Companies to buy based on Gen Y

Financial journalist
Print This Post A A A

They shall inherit the earth, but they’re anything but meek. Generation Y – broadly defined as comprising those born between 1980 to 1994 – is the online generation, the experiential generation, willing to change jobs and go travelling at the drop of a hat.

The habits

Gen Y wants advancement – not necessarily related to work performance or experience – or they’re outta there. They face hefty university debt but are also willing to spend big dollars on holidays. They are not immediately willing to save for a house – scared off by property prices, and because they can always lob back in on mum and dad.

But Gen Y is also a generation whose spending habits are emerging as a driver in certain industries. According to Commonwealth Bank data on the spending habits of two million of its customers, Gen Y consumers are driving growth in online retail sales.

But what confounds marketers is that Gen Yers seem to want to buy things for reasons that are different from previous generations: they buy things because of what those purchases say about them. Companies struggle to retain Gen Y customers, because of the line between what’s hot and what’s not – if a product or service falls out of favour, it is tough to get it back. This makes it difficult to tap into that Gen Y buying power and invest to capture it.

The stocks

Simon Bond, head of the Newport office of broking firm Morgans, has a good handle on what makes Gen Y tick. For many years, Bond has followed the demographic and technological trends that drive share markets. He says there are a number of stocks that stand out as picking up Gen Y spending.

The first is Telstra (TLS), which benefits by providing Gen Y with its most basic need after food and shelter – Internet connectivity.

“When it comes to telecommunications in this country, Telstra has the reach, the spectrum, the cables, the pipes, the infrastructure, it has it all. Telstra is just a winner on every front – especially with the growth in mobile – and it has the best coverage, which is critical, because if something doesn’t work immediately, Gen Y’s patience level is zero.”

The Internet is media to Generation Y, he says. “Traditional media is dead to them. If they read a newspaper, it will be on a smartphone or a tablet. They don’t watch TV – if they watch something, they will watch it on YouTube, or binge-watch a series on Google Chromecast on their mobile. It’s all through Telstra.”

On top of this, Telstra has the added attraction of a 5.6% projected FY15 yield, on analysts’ consensus – or 8% to an SMSF in pension phase (paying zero tax).

Of the smaller telecommunications providers, Bond says TPG Telecom (TPM) stands out in its appeal to Gen Y because it is “cheap and cheerful” internet. While it is cheap, TPG actually has a high profit margin because it keeps costs very low. However, it is not a great yield generator, at 2% projected FY15 yield, on analysts’ consensus: and at $5.50, is trading above its analysts’ consensus target price, at $5.26.

Commonwealth Bank (CBA) is another perhaps surprising stock that can be bought on a Gen Y case. Like Telstra, CBA is a staple of SMSF portfolios, for the very good reason that the 5.1% estimated FY15 yield for CBA on analysts’ consensus forecasts becomes an effective yield of 7.3% for an SMSF in pension phase.

But Bond says Gen Y thinks of CBA in terms of the “killer banking app.”

“CommBank is probably four to five years ahead of its bank competitors on technology,” he says. “CommBank has got the Pay Tag (a small sticker that attaches to the back of a smartphone, allowing the user to make ‘tap & pay’ purchases) and Cardless Cash (which enables the smartphone to be used to get money from CBA ATMs). Because the kids all live on their smartphones, they really get the functionality of CBA’s smartphone apps,” says Bond.

Then there are the internet-based businesses that have become the big business-disruptive web stocks, jobs website operator SEEK (SEK), real estate sales website realestate.com.au (operated by REA Group, REA), auto sales website Carsales.com (CRZ) and travel booking site Webjet (WEB).

“Gen Y identifies with these well-known, web-based brands,” says Bond. “They know them, they use them, they are relevant to them and they believe they will remain relevant,” he says.

Although it is not wholly a web-based business, Flight Centre (FLT) is also a business with strong appeal to Gen Y customers, with its Flight Centre, Escape Travel, Student Flights and Intrepid My Adventure Store brands all picking up on Gen Y’s love of travel, and particularly the targeted, experiential eco-tourism and “voluntourism” (where people combine volunteer work with a non-government organisation (NGO) in the developing world) sectors.

The fact that all five of these stocks are solid, profitable companies, paying fully-franked dividends, is added comfort for SMSF investors – but they are by no means high-yield stocks. On FY15 consensus forecasts, SEK is yielding 2.1%; REA, 1.6%; CRZ, 3.4%; and FLT, 3.7%; with WEB the standout, on 6%.

However, all of these stocks are trading at levels above their analysts’ consensus price target, except CRZ, which has 4% leeway at present.

Lastly, there is Domino’s Pizza (DMP), which Bond says Gen Y investors think of as an app, not as a take-away food company. “The point about Domino’s Pizza is that Gen Y understands it and they use it. They love Domino’s: where else can you sit on a beanbag in your underpants, design your own pizza on the app and have it delivered – while watching YouTube through Chromecast on your big screen, and talking to your friends on Facebook and Instagram,” he says. DMP offers a FY15 prospective yield of 2.2%: it too is trading above analysts’ consensus price target.

It may be a maddening and frustrating generation, but it is also an inspiring one and following the companies that follow their spending trends, could reveal benefits for all generations of investors.

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.

Follow the Switzer Super Report on Twitter

Also in the Switzer Super Report:

Also from this edition

View More Articles