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

Western Union Is Shifting to Digital

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Business Strategy and Outlook

Western Union’s primary macroeconomic exposure is to employment markets in the developed world, as the search for better economic opportunities is the fundamental driver for money transfers. While conditions have improved over time in the United States and Europe, with new entrants adding to the issues for legacy operators like Western Union. At this point, we don’t see a catalyst to improve the situation, and pandemic-related headwinds appear to be lingering. Recent geopolitical events could be an additional headwind. Another major issue for Western Union is the industry shift toward electronic methods of money transfer. The company has been actively building out its presence in electronic channels in recent years to adapt to the change in the industry. Western Union saw a sharp spike in digital transfers at the beginning of the pandemic, and growth has remained strong. Western Union achieved a 32% year-over-year increase in transaction growth in 2021 as this area of the company’s business jumped to about a quarter of revenue. 

Morningstar analysts believe the firm’s aggressive approach is the best strategy as Western Union positions itself to maintain its scale advantage despite the shift. From Morningstar analyst view, scale and market share across all channels will be the dominant factor in long-term competitive position, and Western Union appears to be maintaining its overall position. However, the growth that the company is seeing in digital transfers does not appear to be leading to strong overall growth.

Western Union Is Shifting to Digital

Western Union’s third-quarter results weren’t particularly impressive, as the company continues to battle some pandemic-related headwinds. However, from a long-term point of view,  focus is more on the company’s digital channel results, as Morningstar analysts believe sharing in this channel’s growth is key to maintaining the company’s scale advantage and wide moat over time. On that front, Western Union maintains double-digit growth in digital. Morningstar analysts view the company’s shares as undervalued, as the company has the potential to adapt to a shifting market. Thus, maintain a $26 fair value estimate.

Digital channels considered as the bright spot for the company. Growth in digital channels did moderate as the company lapped the spike it saw last year. However, year-over-year transaction and revenue growth of 19% and 15%, respectively, can be considered as a solid result. Digital transfers now account for about one quarter of revenue, and management believes it is on track to exceed $1 billion in digital revenue in 2021. As per Morningstar analysts perspective, Western Union’s ability to scale across both cash and digital channels is a significant advantage as the overall market shifts to digital.

Financial Strength 

Financial Strength Western Union’s capital structure is fairly conservative, as management sees a strong credit profile as an advantage in attracting agents. The company carried $3.0 billion in debt at the end of 2021, resulting in debt/EBITDA of 2.3 times; this is a reasonable level, given the stability of the business. Western Union also typically holds a substantial amount of cash. Net debt at the end of 2021 was approximately $1.8 billion, and we expect the company to hold a net debt position of about $2 billion over time. Given recent changes to tax laws, it’s possible Western Union might not hold as much cash as it has historically, as it will no longer incur a tax penalty upon repatriation. This could help free management’s hand, as the company historically has returned the bulk of its free cash flow to shareholders through stock repurchases and dividends

Bulls Say

  • The demographic factor that has historically driven industry growth–namely, the differential between population growth in developing and developed countries–remains in place for the foreseeable future. 
  • Western Union didn’t see a major drop-off during the last recession or the pandemic, highlighting the stability of the business. 
  • While the motives for immigrants to relocate to wealthier countries are well understood, developed countries also have incentive to open their borders, as negligible native population growth makes immigration a necessity for long-term GDP growth.

Company Profile

Western Union provides domestic and international money transfers through its global network of about 500,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Johnson Controls’ Service Offerings Are Gaining Traction

Business Strategy and Outlook

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products.

In early 2019, Johnson Controls sold its power solutions business to a consortium of investors for $11.6 billion of net proceeds that the firm used to pay down debt and repurchase shares. Johnson Controls’ prudent capital allocation strategy in tandem with its simplified business model that is clearly showing improving fundamentals have been catalysts for the stock.

 As a pure play building technologies and solutions business, Johnson Controls stands to benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building products and solutions.The COVID-19 pandemic will increase the market opportunity for healthy building solutions, such as air filtration and touchless access controls. These secular tailwinds should allow Johnson Controls to grow faster than the economies it serves. Indeed, over the next three years (through fiscal 2024), the firm is targeting revenue growth at a 6%-7% compound annual rate, compared with expectations of 4%-5% market growth. Key levers behind Johnson Controls’ targeted outperformance include continued product innovation (supporting market share gains and pricing); increased service penetration (a higher margin opportunity); and the firm’s participation in meaningful growth themes (for example, energy efficiency, smart buildings, and indoor air quality solutions).

Financial Strength

After selling its power solutions segment in April 2019, which netted Johnson Controls $11.6 billion, the firm paid down $5.3 billion of debt and repurchased 191 million shares (21% share reduction) for approximately $7.5 billion. The firm’s balance sheet is now in great shape, with a net debt/2021 EBITDA ratio of about 1.8, which is below management’s targeted range of 2.0-2.5. The firm finished its fiscal 2021 with $7.7 billion of debt, about $1.3 billion of cash on the balance sheet, and $3 billion available on two credit facilities. The firm’s significant liquidity as dry powder for additional buybacks or acquisitions

Bulls Say’s

  •   Johnson Controls should benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building solutions. 
  • The COVID-19 pandemic should increase the market opportunity for air filtration and touchless access control solutions. 
  • Johnson Controls’ free cash flow conversion has been improving, exceeding 100% in 2020-21. A 100% free cash flow conversion is in line with other world-class firms

Company Profile 

Johnson Controls manufactures, installs, and services HVAC systems, building management systems and controls, industrial refrigeration systems, and fire and security solutions. Commercial HVAC accounts for about 40% of sales, fire and security represents another 40% of sales, and residential HVAC, industrial refrigeration, and other solutions account for the remaining 20% of revenue. In fiscal 2021, Johnson Controls generated over $23.5 billion in revenue.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Expert Insights

Star Entertainment Group reflects gross revenue declined -22% to $580m, EBITDA declined -87% to $29m and NPAT loss of $74m

Investment Thesis:

  • Additional cost measures announced to support earnings.
  • Monopolies in the casino industry in SGR’s operating geographies and is one of the market leaders in other games such as slots.
  • Economic moat in the nightlife landscape in Sydney given regulatory environment (such as lock-out laws).
  • Diversified business base across different types of entertainment, hotels, retail stores and food & beverage establishments.
  • Strong tourism growth once borders reopen is expected to a tailwind for SGR.
  • Lower AUD could improve international spending in domestic markets.
  • Domestic table games segment remains strong.

Key Risks:

  • Weakening VIP segment, potentially making Sydney less viable.
  • Further deterioration of consumer spending and household discretionary income 
  • Regulatory risks e.g. repeal of lockout laws could increase competition in the nightlife landscape in Sydney.
  • Establishment of new Crown casino in Sydney will increase competition (especially amongst VIP customers) and could potentially dismantle SGR’s monopoly in Sydney.
  • Win-rate risk (if the casinos have a much lower win-rate than the mathematical expected value).
  • Potential scandals.

Key Highlights:

  • On a normalised basis, gross revenue declined -22% to $580m, EBITDA declined -87% to $29m and NPAT was a loss of $74m, impacted by Covid-19 related property shutdowns, operating restrictions, and border closures. Statutory EBITDA of $31m (pre significant items) was down -87% and statutory net loss was $74m (post significant items) vs profit of $49.7m in pcp.
  • Operating expenses increased +23.6% to $401m, reflecting Covid-19 related inefficiencies and investment in staff to position the properties for re-opening.
  • Net debt increased by +4% over 2H21 to $1.2bn with net leverage increasing to 5.2x, impacted by property shutdowns. However, SGR received full waiver of debt covenants for the December 2021 testing date and an amendment of the covenant ratios for the June 2022 testing date.
  • SGR has liquidity of $520m in cash and undrawn facilities.
  • Asset sale continued (to release capital from non-core or low-yielding assets), with SGR selling VIP jet for ~$40m, entering into agreement for the sale of an interest in the Treasury Brisbane assets for $248m (ex GST) and continuing work on the potential sale and leaseback (or similar transaction) of a minority holding in The Star Sydney property. 
  • Operating cashflow declined -96% to $11m with cash collection down -90% to 45%.
  • Capex of $125-150m (FY23 guidance is ~$175m).
  • D&A expense of ~$205m.
  • Net funding costs of $50-55m.
  • JV equity contributions of ~$35m, primarily relating to Gold Coast Tower 2.
  • Cost pressures to continue in 2H22 driven by wages, insurance, energy, Covid-19 related challenges and further investment in headcount in regulatory and compliance functions.
  • Trading Update – in the period from 1 January 2022 to 13 February 2022, total revenue was up +7% YoY with Sydney revenue up +20% (gaming revenue up +17% and non-gaming revenue up +46%) and Queensland revenue is down -6% (gaming revenue down -12% and non- gaming revenue up +32%) with Omicron impact peaking in mid-January and progressively easing. 

Company Description:

The Star Entertainment Group Limited, an integrated resort company, provides gaming, entertainment, and hospitality services in Australia. The Company operates through three segments: Sydney, Gold Coast, and Brisbane. It owns and operates The Star Sydney casino, which includes hotels, apartment complex, restaurants, and bars; The Star Gold Coast casino, which consists of hotels, theatre, restaurants, and bars; and Treasury casino in Brisbane that comprises hotel, restaurants, and bars. The company also manages the Gold Coast Convention and Exhibition Centre. The company was formerly known as Echo Entertainment Group Limited and changed its name to The Star Entertainment Group Limited in November 2015.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Tassal Group Board declared an interim dividend of 8cps, up +14.3%, in line with a target pay-out ratio of at least 50% of Operating NPAT.

Investment Thesis:

  • Number one player in the domestic market (approximately 50% market share), with only one major competitor (Huon Aquaculture Group). This could see rational pricing behavior, which should be positive for both companies. 
  • High barriers to entry (assets, desired temperatures and regulatory licences are difficult to obtain).
  • Initiatives like selective breeding programs and investments in infrastructure appear to be paying dividends, with more recent generations of TGR’s salmon showing more robust growth than their predecessors. 
  • Given the complex nature of salmon farming, TGR is unlikely to have its dominant position as an Australian leading salmon farmer seriously threatened in the foreseeable future.
  • Addition of prawns into TGR’s product portfolio brings diversification benefits to the Company’s risk profile.
  • Growth in prawns represents material upside for group earnings.

Key Risks:

  • Impact on production due to adverse weather conditions and diseases. 
  • The De Costi subsidiary presents an opportunity for diversification; however, execution and competitive risks remain. 
  • Potential review of chemical colouring in salmon may lead to further negative publicity and undermine demand for salmon. 
  • Cost pressures or cost blowout could deteriorate margins significantly given the large cost base relative to earnings (EBITDA).
  • Irrational competitive behaviour (domestic and international markets).
  • Negative media reports on the sustainability of the Tasmanian salmon industry.
  • Regulatory risks regarding Federal, State and Local laws and regulations regarding the leases, licenses, permits and quotas which may affect TGR’s operations.

Key Highlights:

  • TGR’s operating EBITDA was up +14.1% to $89.5m, driven by strong revenue growth of +43.3% to $419.1m, but partially offset by lower EBITDA $/kg due to Grocery tenders in late FY21 and a material increase in supply chain costs.
  • Operating cashflow of $86.99m, was up 110.2% and more aligned with operating EBITDA.
  • Revenue of $419.14m, up +43.3%.
  • Operating cash flow of $86.99m, up +110.2%
  • Underlying EBIT of $50.01m, up +6.9%.
  • Underlying NPAT of $31.18m, up +10.3%.
  • The Board declared an interim dividend of 8cps, up +14.3%, in line with a target payout ratio of at least 50% of Operating NPAT.
  • Leverage (Bank debt / Operating EBITDA) reduced from 2.55x to 2.37x as cash was used to lower debt and growth in EBITDA (in line with operating cashflow). Debt service cover was stable at 2.80. Gearing (Net debt/ Equity) reduced to 38.0% from 39.7%.
  • TGR retained prudent credit metrics with significant headroom to banking covenants.
  • TGR has substantial headroom available in debt facilities with $160.1m in undrawn debt facilities and cash of $43.1m. 
  • Capex fell to $46.0m (versus 1H21: $67.7m) as TGR’s major investment program rolled off.

Company Description:

Tassal Group (TGR) is Australia’s largest vertically integrated seafood/aquaculture company. Based in Tasmania, TGR is engaged in hatching, farming, processing, sale and marketing of Atlantic salmon and ocean trout. Tassal is also undergoing investments to enter the prawn’s market. The company’s products are distributed in Australia, Japan and other international markets. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Economic Weakness and Challenging Competitive Environment Limiting America Movil SAB de CV’s Returns

Business Strategy and Outlook

As the largest telecom carrier in Latin American, America Movil provides broad exposure to rising demand for access to the internet and other data services across the region. That exposure comes with significant political, regulatory, and economic uncertainty, but it is anticipated Movil’s strong competitive position in most of the markets it serves, and its strong balance sheet will create value for shareholders over the long term.  

The Mexican business is Movil’s most important, accounting for about 40% of service revenue. Despite regulatory and competitive changes that hit in 2014-15, Movil has remained the dominant Mexican wireless carrier with more than 60% market share. Wireless competition has subsided recently, with Telefonica essentially exiting the industry and AT&T focused elsewhere, allowing pricing to stabilize. While the market isn’t as attractive as a decade ago, it remains highly profitable and should deliver stable growth. Movil also serves about half of the Mexican internet access market. Competitors are investing aggressively in fixed-line infrastructure, especially cable companies Groupo Televisa and Megacable and fiber provider TotalPlay. These three firms are capturing most of the growth in the broadband market, forcing Movil to upgrade its network. 

It is alleged Movil’s extensive network assets and deep financial resources will enable it to maintain its dominance in Mexico. However, the firm and its primary shareholders, the Slim family, are likely to garner regulatory scrutiny in Mexico from time to time as officials seek to increase network investment and service adoption. In Brazil, Movil’s second-largest market at about 30% of service revenue, the firm has assembled a solid set of assets as the second-largest wireless carrier and largest cable company in the country. Economic weakness and a challenging competitive environment have limited the firm’s ability to earn attractive returns on these assets. The planned carve-up of Oi among Movil, TIM, and Vivo, if approved by regulators, should improve the competitive situation, allowing for better pricing. Consolidation in the fixed-line market is likely, but this process may be painful.

Financial Strength

America Movil’s financial position is sound, in analysts view. The firm has long had a stated leverage target of 1.5 times EBITDA, but it hasn’t been able to approach that goal until recently, as the devaluation of the Mexican peso has offset efforts to trim debt denominated in other currencies. Reported consolidated net debt had hovered around 2 times EBITDA over the past several quarters. However, the sale of Tracfone to Verizon in late 2021 generated proceeds of $3.6 billion in cash and 57.6 million Verizon shares (worth about $3 billion). Movil has also used its stake in Dutch carrier KPN, worth about $2.7 billion, to issued low-cost euro debt exchangeable into KPN shares.With the Tracfone sale, debt net of cash and investments declined to MXN 400 million ($19 billion) at the end of 2021 from MXN 538 million ($27 billion) the year before, putting net leverage at 1.2 times EBITDA after lease expense. Large telecom firms elsewhere in the world often operate with significantly higher leverage. The composition of Movil’s debt load has also improved. The firm has trimmed its U.S. dollar-denominated debt to $8.5 billion from $16 billion since the end of 2014. The Verizon shares should provide a partial hedge against future currency moves. Additionally, Movil has reduced its euros-denominated debt to EUR 8.5 billion from EUR 11.2 billion at the end of 2019. In addition to the hedge the KPN stake provides, about 30% of this borrowing held at Telekom Austria, which Movil consolidates on its financial statements. Share-repurchase activity has been modest in recent years, and shareholders have had the option of taking dividends in scrip rather than cash. With total debt trending lower, though, Movil has ramped up shareholder returns. The firm added a MXN 25 billion ($1.2 billion) share repurchase authorization in March 2021 and another MXN 26 billion in November 2021, repurchasing a total of MXN 37 billion ($1.8 billion) during the year.

Bulls Say’s

  • America Movil has unmatched scale in the Latin American telecom market. It serves far more wireless customers in the region than nearest rival Telefonica and holds the leading share in Mexico, Colombia, and Argentina and the second-largest share in Brazil. 
  • A sharp reduction in U.S. dollar-denominated debt recently, combined with continued stable cash flow, should enable Movil to maintain a strong financial position while steadily increasing shareholder returns. 
  • Movil has deep experience dealing with the political and regulatory nuances of the Latin American market.

Company Profile 

America Movil is the largest telecom carrier in Latin America, serving about 280 million wireless customers across the region. It also provides fixed-line phone, internet access, and television services in most of the countries it serves. Mexico is the firm’s largest market, providing about 40% of service revenue. Movil dominates the Mexican wireless market with about 63% customer share and also serves about half of fixed-line internet access customers in the country. Brazil, its second most important market, provides about 30% of service revenue. Movil sold its low-margin wireless resale business in the U.S. to Verizon in 2021 and now owns a 1.4% stake in the U.S. telecom giant. The firm also holds a 51% stake in Telekom Austria and a 20% stake in Dutch carrier KPN. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Qube Holdings Ltd – Revenue increased +27.6% to $1.2bn and EBITDA increased +18.9% to $110.9m

Investment Thesis:

  • Attractive assets which are strategically located.
  • Leveraged to improving economic growth (e.g., commodity markets, new passenger vehicle sales).
  • Additional project work in future years, leading to improved margins. 
  • Successful ramp up of Moorebank Logistics Park and offering logistics services at incremental margins.
  • Technological advances (and automations) at its ports and operations leading to better cost outcomes and improved margins. 
  • Potential bolt-on acquisitions to supplement organic growth.
  • Sound balance sheet position.

Key Risks:

  • Downturn in the domestic economy (or key end markets such as agriculture, retail), leading to excess capacity and pricing pressure.  
  • Margin pressure due to cost pressures. 
  • Potential direct and indirect impacts from coronavirus outbreak.
  • Value destructive acquisition (dilutive to earnings and a distraction for management).
  • Competitive pressures leading to margin erosion – Logistics industry is a highly competitive market.  
  • QUB does not meet market expectations in achieving capacity utilization at Moorebank Logistics Park.

Key Highlights:

  • Underlying revenue increased +27.6% to $1.2bn and underlying earnings (EBITA) increased +18.9% to $110.9m, despite pcp including ~$16.8m in JobKeeper benefits, driven by organic growth as well as the contribution from acquisitions and growth capex completed in the prior and current periods.
  • Underlying NPATA increased +16.9% to $96.8m and underlying earnings per share pre-amortisation (EPSA) increased +15.9% to 5.1 cents.
  • Despite ongoing impacts from Covid-19, global supply chain disruptions and some industrial relations challenges, as the Company managed to mitigate cost pressures through contractual protections, benefits of scale and operating efficiency and proactive engagement with customers to review and optimize broader supply chain activities.
  • Capex (gross) was $440.4m with ~74% spent in the Operating Division and the balance in the Property Division.
  • Operating Division was the largest driver of 1H22 result, generating underlying EBITA of $126.4m (+19.4%), with Logistics & Infrastructure activities contributing underlying EBITA of $69.9m (+36.8%), benefitting from high levels of container volumes across transport and container park operations, Ports & Bulk activities contributing underlying EBITA of $70.4m (+4.3%), driven by contribution from new contracts secured in the current and prior periods.
  • Property Division delivered underlying revenue of $8.9m (-27.6%). QUB receiving total up-front proceeds of $1.36bn with another $300m deferred consideration expected to be received after construction of Stage 1 of the MLP Interstate Terminal.
  • Patrick (50% share) delivered underlying contribution of $23.5m NPAT and $28.9m NPATA, an increase of +12.4% and +14.7%, respectively, and included QUB’s share of interest income ($6.1m post-tax) on the shareholder loans provided to Patrick. 
  • The Board declaring a fully franked interim dividend of 3cps (up +20% over pcp) and approving capital management initiatives of up to $400m commencing 2H22.  

Company Description:

Qube Holdings Limited (QUB) is a diversified logistics and infrastructure company providing logistics services for clients in both import and export cargo supply chains. The Company operates three main divisions: Ports & Bulk (integrated port services, bulk material handling and bulk haulage), Logistics (largest integrated third-party container logistics provider in Australia), and Strategic Assets (investing and developing future infrastructure).  

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Engie is Well Positioned to Benefit from the Power Prices Rally

Business Strategy and Outlook:

Engie is one of the three largest integrated international European utilities, along with Enel and Iberdrola. Under the tenure of previous CEO Isabelle Kocher, the firm sold EUR 16.5 billion of mostly commodity-exposed assets– E&P, LNG, and coal plants–to focus on regulated, renewables, and client-facing businesses. This strategy lowered the weight of activities that typically have volatile cash flows and no economic moats. After she was ousted by the board in early 2020, the firm shifted its strategy to reduce the weight of these activities and sell stakes in noncore businesses. That drove the sale of Engie’s 32.05% stake in Suez to Veolia at an attractive price and of its multi-technical subsidiary Equans to Bouygues for EUR 7.1 billion. The latter is part of an EUR 11 billion disposal plan by 2023. On the other hand, Engie will increase annual investments in renewables from 3 GW to 4 GW between 2022 and 2025 and 6 GW beyond. 

Regulated gas networks, mostly in France, account for around one third of the group’s EBIT. Contracted assets comprise thermal power plants in emerging markets, especially the Middle East and Latin America, with purchased power agreements, or PPAs, securing returns on capital. Remaining merchant exposure is made up of gas plants across. Europe, Belgian nuclear plants and French hydropower assets. Gas plants are well positioned as the share of intermittent renewables increase. Nuclear and hydropower provide exposure to European power prices although Belgian nuclear plants will be shut by 2025. Taking that into account, the valuation sensitivity to EUR 1 change in power prices is EUR 0.16 per share, 1% of our fair value estimate. With net debt/EBITDA of 2.4 times, Engie has one of the lowest leverages in the sector. Still, the 2019 dividend of EUR 0.8 was canceled because of pressure from the French government, which has 34% of the voting rights, and the coronavirus impact. Still, the dividend was reinstated in 2020 and the 2021 dividend of EUR 0.85 is above the precut level. We project a 2021-26 dividend CAGR of 5% based on a 69% average payout ratio.

Financial Strength:

Economic net debt including pension and nuclear provisions amounted to EUR 38.3 billion at end-2021, implying a leverage ratio of 3.6. It is projected that the economic net debt to decrease to EUR 37.1 billion through 2026. Thanks to the EBITDA increase, economic net debt/EBITDA will decrease to 3.2 in 2026, averaging 3.1 between 2021 and 2026, comfortably below the company’s upper ceiling of 4. After the COVID-19-driven cancellation of the 2019 dividend of EUR 0.80 per share, Engie paid a EUR 0.53 dividend on its 2020 earnings implying a 75% payout. 

For 2021 results, the company will pay a dividend of EUR 0.85, implying a 70% payout in line with the 65%-75% guidance range over 2021-23. Ninety-one percent of debt was fixed-rate at the end of 2021. Meanwhile, 83% of the company’s debt was denominated in euros, 11% in U.S. dollars, and the balance in Brazilian real.

Bulls Says:

  • Engie’s strategic shift announced in July 2020 should be value-accretive as evidenced by the sale of its stake in Suez and of Equans.
  • In the long run, the group could convert its gas assets into hydrogen assets.
  • The group is well positioned to benefit from rising power prices in Europe thanks to its French hydro dams.

Company Profile:

Engie is a global energy firm formed by the 2008 merger of Gaz de France and Suez and the acquisition of International Power in 2012. It changed its name to Engie from GDF Suez in 2015. The company operates Europe’s largest gas pipeline network, including the French system, and a global fleet of power plants with 63 net GW of capacity. Engie also operates a diverse suite of other energy businesses.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Philosophy Technical Picks

Spark New Zealand reported strong 1H22 results;Announced plans to establish Spark TowerCo

Investment Thesis 

  • Attractive dividend yield of 5.2%. 
  • Market-leading position in New Zealand. Dominant market share in Mobile, Broadband and is the leader in IT Services.
  • Strong capacity for growth demonstrated across all segments, with IT expected to continue to be a key driver as more consumers and businesses migrate to the Cloud. 
  • Investments in Broadband and the roll-out of 4.5G should see its lagging broadband segment improve.
  • Multi-product offerings provide interesting points of differentiation from other telco providers.
  • Implementation of “Agile” leading to further cost reductions and operating efficiencies.
  • Increasing customer demand for higher-margin cloud-based services.
  • Increases in ARPU growth and connections despite weak industry conditions
  • SPK still commands a strong market position and has the ability to invest in technologies and areas which could provide room for growth.

Key Risks

  • Unsuccessful migration of copper wire customers resulting in earnings drag in May due to weather conditions. 
  • More competition in its Mobile and Broadband segments leading to aggressive margin contraction, especially as products become commoditized.
  • Risk of cost blowout (for instance in network upgrades or maintenance).
  • Churn risk. 
  • Balance sheet risk (including credit ratings risk) should earnings decline due competitive and structural risks. 
  • Reduced flexibility and increased net debt if unable to fund total dividend by earnings per share
  • Any network disruptions/outages.

1H22 results summary. Relative to the pcp: 

  • Revenue increased +5.2% to $1,890m, driven by +5% growth in Mobile Services (secured ~60% of total market), +3.2% growth in Cloud, security, and service management (driven by demand for public cloud and growth in the health sector), +27.5% growth in Procurement revenue (driven by national health software licence contract), +7% increase in Others (investment behind future markets continued to gain momentum and Spark IoT connections increased +31% to 623,000), partially offset by -3.9% decline in Broadband (amid competitive market intensity) and -5.2% decline in Voice. 
  •  Opex increased +4.3% to $1,352m as increase in product costs driven by higher procurement volumes and growth in cloud and collaboration and increase in net labour costs (talent scarcity) was partially offset by precision marketing savings. 
  •  EBITDAI increased +7.6% to $538m with margin improving +70bps to 28.5% and management remains on track to achieve 31%. 
  •  NPAT increased +21.8% to $179m, driven by EBITDAI growth, a reduction in finance expense and lease liability interest, and lower D&A. 
  •  FCF increased +61.9% to $183m with cash conversion of 110%, driven by improvement in working capital, EBITDAI growth and lower tax. 
  •  Capex increased +14.7% to $218m, driven by uplift in mobile RAN investment in support of accelerated 5G rollout and increased investment in IT systems. 
  •  Net Debt declined -1.4% to $1,380m leading to net debt to EBITDAI ratio declining -0.15x to 1.2x, within internal threshold of 1.4x and consistent with S&P A- credit rating. 
  • The Board declared a 100% imputed interim dividend of 12.5cps. 

Spark TowerCo subsidiary announced

Management announced plans to transfer its passive mobile tower assets, spanning ~1,500 mobile sites, into a separate subsidiary, Spark TowerCo, to improve utilisation through coverage expansion and increased tenancy, while delivering cost efficiencies as the Company expands coverage across Aotearoa. Management also intends to commence a process in 2H22 to explore the introduction of third-party capital into Spark TowerCo, with more information expected to be revealed in 2H22. 

Company Profile

Spark New Zealand Ltd (SPK) is a New Zealand based telecommunications company. SPK’s key services are the provision of telephone lines, mobile telecommunications, broadband services and IT services. Its key product offerings are Spark Home, Mobile & Business, Spark Digital, Spark Ventures, and Spark Connect. The Company operates four main segments: (1) Spark Home, Mobile & Business; (2) Spark Digital; (3) Spark Connect & Platforms; and (4) Spark Ventures & Wholesale. 

 (Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Edison’s Financing In Place To Support 18 Consecutive Dividend Growth Plans

Business Strategy and Outlook

California will always present political, regulatory, and operating challenges for utilities like Edison International. But California’s aggressive clean energy goals also offer Edison more growth opportunities than most utilities. Policymakers know that meeting the state’s clean energy goals, notably a carbon emissions-free economy by 2045, will require financially healthy utilities. 

It is foreseen Edison will invest at least $6 billion annually, resulting in 6% annual earnings growth at least through 2025. Edison already has regulatory and policy support for most of these investments, which address grid safety, renewable energy, electric vehicles, distributed generation, and energy storage. Wildfire safety investments alone could reach $4 billion during the next four years. It is seen state policies will force regulators to support Edison’s investment plan and earnings growth. In August 2021, regulators approved nearly all of Edison’s 2021-23 investment plan. Regulatory proceedings in 2022 will address wildfire-specific investments and Edison’s $6 billion investment plan for 2024. 

Operating cost discipline will be critical to avoid large customer bill increases related to its investment plan. Edison faces regulatory scrutiny to prove its investments are producing customer benefits. It also must resolve the balance of what could end up being $7.5 billion of liabilities related to 2017-18 fires and mudslides. Large equity issuances in 2019 and 2020–in part to fund the company’s $2.4 billion contribution to the state wildfire insurance fund and a higher equity allowance for ratemaking–weighed on earnings the last two years. Edison now has most of its financing in place to execute its growth plan and continue its streak of 18 consecutive annual dividend increases. It is anticipated Edison to retain a small share of unregulated earnings, but those are more likely to come from low-risk customer-facing or energy management businesses wrapped into Edison Energy.

Financial Strength

Edison’s credit metrics are well within investment-grade range. California wildfire legislation and regulatory rulings in 2021 removed the overhang that threatened Edison’s investment-grade ratings in early 2019.Edison has kept its balance sheet strong with substantial equity issuances since 2019. It is not projected Edison will have any liquidity issues as it resolves 2017-18 fire and mudslide liabilities while funding its growth investments. Edison issued $2.4 billion of new equity in 2019 at prices in line with Amnalysts fair value estimate. This financing supported both its growth investments and half of its $2.4 billion contribution to the California wildfire insurance fund. The new equity also allowed Southern California Edison to adjust its allowed capital structure to 52% equity from 48% equity for rate-making purposes, leading to higher revenue and partially offsetting the earnings dilution.Edison’s $800 million equity raise in May 2020 at $56 per share was well below analysts fair value estimate but was necessary to support its growth plan in 2020 and early 2021. Edison also raised nearly $2 billion of preferred stock in 2021 and might issue more preferred stock to limit equity dilution as it finances its growth program. In particular, it is likely Edison will have to raise equity to finance its $1 billion energy storage project in 2022.It is held dividends to grow in line with SCE’s earnings. The board approved a $0.15 per share annualized increase, or 6%, for 2022, its 18th consecutive annual dividend increase. Management has long targeted a 45%-55% payout based on SCE’s earnings, but the board appears to be comfortable going above that range based on the 2021 and 2022 dividends that implied near-60% payout ratios. As long as Edison continues to receive regulatory support, it is held the board will keep the dividend at the high end of its target payout range.

Bulls Say’s

  • With Edison’s nearly $6 billion of planned annual investment during the next four years, analysts project 6% average annual average earnings growth in 2022-25. 
  • Edison has raised its dividend for 18 consecutive years to $2.80 in 2022, a 6% increase from 2021. Management appears comfortable maintaining a payout ratio above its 45%-55% target. 
  • California’s focus on renewable energy, energy storage, and distributed generation should bolster Edison’s investment opportunities in transmission and distribution upgrades for many years.

Company Profile 

Edison International is the parent company of Southern California Edison, an electric utility that supplies power to 5 million customers in a 50,000-square-mile area of Southern California, excluding Los Angeles. Edison Energy owns interests in nonutility businesses that deal in energy-related products and services. In 2014, Edison International sold its wholesale generation subsidiary Edison Mission Energy out of bankruptcy to NRG Energy. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

APA Group – The Board declared an interim distribution of 25cps and reaffirmed FY22 DPS of 53cps, up +3.9% over pcp

Investment Thesis:

  • High quality assets, which are difficult to replicate. 
  • The quality of APA’s assets; the Company will always retain its M&A appeal. Last takeover bid (by CKI) was at $11.00 per share. 
  • Attractive and growing distribution yield. 
  • Highly credit worthy customers.
  • Currently assessing international opportunities – USA focus.
  • Organic growth pipeline of >$1.4bn.
  • Growth through acquisitions.
  • Diversified customer base by sector.
  • Largest owner of gas transmission pipelines in Australia. 
  • Opportunity to grow its renewable business. 
  • Management announced their ambition to achieve.

Key Risks:

  • Negative market/investor sentiment towards “bond-proxies”.
  • Future regulatory changes by pipeline regulators.
  • Large portion of businesses are exposed to the energy sector.
  • Infrastructure issues such as explosions or ruptures.
  • Adverse decision from COAG reviews transmission costs. 
  • Shorter contract terms on existing capacity.

Key Highlights:

  • Revenue (excluding pass-through) increased +4.3% to $1,117.7m, with growth across all segments including Victorian Transmission System, Diamantina Power Station and Asset Management driven by favourable tariff escalation given exposure to Australian and US inflation indices.
  • Underlying opex increased +4.5% to $257.6m, driven by higher bidding costs associated with corporate development activities, higher insurance premiums, and enhancements across technology, partially offset by ongoing discipline in management of operations & maintenance.
  • Underlying EBITDA increased by +4.5% to $859.8m as higher revenue was partly offset by increased investments in capability and strategic projects.
  • NPAT (excluding significant items) declined -2.2%, as higher EBITDA and a decline in interest expense due to lower average interest costs due to liability management exercise completed in March 2021 was more than offset by higher D&A and tax expense. NPAT (including significant items) was $155.6m compared to loss of $15.5m in pcp, largely due to a non-cash impairment of $249.3m in pcp against the Orbost Gas Processing Plant.
  • FCF increased +22.6% to $515.1m, primarily due to higher earnings and lower interest paid.
  • Total capex increased +27% to $314.4m (growth capex down -41.7% and stay-in-business capex down -16%), primarily due to IT capex increasing +77.5% and corporate real estate capex of $7.9m.
  • The Board declared an interim distribution of 25cps (20.12cps from APT + 4.88cps from APTIT), up +4.2% over pcp and equating to payout ratio of 57.3%. APA reaffirmed FY22 DPS of 53cps, an increase of +3.9% over pcp.

Company Description:

APA Group Limited (APA) is a natural gas infrastructure company. The Company owns and/or operates gas transmission and distribution assets whose pipelines span every state and territory in mainland Australia. APA Group also holds minority interests in energy infrastructure enterprises. APA derives its revenue through a mix of regulated revenue, long-term negotiated contracts, asset management fees and investment earnings.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.