Investors living off income are tearing their hair out – just when they thought rates could hardly go lower, the Reserve Bank of Australia (RBA) is being urged to cut the official cash rate from the current record low of 0.75%, to 0.5%, as early as its meeting in February.
With the average term deposit interest rate across all terms currently sitting below 1.4% per annum, and older deposits maturing, it is a frightening time for income-oriented investors – and little wonder that they are effectively forced into the share market for dividend yield, for which they often incur significant capital risk.
Thomson Reuters says the stock market’s average expected yield is 2.765% in FY20, equivalent to 3.95% when grossed-up; and 2.8% in FY21, grossed-up to 4%. And investors have come to expect a lot better than that, particularly in the banks.
Here’s what investors are looking at in terms of the banks, in FY20 estimated yields, with the attached capital-gain prospects:
- ANZ 6.3%, grossed-up to 8.6%
Share price: $25.42
Analysts’ consensus valuation: $26.70 (Thomson Reuters), $26.31 (FN Arena)
- CBA 5.1%, grossed-up to 7.3%
Share price: $84.05
Analysts’ consensus valuation: $75.00 (Thomson Reuters), $73.30 (FN Arena)
- NAB 6.5%, grossed-up to 9.3%
Share price: $25.46
Analysts’ consensus valuation: $27.50 (Thomson Reuters), $27.10 (FN Arena)
- Westpac 6.4%, grossed-up to 9.1%
Share price: $24.98
Analysts’ consensus valuation: $25.58 (Thomson Reuters), $26.436 (FN Arena)
If borne out, those bank yields would be very attractive; and a lot of investors will not look past them. But in the industrial stock market, there are always interesting yield situations around. Here are three:
- Alliance Aviation Services (AQZ, $2.65)
Market capitalisation: $334 million
FY21 Estimated yield: 6.9%, grossed-up to 9.9% (Thomson Reuters)
Analysts’ consensus valuation: $2.75 (Thomson Reuters)
Aviation player Alliance Aviation Services had an impressive 2019, as it continued to diversify from its core specialisation of moving fly-in/fly-out (FIFO) miners and resources workers to remote locations in Queensland, the Northern Territory, South Australia and Western Australia: Alliance is adding new revenue streams areas such as tourism, aircraft sales, “wet” leasing (operating Alliance aircraft for other carriers) and spare parts sales.
In 2019 Alliance commenced regular public transport (RPT) flights in regional Queensland (which are sold as Virgin Australia codeshare services) and signed tourism contracts with US tour operator Tauck and Japanese travel company JTB. Long-term contract revenue is still 60% of revenue, but Alliance has increased its capacity to handle short-term ad hoc charter requests. The five revenue streams are contract flying, wet leasing, RPT flights, charter, and aviation services.
In FY19, Alliance added five aircraft to its fleet, making 38 in total; it lifted revenue from operations by 11.9% to $277.1 million and net profit by 25.5%, to a record $22.7 million. The full-year dividend increased by 77%to a record 15.6 cents: the final (second-half) dividend of 8.8 cents equalled the full-year FY18 dividend. Even if Alliance only maintains its dividend at 15.6 cents, it is trading on a fully franked yield of 5.9%, or a grossed-up equivalent of 8.4%: however, analysts’ consensus estimates from Thomson Reuters expect a dividend of 17 cents in FY20, giving a yield of 6% (grossed-up 9%), and 18.4 cents in FY21, putting AQZ on a forward yield of 6.8%, grossed-up to 9.8%.
There is potential corporate action with AQZ, given that Qantas bought 19.9% of the stock last February, becoming the largest shareholder: the Australian Competition & Consumer Commission (ACCC) has expressed “preliminary competition concerns” about the stake, given that Alliance competes with Qantas for FIFO business, either in its own right or in cooperation with Virgin under the Charter Alliance Agreement; and that Alliance is also Qantas’ only competitor on regular passenger routes between Brisbane and the regional Queensland cities of Bundaberg and Gladstone.
- Super Retail (SUL, $9.50)
Market capitalisation: $1.9 billion
FY21 Estimated yield: 5.5%, grossed-up to 7.8% (Thomson Reuters); 5.5%, grossed-up to 7.8% (FN Arena)
Analysts’ consensus valuation: $9.90 (Thomson Reuters), $9.85 (FN Arena)
Retail heavyweight Super Retail Group – the owner of the Rebel Sport, Super Amart, BCF and Super Cheap Auto brands – has had a rocky start to 2020, losing close to 10%. The problem is that Super Retail has been one of the first ASX-listed stocks to be identified as taking potential damage from the devastating bushfires.
Already, for example, broker Ord Minnett has downgraded the retailer’s shares to a “hold” rating with a $10.00 price target, saying Super Retail’s sales could be hit in the wake of the fires, because of its exposure to the outdoor and camping markets through its BCF (boating, camping, fishing) and Macpac (outdoor equipment) businesses. (Macpac – bought in March 2018 – has until now been a strong performer for the group. Morgans also lopped its price target for SUL for the same reason this month, but in its case, greater bullishness saw the price target trimmed from $11.15, to $11.04 – which if achieved from today, would represent a surge of more than 13%.
But focusing on SUL’s expected dividends, if the company were to maintain the 50-cent dividend it paid in FY19, at the current share price SUL would be trading on a fully franked dividend yield of 5.1%, or 7.3%, grossed-up. Analysts expect 52 cents in FY21, which translates to a prospective yield of 5.5%, or 7.8%, grossed-up. And on analysts’ consensus valuations, SUL looks slightly under-valued, too.
- IVE Group (IGL, $2.47)
Market capitalisation: $366 million
FY21 Estimated yield: 7.2%, grossed-up to 10.3% (Thomson Reuters)
Analysts’ consensus valuation: $2.66 (Thomson Reuters)
Integrated marketing and print communications provider IVE Group is a business built around creating, managing, producing and distributing content for the marketing industry, with major customers in industries such as healthcare, financial services, communications, utilities and education. In recent months, the company has brought its four divisional operating brands under the IVE umbrella, simplifying the integrated offering. Clients like the aspect of a one-stop-shop for their marketing needs.
According to Thomson Reuters, analysts see good grounds for increases in earnings per share (EPS) and dividends for IVE Group over FY20 and FY21: from 16.3 cents in FY19, the fully franked dividend is expected to rise to 16.9 cents this year and to 17.9 cents in FY21, pricing the stock at a yield of 6.9% (grossed-up 9.8%) this year and 7.3% (grossed-up 10.4%) in FY21. While these yields cannot be considered certain, IVE group offers a bit of potential high-yield spice to boost the average yield of an income-oriented portfolio – with the potential for a bit of capital gain thrown in.
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