My idea of an ‘income” stock is that it should be relatively defensive (hold its value in a “down” market), pay a reasonable dividend and have growing earnings. While It is unlikely that the growth will be high, importantly, it won’t be going backwards. Also, it won’t be particularly vulnerable to exogenous shocks or things it can’t control. The latter eliminates most resource companies.
This time last year, I nominated five stocks: Telstra (TLS), Ampol (ALD), APA, Medibank (MPL) and JB Hi-Fi (JBH). (See https://switzerreport.com.au/5-income-favourites-for-2024/). As the table below shows, one stock did brilliantly (JBH), two did ok (TLS and MPL), and two bombed (ALD and APA).
Overall, they generated an average total return of 16.3%. And importantly, each stock delivered on its income objectives.
With 2025 fast approaching, here are five income favourites for next year. I have excluded the major banks from consideration and avoided stocks in the resources sector which can be volatile due to fluctuations in the underlying commodity prices. The five stocks are from different sectors, providing some support to diversification objectives.
1 Telstra (TLS)
Telstra needs no introduction. It had a pretty steady 2024, trading in a relatively tight range largely between $3.80 and $4.
There are several things to like about Telstra. Most importantly, earnings are on the rise as a result of some tough work on costs, competitive pressures easing in the mobiles market and improved execution by the Telstra management team.
At $4, with a forecast dividend of 19c per share for FY25, Telstra is yielding a prospective 4.7% (fully franked). With the exception of Morgans, who think the stock is expensive compared to international peers, the major brokers are moderately bullish on Telstra. The consensus target price is $4.18, about 4.6% higher than the last ASX price of $4. The range is a low of $3.20 (Morgans) through to a high of $4.50 (Ord Minnett). According to FN Arena, there are 5 ‘buy’ recommendations and 1 ‘sell’ recommendation.
- Transurban (TCL)
Toll road operator Transurban has forecast a total distribution of 65c for FY25, up 5% (3c) on the distribution paid for FY24.
The company benefits from “guaranteed” toll price increases each year, plus ongoing traffic growth, although the latter (in a post covid environment) has fallen back to around 1% pa. Highly leveraged, Transurban is vulnerable to increases in interest rates (although almost all its debt is fixed with long durations), and conversely, wins when interest rates fall.
From a regulatory perspective, Transurban is under the microscope as the NSW Government considers toll reform, although the Government has indicated it will “respect the value” of existing contracts.
The 65c forecast distribution implies a current yield of 5.1% (unfranked).
The consensus target price is $13.52, about 6.2% higher than the last ASX price of $12.73. The range is a low of $12.65 (Morgans) through to a high of $14.75 (UBS). According to FN Arena, there are 3 ‘buy’ recommendations and 3 ‘neutral’ recommendations.
- APA Group (APA)
Energy infrastructure business APA has had a difficult year. Commenting on its share price performance at the AGM, Chairman Michael Fraser said: “While it’s impossible to say with any certainty how much any particular factor has influenced the security price, clearly higher interest rates, along with a reduction in the rate of growth of our distributions and issues related to our regulatory environment have had an impact.”
The company reaffirmed EBITDA guidance for FY25 at between $1.96 billion and $2.02 billion, and FY25 distribution guidance of 57 cents per security. This is up 1c on the 56c paid for FY24.
At $7.31, APA is yielding a prospective 7.8% (unfranked). For FY26, the brokers expect a marginal increase in distribution to 57.7c per unit.
The brokers are neutral on the stock. According to FN Areana, there are 2 ‘buy’ recommendations, 2 ‘neutral’ recommendations and 1 ‘sell’ recommendation. The consensus target price is $7.91, about 8.3% higher than the last ASX price. The range is a low of $6.60 (UBS) up to a high of $8.60 (Ord Minnett).
- Medibank Private (MPL)
Leading health insurance provider Medibank Private (MPL) has recovered from its “near death” cybercrime and data incident in October 2022 with the share price rising back to pre-incident levels. This is part due to ongoing policyholder growth and productivity savings.
At the Company’s AGM in November, it reported improving momentum, with stronger net resident policyholder growth in the first 3 months of FY25 compared to the same period last year. Retention in both brands has remained strong in the first quarter of FY25.
In FY24, Medibank paid a dividend of 16.6c per share (fully franked). For FY25, the brokers forecast a dividend of 17.5c per share, putting the company on a prospective yield of 4.7% (fully franked). For FY26, the brokers forecast 17.3c per share.
At $3.74, the major brokers feel that the company is close to fully priced. The consensus target price is $4.03, 7.6% higher than the last ASX price. Targets are in a relatively tight range, from a low of $3.85 through to a high of $4.30. There are 2 ‘buy’ recommendations and 4 ‘neutral’ recommendations (no ‘sell’ recommendations).
- Amcor (AMC)
I wrote about packaging giant Amcor (AMC) just a few weeks back (see https://switzerreport.com.au/amcor-nabs-berry-but-is-it-a-buy/). This followed the announcement of an all script acquisition of US consumer packaging business Berry Global Group.
The combined company (Amcor) will be owned 63% by existing Amcor shareholders and 37% by Berry Group shareholders. With a market cap of US$23 billion (about A$35 billion), it will be headquartered in Switzerland and listed on the NYSE (New York Stock Exchange) and the ASX.
At $15.78 with a forecast dividend of 77.0c per share for FY25, Amcor is yielding a prospective 4.9% (unfranked).
The major brokers are largely neutral on the stock, noting the execution risk of the acquisition of Berry. Macquarie is the most bullish with a target price of $18.04, while Morgan Stanley and Ord Minnett have a target of $15.50. The consensus target price is $16.41, about 4.0% higher than the last ASX price of $15.78. According to FN Arena, there is 1 ‘buy’ recommendation and 5 ‘neutral’ recommendations.
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.
