Searching Beyond the Yield
The latest Westpac/Melbourne Leading Index suggests slower economic growth for the remainder of 2013 continuing into 2014. The expectation is for 2.5% growth for 2013 and 2.3% in 2014, raising the level of speculation about impending RBA rate cuts.
Rates are already at historic lows and the possibility of further cuts should stoke the fires of interest in high yield stocks. Experienced investors are well aware there is more involved in searching for yield than simply looking at the current yield you see on financial websites. In Australia we are blessed with franking credits, which make a big difference between the net yield you often see quoted and the gross yield that takes franking credits into account.
With that in mind we searched a summary share table for the top 300 ASX stocks for the trading week closing on 11 October 2013. We found 20 stocks that exceeded 6% yields, both net and gross. Here is the table, which includes other indicators relevant to the search for high yield stocks:
(Code) Sector Gross Dividend Yield Net Dividend Yield 52 Wk % Change 5 Yr Total Return 5 Yr Est P/EG 2 Yr Earnings Growth Forecast 2 Yr Dividend Growth Forecast
(ASL) Capital Goods 12.38% 8.6% -54% 11.3% 0.57 -9.9% -5.5%
(MTS) Consumer Staples 12.38% 8.7% -13% 2.2% N/A -2.4% -7.4%
GUD Holdngs (GUD) Consumer Discretionary 12.14% 8.5% -26% 15.5% 1.76 -2.4% -14.2%
(MND) Capital Goods 11.29% 7.9% -18% 24.3% 1.04 -9.2% -6%
(RSG) Materials 11.08% 9.01% -72% 3.3 0.21 3.5% –
(CAB) Industrials 11.02% 7.7% -31% -4.6% -6.8 0.1% 4.9%
(BCI) Materials 10.78% 9.01% +60% 78.4% -1.3 13.1% 7.5%
(CTY) Consumer Discretionary 10.68% 7.48% +9% 7.8% – – –
(PRT) Media 10.17% 7.12% +28% -3.2% 1.68 -14.4% 2.4%
Consumer Discretionary 10.12% 7.09% +30% – 3.84 -0.2% -1.4%
(SIP) Health Care 9.68% 6.78% -14% -3.4% 4.19 -8.3% -1.3%
(CDA) Technology Hardware 9.63% 6.53% +1% 33.9% 0.80 -11.1% 0.0%
(PBG) Consumer Discretionary 9.39% 6.58% +35% 0.7% 9.05 -2.9% 0.0%
(CNU) Telecom 9.28% 9.28% -17% – – -1.9% 1.1%
(BKN) Capital Goods 9.08% 6.78% +11% 10% 4.13 24.2% 1.8%
Insurance Australia Group
(IAG) Insurance 8.74% 6.12% +28% 13.8% -10.6 – -6.8%
(DJS) Consumer Discretionary 8.62% 7.07% +6% 4.5% 44.51 3.1% -0.1%
(SPN) Utilities 7.57% 6.64% +16% 13% 4.78 -1.5% 2.1%
(OZL) Materials 6.82% 6.82% -56% -13.9% 0.38 -45.1% -39.5%
(AAD) Consumer Services 6.58% 6.37% +39% 22.2% 1.50 5.8% 6.9%
There is a lesson to be learned from looking at the top 6 yields in the table. All have seen year over year drops in share price. Novice investors sometimes forget that yield is calculated by dividing dividends per share by the share price. Therefore, as the share price drops the yield goes up. Share price declines that can be attributed to real fundamental issues raise the warning of dividend cuts in the future. This does not suggest that all of the top six in the table are unworthy of consideration; only that investors need to look deeper. It makes little sense to grab a great yield without investigating the likelihood the dividends will continue. For that we have growth forecasts for earnings and dividends. Scan the table and you should quickly see two very attractive prospects.
The first is BC Iron Limited (BCI), an Australian based iron ore miner with a lucrative joint venture with Fortescue Metals in the West Pilbara mining region. BCI has a combination of indicators that should get income investors salivating.
The yield is high despite the share price appreciation of 60% and the outlook for both earnings and dividend growth over 2 years is attractive. Analysts like this stock, with six Buys/Strong Buys; five Holds, and no one with a Sell recommendation. Amongst Australia’s major analyst firms, Macquarie, and BA-Merrill Lynch have Outperform and Buy- High Risk recommendations and UBS is Neutral. In response to BC Iron’s solid FY 2013 Full Year Results all three brokers raised their price targets. One of the biggest surprises in the earnings release was the final dividend of $0.30 per share. Despite its Neutral rating, the analyst at UBS predicts the outsized $0.30 per share dividend will be repeated in the first half of 2014. BCI share price has risen steadily and dramatically since it came on the ASX in 2006, briefly interrupted by the GFC. Here is the chart:
BC Iron has thrived despite the troubles in the mining sector, as has mining services provider Bradken Limited (BKN). Bradken provides a broad range of products to the mining, rail, energy, and industrial sectors. Analysts see close to 25% earnings growth over the next two years, coupled with an increase in dividend payments close to 2%. There are eight Buy/Strong Buy recommendations on Bradken with seven Holds and one Sell.
Bradken sells consumable products, which gives the company a decided advantage over the other two mining service providers in the table, Monadelphous (MND) and Ausdrill Ltd (ASL). Bradken products are used in operating mines, making the impact of the construction slowdown less damaging to BKN. Bradken’s Full Year 2013 earnings reflected troubled conditions, but despite lower revenue the company’s cost cutting efforts managed to increase margins. JP Morgan has an Overweight rating on BKN and Macquarie has an Outperform recommendation, calling the shares “inexpensive”, especially due to the dividend payments.
The share price declines of Monadelphous and Ausdrill better reflect the challenges facing mining services providers as the mining boom transitions to who knows what. Here is a one year chart for the two companies:
The truth is mining in Australia is not going to disappear, although there is great debate over its future growth potential. However, the five year estimated Price to Earnings Growth ratios for these two companies suggests both could continue to pay respectable dividends. Considering the volatility we have witnessed in global economic conditions in the last several years, forecasting five years in the future seems like an eternity. Nevertheless, the five year estimated P/EG of 0.57 for Ausdrill suggests that stock could be undervalued and the 1.04 P/EG for Monadelphous suggests it could be fairly valued.
Analysts are exceedingly bearish on MND with only one Buy, five Holds, and nine Sell recommendations. Ausdrill fares better with six Buy/Strong Buy ratings, four Holds, and three Sells. Right now Ausdrill has a trailing P/E of 4.72 and a forward P/E to 20-15 of 5.27. Analysts at JP Morgan and Deutsche Bank are especially high on the strength of Ausdrill’s balance sheet.
Gold miner Resolute Mining LTD (RSG) has dropped year over year more than any dividend payer on the table – down 72%. Despite this, analysts see modest earnings growth of 3.5% over two years and a very appealing five year outlook with a P/EG of only 0.21. The company has mines in Australia and in Mali, West Africa. Analysts are somewhat mixed on the stock, with three Buys/Strong Buys, one Hold, and three Sells. On 24 September, Citi issued a big upgrade, from Sell to Buy, and raised its price target from $0.80 to $1.00.
Oz Minerals Ltd (OZL) is another stock with an impressive five year forecasted P/EG of 0.38. However, one wonders about the staggering disparity between that number and the two year forecasts of a 45% drop in earnings and a 39% drop in dividends. Oz is a copper miner and has been the subject of takeover speculation for some time. That might explain the eight analysts with Buy/Strong Buy ratings on Oz with three Sells. This one might not even be suitable for punters as the company’s total shareholder returns have been abysmal – a negative 6.4% over 10 years; negative 13.9% over 5 years; and negative 51.6% over one year. Even the battered ASX Materials Index, the XMJ, managed to vastly outperform shares of OZL year over year. Here is the chart:
The final stock in the table with a strong 5 Year Estimated P/EG is technology hardware and equipment company Codan Limited (CDA). This is a high-tech operation that designs, manufactures, and distributes sophisticated communications and metal detection equipment to the mining sector. The company increased its dividend payment almost 38% for 2013 but the 2013 outlook is another matter. Prior to the Full Year Earnings release the company issued a profit warning on 14 June 2013. While still expecting record profit, management stated problems with the sale of its metal detection equipment in Africa would cause the company to miss its earlier guidance. The stock plunged 37%. Here is the chart:
There are five Consumer Discretionary Retailing stocks paying high dividends and with the lone exception of automotive parts supplier GUD Holdings (GUD), all have seen share price increases year over year. This is somewhat surprising given the generally downbeat outlook on consumer sentiment in general and retailing in particular, especially department stores. There is little analyst support for GUD with no Buy/Strong Buy recommendations and four Sells and seven Holds.
None of the others fare much better. Myer Holdings (MYR) has two Buy/Strong Buy ratings; eight Holds; and four Sells. Although Myer has been operating in Australia for over 100 years, it only came on the ASX as an independent entity in November of 2009 at $4.20, a long way from the current share price of $2.52. Analysts don’t much care for David Jones (DJS) either, with three Buy/Strong Buy recommendations; three Holds; and five Sells. Yet management of both companies are aggressively pursuing efforts to expand multi-channel operations, incorporating online and in-store sales. Deutsche Bank has a Buy on MYR, calling it the cheapest consumer discretionary on the ASX with strong cash generation. Myer’s strong balance sheet will help its multi-channeling strategy. In contrast, Deutsche Bank has a Sell recommendation on DJS, calling it too expensive.
Pacific Brands (PBG) has a wide range of consumer offerings distributed through three business segments – underwear, work wear, and home wares, footwear & outerwear. The company has branding advantage with well-known product lines and operates primarily in Australia but intends to expand throughout Australasia. There are three analysts with Buy/Strong Buy recommendations; eight are at Hold, and two have Sell ratings. Although UBS has a Buy rating on PBG, calling it a “yield” stock, JP Morgan on 23 August downgraded the stock from Overweight to rock bottom Underweight, due to the company’s downgraded 2014 earnings outlook and increasing cost pressures.
The final retailer is Country Road (CTY) with a market cap 376 million; 71 retail outlets in Australia; 93 concession stores in David Jones and Myers locations as well as in Woolworth’s South Africa locations; and no analyst coverage. What’s more, Yahoo Finance Australia shows an average trading volume of 0 over the last three months!
There are a few other stocks on the table garnering some analyst interest that bear mentioning, most notably Prime Media (PRT). Five of Australia’s major analyst firms have Buy, Overweight, or Outperform recommendations on this provider of both television and radio broadcasting assets in regional Australia. In addition, Prime Media recently announced a long term agreement with Seven West to use its infrastructure to provide Network Seven programs into some areas. Macquarie, JP Morgan, Credit Suisse, Deutsche Bank, and CIMB Securities have Buy, Outperform, or Overweight recommendations on Prime Media.
Insurance Australia Group (IAG) has six analysts with Buy/Strong Buy ratings; six with Hold ratings; and four with Sell recommendations. An analyst at BA-Merrill Lynch with an Underperform rating summarized a concern shared by others that IAG’s solid results are not sustainable. CIMB Securities characterized recent earnings results as “so strong they are never likely to happen again.” The share price has handily outperformed major rival QBE insurance year over year. Here is the chart:
Metcash Ltd (MTS) is a retailing wholesale distributor of groceries, hardware, liquor and a 75% interest in automotive parts and accessories distribution. The share price was rising when management downgraded its FY 2014 profit guidance due to veritable pricing wars over petrol with Woolworth’s and Coles and the price collapsed and has yet to recover. Here is the chart:
Despite this there are three analysts with Buy/Strong Buy ratings; three with Holds, and two with Sell recommendations. On 30 August Macquarie upgraded MTS from Neutral to Outperform. The analyst cited the approximate 25% drop in share price since the profit downgrade as evidence of undervaluation.
Ardent Leisure (AAD) owns and operates entertainment venues in Australia, New Zealand, and the US. Following solid Full Year 2013 results JP Morgan upgraded the stock to Overweight from Neutral, predicting healthy dividend payments in the future. There are four analysts with Buy/Strong Buy ratings; four with Holds; and no Sell recommendations. The falling AUD and Ardent’s expansion plans in the US market make it an income stock to consider. Note the two year forecast for 6.9% growth in dividends.
SP Ausnet (SPN) is a regulated utility distributing electricity and natural gas in Victoria. There are five analysts with Buy/Strong Buy ratings on SPN; six at Hold; and two at sell. Take a minute or two to research the news on SPN and you will find a string of regulatory rulings and appeals that make investing here problematic. The final share dividend declared in FY 2009 was $0.0593 and in FY 2013 it had dropped to $0.041.
Chorus Ltd (CNU) is a New Zealand telecom infrastructure company that was spun out of Telecom New Zealand. It began trading on the ASX in November of 2011. Today the company is to be the primary provider of fibre optic infrastructure for the country’s Ultra-Fast Broadband (UFB) network. Chorus has no analyst coverage in Australia. The company’s FY 2013 results were impressive, with a 72.4% increase in revenue and a 67.6% increase in net profit after tax (NPAT.) In addition, the dividend payment went from $0.114 to $0.145.
The ASX Health Care Sector Index (XHJ) has performed well year over year, but Sigma Pharmaceuticals (SIP) has lagged far behind. Here is the chart:
Sigma is a wholesale distributor of pharmaceutical products across Australia, including its own brands Amcal and Guardian. The company also provides a variety of business services to retail pharmacies. The problem with Sigma is the PBS (Pharmaceutical Benefits Scheme) in Australia. The company’s recent earnings results were not good and management blamed changes in the PBS. There are two analysts with Buy/Strong Buy ratings on the stock; nine Holds; and one Sell. Regulatory risk breeds uncertainty and this stock is probably best left alone till the full impact of the new government on the PBS is clearer.
The last high yielding stock to discuss is Cabcharge (CAB) and there really is not that much to say. Not a single analyst has a Buy recommendation on CAB. Only 2 recommend Holding the shares and seven recommend Selling CAB. This is another case of the risks of investing in stocks subject to government regulations. In May of 2013 the government in Victoria passed legislation cutting the service fee processors of electronic payments could charge from 10% to 5%. According to the company, the service fees represented about $22 million in revenue and this law will cut that in half. What’s worse, some analysts are speculating other states may follow Victoria’s example. Here is a one year price chart showing the disaster: