With the best 60-month term deposits now offering a yield in the 4.6% to 5% range (albeit laden with Ts & Cs), the investment income landscape is a lot more generous to savers than it was even a year ago. However, for investors prepared to look for extra income in the share market, there are some very alluring prospects; particularly when they can make the case for share price growth prospects, to give them a total-return situation that can arguably be pitched in the 20%-plus range — naturally, with the ever-present added risk of the share market well and truly understood.
Here are three stocks that I think are right in the sweet spot of this situation.
- Ampol (ALD, $30.28)
Market capitalisation: $7.2 billion
12-month total return: 3.4%
Three-year total return: 13.8% a year
Estimated FY23 (December) yield: 6%, fully franked (grossed-up, 8.6%)
Analysts’ consensus target price: $36.35 (Stock Doctor/Thomson Reuters, 11 analysts), $35.27 (FN Arena, four analysts)
In February, Australia’s largest oil refiner posted record annual earnings – Ampol uses the calendar year as its financial year – and rewarded shareholders with a big dividend payout. Revenue jumped 78%, to $38.5 billion, driven by the refinery business; operating earnings before interest and tax (EBIT) more than doubled, to a record $1.3 billion; underlying net profit (excluding significant items) from continuing operations for 2022 surged 45% to $732.3 million; and on the back of its soaring earnings, Ampol declared a final ordinary dividend of $1.05 a share, up from 41 cents last year, and also declared a special dividend of 50 cents a share, taking the full-year payment to $2.75 a share. The NZ$2 billion acquisition of Z Energy in New Zealand flowed into the company’s result from May 2022, while the fuel retailing business notched an almost three-fold jump in earnings, and at the wholesale level, jet fuel sales were particularly resurgent.
Revenue exceeded analysts’ expectations, but net profit fell short because of a higher tax bill and a settlement with the Australian Taxation Office (ATO) for $157 million relating to Ampol’s earnings from its Singapore entity.
Analysts don’t expect Ampol to do as well in FY23 or FY24: in March, Ampol flagged a hit to earnings (of up to $50 million) from a planned operational scale-back at its Queensland oil refinery, due to a temporary reduction in production until at least early May. And refining is an inherently cyclical business – it was badly affected by the pandemic, but resurgent jet fuel.
But while analysts expect earnings per share (EPS) is to fall by about 20% in 2023, and stay relatively flat in 2024, on an expected payout ratio of about 69%–71%, Ampol is likely to churn out dividends that equate, at the current share price, to about 6% fully franked, or about 8.6%, grossed-up. And with analysts seeing the stock well short of consensus target prices, the total-return situation starts to look capable of offering 20%-plus.
- Graincorp (GNC, $6.89)
Market capitalisation: $1.5 billion
12-month total return: –24.6%
Three-year total return: 29.1% a year
Estimated FY23 (September) yield: 6.7%, fully franked (grossed-up, 9.5%)
Analysts’ consensus target price: $8.65 (Stock Doctor/Thomson Reuters, eight analysts), $8.55 (FN Arena, five analysts)
As an integrated agribusiness with a heavy focus, as the name suggests, on the grain business — it has grain handling, storage, trading and processing operations in Australia, New Zealand, North America, Asia, Europe and Ukraine, with customers in 50 countries — Graincorp’s earnings are highly leveraged to eastern Australian grain volumes, which in turn, depend heavily on seasonal conditions on the east coast of Australia.
To put it mildly, Graincorp’s fortunes turned with the rains that broke the 2017–2020 drought. The El Niño weather pattern that brought the drought ran its course, and three soggy seasons of the La Niña weather pattern have resulted in back-to-back bumper crops in Australia, with another one expected in 2022-23.
That’s been manna from heaven for Graincorp investors.
The nation’s winter crop production has burgeoned to never-before-seen levels, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). “National winter crop production has driven much of these results, with the winter crop estimated at a new record of 67.3 million tonnes in 2022–23, driven by a record 39.2 million tonnes of wheat, 14.1 million tonnes of barley (the third-highest crop ever) and a record 8.3 million tonnes of canola,” ABARES says.
Despite flooding in eastern states, ABARES expects the national winter crop to beat last year’s record by 4 million tonnes, “driven by exceptional results out of Western Australia and South Australia.” For the high-value wheat and canola crops, production is expected to more than double from the depths of 2019-20, to almost touch 40 million tonnes.
As the crop has doubled in size, so has Graincorp’s share price doubled, from $2.95 in March 2020 to levels approaching $7.
FY22 (year ended September 2022) was a record-breaking year for the company, with a net profit that almost tripled to $380 million, and a fully franked dividend haul — swelled by a special dividend of 16 cents a share — that totalled 54 cents per share, up from 18 cents a share in FY21.
FY23 earnings will clearly be well down on that record result given a smaller crop (albeit the fourth-largest on record), but global demand for grain continues to outstrip supply, Australian wheat remains in high demand, and Graincorp says it is on track to export 8.5-9.5 million tonnes in the year to September 30, meaning that shipments could even exceed FY22’s figure of 9.2 million tonnes.
In guidance issued at the AGM in February, Graincorp said it expected to post earnings before interest, taxes, depreciation and amortisation (EBITDA) of between $470 million and $530 million this year — compared to $703 million in FY22 — and FY23 net profit of between $180 million and $220 million.
On these numbers, analysts believe a 46-cent dividend is achievable, which would flow into a grossed-up yield of over 9.5%. On top of that, analysts see plenty of scope for share price appreciation. Investors just have to keep in mind that as El Niño comes back to prominence, the good times for Graincorp will likely become tougher in the medium term, from 2024 on.
- Nick Scali (NCK, $9.71)
Market capitalisation: $787 million
12-month total return: –5.8%
Three-year total return: 41.1% a year
Estimated FY24 (June) yield: 5.6%, fully franked (grossed-up, 7.9%)
Analysts’ consensus target price: $12.00 (Stock Doctor/Thomson Reuters, seven analysts), $13.56 (FN Arena, two analysts)
Furniture retailer Nick Scali is slowly emerging from a period of a disrupted supply chain from the impact of lockdowns in China, which flowed into the FY22 result. While total sales increased by 18.2 per cent, to $441 million, net profit for the year slid 11.1 per cent, to $74.9 million. The company said underlying net profit after tax was $80.2 million, down 4.9% on FY21.
Then, in February, the market appeared unimpressed with the half-year result to 31 December, despite a 57.4% rise in revenue, to a half-year record of $283.9 million, and a 70% increase in net profit from to $60.6 million (clouded by the fact that the H1 FY22 reported results were “underlying,” and in the December 2022 result, the company made no adjustments from statutory to underlying results.) Even though NCK declared a fully franked interim dividend of 40 cents a share, up 5 cents (14.3%) on the FY22 interim dividend, the shares fell 13%.
The market didn’t appear to like the fact that the company mentioned a year-on-year decline in sales orders for January — usually its strongest trading month —, and did not give any full-year guidance, saying: “The 2H FY23 result will depend upon trading during February to April and at this point it is difficult to provide further guidance.”
There haven’t been any particularly price-sensitive updates since, but analysts are still confident in Nick Scali’s ability to lift its earnings in the full financial year: the analysts’ collation on Stock Doctor expects 22% growth, while FN Arena’s collation is more bullish, projecting 33% growth in EPS.
FY24, however is expected to show an earnings fall; not surprisingly, given that the current environment of higher interest rates, a weaker property market than recent years, and slowing consumer spending is a difficult one for furniture retailers.
However, FY23 will be the first full-year contribution from the acquisition of sofa specialist plush, which it bought in October 2021. Plush added another 45 furniture stores to the 62 under the Nick Scali brand. The company is beavering away at realising the efficiencies and supply-chain synergies of integrating Plush, and that will boost the margins in that business: in the December 2022 half, Plush’s gross profit margin improved to 60.5% from 54.8% for FY22. For the company as a whole, Nick Scali’s first-half gross margin of 62.5% was consistent with FY22.
Nick Scali is consistently rated as one of the ASX’s best-managed companies, and has a great track record of steady growth over the long term. In this kind of environment, discretionary retailers are always at risk of a downturn that shocks the market, but for the heightened short-term risks, analysts see a very attractive yield and plenty of capital-growth headway for Nick Scali.
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