We Test 6 Dividend Payers for Total Shareholder Return

When buying stocks for yield, many investors focus on dividends alone and forget about total shareholder return. Indeed, the best stocks are those that deliver both – dividends plus capital appreciation over time. The trouble is, how do you know if a high-yielding stock is becoming too popular for its own good?

UBS recently downgraded Telstra (TLS) to SELL due to its lofty share price. BA-Merrill Lynch and CIMB Securities have UNDERWEIGHT recommendations for similar reasons. Even the major banks are looking scarily stretched; Goldman Sachs, for instance, recommends selling banks and buying the undervalued mining stocks (now that’s a contrarian play).

A quality dividend payer is a company with an attractive current yield, franking credits, and a record of solid historical total returns to its shareholders on an average annual basis. Additionally, the company needs growth forecasts to sustain the dividend.

The following table details price performance, valuation measures, dividend yield, and shareholder return.  The grossed up yield takes franking credits into account. We selected Telstra to test analyst opinion that the stock is too pricey, and small cap Amcom Telecommunications as a potential “hidden gem.”

Do these stocks pass the quality test? Here’s the price chart:

And here’s the table:

On the total return measure both companies well and truly pass the test. However, past performance does not guarantee continued dividends.

From Thompson/Reuters we get some forward looking valuations for AMM and TLS. The Forward P/E to 2014 for Telstra is 15.39 and the 5 year expected P/EG is 3.81. Telstra is the largest player in Australia and the recent spectrum auction for mobile bandwidth saw it outbid rival Optus.

Telstra’s growth outlook is modest, but dividends are unlikely to be slashed anytime soon.

Over the past decade, Telstra’s fortunes have hinged on the National Broadband Network (NBN), which appears solved. Even if the coalition wins, their policy differs little from that of the current government.

Amcom Telecommunications (AMM) is a company that few income investors would notice because its current dividend yield, of 3.1%, is too low. Taking franking credits into account, however, the stock looks more attractive.

Current valuations for AMM appear a bit rich, but forward estimates indicate the company has the growth potential to maintain and even increase dividend payments. The forward P/E is 17.50 with a 5 year expected P/EG of 1.08. Amcom has its own fibre optic network and its customer base is business enterprises and government agencies. CIMB Securities and Macquarie rate the stock as OUTPEFORM and see double-digit growth justifying the high valuations.

Investors should always check the historical record of actual dividend payments. Quality dividend payers find a way to maintain dividends even in tough times.  Here is a table showing the year by year dividend payments for Telstra and Amcom:

Telstra declared special dividends in 2005 and 2006, accompanying plans to upgrade its copper network prior to the advent of the NBN. Negotiations with the ACCC (Australian Competition and Consumer Commission) broke down in mid 2006, paving the way for the NBN. The company’s share price suffered while negotiations with the new NBN dragged on but Telstra never cut its dividend. Amcom has increased its dividend every year.

Taking into account Goldman Sach’s call that the undervalued mining sector might make an interesting contrarian play – below we will look at two of Australia’s largest mining services providers – Monadelphous Group Limited (MND) and Ausdrill Limited (ASL).

Monadelphous is an engineering firm engaged in construction and maintenance services for resources, energy, and infrastructure companies.  Although the company’s principal focus is iron ore, coal mining and mineral processing, MND also serves the oil and gas, water and power sectors. The company operates primarily in Australia with additional operations in New Zealand and Papua New Guinea.

Ausdrill provides exploration, mine development, and surface and underground drilling to mining companies in Australia, the UK, and Africa.

Here’s the table for the two mining service providers, showing price performance, valuation measures, dividend yield, and shareholder return:

Ausdrill serves to make the point about shareholder return. The company has paid an increasing dividend over the last decade but stock price volatility has left shareholders in the red. On a ten-year basis, ASL has a positive total average annual shareholder return of 14.3%. For the ten year period, MND’s return is 41.1%.  Depending on your definition for short and long term, ASL did not meet the shareholder return test.

The question for both these companies is earnings growth. Obviously analysts can get it wrong, but for Ausdrill the growth is not expected. According to Thompson/Reuters, the one year growth estimate is -3.0% with a -7.30% forecast over five years.

Interestingly, the most recent recommendation from CIMB Securities is an upgrade from NEUTRAL to OUTPEFORM. The analyst feels Ausdrill has an advantage from its drilling services for mines already operating as well as its exposure to African gold mining operations. JPMorgan Chase, Deutsche Bank, and UBS have OVERWEIGHT and BUY recommendations; all noting the company’s core business is services at existing mines. Citi downgraded the stock from NEUTRAL to BUY following a profit warning from ASL management.

Since mid February, Citi, UBS, Deutsche Bank, JPMorgan Chase, and BA-Merrill Lynch have SELL or UNDERWEIGHT recommendations on Monadelphous, citing the usual suspects – challenging market conditions and uncertain guidance. The lone holdout is CIMB Securities that upgraded MND to OUTPERFORM following Half Year results that saw a 38% rise in NPAT along with a 34% increase in EPS and a 24% increase in DPS.

The cautionary forward outlook is the big risk factor since MND management forecast slowing project approvals and difficult revenue growth prospects for 2014.

Consensus estimates show 2 year earnings forecast of 8.4% and a dividend growth forecast of 8.6%. Investors appear to be siding with the negative analyst opinion as MND is now on the Top Ten Most Shorted Stocks list with a short percentage of 11.97.

Over the past month the share price of both has fallen, although ASL is stabilising. Here’s the one month chart:

Both these companies have a solid record of dividend payments over the last decade. Here is the table.

Factoring total return into a search for dividend paying equities can lead to some surprising results.

Our final two stocks are Finbar Group and JB Hi Fi, which is still an ASX Top Ten Shorted stock.

With a market cap of just $288 million, Perth based property developer Finbar Group Limited (FRI) receives little fanfare, despite impressive shareholder returns and modest valuations. Finbar develops medium to high density residential apartments and commercial property in Western Australia. The company either buys land on its own or through joint ventures to spread risk and allow for larger scale projects. Finbar outsources development needs, sales force, and construction to limit capital expenditures. The entire operation is run by fifteen people!

The company’s numbers are outstanding across the board. The growth prospects are solid. Recently the Real Estate Institute of Western Australia warned of a housing shortage in Perth.  Finbar has announced significant new land acquisitions in the area over the past few months. The company’s dividend payment record is solid. Despite the GFC, Finbar managed to cut its dividend by only $0.01 between 2008 and 2009. Here is the table along with the payment history for the final stock in our table, JB Hi-Fi (JBH):

JBH has remained the top shorted stock on the ASX for quite some time. The company built its reputation as the low price electronics leader and has suffered from foreign imports, online competition, and the high Australian dollar crushing its already thin margins. As you can see from the table, despite its world of woes JBH has remained consistent with dividend payments with the exception of a cut following a tough 2012.

The share price has performed well in 2013.  But what about future growth?

Morningstar shows a modest 2 year earnings growth forecast of 5.9% along with forecasted dividend growth of 6.9%. JBH increased its earnings guidance twice over the last three months yet the short sellers remain unconvinced.  The risks are two fold.  First there are structural changes in the electronics industry with the avalanche of streaming and direct download opportunities. Music CD’s, DVDs, Video games, and computer software are disappearing from store shelves.

The second is JB Hi-Fi’s reliance on brick and mortar locations.  The company has 180 stores across Australia with 214 stores anticipated. Analysts wonder what then, as JBH only generates 2% of its current revenue from online sales and will remain saddled with the operating costs of physical locations. Citi has a SELL rating on the stock anticipating a 2% drop in NPAT in 2014 followed by a 10% drop in 2015. CIMB Securities on 06 May upgraded the stock to OUTPERFORM and Macquarie is maintaining its OUTEFORM rating.  The Macquarie analyst noted a “strong product pipeline” ahead while Deutsche Bank’s primary concern appears to be the lack of anything to replace dwindling software sales.

JBH management has defied the odds for a few years now, responding to changing conditions with the roll out of its own online presence and the addition of appliances and other white goods in “concept stores.” With its extensive existing product mix and loyal and youthful customer base, JBH may continue to surprise.

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