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.

Categories
Dividend Stocks Philosophy Technical Picks

Downer Produces the Cash in Fiscal 2021 & No Change In AUD 6.00 FVE.

somewhat below our AUD 228 million expectations, though not meaningfully so. Operating costs were a bit higher than expected. But net operating cash flow rebounded strongly to above expectations AUD 708 million versus just AUD 179 million in the PCP. Higher cash conversion and favorable working capital moves assisted this.

Downer paid a slightly higher than expected final dividend of AUD 12 cents, bringing the full year to an unfranked AUD 21 cents on a 73% payout, an effective yield of 3.6% at the current share price. Government is getting bigger and it is spending more. State governments have allocated AUD 225 billion for infrastructure over the next four years and the NZ Government is also increasing infrastructure expenditure.

There is a strong macro outlook for Downer. The company can now be expected to consolidate its urban services position, the EC&M book in run-off and mining being exited. Its end markets are now substantially in essential services in transport, utilities, and facilities. 

Company’s Future Outlook

Downer expects its core urban services segments to continue to grow in fiscal 2022 but, given the changing nature of the pandemic and the ongoing COVID-19 restrictions, has not provided specific earnings guidance. The fiscal 2022 EPS forecast is unchanged at AUD 0.40, a one-third rise on fiscal 2021’s AUD 0.31. Australian defense spending is expected to increase from AUD 40 billion to AUD 70 billion over the next 10 years.

Company Profile

Downer EDI Ltd (ASX: DOW) operates engineering, construction, and maintenance; transport; technology and communications; utilities; mining; and rail units. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. The engineering, construction, and maintenance business has exposure to mining and energy projects through consulting services. The mining division provides contracted mining services, including mine planning, open-cut mining, underground mining, blasting, drilling, crushing, and haulage. The rail division services and maintains passenger rolling stock, including locomotives and wagons.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Philosophy Technical Picks

Heady (ASX: JHX) Raw Materials Inflation Offering Little Challenge to Hardie in Early Fiscal 2022

After patenting cellulose-reinforced fibre cement in the late 1980s, the Australian company entered the North American market in 1990, establishing its business with the benefit of patent protection. In doing so, the company’s product line has become synonymous with the product category. The firm now enjoys 90% share in fibre cement siding in North America, its largest and most important market, with similar positions in Australia and New Zealand. Fibre cement siding possesses durability advantages and superior aesthetics over vinyl cladding, leading to vinyl’s market share eroding to about 26% today from around 39% in 2003. At this same time, fibre cement’s share has increased to 19%, almost entirely due to increased penetration for Hardie’s product.

Hardie’s siding product range is now in its seventh iteration of product innovation, known as HardieZone, under which the product formulation is tailored to the different climatic zones within North America, increasing durability. Meanwhile, the company assesses its competitors’ product as equivalent to somewhere near its second generation of product, which Hardie released in the mid-1990s. The continued reinvestment in R&D supports Hardie’s strong brand equity and thus perpetuates the price premium that Hardie’s range attracts. 

Financial Strength 

Balance sheet flexibility has improved markedly in early fiscal 2021 despite the economic shock delivered by the coronavirus pandemic. Hardie will return to its regular dividend policy from fiscal 2022 after regular dividends were suspended in early fiscal 2021 in response to the pandemic. Leverage–defined as net debt/EBITDA–stood at 1.0 times at the end of the first quarter of fiscal 2022.Hardie runs a conservative balance sheet with leverage typically within a targeted range of 1-2 net debt/EBITDA. With net debt/EBITDA of 1.0 at the end of the first quarter of fiscal 2022, significant headroom exists relative to Hardie’s leverage covenant, calibrated at a net debt/EBITDA of 3. 

Therefore, Hardie has significant capacity to return surplus capital to shareholders.Hardie’s asbestos-related liability—the AICF trust–has a gross carrying value at fiscal 2021 year-end of USD 1.135 billion and remains an overhang. However, payments to fund the liability are capped at 35% of trailing free cash flow. Narrow-moat James Hardie is off to a flying start in early fiscal 2022 despite substantial inflationary pressures in raw materials and freight which, year-to-date, have shown little sign of abating. Our revised forecast sits slightly above the midpoint of Hardie’s upwardly revised full-year fiscal 2022 net income guidance range of USD 550 million-USD 590 million. Hardie continues to execute impeccably. 

Hardie’s Growth 

First-quarter North American fibre cement volumes rose 21%, tracking significantly above the broader market for exterior wall siding. Reflecting the year-to-date momentum in Hardie’s market share gains, we upgrade our full-year expectations for Hardie’s growth above the North American market index, or PDG, to 9.6% from a prior 7.9%. We lift per share our fair value estimate by 8% to AUD 34.20/USD 25.00, due to the recent depreciation of the Australian dollar. Accordingly, the North American softwood pulp price increased 23% in Hardie’s first quarter to USD 1,598 per tonne. Hardie continues to make progress against its cost savings targets under its ongoing lean manufacturing programme. We continue to expect achievement of USD 340 million in cumulative savings under the lean manufacturing programme by fiscal 2024, a USD 233 million increment over the USD 107 million in incremental cost-out achieved through to the end of fiscal 2021.

Bulls Say’s 

  • James Hardie’s clear leadership in the fibre cement category should drive growth in market share in the North American siding market. We forecast the company retaining its 90% share of the category, while fibre cement climbs to 28% of the total housing market.
  • Hardie’s strong brand equity translates into pricing power, allowing for inflation in manufacturing costs to be easily passed on, thus protecting profitability in the face of imminent input cost inflation.
  • The Fermacell acquisition could finally unlock Europe as an avenue of significant growth following market saturation in North America.

Company Profile 

James Hardie is the world leader in fibre cement products, accounting for roughly 90% of all fibre cement building materials sold in the U.S. It has nine manufacturing plants in eight U.S. states and five across Asia-Pacific. Fibre cement competes with vinyl, wood, and engineered wood products with superior durability and moisture-, fire-, and termite-resistant qualities. The firm is a highly focused single-product company based on primary demand growth, cost-efficient production, and continual innovation of its differentiated range. With saturation of the North American market in sight, the acquisition of Fermacell in early 2018, Europe’s leading fibre gypsum manufacturer, will provide Hardie with a subsequent avenue of growth.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

Asset Sales and Plan for Greater Investment by Lumen Technologies Inc’s (NYSE: LUMN) Put Onus on Management to Return to Sales Growth

Lumen’s fiber holdings make it one of the biggest communications infrastructure providers in the U.S., and its extensive network is matched by few other companies. However, technological advances continually improve networking efficiency and enable less costly solutions to store and transport data. Consequently, even in Lumen’s business services segments, which account for over 70% of total revenue, we think revenue is likely to continue declining. Lumen’s business customers will continue to benefit from the ability to use shared, rather than private, networks and technological advancements that require less bandwidth and enable more efficient routing.

Lumen’s intention to sell a substantial portion of its incumbent local exchange carrier, or ILEC, business should relieve the firm of a big chunk of its fastest-declining revenue (voice) and lower-quality consumer Internet revenue. While the divestiture alone should moderate the firm’s sales declines, it will also result in significantly lower cash flow, which will be further diminished because the firm expects to ramp up investment in its remaining business. 

Financial Strength

Lumen Technologies Inc’s (NYSE: LUMN) continued strengthening its financial position in 2020. In 2020, the firm paid down nearly $2 billion in debt and refinanced $13 billion in debt to push out maturities and reduce interest rates. At the end of 2020, the firm had $400 million in cash, $32 billion in debt, and a net debt/adjusted EBITDA ratio of 3.6. Less than $7 billion of the debt now matures before the end of 2024. With the free cash it generates, we project Lumen has the ability to reduce debt materially while also having a substantial amount of cash to return to shareholders and not scrimping on any capital investment needs. It reliably pays about $1 billion in annual. While the firm is set to sacrifice well below 30% of EBITDA between these transactions and the expiration of CAF-II funds the firm has been receiving. Its dividend for the year 2020 is marked at 10.3 % while in 2019 it was 7.6 %.

Bull Says

  • After selling much of its ILEC business, Lumen may be able to return to sales growth over the next few years rather than face perpetual decline.
  • Lumen has further shifted its business away from the declining consumer and toward the enterprise, which leaves it with a better chance for future top-line growth.
  • The explosion in data use, particularly mobile, could make fiber assets much more lucrative than they have historically been, and Lumen’s fiber holdings place it in the top two or three in the U.S.

Company Profile 

Lumen Technologies Inc’s (NYSE: LUMN) is one of the United States’ largest telecommunications carriers serving global enterprises with 450,000 route miles of fiber, including over 35,000 route miles of subsea fiber connecting Europe, Asia, and Latin America. Its merger with Level 3 further shifted the company’s operations toward businesses (over 70% of revenue) and away from its legacy consumer business. Lumen offers businesses a full menu of communications services, providing collocation and data center services, data transportation, and end-user phone and Internet service. On the consumer side, Lumen provides broadband and phone service across 37 states, where it has 4.5 million broadband customers.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Expert Insights

Market Gains Continue to Offset Weaker Flows to Drive T. Rowe Price’s AUM Higher

with two thirds of its assets under management derived from retirement-based accounts. At the end of 2020, 83%, 79%, and 77% of the company’s fund AUM were beating peers on a 3-, 5-, and 10-year basis, respectively, with 77% of AUM in the funds closing out the year with an overall rating of 4 or 5 stars, better than just about every other U.S.-based asset manager. T. Rowe Price also has a much stronger Morningstar Success Ratio—which evaluates whether a firm’s open-end funds deliver sustainable, peer-beating returns over longer periods–giving it an additional leg up.

T. Rowe Price is uniquely positioned among the firms we cover (as well as the broader universe of active asset managers) to pick up business in the retail-advised channel, given the solid long-term performance of its funds and reasonableness of its fees, exemplified by deals the past few years with Fidelity Investments’ Funds Network and Schwab’s Mutual Fund OneSource platform. With the company likely to generate mid- to high-single-digit AUM growth on average going forward (aided by 0%-3% annual organic growth), we see top-line growth expanding at a positive 7.7% CAGR during 2021-25, with operating margins of 47%-49% on average.

Financial Strength

T. Rowe Price has traditionally maintained a very conservative balance sheet, with no debt on its books since 2002. The company has relied overwhelmingly on its internally generated capital to fund acquisitions and other investments, while still returning a sizable amount of capital to shareholders via stock repurchases and dividends. During 2011-20, T. Rowe Price, by our calculations, generated $14.9 billion in free cash flow (cash flow from operations less capital expenditures) and returned $5.3 billion to shareholders as share repurchases (net of issuances) and $6.2 billion as dividends. Our current forecast has the firm generating $3.5 billion in free cash flow annually on average during 2021-25, the bulk of which will be dedicated to seed capital investments, acquisitions, dividends, and share repurchases.

The company’s quarterly dividend was raised 20% in February 2021 to $1.08 per share, and the company has announced a $3.00 per share special dividend, which was paid out in July 2021. The company remains comfortable with the 35%-40% payout ratio we’ve seen for the regular quarterly dividend over the past five years. During 2019, T. Rowe Price bought back 7.0 million shares (equivalent to 2.9% of its outstanding shares) for just over $700 million, offset by $83 million worth of stock issued under stock-based compensation plans. The firm followed this up with the repurchase of 10.9 million shares for $1.2 billion (equivalent to 4.6% of outstanding shares) during 2020, offset by some $200 million worth of stock-based compensation plan issuances. During the first half of 2021, T. Rowe Price bought back 1.9 million shares for around $309 million.

Bulls Say’s

  • With $1.623 trillion in AUM at the end of June 2021, T. Rowe Price is one of the larger U.S.-based asset managers. Retirement accounts and variable-annuity investment portfolios account for two thirds of assets.
  • At the end of the second quarter of 2021, 91%, 84%, and 86% of T. Rowe Price’s multi-asset AUM was beating passive peers on a 3-, 5-, and 10-year basis, respectively.
  • Target-date retirement portfolios have been a significant source of organic growth, generating just under $100 billion in net inflows (equivalent to an 8% rate of annual growth) for the firm the past 10 years.

Company Profile

T. Rowe Price provides asset-management services for individual and institutional investors. It offers a broad range of no-load U.S. and international stock, hybrid, bond, and money market funds. At the end of June 2021, the firm had $1.623 trillion in managed assets, composed of equity (61%), balanced (28%), and fixed-income (11%) offerings. Approximately two thirds of the company’s managed assets are held in retirement-based accounts, which provides T. Rowe Price with a somewhat stickier client base than most of its peers. The firm also manages private accounts, provides retirement planning advice, and offers discount brokerage and trust services. The company is primarily a U.S.-based asset manager, deriving just 9% of its AUM from overseas.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Shares

Xcel Energy Pushing Through Its Regulatory Agenda; Raising Fair Value Estimate

On July 2, Xcel filed a $343 million rate increase request that we think will be one of its most important and hotly debated rate requests ever in Colorado, its largest jurisdiction. The proceedings during the next six months will test whether regulators are willing to raise customer rates to pay for Xcel’s clean energy and safety investments along with supporting Colorado law that requires Xcel to supply 100% carbon-free electricity by 2050.

Rate settlements in Xcel’s

The Colorado outcome could affect Xcel’s five-year, $24 billion investment plan and management’s 5%-7% annual earnings growth target in the near term. That difference accounts for about 15% of Xcel’s rate increase request. Rate settlements in Xcel’s three smallest jurisdictions are in line with our estimates. In New Mexico, Xcel settled for a $62 million rate increase ($88 million request) and 9.35% allowed ROE (10.35% request). In Wisconsin, Xcel settled for a $45 million combined electric and gas rate increase in 2022 and a $21 million combined rate increase in 2023 based on a 9.8% allowed ROE in 2022 and 10% allowed ROE in 2023. In North Dakota, Xcel settled for a $7 million rate increase ($13 million revised request) and 9.5% allowed ROE (10.2% request).

Company Profile
Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with one third of its electricity sales coming from renewable energy.

(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Philosophy Technical Picks

Kimberly-bottom Clark’s line is being eroded by cost pressures, and its stock isn’t providing much value

The pronounced pullback in retailer and consumer inventories in its North American consumer tissue arm (where volumes collapsed 27% against extraordinary 22% growth last year) drove a significant portion of its underperformance in terms of sales and cost leverage. More specifically, excluding this business, sales were up 4% over the same period in fiscal 2020.

Kimberly’s management lowered its full-year forecast, now calling for organic sales to hold flat or decline by up to 2% (versus flat to 1% growth prior) and $6.65-$6.90 in adjusted EPS (versus $7.30-$7.55 prior). While we intend to trim our 2021 outlook (0.6% organic sales growth and $7.41 adjusted EPS pre-print), we’re holding the line on our long-term expectations of 2%-3% sales growth and high-teens operating margins.

Commodity Cost Inflation

While we never anticipated that the significant level of consumer stock-ups realized a year-ago would persist (particularly as consumers become more comfortable venturing outside the home), commodity cost inflation has outpaced our expectations (serving as a 750-basis-point drag to gross margins in the quarter). In this context, Kimberly now sees inflation costs amounting to $1.2 billion to $1.3 billion in fiscal 2021, up from an anticipated $900 million to $1.1 billion prior (primarily reflecting a 30% increase in the market price for pulp in North America and a more than 90% increase in resin). In an effort to offset the hit to profits over the next several quarters, Kimberly is employing a multi-pronged approach, anchored in pursuing around $100 million in additional cost savings this year (totaling up to $560 million) and raising prices at the shelf at a mid- to high-single-digit clip (similar to its peer set).

Kimberly is employing a multi-pronged approach, anchored in pursuing around $100 million in additional cost savings this year (totaling up to $560 million) and raising prices at the shelf at a mid- to high-single-digit clip (similar to its peer set). Kimberly’s price increases hit shelves a few weeks ago, making consumer acceptance difficult to ascertain thus far. However, we are encouraged by management rhetoric that suggests enhancing its value proposition and leveraging consumer insights across geographies and categories has been an area of focus for its product development.

Company Profile
Kimberly-Clark is a leading manufacturer of personal care (around half of sales) and tissue products (roughly one third of sales). Its brand mix includes Huggies, Pull-Ups, Kotex, Depend, Kleenex, and Cottonelle. The firm also operates K-C Professional, which partners with businesses to provide safety and sanitary products for the workplace. Kimberly-Clark generates just over of half its sales in North America and more than 10% in Europe, with the rest primarily concentrated in Asia and Latin America.

(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

The Strategic review of Tabcrop Favours a Demerger Rather Than a Sale

Further, Tabcorp’s retail exclusivity has little value when punters can place bets with competitors from their smart phones while inside TAB-exclusive venues, such as pubs. We currently model Tabcorp as a combined entity with the demerger earmarked for completion by June 2022, and make no changes to our AUD 3.40 fair value estimate and no-moat rating.

With long-dated licences across all Australian states other than Western Australia, the lottery business enjoys an monopolistic position in its addressable market, and this is bolstered by the scale of its national prize pool. Optimistic about the lottery segment’s opportunity to better realise these competitive advantages and support a strong dividend payout ratio once unshackled from the beleaguered wagering business–the highly cash-generative lotteries business has historically acted as a funding source for capital-intensive wagering investment.

While signaling it remains opens to improved bids, Tabcorp has baulked at the myriad conditions and hurdles to get the various proposals lobbed for its wagering and media business over the line–notably approval from state gaming regulators and racing industry partners.

Company Profile

Tabcorp operates through principally three segments: wagering and media, lotteries and keno, and gaming services. The firm conducts wagering activities under the TAB brand both online and physically in every Australian state and territory other than Western Australia, reaching 90% of the population through a network of retail venues. Tabcorp also operates regulated lotteries in every Australian state except Western Australia. In addition, Tabcorp Gaming Solutions provides services to electronic gaming machine venues.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Expert Insights

Smucker – Long Run Benefits Should Be Gained From Increased Pet Adoption and Flexible Work Arrangements

. Collectively, pet food and coffee comprise nearly 70% of Smucker’s sales. Despite this benefit, we forecast just 2% annual sales growth for the firm (less than that of the total at-home feed and beverage industry), as Smucker’s high exposure to mainstream and value segments in pet food and coffee should result in continuing market share losses as consumers are trading up to premium offerings. Smucker is attempting to offset this pressure with products more aligned with consumer trends, such as Uncrustables on-the-go snacks, it will take a few years for these smaller brands to move the needle.

Financial Strength

The Big Heart Pet Brands acquisition in 2015 increased the net debt/adjusted EBITDA ratio to above 6 from 2. Smucker paid $5.9 billion for the business, 13 times EBITDA, which we believe was rich, particularly considering the acquired brands’ poor positioning in the category. We believe management was prudent in its decision to sell the nonstrategic canned milk business shortly thereafter for $194 million to free up capital in order to accelerate debt reduction. Share repurchases were also significantly curtailed in 2015, which we view as sensible. Net debt to adjusted EBITDA declined to a manageable 2.8 times by 2018, in our opinion, before the firm announced it was acquiring pet food producer. Smucker’s free cash flow (CFO less capital expenditures) as a percentage of revenue has averaged high single digits to low double digits historically, and we expect similar results going forward. With net debt/adjusted EBITDA below 3 times, the firm’s priorities for cash are dividends, capital expenditures, acquisitions, and share repurchase. In the past 10 years, Smucker has averaged a 50% dividend payout ratio (in line with peers), and we expect it will continue to do so; our forecast anticipates 2%-6% annual dividend increases.

Bulls Say

  • A significant increase in R&D and marketing (and increasing productivity of those investments) should enhance Smucker’s capabilities, helping it capitalize on consumer trends.
  • During the pandemic, consumers adopted 11 million pets and purchased 3 million coffee machines, which should provide a lasting benefit for categories representing nearly 70% of Smucker’s fiscal 2021 sales.
  • Executive leadership changes (newly created chief operating officer role, leadership changes for the U.S. sales organization and the pet food segment) should improve execution and enhance accountability.

Company Profile

J.M. Smucker is a packaged food company that primarily operates in the U.S. retail channel (88% of fiscal 2021 revenue), but also in U.S. food-service (5%), and international (7%). Its largest category is pet food and treats (36% of 2021 revenue), with popular brands such as Milk-Bone, Meow Mix, 9Lives, Kibbles ‘n Bits, Nature’s Recipe, and Rachael Ray Nutrish. Its second-largest category is coffee (33%) with the number-two brand Folgers and number-six Dunkin’. Other large categories are peanut butter (10%), with number-one Jif, fruit spreads (5%) with number-one Smucker’s, and frozen hand-held foods (5%) with number-one Uncrustables.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

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)

General Advice Warning

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

Categories
Dividend Stocks 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)

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.