Yield-conscious investors continue to scour the sharemarket for good opportunities, which is not surprising given low term deposit rates. But dividend cuts – even from yield stalwarts such as ANZ Banking Group, in its interim dividend in May – or flat dividends, such as that seen in the recent reporting season from the market’s largest dividend payer, Commonwealth Bank, worry them.
Ideally, investors looking for yield opportunities should be seeking situations where the dividend is expected to grow, and where the payout ratio – the proportion of the net profit paid out in dividends – seems to be sustainable. Here, the market average is about 76% at present, but that’s expected to fall to about 72% by the end of the current financial year. A payout ratio in the area of 50%–70% provides a lot of comfort.
Full franking would be nice, and so would a yield above 4%.
If there is some possibility of capital growth, as indicated by the gap between the current share price and the consensus target price estimate of the analysts that follow the stock, then that should be seen as a bonus.
With the help of analysts at Credit Suisse, we’ve put together a top 10 list for each of FY17 and FY18 of stocks that meet these criteria: we set a 4% yield as a hurdle rate, and looked for the best stocks in terms of expected dividend growth. The only fly in the ointment is that analysts see a handful of these stocks as over-valued – but you can’t have everything.
FY17 stocks
Media company Seven West Media Limited (SWM) owns the Seven Network, 7TWO and 7mate, which make up the largest commercial TV network in the country (by audience and advertising market share), as well as magazine group Pacific Magazines, The West Australian newspaper, as well as a half-stake in Presto Entertainment and Yahoo!7.
Insurance and banking group Suncorp (SUN) saw falls in earnings and dividends in FY16, but the market expects a strong bounce back in both in FY17.
Spark Infrastructure (SKI) is a specialist investor in regulated Australian utility infrastructure. It owns 49% stakes in three electricity distribution networks: SA Power Networks (SAPN), the sole operator of South Australia’s electricity distribution network; CitiPower, which operates the distribution network that supplies electricity to Melbourne’s CBD and inner suburbs; and Powercor, the largest electricity distributor in Victoria, serving central and western Victoria and the western suburbs of Melbourne. Spark also emerged from the privatisation of the NSW-based TransGrid with a 15.01% stake in the largest high-voltage electricity transmission network in the National Electricity Market (NEM). Spark also owns 10.6% of DUET Group. Like most infrastructure stocks Spark looks to have an extremely high payout ratio – more than its earnings – but infrastructure stocks pay their dividends out of operating cash flow, and on that basis SKI’s payout ratio is well under 100%.
Brisbane-based contract and charter air services operator Alliance Aviation Services Limited (AQZ) supplies flight services to the resources industry, operating a fleet of 28 aircraft. It has a national footprint with operations based in Brisbane, Townsville, Cairns, Melbourne, Adelaide, Perth and Auckland. In February Alliance won a five-year contract to operate jet services from Adelaide to Moomba in the Cooper Basin, carrying workers for the gas and oil operations of Santos. Alliance has also struck a long-term strategic partnership with Virgin Australia to work together to grow their respective charter businesses in the fly-in, fly-out FIFO market. Analysts expect dividends to surge in FY17 and FY18, which could have Alliance offering very good value.
Diagnostic imaging provider Integral Diagnostics Limited (IDX) listed in October 2015. The former Lake Imaging is Australia’s fourth largest provider of x-rays, MRI scans, ultrasounds and other diagnostic imaging services, and is an active player in the consolidation of the industry. In its debut result Integral brought in EPS of 9.05 cents and paid a DPS of 4 cents – analysts see that dividend more than doubling in FY17 and growing more sedately in FY18.
Australia’s largest global insurer, QBE Insurance Group Limited (QBE) is one of the world’s top 20 general insurance and reinsurance companies, with operations in all the key insurance markets. The market expects QBE to show earnings and dividend fall in 2016 (it uses the calendar year as its financial year), but rebound in 2017 (particularly in its dividend) and 2018.
Southern Cross Media Group Limited (SXL) generates about 80% of its revenue from its national Austereo radio network and also has an affiliate deal with the Ten Network for its Northern New South Wales television licence area. The market expects dividend growth of more than 10% for Southern Cross in both FY17 and FY18.
GUD Holdings Limited (GUD) manages a diversified portfolio of brands, including Sunbeam (consumer products), Oates (cleaning products), Dexion (warehouse shelving), RYCO (automotive parts), Lock Focus (security). In 2015 GUD bought Brown and Watson International (BWI), the owner of the Narva (automotive lighting) and Projecta (battery power products) brands: almost two-thirds of EBIT (earnings before interest and tax) now comes from the automotive aftermarket industry. Double-digit dividend growth appears to be on the cards for GUD in FY17 and FY18.
Drug wholesaler Sigma Pharmaceuticals Limited (SIP) is a wholesale distributor of drugs to more than 1,200 pharmacies, 700 of which are franchisees under Sigma-owned retail brands such as Discount Drug Stores, Amcal, Pharmasave and Guardian. Sigma operates has the largest pharmacy network in Australia, with more than 1,200 branded and independent stores. The company is now moving into the $2.5 billion hospital pharmacy market: analysts expect rising earnings and dividends in FY17 and FY18.
Tollroad operator Transurban (TCL) has a portfolio of tollroads spread across Melbourne, Sydney, Brisbane and the US state of Virginia. About 40% of revenue comes from the Sydney network, with about 34% from CityLink in Melbourne, 16% from the Queensland roads and the rest from the US. Transurban is a high-quality infrastructure stock and a reliable cash cow. Like Spark Infrastructure, Transurban appears to have an unsustainably high payout ratio on a net profit basis, but measured on operating cash flow available for distribution, the payout ratio in FY16 came in at about 97%, a much more manageable figure.
FY18 stocks
Vacuum cleaner retailer Godfreys (GFY) has given investors in its December 2014 float a bad ride, falling from the issue price of $2.75 to 84 cents, as the company failed to pick a rapid shift in customer preference to ‘stick’ vacuum cleaners, and was hit by fierce competition from electronics chain JB Hi-Fi, spearheaded by the popular Dyson brand. Sales, net profit and dividend all fell in FY16, with the latter down by 11.7%. Analysts expect the dividend to fall again in FY17, but rise by more than 10% in FY18. If these estimates are borne out – and on the company’s form on the market so far, that is a big ‘if’ – Godfreys’ present share price will have proven a great time to buy.
Advertising and marketing services group WPP AUNZ Limited (WPP) is the former STW Communications Group Limited, which merged with the Australian and New Zealand businesses of UK company WPP Plc to create WPP AUNZ. Analysts expect the company to boost its dividend by 20% in FY18, which implies from the current share price a projected fully franked yield of 6.3%.
Staffing, maintenance and project services company Programmed Maintenance Services Limited (PRG) merged last year with rival Skilled Group, with the latter’s shareholders ending up with just over 52% of the new company. The diversified services group reported a net loss for the year ended March 30 2016, but that was on the back of write-downs and various other one-off items: underlying net profit rose 24.5%, although the dividend was slashed by 36%. The market is looking for double-digit percentage recoveries in the dividend in FY17 and FY18, pricing PRG on a prospective fully franked FY18 yield of 6%.
SAI Global Limited (SAI), the former Standards Australia International, oversees the Five Ticks quality assurance standards program in Australia. In June SAI announced it would sell its quality assurance business, to focus its globally integrated risk management solutions business towards higher margin, higher growth software and digital products and services. SAI Global currently has a 15-year licence with Standards Australia to publish and sell more than 7000 sets of standards and rules, for hundreds of industries: the licence runs out in 2018. At that stage SAI will have to renegotiate the 10% royalty rate, to what the market expects will be a higher rate: Standards Australia itself has flagged a push into digital publishing that could threaten its spin-offs revenue. That’s the threat hanging over SAI, but analysts expect earnings and dividend rises this year and next, giving a 5.9% fully franked FY18 yield.
Brisbane-based engineering and construction company Seymour Whyte Limited (SWL) generates most of its income from civil and utilities services contracts: it is particularly well-leveraged to federal government infrastructure spending. In May, Seymour Whyte made its second earnings downgrade in three months, cutting back its profit estimate to $1 million–$2 million, down from $4 million–$5 million before. (In 2015, Seymour Whyte posted a $9.9 million profit.) Both EPS and DPS plunged about 80% but analysts see recovery in earnings and dividends in FY17 and FY18.
Shipping hire container business Royal Wolf Holdings Limited (RWH) sells and hires shipping containers – but not only for shipping purposes, its containers are also used for portable buildings and storage. Portable storage is the company’s largest business, while portable buildings is the fastest growing segment. Royal Wolf was another industrial company to put in a poor FY16 – EPS was down 21% and DPS fell 38%, but look for rebound this year and next.
Hotel and resort group Mantra Group (MTR) is one of the group of stocks seen as benefiting most from the upsurge in Chinese tourism: under its three brands – Peppers, Mantra and BreakFree – Mantra is the second largest accommodation provider in Australia. The company has more than 20,000 rooms under management for owners in properties across Australia, New Zealand and Indonesia. The market is looking for EPS growth from Mantra of 8.5% in FY17 and 9% in FY18, and double-digit dividend growth in both years.
FY17
* Financial year ending December 31
# Financial year ending January 31
See larger chart here [1].
FY18
* Results for year to December 2017
^ Financial year ending March 30
See larger chart here [2].
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