As savings account interest rates tumble below 1.5%, many investors are forced to look for alternatives – and share market fully-franked yields have proven a natural hunting ground.
In particular, shares in the big four banks are paying dividend yields in the 5.8%–6.8% range, which are lifted above 8% on a grossed-up basis – that is, with franking credit benefits included.
But investors have to get their heads around the fact that company dividends can never be considered certain – and that there is capital (share price) risk involved in trying to harvest yield on the share market. For many, the big banks don’t offer much in the way of share price appreciation, and there is considerable concern about the sustainability of their dividend levels, under pressure from declining earnings and higher capital requirements.
But with all the caveats around equity investment and the business risk of individual stocks bedded-down and understood, the search for yield can throw up some attractive alternative situations, where there is potential for healthy yields and – just maybe – the bonus of share price gain. The cut and thrust of profit reporting season always throws up candidates of this kind: here are four we’ve noticed.
1. GUD (GUD, $8.72)
Market capitalisation: $754 million
FY20 forecast yield: 6.5%, fully franked
Analysts’ consensus target price: $10.30 (Thomson Reuters), $10.66 (FN Arena)
Over the past decade manufacturing group GUD has hived off a succession of businesses – such as Sunbeam small appliances, the Dexion warehouse storage equipment business and Oates household cleaning products – to re-orient itself around the automotive aftermarket business and the water (pumps, filters, pool and spa systems and water pressure systems) business.
GUD specialises in product design and development, offshore sourcing and supply chain management, and has a high reputation in the innovation field. Its core automotive business is built around strong brands led by long-standing names such as Ryco, Wesfil and Goss, along with Narva and Projecta and various brands in the Griffiths Equipment and IMG businesses. Recent acquisitions include AA Gaskets, which goes to market with its Permaseal and Crossfire brands, and DBA, an international manufacturer, designer and global marketer of after-market and OE disc brake rotors and brake pads. The water business is led by the Davey brand.
GUD has found the going tough in recent years, and the FY19 profit did not meet market expectations: while revenue rose 9% to $434.1 million, net profit slumped more than 40%, to $59.6 million for the year. However, underlying net profit (from continuing operations) actually rose by 10%, to $60.9 million, and the company managed a 4-cent boost to the fully franked dividend, to 56 cents.
While GUD certainly did not shoot the lights out in FY19 – and its guidance indicated only modest growth expectations for FY20 – the share price slide from $14.72 a year ago, to $8.72 now, appears to have opened up some value. In particular, the slight increase in dividend that analysts expect for FY20 – Thomson Reuters’ estimates collation says 56.9 cents, that of FN Arena says 57.2 cents – places GUD on a prospective grossed-up FY20 yield of 9.3%–9.4%, with the stock price also expected to recover some ground.
2. Helloworld Travel (HLO, $4.38)
Market capitalisation: $546 million
FY20 forecast yield: 5.3%, fully franked
Analysts’ consensus target price: $5.48 (Thomson Reuters), $5.70 (FN Arena)
Travel agency group Helloworld Travel had a good year in FY19, with the crucial total transaction value (TTV) measurement rising by 9.1% to $6.5 billion, revenue growth outpacing that, at 9.8% (to $357.6 million) and net profit surging by 23.8%, to $38.2 million. The fully franked dividend for the year was 20.5 cents a share, a lift of 2.5 cents (13.9%) on the prior year.
The company’s strong results were driven by several business acquisitions in the second half of 2018, including the Magellan Travel Group, Flight Systems, Asia Escape Holidays and the Show Group, while this year Helloworld has picked up New Zealand sports travel business Willment Travel Group, and expanded its New Zealand retail network. Helloworld subsidiary QBT also extended its contract to provide travel management services for the Australian government – a contract it first won in 2015 – over a two-year period, from 1 July 2019 to 30 June 2021. HLO was also reappointed to the panel that provides travel services to the New Zealand government. It also won $50 million worth of new corporate accounts, including the South Australian government and Australia Post.
Helloworld said it had decided not to renew its Qantas Holidays brand licence, which dates to 2008 and expires in March 2020, to focus on its own brands such as Viva Holidays and Sunlover Holidays. The company said every segment of the travel industry grew in FY19, but that growth slowed toward the end of the year.
One of the main risks for HLO is that the falling Australian dollar starts to affect travel decisions. The company did not give guidance with its result, saying that a trading update would come at the annual general meeting in November – but it did say that it expected the FY20 result to benefit from realisation of strong contract performance, network expansion in both Australia and New Zealand, the full-year impact of the FY19 acquisitions, and continued cost rationalisation.
On current analysts’ expectations, HLO is offering a prospective grossed-up FY20 dividend yield around 7.5%.
3. Tabcorp (TAH, $4.39)
Market capitalisation: $8.8 billion
FY20 forecast yield: 5%, fully franked
Analysts’ consensus target price: $4.71 (Thomson Reuters), $4.85 (FN Arena)
In the first full-year of combined operations with the Tatts Group, Tabcorp’s lotteries division powered the gambling heavyweight to a 42.5% jump in underlying earnings in FY19, to $397.6 million, with revenue rising by 46%, to $5.5 billion. A series of big jackpots in the Powerball, Oz Lotto and Lucky Lotteries games – and a price increase – pushed the lotteries business’ revenue to a record $2.9 billion, and boosted the lotteries arm’s earnings before interest, tax, depreciation and amortisation (EBITDA) by 29%, to $509 million. This helped to offset a 7.9% decline in EBITDA from the wagering/media arm, which is battling competitive pressure. Wagering and media revenue rose by 9% on a statutory basis, to $2.3 billion
TAH lifted the full-year dividend by 1 cent, to 22 cents. While the strong result was expected – it was in line with analyst expectations – the potential of the merged Tatts/Tabcorp business is becoming a bit clearer. TAH did not provide FY20 guidance, but analysts expect earnings per share (EPS) growth of about 7%. The share price has done very little over the past year, as the market waited to assess the combined business, but analysts see some scope for a rise from here, with a mostly bullish slate of broker targets – the most optimistic of which is UBS, which sees the stock achieving $5.90. In the meantime, TAH should be able to generate a grossed-up FY20 yield above 7%.
4. Money3 Corporation Limited (MNY, $2.19)
Market capitalisation: $400 million
FY20 forecast yield: 4.6%, fully franked
Analysts’ consensus target price: $2.42 (Thomson Reuters)
Consumer finance specialist Money3 has been one of the surprise packets of the reporting season, showing a rise in virtually every measurement. The company grew its gross loan book by 48%, to $374 million: MNY says gross loan book growth is “the key performance metric and predictor of future cash flows.”
Money3 specialises in secured automotive loans as well as secured and unsecured personal loans in Australia and New Zealand. The Broker division (Australia), which offers secured automotive loans up to $35,000 with terms up to 60 months, grew its revenue by 15% and its gross loan book by 22.9%. The international (Go Car Finance, New Zealand) division benefited from the acquisition of Kiwi secured car loan business Go Car Finance in March: on a post-acquisition basis, the business grew its gross loan book by 17%.
Business-wide, Money3 lifted total revenue by 24.6%, to $91.7 million, and reported a normalised net profit of $35 million, up 9.4%. The full-year was boosted by 0.5 cents, to 10 cents a share.
Money3 said that it continues to focus on growing its market share of its existing, highly profitable portfolio of vehicle receivables. With about $100 million in funding available, MNY group is targeting loan book growth of about 30% in FY20. On Thomson Reuters’ collation, analysts expect earnings per share (EPS) growth of about 33% in FY20, and a fully franked dividend at least maintained at 10 cents, implying a grossed-up yield of about 6.5%.
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