnings report showed a 4.93% increase in revenue and a 12.09% increase in net profit after tax (NPAT). GBT is expanding into Singapore, the UK, the US, and Canada. GBT has one analyst covering the stock with a STRONG BUY rating.
Of the two, Dicker Data is the riskier investment. For one thing, the computer hardware business is declining with tablets replacing notebook and laptop computers and desktop PC sales in rapid decline. However the company recently signed an agreement with Fujitsu of Japan to carry server and storage products as well as an agreement with Watchguard Technologies to carry its security products. Dicker Data also has an exclusive arrangement with Hewlett Packard for that company’s printer products line. DDR’s Half Year results released in February showed a 3.6% drop in revenue and a 9.9% drop in NPAT. Management attributed the result to seasonality and affirmed its full year guidance.
The real challenge of following a company like DDR is the lack of independent analyst coverage. On the company’s website you can find reports from a privately contracted firm. However, somebody must like this stock as the share price is up about 138% year over year!
A safer play appears to be Codan Limited (CDA). The company has maintained or increased its dividend every year and has impressive total returns. The share price has fallen over the past few months but is still up 120% year over year, outpacing the XIJ by a wide margin. Here is the chart:
Codan designs and manufactures what the company calls “clever” electronic products through four operating divisions – communications, metal detection, mining technology, and printed circuit boards. Codan recently expanded its operations to include Canada as well as its traditional markets in Australia and New Zealand. The company delivered solid numbers in its February Half Year report, with revenue rising from $74.1 million for the first half of FY 2012 to $136 million; NPAT rose from $9.9 million to $26.5 million. Dividend investors were happy to receive an $0.06 per share dividend compared to the year before, at $0.04. Despite economic conditions, management forecasts strong second half FY 2013 results on par with the first half of the year.
Data3 Limited (DTL) and DWS Limited (DWS) have similar numbers and analysts expect both companies to maintain dividend payments over the next two years despite minimal growth forecasts. Both stocks have underperformed against the XIJ over the last year, however. Here is the chart:
Both of these IT stocks offer a wide range of traditional IT services to businesses and government agencies in Australia.
DTL and DWS are the only stocks in our table with major analyst coverage. CIMB Securities has NEUTRAL ratings with DTL being downgraded from OUTPERFORM on 03 May. The analyst is bearish on the IT sector in general and sees little movement until the second half of 2014.
DTL’s February Half Year results were bleak, with a 6.8% drop in total revenue and a 5.1% decline in NPAT. However, the company maintained its dividend payment. The results from DWS were similar with revenue from continuing operations showing a meagre gain of $138 thousand and NPAT sliding 13%.
Comparing the 10 year dividend payment history shows both companies maintained or increased dividends consistently with DTL being the less volatile of the two. The P/E for the IT sector is 16.04 so neither of these two companies appears overpriced.
The final stock in the table is Infomedia Ltd (IFM), an international supplier of software services for after market automotive parts and services. Software products include online parts catalogues and service quoting systems. Note that the numbers in the table seem contradictory. How can a company show outstanding total shareholder return with negative earnings and dividend growth over five years?
To address the question let’s look first at the company’s stellar share price movement over the past year. Here is the chart:
The 5 year picture is dramatically different. Here it is:
The company’s 20 February Half Year results presentation characterises the years 2005 through 2009 as the “perfect storm” era. In 2011 Infomedia embarked on a new course, called the Superservice Solution Suite Strategy, to which they attribute a turnaround culminating in a successful 2012. The Half Year results for FY 2013 showed a $1 million increase in revenue and a $1.5 million increase in NPAT. The company is debt free with $8 million cash on hand as of 31 January 2013. Given its global reach, Infomedia is a company that stands to benefit handsomely from a weakening Australian dollar. Infomedia’s current P/E of 15.83 is below the IT Sector average of 16.05 and has a Forward P/E through 2014 of only 11.38, according to Thomson/Reuters. The current share price as of 06 May 2013 is $0.455.
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