Investing for income yield on the stock market is an essential part of an investment strategy, with the inescapable arithmetic caveat that share dividend yields rise as prices fall. The inverse of this relationship is that investors who thought they had “bought” a yield can watch helplessly as a share price fall negates all of this return, and more. And yield-oriented investors have certainly seen the impact of this in recent times, in the “big five” yield stocks of the Australian market, namely ANZ Bank, Commonwealth Bank, National Australia Bank, Westpac and Telstra.
Long-term share investors can reasonably expect a “total return” from their shareholdings, comprising both capital gain and dividend return, that more than compensates for the risk of periods of price weakness and/or dividend pruning (even cessation, but certainly not for long). The best situation is to have both components moving nicely in your favour – but that is not always available on the stock market.
The dividend side of the return depends on the strength of the earnings of the companies in your portfolio, and in uncertain economic environments, this cannot be guaranteed – which is the big question mark over stock market dividend investing.
For instance, bank investors cannot be certain that the big banks’ earnings and dividends will hold up, in FY19 and FY20. According to Thomson Reuters’ estimates collation, only CBA is expected by analysts to boost its dividend in FY19, and even then, it is a minuscule rise, from 431 cents to 431.2 cents. Further out, to FY20, only ANZ and CBA are projected to pay more in dividend than they did in FY18.
Where there is heightened uncertainty about expected dividends, investors can base their yield expectation on the “historical” dividend, that paid in the most recent full-year. This has the benefit of being fact, unlike dividend estimates.
The big banks still offer, in terms of yields as represented by their most recent historical dividend amounts, the following fully franked yields in FY19:
ANZ: 6.3% (grossed-up to 9.1%)
CBA: 6% (grossed-up to 8.6%)
NAB: 8.1% (grossed-up to 11.5%)
Westpac: 7.3% (grossed-up to 10.5%)
There will certainly be investors prepared to buy the bank stocks on these yields, with the ever-present caveats that share prices could fall, and that the actual dividends over the next couple of years could come in lower than those historical amounts. There is also the issue of what a Labor Party election win in 2019 could do to the treatment of franking credits, if investors are expecting full or partial rebates of unused franking credits.
Factoring-in historical dividend amounts in yield calculations is going to be a prudent (but not foolproof) way of looking at income expectations in 2019 and 2020. Here are four more examples of good yield situations that do not require an increase in full-year dividend.
- MyState (MYS, $4.39)
Market capitalisation: $398 million
FY19 historical yield: 6.5% fully franked, based on 28.75 cents FY18 dividend
FY19 estimated yield: 7% fully franked, on consensus dividend of 30.8 cents
Analysts’ consensus target price: $5.00
Although there are worries about the banks’ earnings, given the deteriorating housing situation in particular, Tasmanian-based financial institution looks to be well-insulated. MyState is underpinned in this situation by the fact that just under half (45.5%) of its $4.6 billion home-loan book is in the Apple Isle, which at the moment is well and truly the best-performing housing market in Australia. According to the CoreLogic December home value index results, where national dwelling values dropped by 4.8% in 2018 – marking the weakest housing market conditions since 2008 – Tasmania went completely against the trend, with dwelling values in Hobart rising by 8.7%, and values across regional Tasmania surging by 9.9%.
MyState focuses on high-quality lending, with investor and interest-only lending well below that of its peer group, and well within the regulatory guidelines. Buttressed by its Tasmanian base, growth is targeted to the eastern seaboard states, with a focus on lower loan-to-value (LVR) ratio loans with high asset quality.
The MyState Bank business generates 86% of group revenue: the rest comes from the Wealth business, which includes funds management, financial planning and trustee services business Tasmanian Perpetual Trustees.
- Adairs (ADH, $1.775)
Market capitalisation: $294 million
FY19 historical yield: 7.6% fully franked, based on 13.5 cents FY18 dividend
FY19 estimated yield: 8.2% fully franked, on consensus dividend of 14.5 cents
Analysts’ consensus target price: $2.40
Manchester and homewares specialist retailer Adairs has rebuilt is credibility after a disastrous profit downgrade in late 2016, in which it admitted that it got its inventory wrong in the crucial bed linen category, which accounts for about 40% of total sales. But more recently, the stock has been marked down on the back of concerns that it is exposed to falling house prices. That is arguably the wrong way to look at Adairs: for example, if homeowners decide to stay put and renovate, Adairs will benefit. But the broader argument for Adairs is that is actually driven (now that the market has regained confidence in how the company is managed) by fashion in home furnishings, rather than the housing market.
The company’s focus on large homemaker stores, its Linen Lovers loyalty program, and strong online sales growth have it positioned well. Online sales reached 13% of total sales in FY18 and the company expects to push that to 15% this year. Adairs has released guidance indicating a sales growth target of 9.5%–14% in FY19, and earnings before interest and tax (EBIT) growth of between 4.9%–13.7%.
The financial year got off to a good start, with the first 13 weeks of trade delivering like-for-like sales growth of +5.2% across stores and online – but as with all retailers, the Christmas season figures, and the half-year results, will be very eagerly awaited. Any shock guidance downgrade would be very unwelcome for the share price. In the absence of that, Adairs looks a nice yield prospect.
- IVE Group (IGL, $2.13)
Market capitalisation: $316 million
FY19 historical yield: 7.3% fully franked, based on 15.5 cents FY18 dividend
FY19 estimated yield: 8.4% fully franked, on consensus dividend of 18 cents
Analysts’ consensus target price: $2.78
From its printing base, IVE Group has built over the last decade an integrated print communications and marketing services provider, with strong market positions in commercial and digital printing, direct marketing, niche web offset printing, retail point of display and promotional merchandising. The business’ broad reach enables its customers to communicate more effectively with their customers by creating, managing, producing and distributing content across multiple levels. The strength of the offering is shown by the roll-call of IVE Group’s major customers, which includes Commonwealth Bank, McDonalds, Optus, Telstra, Westpac, Coles and L’Oreal. Many of IVE’s services are essential to these customers’ businesses.
IVE has four operating divisions:
Kalido – A customer experience agency that helps brands prosper through creative concept development, digital services, customer analytics and marketing automation
Blue Star Group – Integrated print, point-of-sale, personalised communications, promotional products, warehouse and logistics services
Pareto Group – Fundraising strategy, data-driven solutions and telephone fundraising agency serving the not-for-profit sector
IVEO – the managed solutions business, which bundles IVE’s broad range of products and services into multi-channel solutions for customers.
After a healthy FY18 (revenue up 40%, net profit up 32%), IVE has not given sales or earnings guidance, other than to say it remains “confident that our earnings growth will continue,” and that “all key drivers of earnings growth are on track.” At the FY18 annual general meeting (AGM) the company talked of a “pleasing start to FY19,” but the December half-year result will be critical – and again, any guidance shock would not be good, this close to the half-year result.
With a 71.5% payout ratio, IVE Group represents an attractive yield, if the consumer-based economy remains relatively healthy.
- Super Retail (SUL, $6.39)
Market capitalisation: $1.3 billion
FY19 historical yield: 7.6% fully franked, based on 49 cents FY18 dividend
FY19 estimated yield: 8% fully franked, on consensus dividend of 51 cents
Analysts’ consensus target price: $9.50
Retail group Super Retail is another stock where investors are nervous ahead of the half-year result – the stock was hit earlier in the month when adventure clothing and accessories chain Kathmandu reported weaker than expected Christmas and Boxing Day trading. That was seen as an ominous sign for Super Retail, which bought rival outdoor business Macpac last year. Compounding the market’s worry, Super Retail’s BCF business also sells outdoor clothing, although the boating, camping and fishing focus of BCF actually has little overlap with the more adventure-style offering of Macpac and Kathmandu.
Super Retail’s portfolio of retail brands also includes Ray’s Outdoors and the diversifying elements of Super Cheap Auto, Rebel Sports and Amart Sports, as well as Auto Trade Direct, which supplies auto parts and accessories to auto mechanics. In particular, the automotive business underpins the company.
Super Retail has been hammered 32% lower by the stock market since its October AGM: even if the December half-year result is weak, arguably much of that concern has already been taken out of an overly ambitious share price. At these levels, Super Retail looks to be good buying on yield grounds.
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 regard to your circumstances.