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Rudi’s View: Reliable Dividends On The ASX

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | May 15 2020

Dear time-poor investor: a line-up of reliable & sustainable dividend paying companies on the ASX

In this Rudi’s View:

-Reliable Dividends On The ASX
-Rudi Talks

Reliable Dividends On The ASX

By Rudi Filapek-Vandyck, Editor FNArena

In Part One of this week’s Weekly Insights I, hopefully, convinced you all that owning a basket of stocks that happen to offer a high yield, with or without franking, is not the smartest investment strategy.

Part Two zooms in on where to find reliable yield in a covid-19 impacted Australian share market.

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The share market absolutely loves companies that grow their dividends consistently over a long period of time.

There are two ways to achieve this. Either a business continues to grow its sales and cash profits, which then allows for dividends to rise while keeping the payout ratio steady.

In the absence of such a straightforward concept, company boards can also “manufacture” growth.

Investors do not always pay attention to the finer details, and thus companies who don’t have the luxury of a booming business with growing revenues can still achieve growth through, for example, lifting the pay-out ratio or raising capital or taking on debt.

The banks and Telstra, two of the main Go-To destinations on the ASX for income-hungry investors, have exactly done that at various stages over the decade past.

It’s not a sign of a healthy set-up, but desperate investors and desperate boards simply went along with it in the hope the band aid could cover up the underlying wound for much longer.

There is another way of creating growth and that is by slashing the dividend by a large percentage; say -50% or more.

After that, growing the dividend becomes a lot easier in the subsequent years. It doesn’t necessarily mean the business has to rediscover its prior mojo, just a little bit of normalisation out of the deep quagmire should suffice.

I don’t think Telstra has reached this point as yet, but the banks look like they are setting themselves up for just such a scenario.

It’s a bit early given we are still in the embryonic stage of the 2020 recession and banks have only just started to defer and reduce their dividends, but maybe in twelve months from today, they might be in a position to announce higher dividends compared to this year.

In the right context and with the right market sentiment, that might just be all investors need to hear. And given dividends will likely have been cut dramatically this year, the banks’ story about growing dividends can easily last 3-4 years without a booming context for the sector overall.

(Nobody cares by then that dividends had to be slashed first. The share market is forward looking, remember?)

In the short to medium term, of course, banks have nothing but negative news to share with their shareholders even though this is not a situation of their own making.

One thing once again stood out this week and that is CommBank ((CBA)) showing everyone why its shares trade, and will continue to trade, at a sizeable premium to the rest of the sector, through the release of a relatively resilient quarterly performance update.

I’ve said and written this many times over in the past I-don’t-know-how-many-years, the lower yield with the premium share price does not mean CBA is “expensive” or that the other banks are more attractive.

On a risk-reward balanced view, it’s the exact opposite. And investors once again have been presented with the evidence.

The observation to add here is the relative gap between CBA shares and the rest of the sector has blown out considerably, which might weigh on the CBA share price short-term and/or allow the other banks to close the gap (exact timing unknown).

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Talking about providing more evidence, packaging titan Amcor ((AMC)) equally caught investors’ attention with its quarterly update this week.

Amcor has been a proud member since inception of my small selection of All-Weather Performers in Australia, and it goes without saying it pleases me enormously when management at the helm continues to defy short-sellers and naysayers.

As pointed out by sector analysts since the release, Amcor stands out in the 2020 context as a reliable, sustainable payer of dividends to shareholders, and the board doesn’t need to slash this year’s dividend first in order to secure growth.

The odds are very much in favour of Amcor not paying out less than last year, at a time when many others are cutting or not paying out anything at all.

On current FX values (the company is now US listed and its prime currency is the US dollar) as well as on current analysts’ forecasts, shareholders can expect to receive 5.4% in dividends in 2021.

There is no franking, of course, but then investors whose focus is solely on franking credits are receiving a few extra (and harsh) lessons this year.

With such a prospective yield, one would have to assume Amcor is now one of the Dividend Champions on the ASX.

As can be quickly established via the Sentiment Indicator on the FNArena website, there are a few dozen companies on the ASX that at face value offer higher yield, but few would have Amcor’s low risk profile attached to those forecasts.

Having established the above, I quickly ran through my lists on the All-Weather Performers section on the website, and I think it’s only fair to point out that Amcor has become the highest yield stock in my little personal universe.

Other stocks on my lists that equally pay out a relatively high yield include (ex-Amcor) Orora ((ORA)), Iress ((IRE)), Brambles ((BXB)), Macquarie Group ((MQG)), Charter Hall ((CHC)), and Coles ((COL)).

For full disclosure: the FNArena/Vested Equities All-Weather Model Portfolio owns shares in Viva Energy REIT ((VVR)), specifically for its reliability and relatively low risk profile, which thus far has been borne out by the REITs consistent payout and overall performance.

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One stand-out reliable dividend payer in the domestic infrastructure space is pipeline owner APA Group ((APA)).

APA listed in 2000 and paid its early shareholders 11c plus a little bit of franking in FY01. That dividend has grown by more than 300% to 47c in FY19.

Current market forecasts expect APA Group to pay out 50c for the running FY20 (of which the interim has already been paid out) and 52c next financial year.

As such, APA with ambitions both in renewable energy and in the US market, combines reliability and growth.

Only twice over the past twenty years did the dividend fall in comparison with the year prior; in FY04 and in FY08.

To my knowledge, none of its peers in Australia is able to match this achievement (see also AusNet Services further below).

If market forecasts prove correct, the securities are currently yielding in excess of 4.5%.

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According to quantitative analysts at Morgan Stanley, there is a sweet spot in the yield/dividend paying space on the ASX. It’s where yield and growth meet and combine with company quality.

Sounds complicated? Nah. Just a lot of filters to determine where is the optimal risk-reward for yield seeking investors.

According to the team, the current sweet spot comprises of Fortescue Metals ((FMG)), Coca-Cola Amatil ((CCL)), BHP Group ((BHP)), Cochlear ((COH)), Rio Tinto ((RIO)), Ansell ((ANN)), JB Hi-Fi ((JBH)), Sonic Healthcare ((SHL)), Wesfarmers ((WES)), Woolworths ((WOW)), AGL Energy ((AGL)), and Coles.

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Strategists at stockbroker Morgans recently lined up their Best Ideas for investors seeking for income through the share market.

This led to a selection of 15 stocks: JB Hi-Fi, Coles, Woolworths, Amcor, Orora, Aurizon Holdings ((AZJ)), BHP Group, Rio Tinto, APN Convenience Retail REIT ((AQR)), Viva Energy REIT, Centuria Industrial REIT ((CIP)), APA Group, AusNet Services ((AST)), Spark Infrastructure ((SKI)), and AGL Energy ((AGL)).

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Equity strategists at JP Morgan equally published their Top Ten in Dividend Picks on the ASX.

The ten stocks selected are: Fortescue Metals, Vicinity Centres ((VCX)), BHP Group, GPT Group ((GPT)), Origin Energy ((ORG)), National Australia Bank ((NAB)), Macquarie Group, Amcor, Telstra, and Iress.

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In mid-April already, analysts at UBS highlighted which dividends they thought looked safe and which ones were most likely due for a reduction this year.

Even though almost a full month has passed since, I am still adding their conclusions as it further underlines the quality of the research.

UBS’s most preferred Go-To dividend stocks are: Aurizon Holdings, AusNet Services, Metcash ((MTS)), Coles, APA Group and Woolworths.

Other stocks that offer reliable dividend streams include AGL Energy, Amcor, Brambles ((BXB)), BWP Trust ((BWP)), Clover Corp ((CLV)), CSL ((CSL)), Inghams Group ((ING)), Kogan ((KGN)), Magellan Financial ((MFG)), ResMed ((RMD)), Rural Funds Group ((RFF)), Seven Group Holdings ((SVW)), Telstra, and Wesfarmers.

Companies most likely to reduce, defer or cancel their dividends this year, on UBS’s assessment, include SkyCity Entertainment ((SKC)), Sydney Airport ((SYD)), JB Hi-Fi, Scentre Group ((SCG)), Challenger ((CGF)) and Vicinity Centres.

In addition, the analysts believed dividends from the following list of companies looked at risk on a twelve months’ view: Alumina Ltd ((AWC)), ANZ Bank ((ANZ)), National Australia Bank, Northern Star ((NST)), OZ Minerals ((OZL)), QBE Insurance ((QBE)), Servcorp ((SRV)), Stockland ((SGP)), Western Areas ((WSA)), and Westpac.

Lastly, the analysts also identified companies whose franking balances were nearly depleted, and thus dividends might still be paid, but the percentage in franking credits attached seems due for a haircut.

Shareholders should thus expect lower franking benefits from dividends paid out by Domain Holdings ((DHG)), Genworth Mortgage Insurance Australia ((GMA)), Nine Entertainment ((NEC)), IVE Group ((IGL)), Link Administration ((LNK)), Lovisa Holdings ((LOV)), Monadelphous ((MND)), Perpetual ((PPT)), and Village Roadshow ((VRL)).

Since the UBS update, banks have reduced or deferred their dividend, while National Australia Bank and QBE Insurance raised additional capital.

One infrastructure operator that is regularly mentioned as a trustworthy, reliable dividend payer, AusNet Services, recently surprised through management preparing investors for a dividend reduction in FY21, and possibly a capital raising on top.

Part Three in this Special on dividends will appear in next week’s Weekly Insights.

Rudi Talks

Audio interview about the smarter way to build an income generating portfolio of equities:

bit.ly/2Z0Lq1z

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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CHARTS

AGL AMC ANN ANZ APA AQR AST AWC AZJ BHP BWP BXB CBA CCL CGF CHC CIP CLV COH COL CSL DHG FMG GMA GPT IGL ING IRE JBH KGN LNK LOV MFG MND MQG MTS NAB NEC NST ORA ORG OZL PPT QBE RFF RIO RMD SCG SGP SHL SKC SKI SRV SVW SYD VCX VRL WES WOW WSA