Category: Dividend Stocks

Companies return profits to shareholders through two main channels, capital gains and income. A high dividend yield indicates that a company is returning a large amount of cash to shareholders relative to the value of the company. This allows investors to maximize their income received relative to their investment amount. The gross dividend is calculated from the net dividend amount paid to shareholders plus the value of any attached franking credits associated with those dividends. A fully franked dividend will have franking credits equal to 30% of the gross dividend value, which can, therefore, represent a significant source of additional value.

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Dividend Stocks

Most of Swatch’s brands benefit from a cost advantage through scale and a higher degree of production automation.

Business Strategy & Outlook

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultra luxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch’s brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, a lack of control over distribution (around 70% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which can be damaging for brands with long-shelf-life products.

The recent strong supply response from Swatch and its competitors to Chinese demand points to a lack of supply discipline. The supply discipline is one of the important moat-supporting factors for luxury brands, as it helps to preserve the brand exclusivity perception and ensure high returns on capital. The expect Swatch Group’s sales to grow at a 4.3% pace over the long term (versus low -single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet and Blancpain, high-single-digit growth for jewelry brand Harry Winston and flat revenue for low-end watches (Tissot, Swatch, Mido, Hamilton and so on).

Financial Strengths

Swatch is in a strong financial position with CHF 2.5 billion in net cash at the end of 2020, with minimal financial debt and around CHF 2.6 billion in cash and marketable securities on the balance sheet. Further, over one third of inventories of Swatch Group, or over CHF 2.1 billion by value, are in precious metals and stones, recorded both in raw materials and as part of finished and semi finished goods. It is well-positioned to weather the COVID-19 crisis. Given the industry’s cyclicality, the financial prudence is appropriate. Cash flow improvement in future through operating leverage on fixed costs, cost discipline in the company—and especially within underperforming brands—and lower investment levels as productive and retail capacity has been built out in the past upcycle years. The free cash flow margin at around 10%, approximately in line with 2020-21 levels, as the investment cycle rolls over. They expect Swatch to remain mostly equity financed with low financial leverage.

Bulls Say

  • Around three quarters of Swatch’s revenue and higher share of profits are from higher-end watch and jewelry brands, not directly affected by smartwatch competition. 
  • Harry Winston, among the few global brands in luxury jewelry, a niche with especially high entry barriers, offers growth and margin expansion potential. 
  • Swatch is increasingly taking action to tackle costs in low-end brands and limit gray market channels for high-end brands.

Company Description

Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in mid range Swiss watches), and Swatch. Swatch group employs over 31,000 people, half of them in Switzerland. The Swatch Group makes about 28% of its sales from Omega, 18% from ultra luxury brands, 20% from Longines, 12% from Tissot, and 4% from Swatch. The Omega and Longines to be the group’s most profitable brands.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Mercury is Primed for Growth on Recovering Generation, Acquisitions and Development

Business Strategy & Outlook:   

Mercury is one of New Zealand’s leading producers of electricity, accounting for more than 15% of the country’s total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favorable environment dominated by four electricity producers. Barring regulatory change, the four major players will continue to generate favorable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating. Installed capacity from the firm’s hydro and geothermal generation is equivalent to about 6800 gigawatt hours, or GWh, of annual production. The firm is building its first wind farm, with full completion in late 2021 increasing average annual generation to around 7640 GWh. 

The generation business is significantly hedged by the supply of electricity to residential and industrial customers, with the added ability to alter output, should weather conditions change. For instance, when wholesale prices are low, Mercury can opt to reduce hydro output if it is more cost-effective to purchase electricity for its retail business than to produce it, though its ability to do so is limited by relatively small lake storage. The firm is affected during a dry year because of lower hydro output, which comprises about 60% of generation in normal years. Its geothermal power plants and hedging to some extent alleviate dry-year risk and provide stability to the firm’s revenue and earnings. Nationwide electricity demand has been soft because of a combination of economic weakness and more efficient energy consumption by households and businesses. Retail markets have been challenging, owing to intense competition from both incumbent gentailers and pure-play energy retailers.

Financial Strengths:  

Mercury is in sound financial health. Gearing (as measured by debt/capital) was 26% in June 2021. Net debt/EBITDA was 2.9 times in fiscal 2021, a little higher than most peers. But earnings growth and the underwritten dividend reinvestment plan should reduce net debt/EBITDA back to 2.5 times in 2023. The likely debt-funded acquisition of Trustpower’s retail division should cause credit metrics to deteriorate a little further but remain comfortable. Maintenance capital expenditure in 2022 should be about NZD 70 million. Growth capital expenditure is picking up with the commitment to build the Turitea wind farm. Other growth investments are possible. Management is committed to paying dividends based on a payout ratio of 70%-85% of free cash flow, but the potential for further special dividends has diminished because of increased growth expenditure. Should the firm have surplus free cash flows after funding growth projects, it might opt for share buybacks.

Bulls Say: 

  • Mercury is a low-cost provider of electricity attributed to its significant renewable assets.
  • The company has a strong retail electricity brand, especially in the key Auckland region.
  • A strong free cash flow is expected to support dividend growth and investment in Tilt Renewables and other growth opportunities.

Company Description: 

Mercury NZ (formerly Mighty River Power) generates more than 15% of New Zealand’s electricity and is one of the four major electricity generators and suppliers in the country. All electricity is now generated from renewable sources, which makes it one of the lowest-cost providers of electricity. The company operates nine hydro stations and five geothermal power plants, all located in the North Island. Mercury sells electricity to residential and commercial customers and has the largest share of the key Auckland market.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Suncorp Sale or Demerger of the Bank Could Make Sense, Depending on Price

Business Strategy & Outlook

Suncorp is a well-capitalised financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons, and Terri Scheer. In New Zealand, key brands include Vero, AA Insurance, and Asteron Life. Some brands are specific to certain states, but at a group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia. The group’s exposure to the Queensland market, where large natural peril events have tended to be larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events. 

Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounting for more than half of total lending. Suncorp Bank’s smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors. While there are potential benefits to the bancassurance model, such as better customer insights versus stand-alone insurance peers, and better cross-selling opportunities, they have not delivered a material tangible improvement in earnings, returns, or switching costs. Selling home insurance to borrowers is the lowest hanging fruit, with recent improvements to give the group a single customer view likely to make the process smoother. Similar to its peers, Suncorp is focused on enhancing the digital offering to ensure simpler and faster quotes, claim processing, and to ensure the large insurer remains competitive on price. In response to changes in the way customers engage with their insurer, with less human contact and the expectation of being able to access services at anytime, productivity improvements remain a priority.

Financial Strengths 

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, net debt/EBITDA is expected to remain below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion. Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet is expected to remain strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say

  • Premium increases stick without an equal rise in claims and rising rates lift yields on fixed income, together lifting underlying profitability and dividends. 
  • A benign claims environment with a lower incidence of major catastrophes would considerably boost underwriting profits. 
  • Risk management has been improved, and productivity initiatives are expected to deliver greater cost efficiencies.

Company Description

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Aviva Is Shifting the Focus of Its Business

Business Strategy and Outlook

As a good middle-of-the-road insurer Aviva has had its fair share of problems over the years. As with many previously poorly run companies, these issues have stretched across leverage, controls, turnover and likely relatedly, its sprawling business portfolio. While prior leadership teams tried to get a handle on this business, up until now none have really done so. This is mainly attributed to a focus on growth and innovation, without a focus on strong capital management and discipline. Mark Wilson’s tenure was characterized by the Friends Life acquisition, the digital garage and his appointment at BlackRock. It felt like Maurice Tulloch would tilt the business more toward general insurance but we think it is likely that the business’ problems became too much for him. Present CEO Amanda Blanc is now set on making things right and has divested noncore assets, promising now to focus on the U.K., Ireland, and Canada.

Aviva is not a highly differentiated business and does not have a strong strategy. As a middle of the road business, reinvestment is critical. Two of its three objectives have been achieved and those are focus and financial strength. However, what is yet to be seen is how Blanc will transform the remaining assets into a collection of units that are better than they are and perhaps approaching market-leading. From what has been seen, this is about investing in exceptional customer service and it’s hard to imagine anyone disputing that need. All too often that falls by the wayside in this segment of financial services. However, there is no disputing that excellent customer service has tangible and financial benefits. It leads to lower customer turnover and lower acquisition costs both in terms of volume and margin. Lastly, this is largely a long-term savings business so accretive investment in Aviva Investors will be crucial.

Financial Strength

Aviva has a weak balance sheet. Aviva’s debt is a little over half of its shareholders’ equity. Most of this is core structural borrowings that are held by the center. Pleasingly, management has decided to appease investors with a near GBP 2.0 billion debt reduction in 2021 and a further GBP 1.0 billion debt reduction program over the coming years. This debt reduction plan has been assisted by the GBP 7.5 billion raised from the eight business sales. This has provided management with plenty of room to commence a GBP 1.0 billion buyback on top of the deleveraging. The net of these actions is anticipated to substantially improve the business’ leveraged position. The interim dividend for 2021 was increased to GBX 7.35 per share and the total dividend for the year will be GBX 22.0. This means a final of GBX 14.7 per share for full-year 2021. Guidance is for a dividend of GBX 31.5 for full results of 2022.

Bulls Say’s

Aviva’s new CEO is still making good strides to focus, transform, and simplify the business.

Leverage has been an issue, and this is a primary focus of the new management team.

Targeted capital remittance plans provide a nice buffer for further buybacks or business reinvestment.

Company Profile

Aviva is a multiline insurer headquartered in the United Kingdom. It traces its roots back to the late 1700s with the establishment of the Hand-in-Hand Fire Office, a mutual insurer of loss from fire. This mutual, along with many other entities acquired and established over the years, was purchased by Commercial Union in 1905. In the late 1990s, Commercial Union and General Accident merged to form Commercial General Union, or CGU. A few years later CGU and Norwich Union merged and later rebranded as Aviva. Aviva acquired Friends Life in 2015. Aviva has been through quick successions of leadership in recent years. Mark Wilson served as CEO in the five years between 2013 and 2018. Then Maurice Tulloch took over and led up to July 2020. Amanda Blanc has led since then.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

FVEs for Anglo American, BHP, and Glencore Modestly Reduced as Queensland Hikes Coal Royalty Rates.

Business Strategy & Outlook

BHP Group is the world’s largest publicly traded mining conglomerate and positioned at the centre of the China boom. The company correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification, relative to its mining peers. BHP produces a range of commodities and is a major producer of iron ore, copper, and metallurgical coal. Exposure to conventional oil and gas ended with the spinoff and subsequent merger with Woodside in 2022. The onshore U.S. shale assets were divested in 2018. Much of the company’s operations are in Australia, particularly the low cost iron ore business. Many of BHP’s assets are located close to key Asian markets, particularly iron ore and metallurgical coal, which provides a modest freight cost advantage relative to peers. 

Commodity demand is tied to global economic growth, China in particular. China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021. With demand for most products likely to soften with the end of the China boom, and BHP’s fiscal 2021-22 earnings back near the fiscal 2011-12 peak, the outlook is for earnings to materially decline, with iron ore the likely key driver. The good times saw significant capital expenditure, notably on iron ore and onshore U.S. shale gas and oil. Overinvestment in the boom diluted returns to the point where long-term excess returns are unlikely. Structurally lower earnings with the demise of the China boom peaks means midcycle returns on adjusted invested capital, after adding back the impairments and write-downs,are anticipated to be close to the cost of capital. Ignoring the cumulative impairments and write-downs, returns are forecasted to modestly excess the cost of capital by mid cycle.

Financial Strengths 

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, net debt/EBITDA is expected to remain below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion. Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet is expected to remain strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces. 
  • The company’s cash flow base is diversified and is less susceptible to the vagaries of the market than single-commodity producers. 
  • BHP’s iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

Company Description

BHP is a leading global diversified miner supplying iron ore, copper, oil, gas, and metallurgical. The merger of BHP Limited (now BHP Ltd.) and Billiton PLC (now BHP PLC) created the present-day BHP. Shareholders in each company have equivalent economic and voting rights in BHP as a whole and in 2022 voted to reunify the dual listed structure. Major assets include Pilbara iron ore, Queensland coking coal, Escondida copper and conventional petroleum assets, principally in Australia and the Gulf of Mexico. Onshore U.S. oil and gas assets were sold in 2018 and the remaining Petroleum assets are likely to be spun off and merged with Woodside.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Medibank Remains a Relatively Defensive Company Heading into an uncertain Economic Environment

Business Strategy & Outlook:   

Medibank is Australia’s largest private health insurer operating under the Medibank and Ahm brands. The dual-brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter waiting times, and a choice of doctors and hospitals. Government policy settings, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will put further pressure on the public health system. Medibank’s current strategy, which has seen growth in policyholder numbers and margins, should see the positive trends continue. Initiatives included increasing the number of service providers where individuals pay no-gap, introducing reward programs (such as discounts) for members, investing in the digital offering to make it easier to lodge claims, adding tools and resources such as 24/7 nurse teleservice, and a new focus on in-home care. To help support margins there has also been a renewed focus on claim costs. 

Medibank secured audit rights with hospitals, which allows the insurer to investigate where rehabilitation referrals of a hospital exceed industry averages andit expanded efforts to identify errors in claims made by hospitals. Despite larger players generating a respectable return on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation, or at the least a pullback in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission. 

Financial Strengths:  

In a debt-free position Medibank is in sound financial health. Medibank can fund long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range. Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021. 

Bulls Say:  

  • Industry growth is tied to a steadily increasing population, ageing demographics and the rise in healthcare spending. Governments will continue to incentivize participation in private health insurance to share the burden of escalating healthcare costs.
  • Premium growth is generally tied to the increasing cost of healthcare.
  • The symbiotic relationship with the private hospital operators and buyer power over general practitioners is a key strength of Medibank’s business model. The majority of private hospital income is paid by the insurers. 

Company Description:  

Previously owned by the Australian government, Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.8 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Entergy to invest more than $4 billion annually for at least the next five years to upgrade its expansive grid

Business Strategy and Outlook 

Entergy’s growing, energy-hungry Southeast U.S. service territory and constructive state regulatory frameworks give it a long runway of earnings and dividend growth potential. Entergy will invest more than $4 billion annually for at least the next five years to upgrade its expansive grid and build out its renewable energy portfolio. Much of this investment has strong support from industrial customers trying to electrify and decarbonize their businesses. Entergy’s investment opportunities and customer growth will lead to annual earnings growth in line with management’s 6%-8% target. Entergy has made a substantial strategic transformation during the last few years. It was the second-largest U.S. nuclear owner for nearly two decades with six plants in the Northeast and four rate-regulated plants in the Southeast. The plants in the Northeast at their peak earned more than Entergy’s rate-regulated utilities. But they became a drag on earnings, dividends, and shareholder returns as power prices fell and never rebounded. 

Management began exiting the business in 2014 by selling and retiring the plants, most notably the Indian Point units that supplied as much as 25% of New York City’s electricity but succumbed to antinuclear policymakers. Entergy closed its last nonutility nuclear plant, Palisades (Michigan), this year. Entergy has turned over decommissioning responsibilities to other companies, eliminating the risk of unexpected decommissioning costs.

As a predominantly rate-regulated utility, Entergy no longer has direct energy market exposure. Entergy’s unique risk is severe storms that hit its service territory regularly. From Hurricane Katrina to Ida and many in between, Entergy regularly faces billion-dollar storm repair costs. Regulators have a long history of allowing Entergy to recover those costs from customers, limiting the financial risk for shareholders. Given the exit from Northeast nuclear generation and the growth potential of Entergy’s utilities, the dividend might increase to track earnings growth.

Financial Strength

The strong industrial growth in the Mississippi Delta region will be one of the main drivers for more than $4 billion of investment annually at Entergy’s utilities during the next five years. Entergy’s balance sheet rightsizing and constructive regulation that enhances cash flow should limit the amount of new debt and equity that the company has to issue to fund its growth program. Entergy enters its large investment program with a strong balance sheet. The approximately $5 billion of impairments or other costs associated with the exit of the merchant nuclear business had weakened its balance sheet, but Entergy has put that behind it. The current leverage is manageable, considering the diversity and consistency of the company’s utility earnings. In October 2021, Entergy’s board raised the dividend $0.24 per share annualized, or 6%, to $4.04, the largest increase since 2010 and are in line with the expectations. Entergy had been raising the dividend $0.08 per share annually, or about 2%, since 2015 and didn’t raise the dividend between 2010 and 2015, constrained by weak performance at the competitive generation business and capital investment needs at the utilities. With the exit from the competitive generation business, the dividend might increase to track earnings growth.

Bulls Say’s

  • Industrial electricity rates that are well below the U. S. average are driving strong industrial development in the Mississippi Delta region and electricity sales growth.
  • The board raised the dividend 6% for 2022, the largest increase in a decade. The dividend growth is to continue at a similar rate for the foreseeable future. 
  • The decision to exit the merchant nuclear business demonstrates good capital allocation as merchant nuclear earnings had high variability.

Company Profile 

Entergy is a holding company with five regulated integrated utilities that generate and distribute electricity to about 3 million customers in Arkansas, Louisiana, Mississippi, and Texas. It is one of the largest power producers in the country with approximately 23 gigawatts of regulated utility-owned power generation capacity. Entergy was the second-largest nuclear owner in the U.S. before it began retiring and selling its merchant plants in 2014.

 (Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

SQM had increased its market share to 35% by the end of 2017 through a volume-over-price strategy

Business Strategy and Outlook 

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, it is expected high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities. SQM is a major supplier in the lithium carbonate market. Long term, the company plans to expand its carbonate capacity to at least 250,000 metric tons from 70,000 in 2019. SQM is also investing in lithium hydroxide production capacity in Australia through a joint venture with Wesfarmers, Covalent Lithium, which will be a fully integrated spodumene-based lithium hydroxide producer. The first part of the project is to enter production in the mid-2020s, with a capacity expansion in the second half of the decade. Unit costs should sit on the lower half of the lithium hydroxide cost curve.

SQM is a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. Specialty potash demand should benefit from the shift in emerging-market diets to higher-value foods. While specialty fertilizer prices tend to move in line with commodity potash prices, they have been less affected by movements in commodity potash prices. SQM is also a small player in commodity potash. SQM is the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films. Iodine demand has grown 3% annually over the past decade and should continue to grow at this pace as healthcare spending rises with aging populations. SQM had increased its market share to 35% by the end of 2017 through a volume-over-price strategy, which caused iodine prices to fall. After higher-cost supply reduced production and SQM achieved its market share goals, the company is now acting as a rational player and prices have increased since 2018.

Financial Strength

SQM is in excellent financial health. As of March 31, 2022, cash and cash equivalents, including current financial assets, stood at $3.3 billion, which exceed the company’s total debt ($2.6 billion). SQM’s debt position has grown in recent years as the company is in the midst of quadrupling its Chilean lithium capacity, funding development of its Australian lithium joint venture project, and expanding its fertilizer and iodine production capacities. The company plans to spend over $2 billion in capital expenditures from 2021 to 2024 to support these growth initiatives. To help fund these investments, the company issued $1.1 billion in equity in early 2021. However, given the recent rise in lithium, fertilizer, and iodine prices, SQM will be able to pay for the remaining capital expenditures with cash generated from its operations. Ultimately, the company’s balance sheet is to remain healthy as profits grow from the increased volumes and higher lithium prices. SQM’s dividend varies each year. It is calculated as a percentage of net income that ranges between 50% and 100% depending on balance sheet metrics, including total current assets divided by total current financial liabilities and total liabilities minus current financial assets divided by total equity. While SQM’s dividend will fluctuate from year to year, the company will generate enough cash flow to meet all of its financial obligations, including dividends.

Bulls Say’s

  • SQM’s crown jewel is its Salar de Atacama operation in Chile, which is the lowest-cost lithium deposit globally. Its capacity expansions at this resource should create long-term value. 
  • The company’s specialty fertilizer blends of potassium, nitrates, and sodium garner a premium to commodity fertilizers due to their use in high-value crops, including fruits and vegetables. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for SQM.

Company Profile 

Sociedad Quimica y Minera de Chile is a Chilean commodities producer with significant operations in lithium (primarily used in batteries for electric vehicles and energy storage systems), specialty and standard potassium fertilizers, iodine (primarily used in X-ray contrast media), and solar salts. The company extracts these materials through its high-quality caliche ore and salt brine deposits. SQM is also developing a hard rock lithium project in Australia.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Spark’s High Dividends can be Maintained

Business Strategy & Outlook:   

Spark New Zealand generates dependable cash flow, has a strong position in the New Zealand telecom market, and has the infrastructure to offer a diverse range of products. Although competition has been intense in the New Zealand telecommunications market, Spark’s scale provides a competitive advantage. Furthermore, private equity ownership of Vodafone New Zealand has heralded in a new age of rational competitive behavior in mobile. Construction of an ultrafast broadband network will lower barriers to entry in fixed-line and broadband, and represents a risk to Spark’s broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband. 

Spark’s moat is supported by cost advantage and economies of scale in a relatively small market. Spark is the equal-largest player in mobile with over 40% revenue market share. The dominant market positions of Spark and Vodafone may make it difficult for new players to enter the market and establish necessary scale. With its price-focused strategy, 2degrees, the third player in the mobile market, has gained some traction, although it is financially constrained under private ownership. Given the small New Zealand market, there is a low risk that a new player will enter as an infrastructure network operator. Any new players may adopt a wholesale access mobile virtual network operator model, selling mobile services using the infrastructure of another network. Spark captures part of the revenue by wholesaling its infrastructure to MVNOs, and recently launched its skinny service to compete in the value-end of the broadband market. Other operations in IT services, managed data, and international fibre are supportive. This includes cloud computing services and international connections offered to corporate and government entities.

Financial Strengths:  

Spark New Zealand is comfortably geared. Net debt/EBITDA before investment income as at the end of December 2021 was 1.2 times. Reliable free cash flow means that operations, maintenance capital expenditure, and investment can be largely funded by cash flow. Spark New Zealand’s capital structure is maintainable in its current form. The company aims to maintain an external credit rating in the A band, with the goal of keeping net debt/EBITDA below the internal threshold of 1.4 times. Spark New Zealand’s metrics to remain in line over the long term.

Bulls Say:  

  • Spark New Zealand is the largest telecom provider in New Zealand, where it provides the most diverse range of telecommunications services. These characteristics provide reasonable diversity and will allow the company to execute a product-bundling strategy.
  • Spark New Zealand has a high-quality mobile network and has secured the greatest capacity in recent spectrum auctions. These attributes provide a valuable competitive advantage in the New Zealand market.
  • Free cash flow generation is strong, despite ongoing requirements to invest in networks, technology, and spectrum.

Company Description:  

Spark is one of only two large integrated telecommunications companies in New Zealand. It is the dominant provider of fixed-line services in the country and effectively equal-number-one player in the mobile telephony market. It also boasts a commanding presence in the New Zealand corporate and wholesale telecommunications services provision space. Spark’s operations are split into mobile, voice, broadband, and digital-related services.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

New PPL Will Look to Rhode Island for Growth

Business Strategy & Outlook:  

PPL is expected to spend nearly $12 billion at its U.S. utilities through 2026, including its recent acquisition of Narragansett Electric. These regulated utility growth opportunities support the expectations for 6% annual earnings growth, the low end of management’s 6% to 8% earnings growth target through 2025. PPL exited its U.K. business for $10.4 billion in net cash proceeds. This was an attractive price, representing a 50% premium to standalone value for the unit. Amid regulatory and political uncertainty, management’s decision to exit the business was the right one. As part of the WPD transaction, PPL agreed to pay $3.8 billion for National Grid’s U.S. utility, Narragansett Electric. Management allocated the remaining proceeds to $2 billion of additional regulated investment opportunities, $3.9 billion to strengthen the company’s balance sheet bringing leverage more in line with its peers, $1 billion of common stock repurchases, and $400 million in additional dividends. 

Overall, these capital allocation decisions were in the best interest of shareholders. Narragansett Electric provides the most growth opportunities among PPL’s portfolio of companies. The forecasted 11% annual rate base growth supported by a constructive regulatory environment. Growth in the region should accelerate in 2024 and beyond, coinciding with the company’s agreement not to seek a rate base increase until then. The company’s legacy Pennsylvania and Kentucky utilities also operate in supportive regulatory environments but offer less growth than Narragansett. In Kentucky, rate base growth will be less than 2% annually as the company slowly winds down its coal generation. Importantly, regulators will allow PPL to recover through rates a return of and on the net book value of assets it plans to retire in the coming years. Coal rate base in the state is $5 billion, declining to $4 billion by 2026, but will still represent one third of rate base in 2026, among the highest of its utility peers. Rate base in Pennsylvania should grow near 4% annually.

Financial Strengths:   

PPL will invest nearly $12 billion at its utilities through 2026, including the recent Narragansett acquisition. This will require PPL to issue debt to maintain its current capital structure. Company didn’t expect any equity issuances in five-year forecast. Total debt/capital improved significantly as management used $3.9 billion in proceeds from its U.K. utility sale to reduce leverage. Estimate leverage will normalize around 50%, down from prior year-end 65% debt to capital. Total debt/EBITDA to stay below 5 times. The earnings stability of the regulated utilities coupled with modest near-term maturities makes the debt load manageable. The company approved a $0.20 per share dividend for the first quarter of 2022, a more than 50% cut from the quarterly payments in 2021 after the company completed the sale of its U.K. business. After closing the Narragansett acquisition, the company increased its quarterly distribution to $0.225, or $0.90 annualized. The company plans to maintain a 60%-65% payout target, and the company will grow the dividend in line with 6% earnings growth estimate.

Bulls Say: 

  • PPL’s domestic regulated earnings mix provides a stable base for earnings growth.
  • Management’s decision to sell its U.K. assets will allow investors to focus on the company’s U.S. utilities.
  • PPL is expected to spend nearly $12 billion in capital investment, including the recently acquired Narragansett, supports near-term earnings growth.

Company Description: 

PPL is a holding company of regulated utilities in Pennsylvania, Kentucky, and Rhode Island. The Pennsylvania regulated delivery and transmission segment distributes electricity to customers in central and eastern Pennsylvania. LG&E and KU are involved in regulated electricity generation, transmission, and distribution in Kentucky. The Kentucky utilities also serve gas customers. Narragansett operates electric and gas utilities in Rhode Island.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.