Time for Lower Risk Dividend Payers

The Australian economy continues to show flickers of light, strengthening the case our recession is over. On 4 November, investors learned retail trade rose by 6.5% in the September quarter, adjusted for inflation, surpassing the forecast of +6.0%.

The positive news further sweetened the prior announcement on 3 November that the Australian Industry Group/Housing Industry Association organisation’s construction index rose 7.5%, vaulting into expansion territory with the index reading of 57 points. The construction index has not been above 50 since 2018.

On 2 November, the consumer confidence ushered in the chorus, with the ANZ-Roy Morgan consumer confidence index reached 99.9 points, notching the highest reading since March. The index has now risen for nine consecutive weeks.

However, the RBA remains concerned about unemployment, although their earlier estimated of unemployment topping out at 10% now has been reduced to 8%. The market expected the interest rate cut, down to an all-time low 0f 0.10%

The additional boosting measure of a $1 billion dollar bond buy quantitative easing (QE) was unexpected. The RBA went on to say, “it is not expecting to increase the cash rate for at least three years.”

While things seem to be improving somewhat, our economy is not limited to what goes on here, nor is the performance of stocks on the ASX. Markets in the US have historically preferred divided government, which they are likely to get as the Democratic Party there failed to gain control of the Senate and the Presidency remains in question. The rally in the US spurred by the prospect of divided government failing to effect much change spilled over to the ASX, with markets here having a good week as well.

However, the COVID 19 Pandemic is still raging in the US, opening the potential for more business closures and the country’s fiscal stimulus pot is running empty.

Given the potentially shaky condition in the US and the rock-bottom interest rates here, it seems prudent for investors to consider expanding their holdings to include safe dividend stocks with growth potential.

Stock screeners investors can find on the Internet or through their trading platforms can produce a list of prospects, but newer investors in the space should beware of shopping for stocks based on yield alone. Yield is calculated by dividing the total annual dividends paid by the stock by its share price. The result can push stocks whose share prices are in free fall to top positions on a screener result. Consider the beaten down coal stocks as an example.

Whitehaven Coal (WHC) and Yancoal Australia (YAL) appear on the results page of many stock screeners at or near the top of the list, with Whitehaven topping out on the ASX website with a mammoth yield of 30.58% and a more modest forward annual yield of 14.08% on Yahoo Finance Australia. Yancoal comes in at 15.93% on the ASX site and 15.94% on Yahoo.

The point of investing in dividend stocks is to increase the total return on the investment, which is impacted by share price performance. Here is the share price performance of these two seemingly high flying dividend payers over the last three years, from the Reuters financial website.

The end result for the investor is an annualised rate of total shareholder return over the three years of -30.2% for Whitehaven and -15.4% for Yancoal.

Conventional wisdom says investors looking for solid dividend payers should look for companies with a history of profitability and low debt. Declining profits and high debt can lead to companies reducing dividend payments or eliminating them altogether.

In today’s investing climate targets should be in businesses that are operating in the current pandemic environment with no or minimal disruption.

The following table includes four stocks with dividend yields in excess of 5% and a history of repeated dividend payments and earnings growth. Three of the four are somewhat under the radar of most high dividend stock screeners. While two of the four were negatively impacted by the pandemic, their businesses are showing positive signs in our recovery.

Fortescue Metals has had a rocky ride with its share performance but both its earnings and dividend performance over ten years has been stunning, to say the least. The following share price performance graphically displays both the share price volatility and the repeated dividend payments over ten years.

Long time followers of Fortescue should note the massive improvement in the company’s debt position with a respectable debt to equity ratio. A few years back the analyst community howled in dismay at the company’s massive debt load. As of the most recent quarter Fortescue had $5.11 billion dollars in debt, but total cash of $4.86 billion and a current ratio of 2.25 should allay the fears of investors with low tolerance for risk. The current ratio tells investors if the company can cover its short-term debt obligations – those due in the year. A ratio over two means the company has two times more assets needed to cover current liabilities.

Fortescue is Australia’s only pure play iron ore miner and as such is more dependent on a stable, if fluctuating, price of iron ore. On 10 August, the Australian Financial Review reported Bank of America had upgraded its forecast for iron ore through 2024, also stating there would be some price fluctuations along the way.

Fortescue has grown both revenues and profits substantially since FY 2018 when the company reported $9.2 billion dollars in revenue and a net profit of $1.2 billion. In FY 2020 Fortescue reported a profit of AUD$18.6 billion dollars and profit of AUD$6.9 billion.

Harvey Norman Holdings (HVN) is a broadly diversified company best known for its retail operations, which includes a robust online presence and multiple company owned and franchise brick and mortar locations across Australia, New Zealand, Singapore, Malaysia, Slovenia, Croatia, Ireland, and Northern Ireland.

Harvey Norman’s product offerings are as diversified as the company itself, including “electrical goods, furniture, computerized communications, bedding and Manchester, kitchen appliances, small appliances, bathroom and tiles, and carpets and flooring, according to the company website. The company’s core product offerings are in the audio visual and technology segment.

The company values its extensive property portfolio at $3.0 billion dollars, including both company owned and franchisee operated stores as well as administration buildings and showrooms in Singapore.

In the first half of FY 2020 Harvey Norman opened 5 new company-owned stores in Malaysia, cancelling the opening of an additional five stores due to the pandemic. The company’s store count stands at 194 franchised complexes along with 96 company owned stores. Harvey Norman has plans to add 12 stores in international locations in FY 2021.

The company’s FY 2020 Financial Results showed a 19.4% increase in profit and a 3.67% increase in revenue. While the pandemic related lockdowns impacted revenue, the “work at home” rush boosted online sales and company efforts to offer contactless delivery kept the company profitable. In addition, franchisees benefited from federal government stimulus programs.

While Harvey Norman cautioned the future impact of the pandemic remains unclear, company management noted sales “recovered quickly,” with improvement performance continuing.

The company did reduce its annual dividend payment from $0.33 to $0.24 per share.

Monash IVF Group (MVF) offers assisted reproductive services (ARS) and diagnostic imaging services for women here in Australia and in Malaysia, with a cooperative agreement with a hospital in China as well.

In the early days of the pandemic, many medical procedures deemed non-essential were put on hold, severely impacting Monash’s core business of helping deal with infertility issues. The company had warned of the impact COVID 19 could have on the company’s financials, so the 24 August release of FY 2020 Financial Results came as no surprise to investors.

Net profit after tax (NPAT) dropped a sickening 40.9%, with the company citing the pandemic impact from March to June period as responsible for an approximately $3.9 million dollar drain on profit. Revenues dropped 4.3% and the number of infertility patients treated during the fiscal year fell 7% while total patient treatments here in Australia were down 5.6%.

However, Monash management noted a “strong recovery in June and July 2020 across all markets with increased marketing investment” and anticipates a return to growth in FY 2021. Monash operates a total of 109 facilities – 25 facility centres; 65 consulting locations; 17 diagnostic sites; and 2 day hospitals. The company listed on the ASX in 2014, commencing dividend payments in its first full year of operation, with the negative impact of the pandemic dragging down the company’s average dividend and earnings growth and the suspension of its final dividend payment for the first time. Monash lags far behind the other stocks in our table but operates in a business recovering. The company’s P/E ratio of 12.4 is half the average P/E of 24.5 for the Health Care Sector.

Monash has 2 analysts with BUY recommendations and one with a STRONG BUY recommendation and a consistent record of dividend payments in a pre-pandemic world.

Schaffer Corporation (SFC) is an oddly diversified industrial company with operations in building materials, automotive leather, and property investments. This small cap is also a dividend powerhouse, never missing a dividend payment over the last decade.

The company’s automotive leather division was crushed by the pandemic, first by shutdowns in China and then in Europe.

On 20 March Schaffer, like many ASX companies, withdrew its prior guidance of FY 2020 NPAT approximating the FY 2019 result.

When the results were released on 18 August, the frozen sales in the automotive leather division drove down revenue by 24% but gains in the company’s property investment operation pushed FY 2020 NPAT up to $23.6 million dollars, besting the FY 2019 result of $22.9 million.

The property portfolio includes leased office, factory, and retail space. The company also develops and sells property assets.

The automotive leather division supplies Land Rover, Audi, Mercedes, Nissan, Toyota, and Ford, with production facilities here in Australia and in Slovakia and China.

The building materials operations should benefit from increasing construction activity here in Australia with its product line of re-cast and pre-stressed concrete elements, as well as paving, walling, and landscaping products, sold both to builders and consumers.

The company began as a provider of limestone building materials and expanded into automotive leather in 1984. Following the sale of Schaffer’s initial operations in building materials, the company’s presence in the sector now consists of the precast concrete and other building materials manufactured by the Delta Corporation, operating primarily in Western Australia.