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The RBA has surprised many by cutting the interest rate to a new historic low to boost the economy. The announcement jolted the ASX into overdrive, with the market reaching a six year high by the close of trading.  In addition, the AUD fell to USD$0.7655, not quite a six year low; and the yields on 10-year government bonds also fell to a record low.

The real long term winners in a rate cutting environment have yet to be determined.  The picture regarding the losers is clearer.  The already weak returns on fixed income investments just got weaker and may get weaker still.  Inevitably, the scramble for high-yielding stocks is back with a vengeance.  But which ones?

In theory interest rate cuts could benefit the economy in a myriad of ways, but the biggest single impact might be on consumer spending.  We are already being told the rate cut could put between $44 and $100 extra dollars a month to families with mortgages.  Add to that the cash saving already in place from falling petrol prices and you have the makings of an uptick in spending.  This suggests investors might want to look at high yielding retail stocks in addition to the “tried and true” dividend stalwarts like Telstra and the Big Four Banks.

However, falling petrol prices have yet to boost consumer spending as the latest figures for December showed a scant 0.2 percent rise in retail trade, short of analyst expectations.  So while it is certain consumers will have more cash available, what they choose to do with it is another matter.  Should they spend; the falling dollar will make online shopping of imported goods less attractive.  The flip side of that coin is that our retailers also import some of what they sell, and they will face higher costs as well.

Some economists see consumers putting the reported average savings of around $46 per month per household towards debt reduction.  The chief economist at CommSec feels the key to unlocking the consumer wallet is low petrol prices continuing.  The view is that consumers doubt the savings will last.  Now we have the added benefit of the rate cuts to the mix, which could be the catalyst to boost consumer confidence and spending.

With those cautions in mind, let us take a look at seven high yielding ASX retailers.  We looked for stocks with fully franked yields over 5%.  Here is the table.

Company

(CODE)

Share Price

(52 Week % Change)

Dividend Yield

Payout Ratio

2 Year

 Dividend Growth Forecast

5 Year

Dividend Growth Rate

5 Year

Total Shareholder Return

McPhersons

(MCP)

$1.23

(-5%)

9.4%

69%

+24.3%

-7.2% 

*(10 Years)

-5.6%

*(10 Years)

Myer Holdings

(MYR)

$1.79

(-30%)

7.4%

87%

-9%

-4.9%

Kathmandu

(KMD)

$1.33

(-54%)

7.3%

58%

-2.4%

-0.1%

RCG Corp

(RCG)

$0.76

(-3%)

6.18%

98%

+6.6%

+4%

+14.2%

Automotive Holdings

(AHE)

$3.79

+5%

5.8%

72%

+9.1%

+8.5%

+16.8%

Harvey Norman (HVN)

$4.04

(+37%)

5.4%

68%

+7.6%

+5.0%

+6.4%

JB HiFi

(JBH)

$17.44

(-9%)

5.02%

66%

+5.1%

+13.8

+2.6%

 

Newcomers to share market investing searching for high yielding stocks are cautioned to go beyond what seems the obvious strategy – look for the stocks with the highest yield.  The first three stocks in the table provide hard evidence to support that caution.  While all three can boast handsome yields, the final column in the table tells the real tale here.  Over time, when you factor in capital appreciation from rising or falling share prices, investors have lost out.  In makes little sense to invest in a high yielding stock whose falling share price destroys the total return.

McPhersons (MCP) is a diversified supplier of consumer products, ranging from household consumables and durables to health and beauty products.  The company’s products are available in North America, the UK and Europe, and in the Asia Pacific Region.  The company’s customers number more than 10,000 leading retailers from supermarkets to department stores to independent houseware outlets.  This is a small company (market cap of $118 million) that is thinly traded and has minimal analyst coverage.  Yet its products are well-known brands.  The company has been a consistent dividend payer, with yields exceeding 10% in each of the last three fiscal years.  

One might be impressed with the dividend growth forecast for the next two years, but the share price performance over time suggests total returns that might disappoint.  Here is a ten year price movement chart for MCP.

The next two companies should be familiar to any investor who regularly prowls financial market websites.  Myer Holdings (MYR) is an iconic Aussie department store operator struggling to turn itself around.  The company is aggressively increasing its online presence and has plans to grow its exclusive branded merchandise.  Myer’s dividend payments have fallen in each of the last three years; from $0.19 In FY 2012 to $0.145 in FY 2014, and analysts expect the decline in dividend growth to continue over the next two years.  

Myer Holdings and the next stock in the table, specialty retailer Kathmandu Holdings (KMD), illustrate the relationship between yield and share price in dramatic fashion.  These two are what financial experts are talking about when they advise caution with high yielding stocks.  The yields are high because the share price is low.  This is basic math – yield is calculated by dividing the annual dividend paid by the current share price.  Both have negative dividend growth forecasts and a negative track record of total shareholder return over five years.  In addition, analysts do not see earnings growth over the next two years for either company, with Myer showing a drop of 9% and Kathmandu a drop of 2.4%.

Investors with risk tolerance may be willing to take a chance on the turnaround potential of these two retailers.  Investors looking for safety in high yielding stocks that could benefit from an upward spike in consumer spending should look elsewhere.  Here is a price movement chart comparing Myer and Kathmandu.

You can see from the chart investors began to lose confidence in KMD late 2014 as the company’s Christmas sales began to lag.

RCG Group (RCG) is in the footwear business, selling “performance, comfort, and active lifestyle” shoes through its own Athlete’s Foot retail outlets, with more than 150 stores throughout Australia and New Zealand.  The company also wholesales its brands to other retailers.

RCG stock had a tough 2014 and suffered a major drop following a profit warning issued on 2 June due to lagging consumer confidence and general concerns over the federal budget.  Here is the chart.

The share price has recovered somewhat and analyst forecasts for earnings over the next two years call for an 11% rise.  The company’s long term performance is solid, with total shareholder return over 10 years at 15.4% and 34% over three years.  RCG’s dividend growth rate over 10 years is 16.9%. Although the Payout Ratio of 98% is high, the formula for calculating the payout ratio – divide dividends per share by earnings per share – suggests that the kind of double digit earnings per share growth for RCG leaves a margin of error.  

Automotive Holdings (AHE) is another consistent dividend paying retailer.  This company has perhaps the brightest retail prospects of any of the stocks in our table in the current environment.  Automotive Holdings operates the biggest network of auto dealerships in Australia.  In addition, the company is now the largest operator of refrigerated transport and warehousing.  Lower petrol costs will benefit the transport business and could send more consumers out looking for new cars.  In addition, lower interest rates for automobile financing could increase sales.  

AHE has a 7.2% earnings growth forecast over two years and has rewarded shareholders with an average annual rate of total return of 34.7% over three years.  In addition, the company is attractive on valuation grounds with a current P/E of 12.44 – well below the Sector P/E of 14.07 – and a Forward P/E of 11.15.  

The share price collapsed in the wake of the GFC but has climbed back and is now up about 250% over 10 years.  Here is the chart.

Harvey Norman Holdings (HVN) is an electronics and home furnishings retailer, operating largely through franchise operations.  The company has had its share of troubles in the face of headwinds in the retail sector, but the property upsurge has helped its bedding, carpets, flooring, and appliance sales.  In addition, the company has wholly owned overseas stores operating under the Harvey Norman brand.  A retail property portfolio rounds out the company’s business operations.

Harvey Norman was one of many Australian retailers suffering from foreign online competition in the electronics space.  The company’s share price began a dramatic rise in 2013 and is now up more than 90%.  Here is the chart.

Over three years HVN has rewarded its shareholders with a total return of 32.2%.  Despite its 7% two year earnings growth forecast, some analysts are skeptical about the company’s future, with four analysts recommending selling the stock.  However, there are also six analysts recommending buying the stock!

The company got an ASX Speeding Ticket on 14 January prompting Chairman Gerry Harvey to comment that there was a “big surge” in the company’s Christmas sales.  Half Year Results are coming up on 27 February.  Investors should keep in mind the company’s stellar dividend and share price performance is of relatively recent vintage, with the share price up 10% over 5 years compared to a 20% rise for the XDJ Consumer Discretionary Index.

The final stock in the table is electronics and appliance retailer JB Hi Fi (JBH), still a favorite target of Aussie short sellers.  The stock held the number one spot in the Top Ten Shorted Stocks list for what seemed like an eternity, but now has fallen to number 7 with a short interest under 10% at 9.72%.

The low point for shareholders came in 2012 but the company has posted an average annual rate of total shareholder return over the last three years of 21.3%.  Over 10 years the total return is 20.9%.  Here is a 10 year price chart for this volatile stock.

On 2 February the company reported mediocre Half Year Financial results.  The share price at the open of trading was $17.01 and the stock closed the day at $16.48.  As of mid-day on 6 February, the price was up to $17.55.  

The skepticism about this company goes back to the cut throat competition from foreign online retailers, forcing discount king JB Hi Fi to lower prices and consequently threaten margins.  In November of 2012 the company announced the launch of JB Hi Fi Home, a concept store combining the company’s electronics with home appliances and white goods.  Some analysts scoffed at the notion but it appears to have worked.  In the recently released results the company reported 5.8% comparable store sales growth for the Home Division.  Management also announced plans to be at 188 stores by the end of 2015; 136 JB Hi Fi Stores and 52 JB Hi Fi Home Stores.  Analysts have a consensus Overweight rating on JBH with 7 Buy recommendations, 8 at Hold, 1 at Underweight, and 1 at Sell.

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