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 Philosophy Technical Picks

Despite wobbles at the top, Bapcor’s core is expected to be positive

Business Strategy and Outlook:

Bapcor’s narrow economic moat is contingent not on the CEO, but rather its scale. Bapcor’s scale allows not only additional buying power, but also the ability to source an extensive range of inventory (over 500,000 SKUs, many of these slow-moving, for over 20,000 different vehicle types) and the flexibility to efficiently allocate inventory between stores. Smaller players, lacking this scale, will be unable to replicate Bapcor’s low cost position. 

Bapcor’s trade network’s extensive reach also means Bapcor is able to provide parts to more customers in a timelier manner than smaller competitors, often within the hour, even for slow-moving SKUs. Bapcor’s trade customers consist of principally chain and independent mechanic workshops. These businesses are relatively price inelastic, as costs are passed through to the end consumer, and these businesses instead value parts availability and convenience, allowing service bays to turn over quickly. The number of registered vehicles in Australia will grow at low single digits over the next decade, marginally outpacing population growth. There are currently more than 19 million passenger vehicles in Australia, with an average age of over 10 years, and more than 14 million older than five years– squarely in Bapcor’s target market.

Financial Strength:

While it is expected that the near-term earnings momentum may slow down, analysts anchor on the firm’s long-term fundamentals and defensive earnings. The dividend yield generated by the firm is also substantial.

The financial outlook for the firm remains unchanged. Bapcor has benefitted from elevated government stimulus and pent-up demand, boosting fiscal 2021 sales as consumers opt to maintain and improve their existing cars rather than upgrade to newer vehicles. Australian retail sales were the standout in fiscal 2021, with sales from the Autobarn and Autopro network up 26% compared with fiscal 2020. It is expected that much of the growth was discretionary, rather than maintenance expenditure–retail sales outperformed 16% sales growth in Bapcor’s maintenance focussed trade business.

Company Profile:

Bapcor is one of the largest automotive spare parts and accessories businesses in Australia and New Zealand. The firm principally distributes automotive spare parts and accessories to independent and chain mechanic workshops in Australia and New Zealand through Burson-branded stores. Bapcor also operates a retail automotive spare parts and accessories business in Australia, catering to the DIY customer, under the AutoPro and Autobarn brands. The specialist wholesale business is a brand owner and wholesaler of specialised parts.

(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

Paychex Is Well Placed to Benefit From the Economic Recovery and a Complex Regulatory Landscape

Business Strategy and Outlook

Paychex’s offering appeals to businesses wishing to outsource mission-critical functions, manage and attract employees, and remain compliant with increasingly complex and evolving regulations. Paychex’s solutions span from do-it-yourself payroll with add-on human capital management modules to full-service HR outsourcing via an administrative services organization or professional employer organization model. The ASO and PEO solutions allow a business to outsource critical HR functions to Paychex, including payroll, compliance, and benefits administration, and access support from onsite HR professionals. The main difference between the two models is that under a PEO, Paychex enters a co-employment arrangement and acts as the employer of record for tax and insurance purposes. 

Financial Strength

Paychex is in a strong financial position. At the end of fiscal 2021, Paychex had a net cash position of over $300 million including restricted cash and total corporate investments. In fiscal 2019, the company issued $800 million of fixed-rate long-term debt to fund the $1.2 billion acquisition of PEO business Oasis. Paychex has returned nearly $7 billion of capital to shareholders during the eight years to fiscal 2021 primarily through dividends and to a lesser extent share repurchases. It is expected that  Paychex’s strong free cash flow generation will support an 80% dividend payout ratio over our forecast period. 

Paychex’s medium-term outlook due to resilient revenue retention and stronger demand for complementary HCM solutions than previously anticipated, underpinning our 4% fair value estimate increase to $110 per share. At current prices, Paychex’s shares screen as overvalued trading at a 21% premium to our updated fair value estimate. Management now expects fiscal 2022 adjusted EPS growth to be about 19%, from about 13% previously.

Bull Say’s

  • Paychex is well placed to benefit from increased regulatory complexity under a U.S. Democratic administration. 
  • Paychex benefits from high customer switching costs, a scale-based cost advantage, and strong brand assets and a referral network built over many decades. 
  • Paychex dominates the small-business outsourced payroll market with strong prospects of further market penetration.

Company Profile 

Paychex is a leading provider of payroll, human capital management, and insurance solutions servicing small and midsize clients primarily in the United States. The company, established in 1979, services over 710,000 clients and pays over 1 in 12 U.S. private-sector workers. Alongside its traditional payroll services, Paychex offers HCM solutions such as benefits administration and time and attendance software, as well as human resources outsourcing and insurance brokering.

(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

General Mills’ Strong Brands Provide the Pricing Power Needed to Combat Inflationary Pressures

Business Strategy and Outlook

As at-home food consumption remains elevated during the pandemic, consumers are finding favor with General Mills’ offerings, as shown by increases in household penetration and repeat purchase rates in most categories. It is expected that this lift will largely be temporary, with consumers gradually returning to activities outside of the home, returning away-from-home food expenditures to half, as it was prior to the pandemic. But it is also expected that a lasting benefit for General Mills’ pet food business exist, given the high-single-digit increase in pet adoptions during the crisis.

General Mills has earned a narrow moat rating for its preferred status with retailers, strong brand equities, and cost edge. Due to evolving nutritional preferences, consumers have been shifting from processed fare to fresh, natural options, causing General Mills’ categories to slow. In response, the firm laid out its Accelerate strategy in 2021, which calls for the company to overhaul its marketing and innovation processes. Specifically, the firm will shift media investments to digital formats to better align with consumer media consumption, it will launch bolder innovations with a faster speed to market, it will be a force for good-with purpose-driven brands–and it will invest in data analytics (leveraging proprietary data from its Box Tops program and brand websites) to drive growth. Further, the firm will reshape its portfolio by divesting 5% of sales that dilute growth and will acquire growing businesses that strengthen its five global platforms (cereal, pet, ice cream, snack bars, Mexican) or its positioning in its eight core markets (U.S., Canada, France, U.K., Australia, China, Brazil, and India).

Financial Strength 

General Mills has generally maintained a net debt/adjusted EBITDA ratio of under 3 times, although the fiscal 2018 acquisition of Blue Buffalo increased the metric to 4.8 times. But in fiscal 2021, the firm reduced leverage to below 3 times, returning the firm to its pre-acquisition capital allocation priorities of 1) capital expenditures, 2) dividend growth, 3) strategic acquisitions, and 4) share repurchases. In September 2020, General Mills implemented its first dividend hike since the tie-up, in the spring of 2021 it resumed share repurchases, and in July it closed on its $1.2 billion acquisition of no-moat Tyson’s pet snacks business. General Mills generates a significant amount of free cash flow (cash flow from operations less capital expense), averaging 15% of sales over the past three years, generally in line with our 14% annual average over the next five years. 

Bulls Say 

  • General Mills’ pet food business should benefit from the high-single-digit increase in pet adoptions during the pandemic. Its BLUE brand has been growing rapidly, as on-trend innovations are resonating with consumers.
  • The firm is modernizing its brand-building capabilities, with shortened lead times for new product launches and advertising budgets that are shifting to digital formats where consumers are spending more time. 
  • General Mills’ well-developed Strategic Revenue Management and Holistic Margin Management programs should help the firm offset steep cost inflation.

Company Profile

General Mills is a leading global packaged food company that produces snacks, cereal, convenient meals, yogurt, dough, baking mixes and ingredients, pet food, and superpremium ice cream. Its largest brands are Nature Valley, Cheerios, Old El Paso, Yoplait, Pillsbury, Betty Crocker, BLUE, and Haagen-Dazs. In fiscal 2021, 75% of its revenue was derived from the United States, although the company also operates in Canada, Europe, Australia, Asia, and Latin America. While most of General Mills’ products are sold through retail stores to consumers, the company also sells products into the food-service channel and the commercial banking industry

 (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

Coca – Cola cash flow generation improved with ongoing FCF of $661m and cash realisation of 124.7%

Coal is excavated at the Jim Bridger Mine, owned by energy firm PacifiCorp and the Idaho Power Company, outside Point of the Rocks, Wyoming March 14, 2014. West Virginia mined 120 million tons (109 metric tons) of coal in 2012, second to Wyoming, or about 12 percent of total U.S. production. Kentucky was third with about 9 percent of output, according to the National Mining Association. REUTERS/Jim Urquhart (UNITED STATES - Tags: ENERGY BUSINESS) - RTR3H5NY

Investment Thesis 

  • Currently under a takeover target. 
  • Structural challenges – consumers moving away from carbonated soft drinks (CSD). 
  • Increased competitive pressures from other beverage companies or margin pressure/erosion from supermarket chains.
  • Cost pressure eroding margins, including the NSW container deposit scheme. 
  • CCL not being able to push through price increases to clients. 
  • CCL has a strong global brand portfolio with diversified product offering.
  • Strong growth in NZ, Indonesia and PNG. 
  • Management is focused on cost out and reinvestment, growing efficiency and margins as a result.

Key Risks

  • CCL unable to sustain the turnaround especially in International segments. 
  • Company meets or exceeds its full year guidance. 
  • Increased competitive pressures. 
  • Cost pressure eroding margins, including the NSW container deposit scheme. 
  • CCL not being able to push through price increases to clients.
  • International segment unable to deliver growth.

Key Financial Results 

  • Volumes for the year were down -4.2% over pcp and revenue declined -3.5% to $2.94bn with a more pronounced decline in ongoing EBIT (down -14.7% to $362.6m with margin down -170bps to 12.3%) due to changes in channel and pack mix (multi-serve PET and multipack cans increasing and demand for immediate consumption offerings decreasing) as consumer behaviour responded to Covid-19 lockdown measures. Management have seen a recovery in volumes starting 2H20, with strong momentum carried into January 2021 trading. 
  • The Company was able to achieve market share gains in the non-alcohol ready to drink (NARTD) market which grew during the year, delivering NARTD volume share gains of +0.7% with Coca-Cola Trademark increasing its volume share by +0.4%. 

Company Profile 

Coca-Cola Amatil (CCL) manufactures, distributes and sells carbonated soft drinks along with still and mineral waters, fruit drinks, ready-to-drink coffee and tea and flavoured milk drinks. CCL also rents and services commercial refrigeration equipment to food/beverage manufacturers.

(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

Magellan Financial Group Ltd Loses Largest Mandate; FVE reduced to AUD 38

Business Strategy and Outlook

Magellan is an active manager of listed equities and infrastructure. The firm has had considerable success in growing funds under management, or FUM, owing to its superior track record of outperformance, product expansion initiatives, and strong distribution capabilities.

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, included in model portfolios, and are well-rated. 

There is a focus on targeting retail investors, with product expansion an increasingly common driver of growth. As per Morningstar analyst, 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.

Magellan Loses Largest Mandate, but Sell-Off Way Overdone

Morningstar analyst reduced its fair value estimate for Magellan Financial Group by 25% to AUD 38 per share, following client the termination of its mandate with its largest client, St James’s Place, or SJP. As per the viewpoint of Morningstar analyst, most of Magellan’s institutional clients hired the group to deliver returns of about 10% per year and focus on downside protection. It is an investment undertaking Magellan has always communicated to the market, and a hurdle it consistently surpassed, with institutional returns averaging 18% per year over the last five years. As Magellan’s recent underperformance has only begun since November 2020, it was believed that institutional clients would negotiate for lower fees rather than terminate Magellan. Regretfully, this has not transpired in SJP’s case.

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 aftertax reflects the capital-light nature of asset management.

Bull Says

  • The majority of Magellan’s earnings come from a few large funds, meaning it has a high reliance on key investment personnel and the performance of its main funds. Should key people leave, or its main funds underperform for a sustained period, outflows could be material. 
  • There is increasing competition from other active international equity managers and new international equity funds from incumbents. 
  • The firm faces fee pressure from the increasing popularity of lower-cost alternatives, such as indextype products and ETFs.

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: Morning Star)

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

CSL Ltd. : Pioneering in Global Biotechnology

Business Strategy and Outlook

CSL is one of three tier one plasma therapy companies who benefit from an oligopoly in a highly consolidated market. All the players are vertically integrated as plasma sourcing is a key constraint in production. The plasma sourcing market is currently in short supply, however, CSL is well-positioned having invested significantly in plasma collection centres, owning roughly 30% of collection centres globally. 

One major threat to plasma products is recombinant products. Recombinants are quickly replacing plasma products in haemophilia treatment despite being more expensive. CSL has an excellent R&D track record and has developed recombinant products for haemophilia. However, we expect revenue growth to slow in the haemophilia segment based on competitor Roche’s successful launch of recombinant Hemlibra. Immunoglobulin product sales are key to CSL.

This market is not yet impacted by recombinants although both CSL and competitors are pursuing R&D in Fc receptor-targeting therapy to treat autoimmune diseases. 

However, gene therapy represents the biggest risk to the plasma industry as it aims to cure rather than treat diseases. While the potentially prohibitive cost may result in slow adoption, CSL has strategically expanded its scope via the acquisition of Calimmune in fiscal 2018 and licensing a late-stage Haemophilia B gene therapy, EtranaDez, from UniQure in fiscal 2020. 

CSL is the second largest influenza vaccine manufacturer, behind Sanofi, and is on the forefront of changes in influenza vaccines where manufacturing is shifting from egg-based to cell-based culturing. It’s also conducting preclinical testing of mRNA influenza vaccines. 

The company has demonstrated good sense for R&D and evaluates spend based on the commercial outlook. The strategy for CSL Behring has been to target rare diseases, a typically low volume and high price and margin business. There is little reimbursement risk in this area or in the vaccine business, Seqirus.

Financial Strength

CSL is in good financial health and can fund all its capital and R&D spending, currently a combined 26% of revenue, as well as maintain a dividend payout ratio of 44% without requiring additional debt. Following the acquisition of Vifor Pharma, financial leverage is expected to increase to 2.3 in fiscal 2023. However, it is forecasted that the net debt/EBITDA may fall within CSL’s target range of 1.0-1.5 by fiscal 2026. This leaves CSL flexible to pursue organic or acquisitive growth opportunities as they present in the evolving biotech industry.

Free cash flow conversion has remained depressed over the last five years as working capital investment and capital spending to add manufacturing capacity was elevated above long-term levels, combined with higher R&D spending. We forecast free cash conversion to improve but still average 52% over the next five years as we anticipate CSL to prefer growing organically rather than acquisitively.

Bulls Say’s

  • CSL is investing in both physical capacity and R&D, leaving it well-positioned to take advantage of growth opportunities in the key immunoglobulins market. 
  • The acquisition of Calimmune’s gene therapy platform in fiscal 2018 and UniQure’s late-stage haemophilia B gene therapy candidate in fiscal 2020 will help defend against emerging competition. 
  • CSL has a strong R&D track record, and the ongoing rate of investment is ahead of major competitors.

Company Profile 

CSL is one of the largest global biotech companies and has two main segments. CSL Behring either uses plasma-derived proteins or recombinants to treat conditions including immunodeficiencies, bleeding disorders and neurological indications. Seqirus is now the world’s second largest influenza vaccination business and was acquired in fiscal 2015. CSL has a strong R&D track record, and the product portfolio and pipeline include non-plasma products as the firm continues to broaden its scope. Originally formed in Australia as a government-owned entity, CSL now earns roughly half its revenue in North America and a quarter in Europe

(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

AUB Group Ltd. visions to boost EPS growth with acquisition strategies

Business Strategy and Outlook

AUB operates the second-largest general insurance broker network in Australia and New Zealand. AUB brokers derive revenue from commissions paid by insurers, based on gross written premiums. AUB owns or has equity stakes in each broking business within the network. Post the exit of rehabilitation services in 2021, around 85% of group EBITA is delivered by the broker network, while the underwriting agencies generate about 15%.

A key value proposition over smaller brokers is AUB’s ability to negotiate more favourable policy wording and pricing. Scale also provides the capacity to spend more on technology, which helps facilitate greater analytical and processing capabilities, and marketing to help attract and retain customers. Other services such as claims support and premium funding support the value proposition.

AUB’s underwriting agencies distribute insurance products but take no underwriting risk. Underwriting agencies act on behalf of insurers to design, develop, and provide specialised insurance products and services.

The earnings outlook is positive. It is expected further insurance price rises over the medium term as insurers seek to cover claims inflation and weak investment income. This follows a weak pricing environment due to excess global reinsurance capacity, soft economic conditions, and elevated competition.

Financial Strength

AUB is in sound financial health. It has strong cash flow generation with a high conversion of earnings to operating cash flow and a relatively high dividend pay-out ratio. Gearing as reported by the company (corporate, subsidiary and look through share of associate debt/debt plus equity) ratio is reasonable, at 28.5% and below the firm’s maximum 45% ratio. Excluding customer cash for premium held by AUB but payable to insurers, AUB holds AUD 90 million in cash, which when included lowers gearing further. The current debt load looks manageable, with EBITDA interest cover of over 16 times and the nature of its businesses being relatively low risk. It is assumed AUB will use operating cash flows to fund increased positions in existing broker partners, with headroom to fund small acquisitions from cash on hand.

Bulls Say’s

  • AUB’s scale and expertise in insurance products and services leave it well placed to benefit from higher insurance pricing. 
  • BizCover and the Kelly+Partners partnership see AUB placed to take market share in the smaller end of the SME market. 
  • The firm’s acquisition strategy, both new investments and increased equity stakes, likely boosts EPS growth.

Company Profile 

AUB Group is the second-largest general insurance broker network in Australia and New Zealand. It has an ownership in 55 brokerage businesses, which collectively write over AUD 3 billion in premiums. It also owns equity stakes in 27 underwriting agencies. AUB derives revenue from commissions (from insurers, ultimately paid for by AUB’s customers) based on gross written premium, or GWP, from agencies it owns, and a share of profits from associates and joint ventures. GWP is split between personal (6%), small to medium enterprises (68%), and corporates (26%).

(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 Sectors

Tassal Group revenue increased driven by volume growth

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 behaviour, 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 1H21 revenue was up on volume growth but EBIT and NPAT fell by -2.7% and -7.8% on pcp, respectively, amid materially negative returns from the export market due to Covid19.
  • Interim dividend was down -22.2% to 7cps.
  • Operating cash flows remained strong despite negative movements in working capital and declining salmon prices.
  • Total revenue increased +6.6% over pcp to $292.48m, with sales volume growth for salmon up +16.2% and prawns up +786.4%, which was more than offset by materially negative returns from the export market given the impact of reduced global pricing and an appreciating AUD/USD exchange rate, leading to operating EBIT falling -2.7% over pcp to $46.78m
  • Balance sheet further strengthened with available committed debt facilities extended by $100m to $509.2m (including Receivables Purchasing Facility), secured to April 2023
  • The Board declared an unfranked interim dividend (vs 25% franked in pcp) of 7cps, down -22.2% over pcp and announced a DRP with a -2% discount.
  • Segment revenue are as follows:
    • Salmon: Segment revenue increased +6.7% over pcp, with decline of -8.7% to $12.47/hog kg in average price (domestic down -2.6% and export down -18%) more than offset by +16.2% increase in volume (domestic up +1.3% and export up +74.3%).
    • Prawns: Operating EBITDA/kg (pre AASB 16) declined -47% over pcp to $3.05, as earlier harvest to optimize Christmas sales led to decrease in size

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 prawns 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 Sectors

Bendigo & Adelaide comprising 4.5cps Y20 final dividend and 23.5cps FY21 interim dividend

Investment Thesis

  • Relative to major banks, BEN trades at fair value in our view, on 13.2x one-year forward price to earnings, 0.9x price to book and dividend yield of ~5.0%. 
  • Strong franchise model with funding predominately by way of deposits. 
  • Expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears). 
  • Continued strong cost discipline, improving efficiency and boosting performance. 
  • Advanced accreditation in progress (which may improve ROE). 
  • Potential pressure on net interest margins as competition intensifies, with major banks in a low interest rate environment. 
  • Leading in terms of customer satisfaction and net promoter metrics, which are increasingly key in a period where trust is paramount.

Key Risks

  • Intense competition for loan growth, combined with further discounting. 
  • Volatility in Homesafe earnings. 
  • Increase in bad and doubtful debts or increase in provisioning. It is to monitor the asset quality of Rural Bank and Great Southern portfolios. 
  • Funding pressure for deposits and wholesale funding.

FY21 Results Highlights

  • Statutory net profit of $243.9m, up +67.3%. Cash earnings after tax of $219.7m, up 1.9%. Cash earnings per share of 41.4cps declined -5.5%. Total income was $849.0m, up +3.3%. Operating expenses of $517.4m, down -3.1% as BEN was able to drive cost reductions across the business. 
  • Net interest margin of 2.30% was down 7bps, reflecting “active pricing and volume management for lending and deposits, despite lower lending rates due to a mix of growth and competitive new business rates”. Core BEN NIM of 1.97% was up +6bps on 2H20 NIM of 1.93%. Management noted the December 2020 exit NIM was -3bps lower, which again highlights margin pressure remains from front book/back book repricing. However, we expect this to be offset by favourable funding costs. 
  • Bad and doubtful debts of $19.5m, declined – 15.9%, and comprises 6bps of gross loans. This was a solid outcome and we are likely to continue to see lower BDDs in the near-term. However, we remain cautious of this trend further out as government assistance starts to pull back. 
  • Common Equity Tier 1 of 9.36%, improved 36 basis points on the pcp, above APRA’s ‘unquestionably strong’ benchmark.

Company Profile 

Bendigo and Adelaide Bank Ltd (BEN) offers a variety of banking and other financial services including internet banking, housing finance, retail and business banking, commercial finance, funds management, treasury and foreign exchange services, superannuation and trustee services.

(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 Sectors

Spark New Zealand reports earnings better than expected; however it was negatively impacted by Covid

Investment Thesis:

  • Attractive dividend yield of 5.4%. 
  • 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 positions 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.

Key highlights:

  • SPK’s earnings were negatively impacted by Covid-19 with ongoing loss of mobile roaming revenues and lower growth broadband and prepaid markets.
  • EBITDA was up +0.4% to $502m, despite Covid-19 impacts, offset from strong cost controls.
  • Margin of 27.4% was 60bps lower than the pcp. NPAT was -11.4% lower to $148m, driven by a $29m increase in depreciation and amortisation charges resulting from the shorter asset lives of new digital technologies, and higher depreciation related to customer and property leases.
  • Operating expenses declined $30m, or -2.3%, offsetting revenue declines
  • NPAT was -11.4% lower to $148m, driven by a $29m increase in depreciation and amortisation charges resulting from the shorter asset lives of new digital technologies, and higher depreciation related to customer and property leases.
  • Free cash flow of $113m, was up $63m over the pcp on tight management of working capital resulting in higher cash conversion rate of 102%.

Company Description: 

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.