In a tough year for investors, dividends again saved the day – barely. A loss of 2.1% for the S&P/ASX 200 Index for calendar 2015 became, on the S&P/ASX 200 Accumulation Index (which counts dividends), a gain of 2.6%
And with the price index already down close to 6% on its 2015 close, dividends look likely to be even more critically important this year.
Of course, looking for the best dividend yields on offer is hardly a new strategy on the Australian market: it is already a seemingly crowded trade. But given the turmoil on world markets, yield looks like being a safe haven in 2016, too.
Where possible, investors should be looking to augment dividend income even further. In that light, here are four possibilities for a special dividend top-up – on already attractive yields – in 2016.
Qantas Airways (QAN, $4.08)
Market capitalisation: $9 billion
Last 12 months: +69%
Analysts’ consensus price target: $4.91
Implied upside: +20.3%
Analysts’ consensus FY16 yield: 6.4% unfranked
Qantas’ (QAN) impressive turnaround since the horror result of FY2014 – a $2.8 billion loss – has been well documented, being built on a determined assault on operational cost. The national flag carrier has reduced its workforce, aircraft fleet and capital spending; it has ditched underperforming routes; and worked hard to improve efficiencies and customer service. Now it appears poised to cash-in on the bonuses of a continued period of capacity restraint in the domestic market and plunging fuel costs.
Hammered by the turmoil in China, oil prices have slid to their lowest levels since 2004, and this will flow through to Qantas’ jet fuel costs. Put simply, oil at these levels pours money into Qantas’ coffers. Broker Credit Suisse for one believes that analysts’ consensus currently under-estimates the benefit to QAN from falling fuel prices, and that excess free cash flow – after all capital spending – cannot help but build-up on the balance sheet. As well as boosting ordinary dividends, Credit Suisse reckons Qantas could pay a special dividend of 50 cents a share both this year (FY16) and next, with room to go even higher, with excess capital of more than twice that payout. Credit Suisse’s target price of $5.50 is well ahead of consensus.
Insurance Australia Group (IAG, $5.21)
Market capitalisation: $12.7 billion
Last 12 months: –11.4%
Analysts’ consensus price target: $5.58
Implied upside: +7 %
Analysts’ consensus FY16 yield: 5.9% fully franked
IAG, the owner of big insurance brands such as NRMA and CGU, stunned the market in October when an institutional shareholder mutiny induced it to shelve its plans to expand in China. But pulling out of China means that the funds set aside for the strategy can now be used in a different way. IAG made a $500 million equity placement to Warren Buffett’s Berkshire Hathaway in June last year, and just this week announced that it had secured $7 billion of reinsurance cover to protect its balance sheet from natural disaster claims in 2016.
According to CBA, that gives IAG about $1.2 billion of excess capital, which should start flowing back to shareholders this year. IAG actually cut its full-year dividend in FY15 to 29 cents, from 39 cents in FY14, after full-year profit fell by 41 % on the back of a blowout in natural disaster claims; but CBA now expects IAG to pay a special dividend of 29 cents a share with the interim result next month, and says there is “further scope” for the insurer to pay special dividends of 16 cents a share each year for the next three years.
Suncorp Group (SUN, $11.50)
Market capitalisation: $14.8 billion
Last 12 months: –11.7%
Analysts’ consensus price target: $12.71
Implied upside: +10.5%
Analysts’ consensus FY16 yield: 6.5% fully franked
Insurance and banking group Suncorp has good form on the special dividend front. In FY12 it paid a sweetener of 15 cents a share, and followed that with 20 cents a share in FY13, 30 cents a share in FY14, and 12 cents a share in FY15. And there appears to be scope for the special-div largesse flow to continue, as Suncorp unlocks more capital from its business.
About 60% of Suncorp’s earnings come from its heavyweight general insurance division – through major brands such as AAMI, GIO and APIA – with the banking division generating about 30%, and life insurance the balance. The company is in the process of what it calls “optimising” its platform, which involves using big data analytics to drive more efficient use of customer, policy and claims data, as well as its own HR, finance and management data. Suncorp expects to generate about $170 million from this process by FY18. Suncorp promises shareholders that it will payout between 60 %–80% of net profit as dividend and “return any surplus capital” – meaning another special dividend this year would not surprise.
Platinum Asset Management (PTM, $7.11)
Market capitalisation: $4.2 billion
Last 12 months: +7.2%
Analysts’ consensus price target: $7.74
Implied upside: +8.8%
Analysts’ consensus FY16 yield: 5.6% fully franked
One of the ways that Australian investors can get away from reliance on their home market is to buy overseas shares – and Platinum Asset Management is one of the best methods of doing that. Platinum runs a broadly diversified flagship International Fund, as well as more targeted – but still diversified within that targeting – Asian and European funds.
Given the turmoil on world markets, the company’s funds under management (FUM) is flighty at present: the three most recent readings show FUM down 0.8% in September, up 5% in October and down 2.9% in November. However, longer-term Platinum investors would know that a “contrarian” style and focus on absolute returns means that its funds’ returns do not show much correlation with market indices. PTM’s profit comes mostly from management fees on funds with specific mandates: that is much more preferable than relying on performance fees. Platinum paid a special dividend of 10 cents a share in FY15, and some analysts see potential for a repeat performance this year.
All charts sourced at Yahoo!7 Finance, 11 January 2016
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
