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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Deployment Plans Pave a Road to Improving EBITDA at Carnival in 2022

However, global travel has waned as a result of corona virus, potentially leading to longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers slowly resume cruising after a year-plus no-sail halt (with eight of the company’s nine brands set to resume limited sailings by year-end), we suspect cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. Aggravating profits will be the fact that the entire fleet will likely have staggered reintroductions, crimping profitability over the 2021-22 time frame, ceding scale benefits. For reference, as COVID-19 continues to wane, 52% of the fleet is expected to be deployed by November.

Financial Strength

We believe Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with $9.3 billion in cash and investments at the end of May 2021. This should cover the company’s cash burn rate over the ramp-up, which is likely to increase from the roughly $500 million per month experienced in the first half of 2021. Since the beginning of the pandemic, Carnival has raised nearly more than $24 billion in cash via short-term debt, long-term loans and equity issuances (announcing another $500 million at the market equity issuance of June 28, 2021). By our math, Carnival has about 16 months worth of liquidity to operate successfully in a no-revenue environment. If we assume all customer deposits are refunded, this shrinks to about 12 months.

Bulls Say

  • As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate if capacity limitations are repealed.
  • A more efficient fleet composition (after pruning 19 ships during COVID-19) may help contain fuel spending, benefiting the cost structure to a greater degree than initially expected, once sailings fully resume.
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Profile

Carnival is the largest global cruise company, set to deploy 52 ships on the seas by the end of fiscal 2021 as the COVID-19 pandemic wanes. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(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

Bank on the Australian Majors Buying Back Shares

The remainder of surplus capital returned via an annual dividend top-up between fiscal 2021 and 2024, and on-market buybacks once franking balances deplete. Off-market buybacks can provide an attractive opportunity for Australian-based shareholders to sell depending on their tax circumstances. Given a large component of the buyback is treated as a dividend, and franked, the total return to the shareholder can be 20% higher than selling on market.

We think the Commonwealth Bank could kick things off in August 2021 with an approximate AUD 5.5 billion off-market buyback. However, the bank’s conservatism around loan loss provisioning and dividends during 2020 and 2021 suggests shareholders may need to wait until 2022.

Based on a target common equity Tier 1 ratio of 11%, we assume AUD 30 billion is returned to shareholders. We estimate Commonwealth Bank returns around AUD 5.50 per share, ANZ and National Australia Bank around AUD 2.20 each, and Westpac AUD 1.90. Only Westpac has enough franking credits to fully frank all returns.

Shares of the major banks trade around our fair value estimates (except for Commonwealth Bank). But we think the strong wide-moat franchises and prospects for material capital management initiatives, still make the banks attractive holdings in a fairly overvalued Australian market. Our fair value estimates assume the banks have returned excess capital to shareholders by 2025. This may occur sooner, but timing is not material to our fair value estimates. We have not included dividend top-ups in our forecasts given uncertainty around timing.

Company Profile

ANZ Bank is Australia’s third-largest bank by market value and provides retail, business, and institutional banking services to customers in Australia, New Zealand, and Asia-Pacific. The super-regional Asian strategy is being de-emphasised, with management focusing on the higher-returning businesses in Australia and New Zealand. Fine-tuning strategy and bank-wide restructuring results in a differentiated bank compared with domestic peers. ANZ Bank still retains a tilt to its Asia-centric strategy, but is now more balanced, better capitalised and a simpler bank.

(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 Expert Insights

Federal Realty’s Portfolio of High-Quality Retail Thrive in Recovery

As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades.

Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

E-commerce continues to pressure brick-and-mortar retail as consumers increasingly move their shopping habits online. While many of Federal’s tenants must directly compete with the growth of e-commerce, much of the portfolio is insulated from online competition. Segments like grocery stores, restaurants, fitness centers, and other service-based businesses still drive traffic to physical retail centers. Regardless of the competition from e-commerce, location is still paramount for retailers. Retailers are becoming more selective with their physical locations, opting to locate storefronts in the highest-quality assets while closing stores in low-productivity sites. Thus, we expect Federal’s portfolio to remain in demand despite the changing retail environment.

However, Federal must deal with the fallout of the current corona virus pandemic. Many retailers were forced to close for a period of time and shopping at brick-and-mortar locations has fallen. While Federal’s revenue is somewhat protected by long-term leases, retailer bankruptcies have caused a drop in occupancy and Federal has been forced to offer rent concessions to keep others afloat. We believe that high-quality retail locations will rebound and will eventually return to their prior occupancy and rent levels, but the short-term impact to Federal’s cash flow has been significant.

Financial strength:

Federal is in good financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which we believe will serve stakeholders well. Federal has an A-/A3 credit rating, so it should be able to easily access low-rated debt to service financial obligations. Debt maturities in the near term should be manageable through a combination of refinancing and the company’s significant free cash flow. Additionally, the company should be able to access the capital markets when development and redevelopment opportunities arise. We expect 2021 net debt/EBITDA and EBITDA/interest to be roughly 6.9 and 4.2 times, respectively, both of which are slightly outside of Federal’s targeted range but we believe the company will return to historical norms within a few years .As a REIT, Federal is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow.

Company Profile:

Federal Realty Investment Trust is a shopping center-focused retail real estate investment trust that owns high-quality properties in eight of the largest metropolitan markets. Its portfolio includes an interest in 101 properties, which includes 23.4 million square feet of retail space and over 2,600 multifamily units. Federal’s retail portfolio includes grocery-anchored centers, superregional centers, power centers, and mixed-use urban centers. Federal Realty has focused on owning assets in highly desirable areas with significant growth, and as a result, the average population density and average median household income are higher for its portfolio than for any other retail REIT.

(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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Woolworths’ Solely Adjusting for the Demerger of Endeavour

Following the demerger of wide-moat Endeavour Group, we maintain our narrow economic moat rating for Woolworths which is underpinned by cost advantages related to the core Australian food segment. Our low uncertainty and Exemplary capital allocation ratings are also unchanged.

Post-demerger of its liquor retailing and hospitality, Woolworths is essentially a pure-play food retailer with significant competitive advantages over its Australian competitors, Coles, Aldi, and independent operators.

Our investment thesis on Woolworths stands. We expect Australian supermarkets to compete by passing on efficiency gains or cost savings to consumers through price cuts, rather than expanding operating margins and potentially losing share.

As a result, we think Woolworths will successfully defend its market share in food retailing at around 37% in the long term, while EBT margins are capped at around 4.5%.

The demerger of Endeavour Group separates perceived environmental, social, and governance, or ESG, risks associated with liquor retailing and gaming operations from Woolworths’ supermarkets business. We consider the now lessened ESG risks for Woolworths’ supermarket and department store businesses as immaterial to our fair value estimate and well mitigated by the company’s existing

Processes and procedures.

Financial Position of the company

Woolworths’ balance sheet improved with the demerger, including a pro forma net cash position of AUD 75 million as of Jan. 3, 2021. This has prompted management to consider capital management options and potential for capital returns of between AUD 1.6 billion and AUD 2.0 billion is flagged—subject to Board approval. We anticipate capital returns of AUD 1.8 billion to shareholders in fiscal 2022, and we expect Woolworths to comfortably pay out around 75% of earnings in dividends going forward. At our revised fair value estimate, Woolworths offers a fully franked dividend yield of 4%.

Company Profile

Woolworths is Australia’s largest retailer. Operations include supermarkets in Australia and New Zealand, and the Big W discount department stores. The Australian food division constitutes the majority of group EBIT, followed by New Zealand supermarkets, while Big W is a minor contributor.

(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 Shares

Costco’s Sales Growth Remains Strong Even as Comparisons Become Harder, but the Shares Seem Rich

Its 21% revenue growth impressed considering the chain lapped the early days of the pandemic (which included significant customer stock-up activity), but we mostly attribute the results to transitory factors. So, our long-term forecast still calls for mid-single-digit percentage sales growth and 3%-4% adjusted operating margins. We suggest investors seek a more attractive entry price, particularly considering elevated uncertainty as the customer habits normalize.

Costco posted 15% comparable growth excluding fuel and foreign exchange, well ahead of our 8% target, with the outperformance likely a result of greater-than-expected demand for discretionary items and recovering warehouse traffic (stimulus likely also played a role). Costco’s 3.7% operating margin was about 50 basis points higher than its prior-year mark and our estimate, reflecting cost leverage and reduced pandemic-related expenditures.

We are encouraged that around 70% of orders of big, bulky items (generally higher-value items like furniture, exercise equipment, and electronics) are being fulfilled by Costco Logistics, which the company purchased in early 2020. We believe the shift to in-house fulfilment will lift the profitability of orders of such goods as well as delivery times and customer service levels. We also believe these larger items remain an opportunity for Costco to benefit from rising e-commerce penetration, allowing for a broader assortment than what is available in-warehouse. While we continue to expect that the core of the value proposition will remain instore (as much of Costco’s assortment skews toward bulky, low-priced consumer goods that are difficult to ship economically), we support the company’s targeted investments in expanding its digital capabilities, which also include its growing online grocery offering.

Costco Wholesale Corp Company Profile

The leading warehouse club, Costco has 795 stores worldwide (at the end of fiscal 2020), with most sales derived in the United States (73%) and Canada (13%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 42% of fiscal 2020 sales, with hardlines 17%, ancillary businesses (such as fuel and pharmacy) nearly 17%, fresh food 14%, and softlines 10%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 6% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

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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Abbott Laboratories Reduces Outlook for Pandemic-Related Diagnostics

We’d already seen a foreshadowing of softening demand for COVID-19 diagnostic tests as reference labs LabCorp and Quest Diagnostics had indicated that SARS-CoV-2 testing volume peaked in mid-December and then steadily declined through to the end of the first quarter. Considering the penetration of COVID-19 vaccination in the United States and a falling caseload in the last couple of months, we anticipate further decreases in PCR testing through the rest of this year at the labs.

The big question is to what degree demand for COVID-19 PCR testing could shift to the point-of-care, rapid antigen tests that Abbott has supplied. The U.S. government made bulk purchases of those antigen tests last year, and the test recently became widely available over the counter. However, gains in vaccinating adults and now teens in the U.S. are taking place quickly, reducing the need for rapid antigen tests. Abbott now expects $4 billion-$4.5 billion in

COVID-19 test sales in 2021 (down from the $6.5 billion it expected earlier this year), which is closer to our $4.5 billion estimate. We continue to project the diagnostics segment to decline 7% in 2022, driven by falling demand for COVID-19 tests.

Company Profile

Abbott manufactures and markets medical devices, adult and pediatric nutritional products, diagnostic equipment and testing kits, and branded generic drugs. Products include pacemakers, implantable cardioverter defibrillators, neuromodulation devices, coronary stents, catheters, and infant formula, nutritional liquids for adults, and immunoassays and point-of-care diagnostic equipment. Abbott derives approximately 60% of sales outside the United States.

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 Shares

Bank of Nova Scotia Revenue Growth

Its domestic operations are more concentrated in mortgages and auto lending, with leading market share in autos. The bank has been expanding its domestic wealth operations significantly with its acquisitions of MD Financial and Jarislowsky Fraser, making it the third-largest active manager in Canada. The bank has also been making multiple acquisitions in its Latin America footprint as it attempts to consolidate better share within the area.

The international exposure gives the bank the potential for higher growth and return opportunities compared with peers, but it also exposes the bank to more risks. While Latin America has been more stable in the past decade, there are risks that this may not continue. A return to political instability, higher credit losses, and inflation arguably all have higher likelihoods in these emerging markets than for Canada. The unique risks surrounding Latin America’s bounce back from COVID-19 are also worth considering.

After numerous acquisitions, the bank is in the middle of rationalizing its many back-end systems and improving efficiency bankwide. The bank’s original goal was to have an efficiency ratio of 50% by the end of 2021; however, we think this will be delayed, given the less positive economic backdrop caused by COVID-19. We like the bank’s digital efforts. While all banks in Canada are engaged in similar ongoing investments, Scotiabank has been spending the most on its technology and communication expenses. We think these efforts will ultimately pay off in the form of improved operating efficiency, customer engagement, and internal sales coordination. This leads us to believe that returns on tangible equity near 15% are sustainable over the longer term for the bank.

Bank of Nova Scotia is a global financial services provider. The bank has five business segments: Canadian banking, international banking, global wealth management, global banking and markets, and other. It offers a range of advice, products, and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. The bank’s international operations span numerous countries and are more concentrated in Central and South America.

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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AusNet Services Posts Good result

Reported EBITDA rose 6% to AUD 662 million. Adjusted EBITDA rose 7% to AUD 627 million, tracking slightly ahead of our full-year forecast mainly because of higher-than expected electricity demand. More people working from home benefited volumes and saw the firm earn AUD 21 million above its regulatory cap. This will be returned to customers via lower tariffs mainly in fiscal 2022. As AusNet is regulated, there is no lasting impact on our longer-term earnings forecasts or valuation from demand fluctuations.

Electricity distribution performed well, with revenue up 4% to AUD 502 million and adjusted EBITDA up 11% to AUD 288 million. The strong result benefited from tariff increases and stronger residential demand, but the outlook isn’t as rosy. This asset undergoes a regulatory reset in early 2021, which will likely reduce allowed returns on equity to under 5% for the next five years, from over 7% currently. We forecast average annual revenue growth of just 1% over the next five years, despite ongoing reinvestment and growth in regulated asset base. Gas distribution also benefited from tariff increases and stronger residential demand, helping revenue increase 4% to AUD 149 million and adjusted EBITDA increase 8% to AUD 117 million. The next regulatory reset for the gas network is in early 2023. Overall, we expect revenue to grow at about 3% for the next two fiscal years, before resetting about 5% lower from 2023.

EBITDA in the electricity transmission network rose 1% to AUD 181 million. We forecast revenue grows 1% per year for a couple of years, before falling a few per cent in fiscal 2023 following the next regulatory reset in 2022. The main growth opportunity for AusNet is transmission connections to new wind and solar farms and between states. Some will be unregulated, some regulated. All will be capitalintensive, but we think the firm can fund without an equity raising.

 (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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Avita Therapeutics Inc- outlook

Procedural volumes in the first quarter increased 27% sequentially to 496. As burns treatment is acute and not elective, it cannot be deferred and the reduction in both hospital duration and treatment costs when using RECELL, as opposed to a skin graft, should underpin its use amid a stretched healthcare system. Therefore, while we continue to monitor the resurgence of COVID-19 in the U.S., we think Avita can sustain the estimated first-quarter run-rate of 770 RECELL units and leave our full-year fiscal 2021 unit sales and revenue forecasts of 3,060 and USD 20 million, respectively, unchanged.

The current U.S. approval of the RECELL system is limited to adult burn wounds, however, the applications are far broader. Pivotal clinical trials are underway, and we still anticipate the roll-out of RECELL to be phased to adults outside burn centres in fiscal 2022, paediatric use and vitiligo treatment in fiscal 2023, and soft-tissue reconstruction in fiscal 2025. Key to our valuation is RECELL achieving 45% market share in adults and 20% in children treated at burn centres in the U.S. by fiscal 2025.

Avita is in a healthy financial position and held USD 66 million in cash and no debt as at Sept. 30, 2020. We forecast the company to report a loss of USD 28 million in fiscal 2021, reducing to USD 14 million in fiscal 2022, before positing a USD 5 million profit in fiscal 2023 alongside positive free cash flow.

 (Source: Morningstar)

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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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Bank of Queensland – Slightly Better on Most Fronts

The AUD 95 million drop in profit was largely attributable to the AUD 101 million rise in loan impairment expenses to AUD 175 million. Statutory profit was only AUD 115 million, reflecting amortisation of intangibles and restructuring. Non-recurring below the-line items have wiped a cumulative AUD 216 million from profit over the past five years, with ongoing investment required to remain competitive against much larger peers understated by cash earnings.

Our AUD 7 fair value estimate is maintained following the result. Fiscal 2020 was a slight beat across the board. Net interest margins of 1.91% were narrowly ahead of our 1.9% forecast, operating expenses increased 7% versus prior guidance and our expectations of 8%, and loan growth of 1.8% to AUD 47 billion was also slightly ahead. While we like the steps being taken by management to improve loan processing times, the digital offering, and ensure no regulatory or compliance breaches; the funding, scale, and capital advantages of large competitors will be difficult to overcome. Over the long term we continue to believe the bank will struggle to achieve above-system loan growth and maintain margins.

Management’s fiscal 2021 outlook for NIM to fall between 2 and 4 basis points, operating costs to be 2% higher, and above-system lending growth, all look reasonable and within our forecasts. We expect profit growth to remain elusive though, due to even higher loan impairments. We assume loan impairments to gross loans of 0.45% and 0.3% over fiscal 2021 and 2022. Bank of Queensland had 12% of its home loan book and 16% of its SME loan book in deferral as at Aug. 31, 2020, and we remain cautious about the outlook as government stimulus is wound back and deferral

periods end.

 (Source: Morningstar)

Disclaimer

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.