If you are after dividend income, then you probably don’t need to go much further than the major banks or the major miners. Quite unusually, some of the best dividend yields are to be found with the likes of in BHP, Rio and Fortescue. But assuming that there is a sound basis for the adage that goes “never buy a mining company for income”, then there is a good case for diversifying away from the banks and the miners.
My idea of a good income stock is something that is pretty boring, reliable, and importantly, relatively capital stable. This means that it shouldn’t go down much in price and also, unlikely to go up much in price. Here are 4 dividend picks from outside banking and mining.
1. Charter Hall Long WALE REIT (CLW)
Charter Hall Long WALE REIT is a $4.5bn property trust that owns a portfolio of high quality real estate assets with a long WALE (weighted average lease expiry). The WALE is currently 14.1 years.
There are 459 assets across industrial and logistics, retail, office, telco exchanges and agri-logistics. By value, approximately 25% is in industrial, 33% in retail (BP service stations, pubs and bottle shops, David Jones), 22% in office and the balance of 20% in telco exchanges and agri-logistics. The portfolio occupancy is 97.5%.
Portfolio credit quality is high with 73% of tenants (by income) independently rated ‘investment grade’. Of the balance, this includes names such as Brisbane City Council, Inghams and Arnott’s.
A recent acquisition was a 50% interest in David Jones flagship “Elizabeth Street” store in Sydney on a 20 year ‘triple N’ lease (the tenant pays structural maintenance and repair costs, insurance and other property expenses in addition to the rent).
In CY20, CLW delivered operating earnings of $125.8m or 28.5c per unit. It has a policy to payout 100% of operating earnings (net property income less operating expenses and finance costs), and paid out 28.5c per unit in distributions (14.0c for 2H20 and 14.5c for 1H21).
For FY21, it has guided to operating EPS of no less than 29.1 cents per unit, reflecting operating EPS growth over FY20 of no less than 2.8%. The target distribution payout ratio remains at 100% of operating earnings. This implies a total distribution of at least 29.1 cents per unit, with a second half distribution of at least 14.6 cents per unit.
Charter Hall Long WALE REIT (CLW) – 3/20 – 3/21
At a market price of $4.70, this puts CLW on a prospective yield of 6.2% (unfranked).
The brokers remain favourably disposed. According to FN Arena, of the 5 major brokers that cover the stock, there are 3 buy recommendations and 2 neutral recommendations. The consensus target price is $5.13 (range $4.80 to $5.38), a 9.1% premium to the last ASX price of $4.70. The last reported NTA (net tangible asset value) is $4.70.
Gearing (on a look through basis) has increased to 39.3%, and while the fund has no debt maturing in the next two years, if bond yields keep increasing, this could put some pressure on the unit price.
2. APA Group (APA)
APA owns and operates about $22bn of energy infrastructure assets. This includes 15,425km of gas transmission pipelines, 29,500km of gas mains and pipelines that connect to 1.4m gas consumers, gas fired power generators, wind and solar energy generators, gas storage and gas processing facilities, and electricity transmission lines.
Overall, approximately 89% of APA’s revenue is ‘take or pay’ being either capacity charge revenue, regulated revenue or contracted fixed revenue. This means it is relatively fixed and not subject to short term variable demand. APA says it is supported by long term contracts with customers of whom 92% are investment grade quality, and that the revenue weighted average contract tenor remaining is 12 years.
Because the revenue is reasonably predictable and the assets are capital rather than labour intensive, APA is able to guide with a high degree of confidence its expected financial outcomes. For the first half of FY21 (1H21,) APA delivered EBITDA of $823m. This was in line with the market’s forecast and consistent with the company’s full year guidance, where it has guided to EBITDA of being in the range of $1,625m to $1,665m, with interest expense of $490m to $500m (FY20 was $497m). Importantly, it upgraded its distribution guidance for FY21 to be 51.0c per share (up from 50.0c in FY20).
Based on an ASX price of $9.92, the 51.0c distribution puts it on a forecast yield of 5.1%. Potentially, a small amount (up to around 7c per unit) will be franked, which will be confirmed with the final distribution.
APA Group – 3/19 to 3/20
As an investment thesis, APA has a low risk business model built around stable cash flows, majority take or pay contracts with CPI adjustments, long term contracts, established customer relationships and a portfolio of high-quality long life assets. Growth could come from commercialising new energy technologies and investment in North America.
While Its strong credit metrics (it has an investment grade rating) provide balance sheet flexibility, it does have net debt of $11bn.
The broker analysts have a target price of $10.83 for APA, 9.2% higher than the last ASX price of $9.92. There are 5 buy recommendations and 2 neutral recommendation (no sell recommendations).
3. Medibank Private (MPL)
Despite the challenges facing private health insurance, in particular participation and affordability, I like Medibank Private because over the last few years, it has increased its number of policyholders and its market share. When you are the clear market leader in a highly regulated market, this is hard – so this tells me that the team at Medibank is executing well. Further, it is advancing a number of initiatives such as in-home care, health and wellbeing services, and telehealth ancillary services to create a competitive advantage in health insurance.
Unfortunately, CEO Craig Drummond has announced that he will be retiring on 30 June.
Over the last 12 months, it grew the number of policyholders by 2.6% or 48,000. This included growth in both brands – the premium ‘Medibank’ brand and the youth oriented ‘ahm’ brand. Market share increased by 0.28%
In the first half, profit before tax increased by 26.4% to $321.9m. A big jump in investment income drove much of the increase, but health insurance operating profit also rose by 13.6% to $254.6m. Lower claims expense (partly due to the impacts of Covid) and a tight handle on costs, drove an improvement in the operating margin from 6.8% to 7.7%.
For the second half, Medibank says that it expects the same underlying growth in claims expense (they will be higher in aggregate because the Covid-19 impacts are expected to reverse), plus further progress on productivity savings.
Medibank Private (MPL) – 3/20 to 3/21
According to FN Arena, the major brokers are relatively positive on the stocks with 3 buy recommendations and 4 neutral recommendations. The consensus target price is $3.08, about 5.8% higher than Friday’s closing ASX price of $2.91.
For the first half, Medibank paid a fully franked dividend of 5.8c per share. This represented a payout ratio of 79% of underlying NPAT. For the remainder of FY21, it says that it expects to pay “towards the top end of its target payout ratio of 75% to 85%”. This has brokers forecasting a full year dividend of 11.9c per share, implying a yield of 4.1% (fully franked). For FY22, the brokers’ forecast a small increase to 12.3c per share, a yield of 4.2%.
4. Telstra (TLS)
I wrote about Telstra five weeks ago (see https://switzerreport.com.au/telstra-is-it-still-a-buy/ [1]). To quote from my summary:
“I am going to stick my neck out again and say that there is more upside with Telstra. The support from dividend thirsty income seekers, plus others expecting some form of distribution in relation to the sale of TowerCo, will keep a floor on the price.
I am not looking for much, maybe over time up to $3.75. I do not see a lot of downside risk in the short term, which makes it a buy/hold rather than a sell.”
Telstra – 3/20 – 3/21
The major brokers are in the main bullish on the stock. According to FN Arena, the consensus target price is $3.59, 11.7% higher than the last ASX price of $3.21. Range is $3.00 to $4.05, with 3 buy recommendations, 1 neutral recommendation and 1 sell recommendation.
On the dividend front, I don’t think there is any doubt that Telstra will maintain its full year dividend of 16c per share (fully franked) in FY21, and the odds are improving in regard to FY22 and FY23. The brokers agree, with the consensus forecast of 15.8c for FY21 and 16.0c for FY22. On Friday’s ASX price of $3.21, this puts Telstra on a prospective yield of 5.0% (fully franked).
Prices, forecasts as at 19/3/20.
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