The shock-and-horror reaction during the recent reporting season, when Telstra warned the market to expect lower dividends in future, says it all about Australian investors’ love of share dividends.
Telstra tumbled from $4.33 to $3.87 on the news – a fall of 10.6% – and has continued to slide, to $3.65, taking the company’s loss of value close to 16%.
Not all of that market reaction can be sheeted home wholly to the lower dividend news, but it certainly did not go down well.
The reaction showed how the extent to which many income-oriented investors have come to rely on share dividends for income, in a low-interest-rate world. The problem with that strategy is that share dividends can never be assumed to be guaranteed at the prevailing level.
Telstra maintained its FY17 dividend at 31 cents, but surprised the market with a new dividend policy: the company told investors to expect 22 cents, fully franked, in FY18, including both ordinary and special dividends. Prior to the announcement, the analysts’ consensus had expected 29.6 cents in FY18.
Cue the dumping of Telstra on the stock market.
The Telstra Tantrum demonstrated the price risk that income-conscious investors run when they are treating shares as dividend cows, but when the dust settled, Telstra was still offering investors a fairly decent yield, supported by the attributes of the dividend imputation system.
A self-managed superannuation fund (SMSF) operating in accumulation phase, with a tax rate of 15% on earnings, receives a partial rebate of the franking credits attached to a fully franked dividend, because it does not need all of the franking credits to offset tax on the dividend. An SMSF in pension phase (paying pensions to all members), with no tax on its earnings, receives a full rebate of the franking credits, because it has no tax to offset.
For SMSFs, a dollar of fully franked income is effectively worth more than a dollar.
To calculate effective yield in the hands of the SMSF, a fully franked yield in the hands of an SMSF in accumulation phase should be multiplied by 1.215. For an SMSF in pension phase, multiply by 1.428.
With the Telstra share price having fallen to $3.65, the 22-cent dividend expected for FY18 (and FY19) represents a forward (prospective) dividend yield of 6.03%. To an SMSF in accumulation phase, that is effectively 7.3%; to an SMSF in pension phase, it is effectively 8.6%.
Of course, every Telstra investor has their own idiosyncratic yield from the company, governed by the price they paid for their shares. But those are the yields that someone buying today would generate.
On expected dividend payments and the resultant yields – which repeat, cannot be considered as guaranteed – there are quite a few situations on the ASX promising similar yields to Telstra. Here are five more 6%-plus forecast yields, with the caveat that like all listed companies, there is the possibility of a company decision on the dividend like the one Telstra announced in mid-August.
We’ve also kept an eye on how the analysts expect these stocks to perform, looking for scope for capital growth, as expressed in the analysts’ consensus target price – for example, the analysts see Telstra regaining $4.00.
G8 Education (GEM, $3.74)
Market capitalisation: $1.67 billion
Five-year total return: 32.2% a year
FY17 forecast dividend yield: 6.42%
Analysts’ consensus target price: $4.43
Many Australian investors would still be so scarred by the ABC Learning experience that they would not contemplate investing in childcare again, but G8 Education – despite an appetite for expansion by acquisition that reminds some of ABC Learning – but the differences are that G8 Education does not appear to overpay for the assets it buys, and it shows impressive cost control.
G8 Education can expect an improvement in government funding from July 2018. It will also start to generate income from new sites over the next three years. The company has repeated its targets of about $1 billion in revenue and earnings per share (EPS) of 40 cents by December 2019: those targets compare to revenue of $777,470 and EPS of 24.7 cents in 2016.
Super Retail Group (SUL, $8.13)
Market capitalisation: $1.6 billion
Five-year total return: 4.6% a year
FY18 forecast dividend yield: 6.06%, fully franked
Analysts’ consensus target price: $9.80
Like most Australian retailers, Super Retail Group has been affected by the “Amazon factor” – investor concern at the looming entry of the US giant’s online Amazon Prime service into Australia. But SUL, the owner of the Rebel Sport, Super Amart, BCF, Ray’s Outdoors and Super Cheap Auto brands, says that half of its top-selling automotive and leisure items are not available on Amazon, and nor are their equivalents. The company’s FY17 result was strong – although the performance of the leisure segment (BCF and Ray’s Outdoors stores) was a touch disappointing, but Super Retail’s margin growth was impressive and its market-leading brands can give investors a fair degree of comfort.
Retail Food Group (RFG, $4.38)
Market capitalisation: $774 million
Five-year total return: 14.4% a year
FY18 forecast dividend yield: 7.08%, fully franked
Analysts’ consensus target price: $5.43
Listed fast food and coffee group Retail Food Group (RFG) owns the Michel’s Patisserie, Gloria Jean’s Coffees, Donut King, Brumby’s Bakery, Pizza Capers and Crust Gourmet Pizza fast food brands. It is also a significant wholesale coffee roaster through Di Bella Coffee, Evolution Coffee Roasters Group and Roasting Australia.
Retail Food has been a market favourite in recent years, as investors seek similar stories to the Domino’s Pizza phenomenon. But in June, RFG brought out a profit downgrade that surprised the market, and saw 10% cut from its market value. RFG had expected to lift FY17 net profit by 20%, but said the expected increase would be more like 15%. When the result came out, underlying net profit rose by 14%. Analysts expect RFG to pay fully franked dividends of 31 cents in FY18 and 32.7 cents in FY19, pricing it at present on forward yields of 7.1% and 7.5%.
Thorn Group (TGA, $1.21)
Market capitalisation: $193 million
Five-year total return: –3.4% a year
FY18 forecast dividend yield: 6.6%, fully franked
Analysts’ consensus target price: $1.34
Consumer leasing and business finance company Thorn Group – the owner of the 79-year-old Radio Rentals brand – is another market darling that disappointed and fell to earth: back in 2014 and 2015 it seemed that every small-cap manager wanted some, and the shares cruised to as high as $3.10 in early 2015. But a succession of unwelcome events hammered the share price, including business underperformance, the exiting of the debt collection and consumer loans businesses in the wake of heightened scrutiny on these activities, an Australian Securities and Investment Commission (ASIC) investigation into Radio Rentals’ leasing activity – which more recently has flowed into a prospective class action on behalf of thousands of customers who were allegedly ripped off while leasing household goods. Thorn also had to cut its prices in response to the Small Account Credit Contract (SACC) and consumer leasing laws.
The rocky road for the company was shown by a 7% fall in EPS in FY17, a cut in the full-year dividend from 11.5 cents to 8 cents, and a $6.1 million provision for the “anticipated remediation costs and penalties from the ASIC regulatory review” into Radio Rentals. But on the current share price of $1.22, maintaining the dividend at 8 cents a share in FY18 would imply a prospective fully franked yield of almost 6.6%; while the lift to 8.5 cents that analysts’ consensus expects in FY19 would represent almost 7%. And analysts also see reasonable recovery in the share price.
Shriro Holdings (SHM, $1.25)
Market capitalisation: $119 million
Five-year total return: n/a
FY18 forecast dividend yield: 9.3%, fully franked
Analysts’ consensus target price: $1.43
Kitchen appliance and consumer products marketer Shriro Holdings Limited (SHM) came to the share market in early 2016 at $1, and quickly interested the small-cap fund managers. markets and distributes kitchen appliances and consumer products across Australia and New Zealand. About 55% of revenue comes from selling third-party brands, namely Casio watches, calculators and musical instruments, Blanco sinks and taps, and Pioneer stereo equipment. (The partnership with Casio spans more than 30 years and currently generates one-third of revenue.)
Shriro’s strategy is to boost the contribution of its company-owned brands, which include Omega (kitchen appliances), Robinhood (kitchen appliances) and Omega Altise (coolers, heaters and air purifiers). The company has ambitious plans for its Everdure by Heston Blumenthal range of charcoal-fired barbecues, which is riding the “foodie” wave in the Australian market: Shriro is also taking the brand to the global market. Shriro also markets a range of Omega ovens and cooktops co-branded with noted Australian chef Neil Perry.
Analysts expect Shriro to increase both profit and dividends this year (the company reports on a calendar-year basis). Net profit was up 6.5% at the half-year, while the interim dividend was 1 cent higher, at 4 cents. On the expected lift in full-year dividend to 11.5 cents a share (from 10 cents in 2016) Shriro shares are priced, at $1.22, on a high nominal fully franked dividend yield of 9.4%. That requires a final dividend of 7.5 cents: that might look a bit of a stretch, but Shriro’s result is normally skewed heavily to the second half. Analysts think that is possible, with 11.6 cents predicted in 2018.
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