Now that the RBA has decided to keep the all-time low cash rate of 2.0% where it is, the frothy speculation among experts has shifted to what might come next month, and the month after, and the month after. Some forecasters predict a May cut to 1.75. Meanwhile, Morgan Stanley and others are predicting a second cut by the end of 2016, with the rate settling down at 1.5.
There are few certainties in life, but a prediction the cash rate will not be going up anytime soon comes close. If you have not already done so, maybe it is time to consider searching for yield in equity dividend payers.
One avenue to explore is to follow the advice of many analysts and experts and stick with the big blue chip dividend payers. That advice might make sense when times are good, but in stormy weather many blue chips flounder. BHP and RIO once were favoured dividend payers – but no more. The Big Four banks are still churning out juicy dividends but analysts and experts are increasingly skeptical they can continue to do so for much longer.
Times may not be as bad as some would have you believe, but neither are they good: looming over all of us is the spectre of recession. Steve Keen, the economist who wrongly predicted the bursting of our housing “bubble”, is now making a case for a recession based on data compiled by the Bank of International Settlements on private and government debt. He may be wrong again but the information in the Bank of International Settlements does not appear to be cause for celebration. The following graph makes the case.
It seems Australia did the opposite of advanced economies around the world following the GFC – we increased debt while others reduced theirs. As one would expect, in short order other economists came forward claiming things were not as bad as they seemed if you interpreted the data in another way. The chief economist at research firm Capital Economics claims the data cited by Keen stems primarily from housing debt and does not take into account Australian households increasing cash reserves in other accounts.
Economic forecasting is hardly an exact science. US economist Paul Samuelson famously said: “Wall Street indices predicted nine out of the last five recessions”!
If you lean towards bearish sentiments, or are simply looking for dividend payers that perform well in good times as well as bad, there may be some relatively “bullet-proof” stocks out there to consider.
Diversified financial companies that operate as easy credit providers and/or offer debt collection services are possibilities. In theory, the logic seems irrefutable. In recessionary times people and small businesses in trouble look for more credit to tide them over till things get better, which they often do not. Once debt defaults increase these companies step it to either help traditional loan and credit providers recover what they can; or they buy debts in bulk for pennies on the dollar and recover what they can on their own.
In the United States payday lenders did a booming business following the GFC; not immediately, but in a relatively short period of time. One of our largest easy credit providers, Credit Corp Group (CCP) followed a similar pattern. Here is a price chart comparing the movement of Credit Corp and the US company Cash America.
You can see both dropped but both recovered quickly in comparison to other business sectors. In short, one could make a strong case for looking at ASX diversified financials operating in the lending and collection space with strong dividend prospects. The following table includes five stocks to consider. We looked for stocks with a minimum dividend yield of 4.5% with 100% franking and double digit two year growth forecasts in dividends and/or earnings.
The smallest stock in the table, Pioneer Credit (PNC), is also the newest, beginning trading on the ASX in May of 2014. The company’s P/E is not quite half the Sector P/E (Diversified Financials) of 15.46. The company raised $40 million from fund managers and high net worth individuals buying shares at an issue price of $1.60. Pioneer is in the debt collection space, buying portfolios of bad retail loans from banks and other credit providers. These are unsecured retail loans typically more than 180 days past due. Pioneer buys the loans at a discount and then works to make arrangements to collect the debt from the borrower. Pioneer is the largest debt collector in Western Australia.
In its first full year reporting (FY 2015) the company posted a 51% revenue increase along with a 611% increase in net profit after tax (NPAT). For the Half Year 2016 Pioneer reported revenues up 36% and NPAT up 152%.
The Pioneer stock price movement does not seem to reflect the impressive financial performance.
With a decline of 3% year over year Pioneer had the best share price performance of any stock in the table. The forward looking numbers for all of the companies look respectable. Year over year the ASX 200 is down about 15% and only two of the five stocks bested that mark. Perhaps past financial performance explains what is happening here.
The following table lists revenue and profit reported for each company for the last three years.
Cash Convertors was the only company that struggled and that may have turned around as the 2016 Half Year Results saw another revenue increase but NPAT went from the previous period loss of $5.5 million to a profit of $15.9 million. In addition, the company announced a change in strategic direction. Cash Converters is selling off its corporate locations in the UK, returning to a master franchising strategy. The company plans to focus on the most profitable business segments here in Australia, with investments to build on its brand strength and increase online lending operations. Cash Converters is classified as a retailer due to its franchised and corporate-owned outlets for buying and selling second hand goods. However, the company has a financial services operation offering cash advance and payday loans, earning it a place under the ASIC (Australian Securities and Investment Commission) microscope as new regulations are considered for the industry. What may be keeping investors away from these companies is the ongoing ASIC effort to monitor the industry.
Money3 Corp is the only pure play lender in the group, the others are diversified to varying degrees with operations including both loans and debt collection services.
Money3 Corp had two operating divisions; one for secured loans and one for unsecured loans. It is the unsecured business offering short term cash loans from retail locations and an online platform that is under scrutiny. The argument in favor of short term cash loans has been it serves a market segment that cannot access traditional sources of financing. Money3’s secured division also deals with that segment but the loans are primarily used for vehicle and boat purchases and repairs and are thus secured by the vehicle.
On 18 November of 2015 the company announced it would be out of the small unsecured loan business by mid-year 2016 in order to focus exclusively on its more profitable secured loan operation. Money 3 now has plans to broaden the range of items eligible for secured loans. The company’s Half Year 2016 results were outstanding with a 45.4% rise in revenue and a 37.3% profit increase.
Credit Corp Group (CCP) offers debt collection services for both consumer and commercial loans in default. In addition, the company buys groups or ledgers of consumer debts from banks, lending institutions, and telecommunications companies. The company’s primary business is not short term loans; rather it is in the business of recovering as much as possible from delinquent credit cards, phone bills, and personal loans. However, Credit Corp has an online subsidiary company called Wallet Wizard that offers fast cash loans from $500 to $5,000.
The company posted solid Half Year 206 results with 20% revenue growth along with a 6% profit increase. Credit Corp’s current dividend yield is lower than the other companies but it has an impressive five year dividend growth history of 40.6%. The company has rewarded its shareholders with positive total returns over ten years. The following table shows the five year dividend growth as well as total shareholder returns for the four companies trading at least three years.
Thorn Group (TGA) is the most diversified stock in the table offering consumer rentals and unsecured loans, consumer and commercial equipment financing, receivable debt management services for businesses, and a short term cash financing operation for businesses. The debt management operation purchases bad loans for recovery as well as managing debt repayment for its clients.
The company’s Half Year 2016 results showed modest increases in revenue, up 7.4%, and profit, up 1.5%. Some of Thorn’s businesses are more at risk of recession than others. For example, the company’s commercial finance operation provides financing for small- to medium-sized businesses to purchase needed equipment under $100,000. Generally speaking companies buy equipment to expand to meet demand and in recessionary times demand typically dwindles.
These companies have solid growth potential that in fact exceeds that of some of our best known blue chip dividend payers. The two year earnings growth forecast for Telstra (TLS) is 2.2% and for our largest bank, Commonwealth Bank of Australia (CBA) the earning growth forecast is 4.4%.
Payout ratio is the final point to be made in favor of these apparently unloved stocks. Payout ratio is the percentage of earnings paid to shareholders as dividends. Companies with lower payout ratios are better equipped to sustain the dividend in challenging conditions as well as having more cash to invest in growing the business. Generally speaking lower payout ratios are preferred – higher payout ratios are more risky if the company’s earnings growth forecasts are low.
CBA’s payout ratio is 78% with two year earnings growth forecasted at 4.4%.
Telstra’s payout ratio is 88% with two year earnings growth forecasted at 2.2%.
Here are the payout ratios for the potentially bullet-proof dividend payers:
Credit Corp Group ` 53%
Thorn Group 54%
Cash Converters 23%
Money 3 Corp 53%
Pioneer Credit 50%