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

P&G Cleans Up in Fiscal 2021, but Inflationary and Competive Headwinds Could Stall Its Trajectory

                   

 However, this performance is not solely a by-product of the pandemic, which has seen consumers place an outsize emphasis on cleaning and disinfecting. Rather, we attribute these marks to the strategic course P&G embarked on more than seven years ago (rightsizing its category and geographic reach by shedding more than 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing across its business .

But even as its top line appears healthy, P&G is facing unrelenting commodity cost inflation that management has qualitatively pegged as some of the most significant in some time. However, we think the degree of inflation combined with P&G’s innovation mandate (rooted in consumer-valued new fare) should make such increases more palatable. Further,  P&G is now involved in leaning into brand spending to illustrate the value its products offer consumers as opposed to turning off the spigot to preserve profits in this uncertain climate. This aligns with our forecast for P&G to direct around 3% and 10%-11% of sales long term to research and development and marketing, respectively, relative to the 2.7% and 10.5% expended on average the past five years.

Financial Strength

P&G maintains solid financial health. The firm continues to throw off a significant amount of cash, with free cash flow amounting to around $15 billion in fiscal 2021 .We expect P&G will remain committed to returning excess cash to shareholders and will increase its dividend, to an average payout ratio north of 60%. For the year 2020 the firms revenue stood at 70.950 USD million while its EBIT was 16,143 USD million. On the other hand the firms EV/EBIDTA was 18.2 while its P/E ratio was 23.4 for the year 2020.

 We believe P&G is also open to bolting on select brands and businesses to its mix over time. The firms acquired Germany-based narrow-moat Merck’s consumer healthcare brands for $4 billion in April 2018. In our view, this deal stood to replace the scale and technological know-how lost following the dissolution of its joint venture partnership with no-moat Teva at the end of fiscal 2018. As such, we don’t think it signals a reversal in the firm’s strategy to operate with a leaner brand mix. Rather, at just 1%-2% of sales, we believe this addition aligned with management’s rhetoric that it intends to selectively bolster its reach in attractive categories (consumer health growing midsingle digits) and geographies. Beyond this deal, P&G has failed to assert itself as a consolidator in the global household and personal-care arena.

Bulls Say

  • To the extent that retailers and consumers continue to find favour with leading branded operators, P&G’s sales trajectory may outpace our expectations.
  • Additional opportunities to narrow its product mix could enable P&G to more effectively direct its brand spending to the highest-return areas.
  • As P&G reaches the end of its second $10 billion cost reduction effort, further savings (probably related to reducing overhead and bolstering the yield on its manufacturing footprint and marketing investments) could manifest if efficiency is as engrained in its culture as management suggests.

Company Profile

Since its founding in 1837, Procter & Gamble has become one of the world’s largest consumer product manufacturers, generating more than $75 billion in annual sales. It operates with a line up of leading brands, including 21 that generate more than $1 billion each in annual global sales, such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo, and Pampers diapers. P&G sold its last remaining food brand, Pringles, to Kellogg in calendar 2012. Sales outside its home turf represent around 55% of the firm’s consolidated total, with around one third coming from emerging markets.

(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

Continued Spending on the Home Improves Profitability at Wide-Moat Home Depot

 to deliver more than $140 billion in revenue in 2021. It continues to benefit from a healthy level of housing turnover along with improvements in its merchandising and distribution network. The firm earns a wide economic moat rating because of its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our margin expansion forecast. Its flexible distribution network will help elevate the firm’s brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the pro business. 

Home Depot should continue to capture top-line growth beyond 2021, bolstered by aging housing stock and rising home prices, even when lapping robust COVID-19 demand. Other internal catalysts for top-line growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (most recently bolstered by the acquisition of HD Supply). Expansion of newer (like textiles from the Company Store acquisition) and existing (such as appliances) categories could also drive demand.

The commitment to better merchandising and an efficient supply chain has led the firm to achieve operating margins and adjusted returns on invested capital, including goodwill, of 13.8% and 30%, respectively, in 2020. Additionally, Home Depot’s focus on cross-selling products in both its DIY and its maintenance, repair, and operations channel should support stable pricing and volatility in the sales base, helping achieve further operating margin lift, with the metric reaching above 15% sustainably over the next decade.

Bulls Say

  • Home Depot’s focus on distribution and merchandising should improve productivity and increase domestic share in a stable housing market, increasing sales and margins.
  • The company has returned $56 billion to its shareholders through dividends and share buybacks over the past five years–more than 15% of its market cap. It has consistently increased its dividend and used excess cash to repurchase shares.
  • The addressable pro market is around $55 billion, and Interline and HD Supply make up around 10% share, leaving meaningful upside up for grabs.

Financial Strength

Home Depot raised $5 billion in long-term debt in March 2020 to ensure it could weather COVID-19 without disruption, and raised another roughly $3 billion in the fourth quarter of 2020 to help facilitate the acquisition of HD Supply. This led Home Depot to end 2020 with a total long-term debt load of more than $35 billion and a debt/capital ratio of 0.92.Strong free cash flow to equity that has averaged about 10% of sales over the past five years supports higher leverage, and we expect the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s $25 billion in net property, plant, and equipment provides an asset base to secure more debt if necessary. 

Company Profile

Home Depot is the world’s largest home improvement specialty retailer, operating nearly 2,300 warehouse-format stores offering more than 30,000 products in store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals. The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations business, which has been expanded through the tie-up with HD Supply. 

(Source: Morningstar)

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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

Streamlined Portfolio Should Continue to See Solid Demand as Apartments Recover

The company invests in metropolitan markets with solid demographic trends that allow the company to maintain high occupancies and pass along consistent rent increases. Demand for apartments depends on economic conditions in their markets like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers. Apartment Income has significantly simplified and streamlined its portfolio and strategy over the past decade. 

While the company has decreased its portfolio from over 300 properties at the end of 2008 to 96 properties in the current portfolio, the company owns approximately the same number of assets over that time frame in the 8 markets it currently considers to be its core markets. The company’s exit from markets with lower growth prospects has increased the portfolio’s expected average growth. In 2020, Apartment Income spun off its development pipeline and lease-up portfolio into its own company so that the remaining company could focus on the highest-quality assets.

Financial Strength 

Apartment Income is in decent financial shape from a liquidity and a solvency perspective. Debt maturities in the near term should be manageable through a combination of refinancing, asset sale proceeds, and free cash flow. The company should be able to access the capital markets when acquisition and development opportunities arise. As a REIT, Apartment Income is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cash flow from operating activities, providing Apartment Income plenty of flexibility to make capital allocation and investment decisions. 

Fair value estimate to $47.50 per share from $44 after incorporating second-quarter results and adjusting our near-term forecasts to account for a better-than-anticipated recovery from the pandemic. Our fair value estimate implies a 4.3% cap rate on our forward four-quarter net operating income forecast, 23 times multiple on our forward four-quarter funds from operations estimate, and 3.5% dividend yield based on a $1.64 annualized payout. Currently project $200 million of dispositions a year at an average cap rate of 5.75% and $100 million-$200 million of acquisitions at 5.25% cap rates as the company looks to recycle lower-quality assets to fund the acquisition of higher-quality assets. Apartment Income’s net asset value to be approximately $39 per share.

Bulls Say’s

  • Apartment Income’s diversified portfolio of mainly suburban and infill assets should see less impact from supply, which is more concentrated in urban, luxury markets.
  • Positive demographic and economic trends will fuel strong demand for apartment rentals, including the millennial generation, which is beginning to move to the suburbs but still lack the necessary capital to purchase a home.
  • While supply growth may be near a peak now, rising construction prices and higher lending standards will reduce construction starts and reduce supply growth in the future.

Company Profile 

Apartment Investment and Management Co. owns a portfolio of 96 apartment communities with over 26,000 units. The company focuses on owning large, high-quality properties in the urban and suburban submarkets of Boston, Denver, Los Angeles, Miami, Philadelphia, San Diego, San Francisco, and Washington, D.C.

(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

Sydney Airport Flight Delayed to Fiscal 2022; FVE Maintained

Long distances between major cities in Australasia means flying is a preferred mode of travel. Despite a rival airport scheduled to open in 2026, we expect Sydney Airport to remain the favoured terminal for business and long-haul leisure travellers for the next decade. Revenue is about evenly sourced from aeronautical and other operations. Aeronautical fees are mostly on a per-passenger basis, with base charges negotiated with airlines every five years. Retail is the largest non-aeronautical contributor, accounting for about 23% of pre-COVID-19 revenue.

Duty-free and luxury shopping has threats, given the ability for e-commerce sites to offer lower prices than duty-free, and ESG risks given the reliance on tobacco and alcohol sales. However, in the long run, risks materialising in any particular sub-category should be offset by passenger growth boosting defensive categories such as food, car-rental, parking, souvenirs, and holiday items. Population and passenger growth should aid Sydney Airport as it can increasingly allocate slots away from domestic and toward international flights. International flights account for about 40% of passengers, but about 70% of passenger revenue. 

Financial Strength

Sydney Airport’s financial health is fair, with relatively defensive income offset by high debt. Net debt/EBITDA was a high 14 times in fiscal 2021, up from 7.2 in 2019. Our base case is that by fiscal 2023 debt/EBITDA will be back to a more sustainable level below 8 times, and declining, but under our bear scenario this would not occur until 2025 and would remain elevated over our 10-year discrete forecast period. Management acknowledged the high debt and took appropriate actions to reduce leverage, including cancelling distributions in 2020, delaying capital expenditure, securing additional bank facilities, and raising AUD 2 billion in equity in the September quarter of 2020.

Narrow-moat Sydney Airport’s half-year result showed potential, with domestic traffic recovering to 65% of April 2019 levels. This is negligible for our unchanged fair value estimate of AUD 7.85 per share. The key driver is our unchanged post-virus recovery and passenger growth estimates. An acquisition proposal from IFM was this week increased to AUD 8.45, up from 8.25, but was immediately rejected by Sydney Airport. The consortium’s valuation assumptions are unknown. Bulls on Sydney Airport appear to expect Chinese travellers, about 8% of Australia’s arrivals in 2019, will resume rapid growth as borders reopen.

While the long term is the key driver, the near term is relevant given Sydney Airport’s high debt load. Domestic travel volumes through Sydney Airport in the first half of fiscal 2021 improved on the coronavirus-impacted volumes of the second half of fiscal 2020, but domestic border restrictions have resulted in volumes falling significantly in July. A net debt to EBITDA ratio of 14 times is extreme and will be problematic if Australian international borders remain closed for years into the future. Further, the weighted average maturity of Sydney Airport’s portfolio of debt is about five years, and the group has AUD 500 million in cash and AUD 2.4 billion in undrawn banking facilities, more than enough to cover debt expiries in the next two years.

Bulls Say’s 

  • Sydney Airport’s convenience to the business district and coastal suburbs of Australia’s largest city makes it near impossible to replicate. Rising incomes in nearby nations, and Australia’s growing population bodes well for long-term passenger numbers.
  • A light regulatory regime is unlikely to become significantly more onerous.
  • Sydney Airport has spare landing slots, plus the ability to reallocate slots away from domestic and toward more lucrative long-haul international flights, as passenger traffic grows.

Company Profile 

Sydney Airport has a lease to operate the facility until 2097. As Australia’s busiest airport, it connects close to 100 international and domestic destinations, and handled more than 40 million passenger movements annually until COVID-19 border restrictions in 2020. Regulation is light, with airports setting charges and terms with airlines, and the regulator monitoring the aeronautical and car park operations to ensure reasonable pricing and service. Retail and property operations are free from regulatory oversight, though political and commercial pressure limits Sydney Airport from overly flexing its pricing muscle, particularly as the government owns the rival Western Sydney Airport, set to open in 2026.

(Source: Morningstar)

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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

Tapestry Closed F.Y.21 on Good Note with Attractive Shares

Handbags and some types of apparel have been selling well as economies in the U.S. and greater China have recovered. Tapestry has good momentum as it enters fiscal 2022, so it is expected to lift share fair value estimate of $43.50 by a mid-single-digit percentage. Tapestry is one of the few firms in the apparel and accessories space that is currently undervalued, especially after its share price slid 3% after the earnings report.

Against an easy comparison, Tapestry reported constant currency sales growth of 122% in the quarter, eclipsing 118% estimate. More importantly, its sales rose 7% as compared with 2019, with most of the growth attributable to Coach. As targeted by the Acceleration Program, the firm achieved the $200 million in gross expense savings in fiscal 2021 and expects to achieve $300 million in additional savings this year. 

Tapestry has reinstated its dividend as its business has rebounded nicely from the pandemic, and plans to resume share repurchases. It intends to pay a dividend of $1 per share in fiscal 2022. Capital allocation rating on Tapestry is Standard.

Company’s Future Outlook

Tapestry’s quarterly adjusted operating margin of 16.9% came in 40 basis points above 16.5% forecast. Tapestry guided to fiscal 2022 EPS of $3.30-$3.35 on $6.4 billion in sales. Tapestry’s outlook is achievable based on current momentum in the business. It is believed that Coach has the brand strength to hold recent pricing gains; this may be more difficult for Kate Spade and Stuart Weitzman. It also guided to $500 million in repurchases in fiscal 2022, which would be its most since before the 2017 Kate Spade deal. Tapestry may look for another large acquisition in the future. The firm’s new CEO, Scott Roe, has considerable experience with acquisitions. 

Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry INC (NYSE:TPR). The firm’s products are sold through about 1,500 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2020 sales), Europe, Asia (32% of fiscal 2020 sales), and elsewhere. Coach (71% of fiscal 2020 sales) is best known for affordable luxury leather products. Kate Spade (23% of fiscal 2020 sales) is known for colorful patterns and graphics. Women’s handbags and accessories produced 68% of Tapestry’s sales in fiscal 2020. Stuart Weitzman, Tapestry’s smallest brand, generates nearly all (98%) of its revenue from women’s footwear.

 (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

Hanesbrands’ Investment Key Brands Under Its Full Potential Plan Support

While the COVID-19 crisis adversely affected 2020 results, we think Hanes’ share leadership in replenishment apparel categories puts it in better shape than some competitors. Hanes’ management forecasts Champion will reach $3 billion in global sales in 2024, up from about $2 billion this year, which we see as an achievable goal. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past three years. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. 

Financial Strength 

Hanes is saddled with heavy debt from its acquisition spree in 2013-18 and closed June 2021 with $3.7 billion in debt. However, the firm also had nearly $700 million in cash and no borrowings under its revolving credit facilities of just over $1 billion. Moreover, we estimate Hanes will receive about $400 million in cash after it sells its European innerwear operations (expected in 2021). Hanes has a stated goal of bringing debt/EBITDA below 3 times by 2024, which we forecast may happen as early as the end of 2022.Hanes has suspended its share buybacks due to the pandemic, but we expect it will resume repurchases on a large scale in 2022. 

The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. Its annual dividend has been set at $0.60 per share since 2017, but we forecast it will raise in 2022 and in subsequent years. We estimate an average annual dividend payout ratio of 38% in 2022-30.Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. 

Our 2024 sales estimates for innerwear and activewear are $3.0 billion and $1.9 billion, respectively, up from $2.7 billion and $1.7 billion this year. In the long term, we model annual organic innerwear growth rates of 2%-3%. Although long-term growth in domestic innerwear (45% of 2020 sales) is low, Hanes has been gaining share in some basics categories. Our fair value estimate assumes moderate inflation in wage and cotton prices, resulting in a gross margin that stabilizes at 40%.

Bulls Say’s 

  • Hanes’ Champion is a contender in the hot but crowded athleisure space. The brand is already well known in North America and parts of Europe, and there is significant potential in China and other underpenetrated markets.
  • Hanesbrands has successfully introduced brand extensions that have allowed it to expand shelf space and increase price points in the typically staid category of basic apparel.
  • After a review, Hanesbrands announced a new strategic plan called Full Potential to boost growth and reduce expenses, which should benefit its brand strength.

Company Profile 

Hanesbrands manufactures basic and athletic apparel under brands including Hanes, Champion, Playtex, Bali, and Bonds. The company sells wholesale to discount, midmarket, and department store retailers as well as direct to consumers. Hanesbrands is vertically integrated as it produces more than 70% of its products in company-controlled factories in more than three dozen nations. Hanesbrands distributes products in the Americas, Europe, and Asia-Pacific. The company was founded in 1901 and is based in Winston-Salem, North Carolina.

(Source: Morningstar)

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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

ASX Interest Rate Pressures to Abate From Economic 2023

with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. The ASX has long been protected by two significant barriers to competition through regulation and network effects. 

The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome. In March 2016, the government reiterated its desire for competition in cash equities clearing, which constitutes just 7% of ASX group revenue, but not in cash equities settlements, which make up a further 6% of group revenue. There are currently no proposals to introduce competition in derivatives clearing, ASX’s largest business (comprising around a third of group revenue), with obstacles such as cross-margining acting as a barrier to competition.

Financial Strength 

ASX is in good financial health due to its dominant Australian securities exchange, high margins, and capital-light business model. The wide economic moat has protected consistently strong and stable EBIT margins of around 70% over the past decade, and we forecast an average EBIT margin of around 70% over the next five years. Although revenue is vulnerable to market declines to some degree, the large margins limit leverage at an EPS level. 

ASX lacks an appetite for acquisitions, which is not a bad thing in our opinion. The company seeks to drive growth organically through product innovation and cost efficiencies. Our fair value estimate excludes the value of ASX’s franking credits, which are received by Australian resident taxpayers. However, as discussed in our recent special report, “10 Franked Income Stock Ideas for Australian Investors,” franking credits can effectively boost the fair value estimate for investors that receive them. 

Revenue was 4% above our forecast due to stronger than expected performances from the cash equities, listings, and information services divisions, but a weaker-than-expected performance from the derivatives and OTC division. Our fiscal 2022 expenses growth forecast of 5% is at the lower end of management’s guidance range of 5% to 7%, and lower than the 8% reported for fiscal 2021. Our fiscal 2022 capital expenditure forecast of AUD 114 million is at the top end of the AUD 105 million to AUD 115 million guidance range, and lower than the AUD 125 million in fiscal 2021.

Bulls Say’s 

  • Long-term earnings growth is underpinned by growth in the value of the stock market and protected by a wide economic moat. However, in the short term, earnings can be affected by market weakness, although EPS fell just 7% during the global financial crisis.
  • ASX has a wide economic moat underpinned by network effects and regulation. We expect this competitive advantage to protect EBIT margins of around 70% over the next decade and a low-single digit EPS CAGR.
  • ASX is financially robust with a good balance sheet, strong cash flow, and tight cost control.

Company Profile 

ASX is the largest securities exchange in Australia with an effective monopoly in listing, trading, clearing, and settlement of Australian cash equities, debt securities, investment funds, and derivatives. Other activities include the technology services, enforcing exchange rules, and exchange-related data. The ASX demutualised and listed on its own exchange in 1998 and subsequently acquired the Sydney Futures Exchange in 2006.

(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

Treasury Lacks an Economic Moat Amid the Highly Competitive and Volatile

particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 70% in fiscal 2021 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. We expect continued end-market premiumisation to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020

However, Treasury will face an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations. Treasury also faces risks from unfavourable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. But the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns.

The reason why Treasury lacks an economic moat:

  • Treasury Wine Estates has not carved out an economic moat, in our opinion. Although we expect the firm’s strategic shift to focus on high-end wines and its increased geographic diversification to benefit both long-term top-line growth and profitability, the wine industry’s high degree of competition, and volatile annual demand will likely limit Treasury’s ability to generate sustainable excess economic profits. These concerns are further exacerbated by persistent industry oversupply and specific taxation rules in Australia that award excise tax exemptions against the first AUD 350,000 in direct-to-consumer sales, a barrier to industry consolidation. Furthermore there is also continued pressure from powerful retailers in Australia, where liquor stores owned by grocery giants Woolworths and Coles account for over 50% of total wine sales and
  • We don’t believe owning a portfolio of wine brands builds a moat worthy intangible asset because wine brands are stand-alone assets and therefore consumer awareness of Treasury’s ownership in both Stags’ Leap and Berringer in the U.S., or Penfolds and St Huberts in Australia, leads to improved pricing for the respective brands versus peers, or if such awareness even materially exists. There are some cost benefits to running a portfolio of wine brands, as Treasury can optimise its grape sourcing and production within its many geographies. But we expect premium wines will likely continue to see fluctuations in supply and fruit cost year to year.
  • In all, despite the positives of premiumisation in recent years, ROICs considerably trailed WACC until fiscal 2019. This is due to the substantial inventory requirements of wine-making, the high cost of land ownership, difficult price competition in a very fragmented market, and Treasury’s lack of scale economies and brand intangible assets versus larger peers.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine.
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands.
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilisation, improving margins, and higher ROICs.

Company Profile

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(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

Bendigo & Adelaide Bank (ASX: BEN) Updates

  • 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 Home safe earnings.
  • Increase in bad and doubtful debts or increase in provisioning. We continue to monitor the asset quality of Rural Bank and Great Southern portfolios.
  • Funding pressure for deposits and wholesale funding.

FY21 Results Summary

Relative to the PCP: Statutory net profit of $524.0m was up +172%.  Cash earnings after tax of $457.2m, was up +51.5%.  Net interest margin of 2.26%, was down 7 bps. Total income on a cash basis of $1,702.5m, was up +4.5%, with BEN exceeding system lending growth. Bad and doubtful debts were $18.0m, which equates to 2bps of gross loans. 

Excluding the provision release of $19.4m announced on 5 August 2021, bad and doubtful debts equate to 5bps of gross loans. Operating expenses of $1,027.4m were up +0.6% over the PCP, on increased investment in transformation. Excluding transformation, operating costs were -2.5% lower. BEN’s cost to income ratio of 60.3% was down 240bps relative to the PCP, but remains above BEN’s medium target of a sustainable cost to income ratio 50%. CET 1 of 9.57% was up 32 bps, and remains above APRA’s ‘unquestionably strong’ benchmark.  Cash earnings per share were 85.6 cents per share (cps), up +43.4%.

 The Board declared a final dividend of 26.5cps which brings the total fully franked dividend of 50.0 cps for the full year, with DRP discount of 1.5%. The dividend payment equates to 58.4% of cash earnings.  BEN saw growth in market share in lending (up to 2.41% from 2.24% in FY20) and deposits with total lending of $72.2bn, up +10.6%, driven by residential lending (at a rate of 2.8x system or up +14.8%), and total deposits of $78.0bn, up +15.2%, with customer deposits up +14.2%

Company Description

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.

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

Charter Hall Retail REIT Looks Defensive; Shares Fairly Valued

But we maintain our long-term assumptions and AUD 3.85 fair value estimate, which sees the stock screen as fairly valued. The REIT announced a final distribution of AUD 12.70 cents per security, taking full year distributions to AUD 23.40 cps. As a result of recent restrictions, the New South Wales and Victorian governments have reimplemented a landlord code of conduct similar to that enforced in 2020. The scheme forces landlords to provide rent waivers and deferrals for small to medium enterprises where turnover has been curtailed due to restrictions. This is likely to push more consumers to online shopping channels, fuelling the ecommerce trend.

While the near-term impact hurts especially with lockdowns potentially lasting late into calendar 2021 in line with the current vaccine rollout pace, the overall impact on Charter Hall Retail should be contained, relative to the impact in 2020. Its portfolio is increasingly dominated by major longleased tenants that are not eligible to defer rents under the government schemes. Also, the REIT has made significant efforts to increase omnichannel capabilities for tenants including click and collect facilities. This should reduce the financial impact on stores and thus reduce the need to waive or defer rent.

Company’s Future Outlook 

We forecast operating earnings per share to increase by 5% to AUD 28.60 per security in fiscal 2022, underpinned by a 2% increase in rental growth. We don’t expect there to be another equity raising, even in an extended lockdown, after one in 2020. Overall Balance sheet gearing looks modest at 33%, which sits at the midpoint of the target range of 30% to 40%. We view 55% of the REIT’s tenants as defensive (unlikely to miss a rent payment), which include the likes of Woolworths, Coles, bp, Wesfarmers, and Aldi. Supermarkets and service stations are also less likely to be impacted by COVID-19 restrictions. The proportion of portfolio income that these major tenants contribute to has steadily increased over the years, with the top five listed above representative of 54% of the portfolio income, up from 51% in fiscal 2020.

Company Profile 

Charter Hall Retail REIT, or CQR, owns and manages a portfolio of convenience focused retail properties, including neighbourhood and subregional shopping centres, service stations, and some retail logistics properties. The REIT is managed by Charter Hall, a listed, diversified fund manager and developer, which owns a minority stake in CQR, and frequently partners with it on acquisitions and developments. More than half of rental income comes from major tenants Woolworths, Coles, Wesfarmers, Aldi and BP (the latter occupies service station assets). The portfolio is more seasoned than some convenience rivals, with approximately two thirds of supermarket tenants at or near thresholds for paying turnover-linked rent.

(Source: Morningstar)

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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.