Gone are the days were you can shove your cash in a term deposit and be done with it. Rates have come back, which means that high-yielding shares are back on the agenda.
According to the latest Westpac/Melbourne Leading Index, slower economic growth is in store for the remainder of 2013 and into 2014; 2.5% growth for 2013, and 2.3% in 2014. This means rates could, in theory, be cut again.
When hunting for shares that deliver healthy dividends, don’t just look at the current yield figure. Franking credits are also important; they can make a big difference between the net yield you often see quoted and the gross yield that takes franking credits into account.
We’ve done some numbers on a range of stocks in the top 300 ASX stocks for the trading week closing on 11 October 2013. We found 20 stocks with yields over 6%, both net and gross.
|Sector||Gross Div. Yield||Net Div. Yield||52 Wk % Change||5 Yr Total Return||5 Yr Est P/EG||2 Yr Earnings Growth Fore- cast|
2 Yr Div. Growth Fore- cast
|GUD Holdngs (GUD)||Consumer Discret.||12.14%||8.5%||-26%||15.5%||1.76||-2.4%||-14.2%|
Insurance Australia Group
Take a look at the stocks offering the best yields; six of them have suffered share price declines over the past year. Remember that yield is calculated by dividing dividends per share by the share price – which means that as the share price falls, a yield advances higher.
Be warned: share price declines might suggest dividend cuts in the future.
This doesn’t mean that all six stocks are unworthy of consideration; only that investors need to look deeper.
Don’t grab a great yield without investigating the likelihood that dividends will remain robust in the future, which involves analysing growth forecasts for both earnings and dividends.
Scan the table, and two stocks stand out on numbers alone.
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.
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 forecast 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:
Mining in Australia may slow, but it is not going to disappear. The five year estimated Price to Earnings Growth ratios for both companies suggests dividends could remain stable. Considering recent volatility, forecasting five years out seems like an impossibility. Nevertheless, the five year estimated P/EG of 0.57 for Ausdrill suggests the 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 declined 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 more 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 forecast of a 45% downturn in earnings and a 39% fall 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. Unfortunately the company’s total shareholder returns have been disappointing – 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, with automotive parts supplier GUD Holdings (GUD) the only retailer in the group that has suffered share price declines. It is surprising news given the recent lacklastre consumer sentiment and retailing conditions. GUD has no Buy/Strong Buy recommendations, 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 listed in November 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 & outerw. 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, the average trading volume over last three months has been minimal to say the least.
The other stock of note is 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 summarised a concern shared by others: IAG’s solid results are not sustainable. CIMB Securities characterised 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 share price slide 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 things 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 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 risks breed 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). Not a single analyst has a Buy recommendation on CAB. Only 2 recommend Holding the shares and seven recommend Selling CAB. Here is another case of the risks of government regulation changes. In May 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:
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