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 Shares

Capable Hands Remain at the Helm of Magellan; Valuation Upside High as Shares Lose Steam

Business Strategy and Outlook

Magellan is an active manager of listed equities and infrastructure. The firm has a fundamental, high-conviction investment approach. Its flagship Global strategy has historically tilted toward IT, e-commerce platforms, and consumer franchises; preferring large, developed market multinationals. FUM have been attracted by consistently achieving excess returns with lower volatility and drawdowns relative to peers.

Magellan’s products are well-distributed. Its funds are featured across platforms.There is a focus on targeting retail investors, with product expansion an increasingly common driver of growth. After pioneering the first active ETF in Australia in 2015, Magellan has worked on attracting new FUM via its partnership initiatives, launching its own low-cost active ETFs, and introducing a new equity fund that caters to retirees seeking predictable income.

Morningstar analysts think Magellan has built the foundations for ongoing earnings growth, supported by its economic moat, product variety, and historically strong track record. Regardless, the potential earnings upside from these positive traits will take time to manifest. In light of Magellan’s recent underperformance, Mornigstars analysts believe a sustained improved track record will be the precursor to stronger fund inflows.

Morningstar analysts anticipate fee margin compression from investors trading down from Magellan’s core funds in preference for its low-cost ETFs, mix shift to other asset classes, and industry wide fee pressure. Continued strong performance is key to sustaining margins, as future FUM growth is likely to hinge more on market movements rather than net inflows given Magellan’s maturity and scale.

Capable Hands Remain at the Helm of Magellan; Valuation Upside High as Shares Lose Steam

Magellan has historically delivered above market returns with relatively low drawdowns. This has allowed it to rapidly scale in FUM to over AUD 93 billion and provides the foundation for continued earnings growth. While Morningstar analysts don’t believe it will be immune from the structural trend of investors moving to passive investments, ongoing competition among fund managers and major institutions in-housing their asset management, and is better placed than most active managers to address these headwinds. Magellan is moving beyond just managing money, to implementing new initiatives such as product expansion to attract new money. Morningstar analysts  believe shares are undervalued, but concur there are limited near-term earnings and share price catalysts due to recent underperformance. 

Chairman and CIO Hamish Douglass’ indefinite leave from Magellan . But morningstar analysts  don’t believe this is overly value-destructive for shareholders. In the interim, Chris Mackay and Nikki Thomas will work with Magellan’s investment team to manage its flagship Global Equity strategies. The strategies are in good hands. Mackay is Magellan’s co-founder, and was its chairman and CIO until 2012. Despite analysts’ conviction in Magellan, Morningstar’s analyst concern is not all investors may be willing to ride out this storm. Thus Morningstar analysts have lowered its fair value estimate to AUD 34.50 per share from AUD 38, after factoring in 3% more net outflows than before and further trimming our retail fee forecasts.

Financial Strength 

Magellan is in sound financial health. The firm has a conservative balance sheet with no debt, with its financial position also boosted by solid operating cash flows. As of June 30, 2021, Magellan had cash and equivalents of about AUD 212 million and financial investments with a net fair value of around AUD 453 million mainly invested in its own unlisted funds and listed shares. This should provide it with enough liquidity to cope with most market conditions. Its high dividend payout ratio of: (1) 90%-95% of the net profit after tax of its core funds management business before performance fees; and (2) annual performance fee dividend in the range of 90%-95% of net crystallised performance fees after tax reflects the capital-light nature of asset management.

Bulls Say

  • Magellan retains an intangible brand, supported by historically strong performance, which it has leveraged to hold on to client funds, attract new money and charge premium fees. 
  • Due to structural market trends and product expansion initiatives, the prospects for organic FUM growth is strong, notably from investors seeking to diversify exposure to international equities or gain a steady retirement income stream. 
  • Aside from domestic tailwinds from superannuation, Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. should support growth.

Company Profile

Magellan Financial Group is an Australia-based niche funds manager. Established in 2006, the firm specialises in the management of equity and infrastructure funds for domestic retail and institutional investors. Magellan has been particularly successful in winning mandates from global institutional investors. Current FUM is split across global equities, infrastructure and Australian equities.

(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

2021 a Year of Strong Growth for C.H. Robinson; Outlook Positive, but Expect Normalization in 2022

Business Strategy and Outlook

C.H. Robinson dominates the $80-plus billion asset-light highway brokerage market, and its immense network of shippers and asset-based truckers supports a wide economic moat, in our view. Although the company isn’t immune to freight downturns, its variable-cost model helps shield profitability during periods of lack lustre demand, as evidenced by a long history of above-average profitability. The firm does not own transportation equipment, and a large portion of operating expenses are tied to performance-based variable compensation, which tends to move in line with net revenue growth. The firm is thought to be well positioned to capitalize on truck brokerage industry consolidation (including market share gains) despite intensifying competition.

Over and above underlying shipment demand trends, share gains will probably remain the key growth driver for Robinson long term. For perspective, it is estimated that Robinson’s stake of the domestic freight brokerage industry at roughly 18% in recent years, up from 13% in 2004, based on market data from Armstrong & Associates. The truck brokerage business is still vastly fragmented, and small, less sophisticated providers are finding it increasingly difficult to keep up with rising demand for efficient capacity access and the need to automate processes. Robinson’s industry-leading network of asset-based truckload carriers (most small) should remain highly valuable to shippers over the long run. This is particularly because truckload-market capacity will probably continue to see growth constraints due in part to the stubbornly limited driver pool.

Robinson has also positioned its air and ocean forwarding unit to contribute to growth. In this segment, it competes with other top-shelf providers like Expeditors International. In 2012, it purchased Phoenix International, which doubled Robinson’s forwarding scale, and organic growth has continued (on average), along with additional tuck-in deals that have boosted the firm’s global footprint. Buying scale and lane density are important in order to secure adequate capacity for shippers, particularly during the peak season.

Financial Strength

C.H. Robinson has taken a more active stance with its balance sheet over the past decade, increasing leverage in part to fund occasional opportunistic acquisitions. Before 2012, the firm was largely debt free. That said, its capital structure remains quite healthy. At the end of 2021, the firm had a manageable total debt load near $1.9 billion and $257 million in cash. Debt/EBITDA was near 1.6 times (versus 1.4 times in 2019 and 2020), and in line with management’s targeted range of 1.0-1.5 times. Interest coverage (EBITDA/interest expense) in 2021 was a comfortable 20 times. Importantly, as a well-managed asset-light 3PL, Robinson has a long history of consistent free cash flow generation, averaging more than 3.0% of gross revenue over the past five years (20% of net revenue). Note that truck brokers’ free cash flow tends to be lowest in strong years of growth by nature of the intermediary business model and related spike in accounts receivable. It is expected that free cash flow to approximate 3%-4% of gross revenue over our forecast horizon. Robinson is expected to have no issues servicing its long-term obligations, given its top-tier profitability, and the firm’s liquidity should be more than ample to weather cyclical demand pullbacks

Bulls Say’s

  •  C.H. Robinson enjoys a long history of impressive execution throughout the freight cycle, and it has thwarted a host of competitive threats over the years. 
  • It is estimated that C.H. Robinson has gradually increased its share of the truck brokerage industry to roughly 17% from 13% in 2004. 
  • Robinson’s non-asset-based operating model has generated average returns on capital near 27% during the past decade and 21% since 2017 (around 23% in 2021)–well above returns generated by most traditional asset-intensive carriers.

Company Profile 

C.H. Robinson is a top-tier non-asset-based third-party logistics provider with a significant focus on domestic freight brokerage (57% of 2021 net revenue), which reflects mostly truck brokerage but also rail intermodal. Additionally, the firm also operates a large air and ocean forwarding division (34%), which has grown organically and via tuck-in acquisitions. The remainder of revenue consists of the European truck-brokerage division, transportation management services, and a legacy produce-sourcing operation.

(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

New Jersey Resources Starts Fiscal Year with Good Momentum

Business Strategy and Outlook

New Jersey Resources remains primarily a regulated gas utility even as it invests heavily in nonregulated energy businesses such as solar and natural gas midstream. NJR’s regulated utility business will continue to produce more than two thirds of earnings on a normalized basis for the foreseeable future as New Jersey’s need for infrastructure safety and decarbonization investments provide growth opportunities. 

NJR’s constructive regulation and customer growth has produced an impressive record of earnings and dividend growth. The expected NJR’s regulated distribution utility can grow earnings 6% annually based on 1% customer growth and planned infrastructure investments. NJR’s clean energy business should grow even faster, leading to consolidated earnings growth near the top half of management’s 7%-9% annual growth target.

 New Jersey’s historically constructive regulation allows NJR to support a high payout ratio and dividend growth in line with the utility’s earnings growth. That regulatory support was confirmed in November 2021 when regulators approved a settlement that raises rates to account for NJR’s infrastructure investments and maintains its 9.6% allowed return on equity from NJR’s 2016 and 2019 rate cases. Although this allowed ROE is lower than other utilities, NJR enjoys other rate mechanisms that support good cash flow generation. 

NJR’s gas distribution business faces a potential long-term threat from carbon-reduction policies. To address that threat, NJR plans to invest $850 million in its solar business in 2022-24 and pursue hydrogen and renewable natural gas projects. These projects support aggressive clean energy goals in New Jersey and other states. NJR’s $367.5 million acquisition of the Leaf River (Mississippi) Energy Center in late 2019 paid off big in early 2021 when extreme cold weather allowed NJR to profit from its gas in storage. However,  don’t expect windfalls like this to continue as management derisks its energy-services business, reducing the earnings sensitivity to volatile gas prices, basis spreads, and winter weather.

Financial Strength

NJR has maintained one of the most conservative balance sheets and highest credit ratings in the industry. We don’t expect that to change even with its large capital investment plans. The is forecast an average debt/total capital ratio around 55% and EBITDA/interest coverage near 5 times on a normalized basis after a full year of earnings contributions from its midstream investments. Management has a history of using large cash inflows during good years at its non-utility businesses to offset equity needs at the utility. NJR’s $260 million equity raise in fiscal-year 2020 will primarily go to fund the Leaf River acquisition and midstream investments. We don’t expect NJR will need any new equity through at least 2024. In mid-2019, it issued $200 million of 30- and 40-year first mortgage bonds at interest rates below 4%, among the lowest rates of any large U.S. investor-owned utility at the time. It has raised two low-cost green bonds to support solar investments. Up until 2020, NJR had been able to avoid issuing equity in part due to cash it has collected from its unregulated businesses. Extreme winter conditions in 2014 and 2018 provided a timely source of cash ahead of NJR’s uptick in utility and midstream investments. The success of the nonutility businesses and divesture of the wind investments also brought in cash to fund what is expected will be more than $2 billion of investment in 2022-24 without new equity. NJR’s board took a big step by raising the dividend 9% to $1.45 per share annualized in late 2021. The expected dividend growth to follow at least in line with earnings now that NJR has reached a pay-out ratio near 65%, which is reasonable for a mostly regulated utility.

Bulls Say’s

  •  NJR’s customer base continues to grow faster than the national average and includes the wealthier regions of New Jersey. 
  • NJR raised its dividend 9% for 2022 to $1.45 per share, its 26th consecutive increase. It is expected that streak to continue. 
  • NJR’s distribution utility has received three constructive rate case outcomes and regulatory approval for nearly all of its investment plan since 2016.

Company Profile 

New Jersey Resources is an energy services holding company with regulated and nonregulated operations. Its regulated utility, New Jersey Natural Gas, delivers natural gas to 560,000 customers in the state. NJR’s nonregulated businesses include retail gas supply and solar investments primarily in New Jersey. NJR also is an equity investor and owner in several large midstream gas projects.

(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

Ingredion’s Specialty Ingredients Are Positioned for Long-Term Growth Despite Near-Term Volatility

Business Strategy and Outlook

Ingredion manufactures starches and sweeteners by wet milling and processing corn and other starch-based raw materials. The company steeps these raw materials in a water-based solution before separating the ingredients from co-products (animal feed and corn oil). The company’s long-term goal is for specialty ingredients to generate 38% of sales and nearly 60% of profits. Core ingredients are typically commodity-grade, providing no pricing power for Ingredion. Ingredion sells roughly half of its core products on a cost-plus basis. Specialty ingredients are value-added, requiring additional processing and, in many cases, proprietary formulations. 

Financial Strength

Ingredion is in good financial condition. As of Dec. 31, the company had just under $2.2 billion of debt and a little less than $0.7 billion in cash and cash equivalents on its balance sheet. On the M&A front, the company will probably continue to target smaller, tuck-in acquisitions rather than pursuing large, transformative deals. These acquisitions would likely focus on companies that offer new product lines and cater to small and midsize customers, as Ingredion aims to both expand its specialty ingredient portfolio and avoid being beholden to the strong bargaining power of large consumer packaged goods customers. The company should be able to finance these size acquisitions largely from free cash flow, which should allow Ingredion to maintain its solid financial position.

Ingredion shares fell nearly 10% on the day as the market responded negatively to the company’s results and management’s guidance. However, with shares now trading less than 10% above our bear case fair value estimate of $80 per share, the bad news is priced into the stock. Our bear case assumes average annual revenue growth of 1% over the next five years and midcycle operating margins of 11%, versus the 11.5% averaged by the company over the past decade.  

Bulls Say’s 

  • Ingredion benefits from its growing proportion of specialty ingredients that carry some degree of pricing power and generate higher profit margins. 
  • Through its investment in plant-based proteins and natural non-corn-based sweeteners, Ingredion is well positioned to capture growth from increasing consumer demand for alternative meat and reduced sugar products. 
  • Management has a strong record of managing growth and acquisitions and returning cash to shareholders.

Company Profile 

Ingredion manufactures ingredients for the food, beverage, paper, and personal-care industries. Sweeteners (syrups, maltodextrins, dextrose, and polyols) account for about 35% of sales, starches (for food and industrial use) around 45%, and co-products the balance. Value-added, specialty ingredients account for roughly one third of sales, with the balance being commodity-grade ingredients. With the majority of sales outside the U.S., Ingredion is a global player with good exposure to developing markets, including Latin America and Asia-Pacific.

(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

Littelfuse is a small but differentiated electrical protection supplier with semiconductor exposure

Business Strategy and Outlook:
Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications. While the firm is a smaller player than other competitors in the components market under our coverage, it has aligned its portfolio toward secular themes of safety, efficiency, and connectivity to pursue growth. Littelfuse’s best organic growth opportunities will come from vehicle electrification; battery electric vehicles require five times
the circuit protection content of an internal combustion counterpart, and charging infrastructure presents a lucrative opportunity for the firm’s growing power semiconductor business.
Littelfuse’s passive components are small and inexpensive, yet vitally important to the safe and continuous function of mission-critical systems in end applications. Circuit protection products safeguard against
electrostatic discharge and overcurrent to prevent component failure and/or fire in cars, power grids, data centers, and manufacturing plants. Even though individual parts like fuses and relays don’t carry a hefty price
tag, Littelfuse’s application expertise helps the firm stave off commoditization and creates sticky customer
relationships.
Financial Strength:
Littelfuse is in good financial shape. As of Jan. 1, 2022, the firm held $637 million in total debt and $478 million in cash on hand. The firm is expected to satisfy its financial obligations with ease. Littelfuse has no more than $150 million coming due in a single year through 2026, and the firm averaged $226 million in free cash flow from 2017 to 2021. The firm has been forecasted to average $471 million in free cash flow per year over our explicit forecast. Littelfuse’s debt/adjusted EBITDA ratio of 1.29 times at the end of 2021 places it solidly at the low end of management’s long-term range of 1 times-2.5 times.
Bulls Say:
 Secular trends toward renewable energy and electric vehicles should boost demand for Littelfuse’s
products.
 Littelfuse has a foot in the door of the emerging silicon carbide semiconductor market, which could fuel
future rapid growth for the firm.
 Littelfuse’s sticky customer relationships have helped it earn excess returns on invested capital for 11
straight years, even in the face of cyclical downturns in 2019 and 2020.
Company Profile:
Littelfuse is a leading provider of circuit protection products (such as fuses and relays) and other passive
components, selling billions of units into the transportation, industrial, telecommunications, and consumer electronics end markets. The firm is also increasing its power semiconductor business, where it predominantly
serves industrial end markets and is breaking into electric vehicle charging infrastructure.
(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

Returning to Truist After Q4 Earnings; Increasing Our Fair Value Estimate to $66 From $63

Business Strategy and Outlook

Truist (the combination of BB&T and SunTrust), is set for its next step up in profitability, as merger-related costs are essentially cut in half in 2022 and then fall out completely in 2023. The combination has formed one of the better regionals in the U.S. from a competitive standpoint.Morningstar analysts like Truist’s insurance growth engine, and the bank has only been adding to its strength here with the acquisition of Regions Insurance Group in 2018, multiple smaller acquisitions in 2020, and Constellation Partners in 2021.Morningstar analyst also like the strength of the bank’s investment banking group, as well as its growing wealth business, and believe Truist will have room to increase non interest revenue over time. 

Morningstar analysts view the bank’s latest push into the Point of Sale consumer financing space with the acquisition of Service Finance in late 2021 as another positive. We expect the unit will drive multiple billions of dollars of loan originations for years to come, with solid yields on these loans, although expect competition to increase over time, as Truist is not the only bank making major moves in this space. 

Truist has made steady progress on its integration efforts (the acquisition closed in late 2019), with much of the remaining work set to be completed in 2022. The financials still remain a bit complex due to PAA and PPP related NII, one-time expenses, and additional bolt-on acquisitions taking place. Once the dust settles in 2023, we believe management’s goal of becoming a top-tier bank from the standpoint of efficiency and return on tangible equity is realistic.

After updating projections with the latest quarterly results, Morningstar analyst increased its fair value estimate to $66 per share from $63. This values Truist at roughly 2.6 times tangible book value as of December.

Financial Strength

Morningstar analysts think Truist is in good financial health and also do not have significant concerns about capital, and the bank had a common equity Tier 1 ratio of 9.6% as of the fourth quarter of 2021, roughly in line with management’s expectations.

Bulls Say 

  • A strong economy and higher rates are all positives for the banking sector and should propel revenue even higher. 
  • Truist’s now combined operations will allow the bank to reach new levels of operating efficiency and profitability, previously out of reach when BB&T and SunTrust were separate franchises. 
  • Truist keeps growing its insurance operations at an above market rate. Additional bolt-on acquisitions, higher interest rates, and the falling out of acquisition related expenses means Truist will see uniquely strong core revenue growth along with falling expenses.

Company Profile

Based in Charlotte, North Carolina, Truist is the combination of BB&T and SunTrust. Truist is a regional bank with a presence primarily in the Southeastern United States. In addition to commercial banking, retail banking, and investment banking operations, the company operates several nonbank segments, the primary one being its insurance brokerage business.

(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

Snap-on Remains Resilient Despite Supply Headwinds

Display of Stock market quotes

Business Strategy and Outlook

Snap-on provides premium tools to vehicle repair shops and industrial customers. Snap-on will continue to be the top player in the tools industry. The company benefits from a strong brand reputation among repair professionals. Customers value Snap-on’s high-quality and strong performing products, in addition to its high-touch mobile van network. Snap-on’s tools and diagnostic products help customers complete repairs faster, improving productivity. Customers will continue to pay up for Snap-on’s tool durability, convenience, and flexible financing options. 

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Snap-on’s tools are considered the go-to products, exhibiting better durability and reliability than cheaper alternatives that break a lot quicker. Diagnostic products arm technicians with more information to identify issues faster. Snap-on has exposure to end markets that have attractive tailwinds. In automotive, Demand for vehicle repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed due to the COVID-19 pandemic).

Financial Strength

Snap-on’s remaining segments were resilient, despite the supply headwinds. The repair systems and information segment increased about 9% year on year. A key contributor to sales growth was increased demand for undercar equipment and diagnostic products, which help technicians quickly access repair data, boosting operational efficiency. Snap-on’s exposure to diagnostic products positively, given the proliferation of electronics in automobiles. Snap-on maintains a sound balance sheet. The industrial business does not hold any long-term debt, but the debt balance of the finance arm stood at $1.7 billion in 2021, along with $2.1 billion in finance and contract receivables.

As a lender, the finance arm helps drive sales in the industrial business by providing both customers and franchisees financing. With respect to financing for customers, Snap-on extends credit for large ticket purchases and leaves financing for smaller items to franchisees. Sales representatives bear the credit risk if customers fail to pay. Snap-on’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth but also returns cash to shareholders via dividends and share repurchases.

Bulls Say’s 

  • The growth in vehicle miles driven increases the wear and tear on vehicles, calling for more maintenance and repair work to keep them on the road, benefiting Snap-on. 
  • Auto manufacturers continue to tap Snap-on to create new tools and products to service new EV models. This alleviates concerns that EV adoption will threaten Snap-on’s viability. 
  • Sales representatives can add new customers on their designated service routes, increasing revenue per franchisee.

Company Profile 

Snap-on is a manufacturer of premium tools and software for repair professionals. Hand tools are sold through franchisee-operated mobile vans that serve auto technicians who purchase tools at their own expense. A unique element of its business model is that franchisees bear significant risk, as they must invest in the mobile van, inventory, and software. At the same time, franchisees extend personal credit directly to technicians on an individual tool basis. Snap-on currently operates three segments—repair systems and information, commercial and industrial, and tools. The company’s finance arm provides financing to franchisees to run their operations, which includes offering loans and leases for mobile vans.

(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

Returning to U.S. Bancorp After Q4 Earnings; Increasing Our FVE to $61 Per Share From $60

Business Strategy and Outlook

U.S. Bancorp is one of the strongest and best-run regional banks we cover. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. If we were to have a complaint, it would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time. 

U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important.

Financial Strength

The company’s balance sheet is sound, its capital investment decisions are exemplary, and its capital return strategy is appropriate. U.S. Bancorp is currently above management’s targeted common equity Tier 1 ratio of 8.5%-9%, with a ratio of 10% as of the fourth quarter of 2021, and we view the current goal as appropriate. Bancorp has avoided investing capital in value destroying products, such as GFC era MBS, while simultaneously pursuing value-adding acquisitions and organic growth. Over the last decade plus, U.S. Bancorp has generally maintained its position as the highest returning, most efficient franchise. 

On an EPS basis, wide-moat-rated U.S. Bancorp reported OK fourth-quarter earnings of $1.07 per share, roughly in line with the FactSet consensus of $1.10 and ahead of our estimate of $1.01. However, the trends for the bank’s payment-related fees were not the strongest. The beat was largely attributable to additional reserve releases, which is not a core earnings driver. On the other hand, payment fees, where U.S. Bancorp is more exposed as a percentage of revenue than any other bank we cover, were down across the board sequentially.

Bulls Say’s 

  • Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity. 
  • The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders. 
  • As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.

Company Profile 

As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.

(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

Westpac Grinds Through Another Tough Quarter as Margins Continue to Shrink

Business Strategy and Outlook

Westpac Bank Corporation is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits. 

Westpac’s strategy is anchored in its commitment to conservatively manage risk across all business areas, following its near-death experience in the early 1990s. The multibrand, customer-focused strategy aims to capture an increasing share of business from its Australian and New Zealand banking and wealth management customer base.The main current influences on earnings growth are modest credit growth, with regulators likely to cool credit demand due to rising house prices and increased household leverage, and delays to business plans for capital expenditure. Intense competition is constraining interest margins with opportunities to lower funding costs largely exhausted. Operating expenses are increasing due to increased provisions for regulatory and compliance project spend.

 Bad and doubtful debt expenses peaked in first-half fiscal 2009 and remained at decade lows until provisions for the coronavirus impact were taken in first-half fiscal 2020. Morningstar analysts expect loan impairment expenses to average under 0.2% of loans over the long term.

Westpac Grinds Through Another Tough Quarter as Margins Continue to Shrink

Westpac’s first-quarter 2022 profit of AUD 1.58 billion was up modestly from the quarterly average of second-half fiscal 2021. A 2% increase in net interest income and 7% fall in operating expenses lifted earnings pre-impairments by around 10%. Unlike last year, the bottom line is no longer being boosted by loan impairment provision releases. Impairments were still modest, and credit quality remains sound, with loans in arrears as a percentage of loans falling 10 basis points to 0.58%.

Loan growth was soft in a strong market, and net interest margins, or NIM, fell to 1.91% in the quarter from 1.98% in the second half of fiscal 2021. The squeeze from chasing loan growth in a competitive environment, an ongoing drag from more fixed-rate loans, plus holding more liquid assets which earn no interest, was a little more severe than Morningstar analyst expected. Morningstar analysts lower  fiscal 2022 NIM forecast to 1.85% from 1.90% previously. The 7% reduction to fiscal 2022 profit forecast is not material enough to move to A$29 fair value estimate. 

Financial Strength 

Westpac comfortably meets APRA’s common equity Tier 1 ratio benchmark of 10.25%. The bank’s common equity Tier 1 ratio was 12.2% as at Dec. 31, 2021. This is based on APRA’s globally conservative methodology and a top-quartile internationally comparable 18%. We see the risk of higher loan losses and credit stress inflating risk-weighted assets as the greatest threat to the bank’s capital position in the near term. In the past three years, the proportion of customer deposits to total funding is about 60% to 65%, reducing exposure to volatile funding markets. Westpac has AUD 8.6 billion in excess capital as at Dec. 31, 2021. Assuming completion of the AUD 3.5 billion share buyback announced in November 2021, this surplus falls to around AUD 5 billion. The bank expects divestments to add roughly AUD 2 billion to this position in fiscal 2022.

Bulls Say

  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2023. 
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth. 
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities. 
  • The withdrawal of personal financial advice by Westpac salaried financial advisors reduces compliance and regulatory risk.

Company Profile

Westpac is Australia’s oldest bank and financial services group, with a significant franchise in Australia and New Zealand in the consumer, small business, corporate, and institutional sectors, in addition to its major presence in wealth management. Westpac is among a handful of banks around the globe currently retaining very high credit ratings. The bank benefits from a large national branch network and significant market share, particularly in home loans and retail deposits.

(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

Vodafone Continues to Make Gradual Progress as Potential Consolidation Comes Into Focus

Business Strategy and Outlook

Vodafone has steadily transformed its business over the past several years, adding fixed-line assets in core markets, selling out of peripheral areas like New Zealand, and forming partnerships in others. Through a series of acquisitions and partnerships, Vodafone has added fixed-line infrastructure to its traditional wireless business in several countries.Vodafone is now the largest cable company in the country, with networks that reach around 60% of the population, enabling it to capture about one third of the broadband market. 

Vodafone has also sought to improve efficiency and free up assets. Intense competition, especially in Spain and Italy, has led to disappointing financial results recently. However, Morningstar analysts think the reshaping of Vodafone’s capabilities across Europe to integrate fixed-line and wireless assets positions the firm to compete more effectively over the long term. Integrating fixed-line and wireless networks should improve the quality of each over time, while bundling services should enable the firm to serve customers more efficiently.

Vodafone Continues to Make Gradual Progress as Potential Consolidation Comes Into Focus

Vodafone’s fiscal third-quarter results were broadly as expected, with management stating that the firm remains on track to hit the upper end of its financial expectations for the year. The firm only reports revenue and customer metrics for odd-numbered quarters. More importantly, management clearly sounded optimistic that it will move forward with transactions that change the structure of its operations in several countries. Rumors have swirled around potential merger partners for Vodafone’s operations in the U.K., Italy, and Spain, each of which continues to face challenging competitive environments. We continue to believe the market has overly discounted the long-term value of Vodafone’s assets, and we suspect moves to improve the economics in certain countries will help uncover that value. Morningstar analysts  don’t plan to change its GBX 185 fair value estimate.

Financial Strength 

As of mid-fiscal 2022, net leverage stood at 3.0 times (before lease obligations), with spectrum costs, restructuring expenses, and dividend payments consuming a large portion of free cash flow while the pandemic and competitive pressure have weighed on EBITDA. Management targets leverage in the range of 2.5-3.0 times EBITDA, though, so debt reduction is not a high priority currently.Even with management claiming comfort with the balance sheet, Vodafone still decided to cut its dividend 40% in May 2019, saving the firm about EUR 1.6 billion annually. The payout in fiscal 2019 consumed more than 90% of free cash flow, after funding spectrum purchases. At the new dividend payout, that ratio dropped to less than 50% of free cash flow during fiscal 2020, though cash payments for spectrum were modest. Sizable spectrum purchases pushed the payout ratio to nearly 80% of free cash flow in fiscal 2021. The firm expects a 60% cash flow payout assuming EUR 1.2 billion of spectrum purchases in the average year.Overall, Morningstar analysts don’t believe Vodafone’s debt load is a concern. The firm holds stakes in multiple assets that could be sold if needed to reduce leverage, including its Australian venture, its partnership with Liberty Global in the Netherlands, and its stake in Vantage Towers. Vodafone has also pledged not to put additional money into its troubled Indian venture.

Bulls Say

  • Vodafone possesses massive scale, serving around 280 million wireless customers globally, and it owns extensive wireless and fixed-line networks in most of the markets it serves. Few telecom firms can match its size and strength. 
  • While Europe forms the core of the business, Vodafone still provides access to several emerging markets with strong growth potential. 
  • Even after the 2019 dividend cut, Vodafone shares still offer a very attractive yield. The current payout should prove sustainable, with room for growth as restructuring efforts wind down.

Company Profile

With about 270 million wireless customers, Vodafone is one of the largest wireless carriers in the world. More recently, the firm has acquired cable operations and gained access to additional fixed-line networks, either building its own or gaining wholesale access. Vodafone is increasingly pushing converged services of wireless and fixed-line telephone services. Europe accounts for about three fourths of reported service revenue, with major operations in Germany (about 30% of total service revenue), the U.K. (13%), Italy (12%), and Spain (10%). Outside of Europe, 65%-owned Vodacom, which serves sub-Saharan Africa, is Vodafone’s largest controlled subsidiary (12% of total service revenue). The firm also owns stakes in operations in India, Australia, and the Netherlands.

(Source: Morningstar)

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