Question 1: I am currently holding Fortescue (FMG). Do you think it will rebound pre-dividend?
Answer: The sell-off in Fortescue has been pretty severe. Weaker than expected FY25 guidance, forecasts of higher costs and capex, lower price realisation, weaker iron ore prices, management upheaval and finally a big institutional shareholder bailing out have all impacted. The market remains somewhat bearish on Fortescue, with 1 “buy” recommendation, two “neutral” recommendations and 4 “sell” recommendations. The consensus target price, according to FN Arena, is $19.22, about 5.9% higher than the last ASX price of $18.16. However, the range is quite wide – with a low target of just $14.25 through to a high target of $23.50. I prefer the “safety” of a BHP or RIO, but if you are more of a thrill seeker, then Fortescue looks a reasonable bet. But I think you have to be fairly confident about the price of iron ore holding around US$100 per tonne. On the dividend, this year’s dividend will be lower than last year, and next year’s even lower. The market is forecasting a total dividend for FY24 (interim and final) of 185c, falling to 136c for FY25. Fortescue announces its full year results (plus final dividend) on August 28.
Question 2: My husband and I have a SMSF with around $600,000 which I look after, my husband shows no interest. We are both heading into our 80’s and although in good health, we don’t know how long we will remain this way. For this reason I’m thinking about winding the fund up. Is this a reasonable idea? If so, what ideas can you give me what to do with the funds?
Answer: I think if you have concerns about how you might manage your SMSF going forward, then it makes sense to think about winding it up. If you do, one option would be roll-over the super monies into a public offer super fund, perhaps with a provider such as Australian Super. If you don’t have any other taxable income and can access the tax free threshold of $18,200, then investing outside super would be more flexible. In that case, a portfolio of shares such as our model portfolios (see https://switzerreport.com.au/advice/model-portfolios/), or if you just want the easy option, an index fund such as VAS or IOZ might be the way to go. You could also look at Vanguard’s diversified ETF options (balanced, growth, high growth etc).
Question 3: Could you discuss the poor market reaction to the Audinate (AD8) update the other week? Is it a hold, or join the crowd and sell?
Answer: Audinate’s (AD8) downgrade to FY25 revenue, gross profit and EBITDA caught the market by surprise. Brokers slashed valuations in response. In fairness to Audinate, part of the reason for the downgrade to revenue (revenue now expected to be less in FY25 than FY24) was that revenue had been boosted in FY24 by Audinate filling back orders (due to manufacturing delays). However, the extent of the downgrade was material.
According to FN Arena, the adjusted target price (for broker forecasts post the downgrade) is $10.18, about 10% higher than the last ASX price. The range is relatively narrow from $9.30 to $10.90, and the brokers remain relatively bullish.
My sense is that Audinate will do quite a bit of work around $9.00. Market confidence has been shaken, and while it remains a stock with good long-term prospects, it will take a while to recover from this shock.
Question 4: Why is JB Hi-Fi paying a special dividend of 80c, rather than just increasing its ordinary dividend? Do you expect other companies to pay special dividends?
Answer: There are two reasons why JB Hi-Fi is paying a special dividend. Firstly, it is well capitalised, and cash flow is good. Secondly, it has surplus franking credits. So, by paying a special dividend, it is a means of distributing surplus franking credits to shareholders without raising expectations of a “perpetually” higher ordinary dividend. Franking credits are of absolutely no value to the company…they are only valuable in the hands of shareholders. Because of the Government’s changes to off-market share buybacks (effectively bringing these to an end), special dividends are one of the few ways that surplus franking credits can be distributed to shareholders. Yes, I expect more companies to pay special dividends.
