With term deposit rates struggling to push above 3%, investors are still motivated to look for interest returns from the share market – especially fully franked yields. For SMSFs, it’s the grossed-up yields that matter, particularly if the share dividends are contributing to pension payments.
The obvious caveat with share dividends, of course, is that they are not to be considered locked-in: even the dividend-paying stocks considered most reliable, such as the big four banks and Telstra, cannot be considered immune from cutting dividends.
There is also another important caveat with dividend-paying stocks, and that is that, whether you calculate your expected yield on the last dividend paid or the dividend that analysts expect the company to pay in the next financial year, that yield improves with a falling share price.
Some of the attractiveness of the yields on offer in the share market is because the share prices have come off: you can’t have yields much higher than the market average – the market average gross dividend yield is 5% – without some element of higher-than-normal risk. Yield-oriented investors cannot escape this dilemma.
When you’re dealing with projected/estimated yields, any share price recovery lowers the potential yield on offer – but as always, your eventual yield on a stock is determined by your buying price, not what happens to the share price after that.
That said, we’ve scoured the industrial share market looking for stock candidates that offer, on analysts’ consensus expectations, attractive fully franked dividend yields for the 2018 financial year, but which also offer some reasonable expectations for capital growth.
As readers would expect, when you are dealing with expected dividends, nothing is guaranteed: nor is it in terms of the business prospects of these companies. Changing share prices, actual declared dividends, payout ratios and indeed business performance could potentially alter these yield projections.
BPS Technology Limited (BPS, 89 cents)
Market capitalisation: $81 million
FY18 projected yield: 8.1%
FY18 grossed-up yield: 11.6%
BPS Technology Limited (BPS) is a global trade exchange business: it is the parent company of Bartercard, the world’s largest barter trading exchange. Bartercard enables its business members to exchange goods and services with others, without the use of cash or cash equivalents, or without a direct swap. It also provides on-demand cloud-based software for both the “alternative” digital and cash economies, through the Tess and Bucqi platforms. BPS operates in eight countries and handles $600 million worth of trade a year.
In August last year, BPS bought the restaurant and activity guide Entertainment Publications, for $33.7 million, in what the company describes as a “game-changing” acquisition. Entertainment Publications provided an immediate $32.7 million boost to revenue in the December 2016 half-year, even better than the Bartercard arm’s revenue of $23.2 million.
BPS has also signed a significant deal with online retail firm SmartTrans Holdings, a partner of China online giant Alibaba, to gain preferential access to China for Australian members, and tap into the fast-growing Chinese tourist market.
BPS earns revenues on every transaction conducted on its platforms, which serve 36,000 merchants, about 600,000 paying customers and a network of 20,000 not-for-profit organisations.
In the December 2016 half-year, BPS more than doubled revenue to $55.9 million and lifted net profit by almost 60%, to $5.56 million. This beat guidance, and enabled a lift in the interim dividend, from 2 cents to 2.25 cents. In FY18, analysts’ consensus expects a full-year dividend of 7.2 cents, which places the stock, at 89 cents, on a prospective fully franked dividend yield of 8.1%. According to Thomson Reuters, the analysts that follow BPS have a consensus price target of $1.475 cents on the stock.
Source: ASX
RXP Services Limited (RXP, 78.5 cents)
Market capitalisation: $110 million
FY18 projected yield: 5.4%
FY18 grossed-up yield: 7.6%
Technology and digital services consultancy RXP Services Limited (RXP) provides professional services to a wide range of corporations and government bodies in Australia and Asia, across the banking and finance, retail, fast-moving consumer goods (FMCG), transport, media and entertainment, telecommunications, airline and health industries.
RXP’s service offering can be summarised into four categories, namely professional placements, management consulting, technology services and support and maintenance.
RXP delivered a strong full-year result in 2016, reporting sales of $127 million, up 61%, and well above the company’s guidance of $105 million. Net profit more than doubled, to $10.6 million, as did operating cash flows, to $14.8 million. The company followed that with a healthy interim result, with half-year revenue up 26%, to $70.6 million, driven by strong growth in digital services, and profit up 35%.
In January, the company opened its ‘Experience Hub,’ designed as a space for clients meet with RXP’s specialists and collaborate in prototype ideas, test them and demonstrate them to a wider audience the auditorium. This highlights the big growth area for RXP, which is to leverage the growing demand for digital services. RXP says it expects revenue to grow by 10%–15% in both FY17 and FY18, with EBITDA (earnings before interest, tax, depreciation and amortisation) margins of 13%–14%.
Analysts expect RXP to lift its full-year dividend from 3 cents in FY16 to 3.7 cents a share in FY17, and then to boost it to 4.2 cents in FY18. At 78.5 cents, that places RXP on a prospective FY18 fully franked dividend yield of 5.4%. And according to Thomson Reuters, the analysts’ consensus price target for RXP is $1.177, which would deliver a 49.7% gain if reached.
Source: ASX
Capral Aluminium (CAA, 16 cents)
Market capitalisation: $76 million
FY18 projected yield: 7.8%
Grossed-up yield: 11.1%
Aluminium products producer Capral has spent a long time in the wilderness, and certainly would not have been a candidate for an article like this for some time: the company did not pay a dividend between 2004 and 2016. Capral has been one of the local companies most severely damaged by China’s constant dumping of competing aluminium products at below the domestic market price.
But slowly, helped by the government’s Anti-Dumping Commission, Capral has been able to drag its market back to a more level playing field: government inquiries found that Capral was being hurt by dumping, the company won its first case in 2010, measures to redress this were finalised in 2015 and imposed for five years to 2020. Imports from China have reduced but imports from Vietnam and Malaysia have risen: the Anti-Dumping Commission initiated a new case against Vietnam and Malaysia in August 2016, with a preliminary affirmative decision imposing temporary duties of about 13%: this investigation is expected to finalise by mid-year.
Capral makes and distributes aluminium products for use in residential, commercial and industrial markets. The company is seeing strong volume growth from Australia’s housing construction boom, it has plenty of capacity to expand, and with the dumping of cheap imported product finally abating, its profit margins are back on the rise.
In FY2016 – Capral uses the calendar year as its financial year – revenue grew by 5.5%, to $424.8 million, on the back of volume growth of 9.7%, driven by the strong housing market. With greater capacity utilisation, Capral parlayed this into a net profit of $14.4 million, a strong turnaround from a $2.5 million net loss in 2015. Even more importantly, the company paid a fully franked dividend of 1.25 cents a share, which represented a 42% payout ratio (of net profit).
If that dividend is maintained – as analysts expect – then Capral, at 16 cents, offers a yield of 7.8% in FY18. The payout ratio is very conservative and could even be lifted. And there is a bit of capital growth potential, too: according to Thomson Reuters, the analysts that follow Capral have a consensus price target of 23 cents on the stock, implying a 44% gain if that were achieved.
Source: ASX
The PAS Group (PGR, 56 cents)
Market capitalisation: $77 million
FY18 projected yield: 12.1%
Grossed-up yield: 17.3%
As stated at the outset, the attractiveness of dividend yields can quite often come from a falling share price – and that’s the case with PAS Group, which has declined from 75 cents at the start of the year to 56 cents. But analysts’ consensus looks for EPS of 10.5 cents in FY18 to support a dividend of 6.8 cents, which would represent a yield of 12%.
PAS is a fashion business, with a stable of designer brands including Review, Black Pepper, Marco Polo, White Runway, JETS, Mooks, Breakaway and Yarra Trail. These are “omni-channel” brands, in that they are sold in the company’s own retail stores, through wholesale relationships, and online. Each business is run as a separate entity, with each brand having its own general manager, head of marketing and separate design team.
The group recently formed a sports division, supplying wholesale product with internationally recognised brands such as Everlast, Dunlop, Slazenger and Karrimor.
The group’s retail sales growth has been driven recently by strong online sales growth. Online sales surged by 149% in FY16, and now account for more than 9% of retail sales. Online sales now represent 11.2% of sales: 53% of sales are retail, with 47% wholesale.
PAS’ own stores (it has 280) account for almost 41% of its sales, with the next largest Kmart (14.8%) and Target (6.8%). The international channel is growing well, albeit off a low base: in FY16, international accounted for 2.1% of sales, but in the first half of FY17 that swelled to 4.1%. PAS’ investment in own retail and international channels has clearly reduced its reliance on local discount department stores.
Clothing retailers are anxiously awaiting the arrival of Amazon in Australia, to see what impact it has on their business: PAS Group is banking on its own growing online sales and its loyalty program to buttress its position. In the latest half-year, to December 2016, PAS Group added 118,000 loyalty program members, up an impressive 22% in just six months.
The market is clearly a touch nervous about PAS Group: the projected FY18 yield should not be considered guaranteed. The analysts’ consensus target price for PAS Group is currently 65 cents, but that has not been updated since January. If the share price rises, that projected FY18 yield will come down.
Source: ASX
Legend Corporation (LGD, 18.5 cents)
Market capitalisation: $40 million
FY18 projected yield: 10.8%
Grossed-up yield: 15.4%
Legend Corporation Limited (LGD) is an Australian engineering, IT and communications solutions provider, operating in the electrical, information technology, semiconductor and power utility industries. Legend’s products are marketed under seven brands: Legend Performance Technology, Cabac, Hendon Semiconductors, MSS Power, MSS Fibre, Legend Defence and Ecco Pacific. The company holds 45 patents and 33 registered designs: about 77% of its revenue comes from its own branded products.
Legend guided the market in early January for subdued trading conditions. In the December 2016 half-year, revenue fell 8.6% to $55 million, mainly because a major client pulled forward orders in the second half of FY16, which were not repeated in the first half of FY17. Earnings before interest and tax (EBIT) slumped 52% to $2.5 million, but operating cashflow remained strong at $5.3 million. Legend’s interim net profit was down 68% at $1 million, but the company held its interim dividend steady at 0.6 cents.
Trading conditions are likely to remain subdued the short term, but a continued focus on cost control, inventory reduction and operational efficiency should improve margins.
This year, FY17, analysts expect LGD to earn 3 cents a share, supporting a dividend of 1 cent a share. But in FY18, the analysts’ consensus sees Legend earning 4 cents a share, allowing it to pay a fully franked dividend of 2 cents a share. At the current price of 18.5 cents, that implies a prospective fully franked yield of 10.8%. And the analysts’ consensus target price for the stock – last updated in March – envisages appreciation to 22 cents, implying a potential gain of almost 19%. Again, any share price recovery would lower the potential yield on offer.
Source: ASX
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.
