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 Expert Insights

Bega Cheese- Delivers Robust Earnings

Bega benefited from consumer stockpiling and an associated reduction in promotional activity amid the pandemic. The firm was able to leverage production capacity to meet demand quicke than competitors, achieving market share gains in spreads. However, this was offset by a decline in demand for wholesale food products, bulk ingredients, and disruptions to export market supply chains. Underlying EBITDA margins deteriorated to 6.9% from 7.4% in the prior period, which we attribute to elevated input costs, operating inefficiencies and unfavourable mix shift.

Nonetheless, we expect COVID-19 headwinds to be a shortterm issue for Bega, and the outlook for input cost pricing is improving due to more favourable conditions. We forecast operating margins to expand to 6% by fiscal 2025 (on a post AASB 16 basis) from less than 4% in fiscal 2020, underpinned by process optimisation and cost out initiatives. But we expect further margin expansion to be somewhat limited by Bega’s powerful supermarket customer base, and continued substantial contribution from the dairy category despite the firm’s strategic shift towards becoming a diversified branded consumer packaged food business.

We forecast a revenue CAGR of 6% over the five years to fiscal 2025, underpinned by mid-single-digit growth in the branded foods business, low-single-digit growth in the bulk foods business and inflationary price growth. We forecast per capita cheese consumption to remain stable, implying demand will grow in line with population growth.

Bega’s balance sheet is in sound financial health. Leverage, measured as net debt/underlying EBITDA, improved to 2.35 in fiscal 2020 from 2.75 in fiscal 2019, which is comfortably below covenants. Bega utilised robust operating cash flow and effective working capital management to reduce net debt over the period. We expect leverage to improve to sub-1.0 by fiscal 2025 as earnings improve, working capital unwinds and capital expenditure normalises. We anticipate Bega will have the balance sheet capacity to explore potential bolt-on acquisitions and partake in industry rationalisation, although the timing and scale of further acquisitions is uncertain. Regardless, we expect Bega will maintain a dividend payout ratio of 50% normalised EPS.

 (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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Flight Centre Travel– Trading Update Supports Recovery

Furthermore, the cost of maintaining the physical network (wages, rent) is likely to magnify the impact on earnings from just a slight weakness at the top line. However, the corporate travel unit within Flight Centre is more profitable (lower fixed costs, more automated), structurally more resilient (more essential travel volume, longer growth runway) and will become a bigger part of the group going forward.

Key Investment Considerations

  • The company’s ability to thrive in a weakened retail environment demonstrates earnings resilience.
  • History suggests Flight Centre’s earnings do not benefit significantly from a stronger Australian dollar, while the effect of a weak domestic currency is typically offset by airlines lowering fares, travellers substituting lowerpriced overseas destinations such as Bali, and a rise in higher-margin domestic travel.
  • Flight Centre’s offshore initiatives are still paying off, and we remain optimistic that the firm’s highly developed ability to exploit profitable industry niches will generate acceptable returns overseas.
  • A strong balance sheet allows Flight Centre to take advantage of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to more effectively address specific market segments.
  • Brand strength provides a potent underpinning for the blended online/physical store offering.
  • Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favourable deals with travel providers.
  • Domestic market success does not guarantee the sustained success of offshore expansion. The firm’s scale in offshore markets is significantly less than in Australia.
  • Occupancy and staff costs reduce the competitiveness of brick-and-mortar travel agents, such as Flight Centre, relative to online-only competitors who contend with much lower overheads. New generations of consumers are increasingly confident about shopping online, which reduces the cost of market entry for new players.

 (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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Dividend Stocks Shares Technical Picks

Fortescue Metals Group- Iron Ore Price to Strong

There is an approximate one-month delay between shipping the iron ore and prices being finalised. Higher profit versus last year was driven primarily by price, which rose 21% to USD 79 per tonne. Volumes were mildly positive, with iron ore shipments up 6% to 177 million tonnes. The strong result saw Fortescue increase total dividends by 54% to AUD 1.72 per share, slightly ahead of our AUD 1.60 forecast.

We make no change to our AUD 7.70 per share fair value estimate. While the fiscal 2020 result was strong, we struggle to see how the buoyant iron ore price can be sustained. It’s hard to imagine external conditions getting materially better, and we see longer-term downside. On the demand side, we see a coming headwind as infrastructure spending to offset the COVID-19 downturn in China abates and as urbanisation and infrastructure requirements

generally reduce. The peak of urbanisation has passed, and China’s stock of housing and infrastructure is now relatively mature. We expect China’s steel consumption to slow accordingly and for a growing proportion of steel to come from recycling at the expense of iron ore demand.

We see modest supply additions from Fortescue’s Iron Bridge, Vale’s planned 20 million tonne S11D expansion, and the 7 million-8 million tonne Samarco restart. Longer term, the restart of production from Vale’s mines interrupted by the 2019 Feijao tailings dam failure is material. Production in 2020 is likely to be almost 100 million tonnes lower than we expected before the failure, or about 6% of global supply.

Admittedly, the outlook for near-term earnings is very strong. We expect only a 9% decline in earnings in fiscal 2021 from fiscal 2020’s record level. However, the iron ore price is way above its marginal cost, reflecting the dual shocks to supply–primarily from Vale since 2019 –and demand from China’s stimulus.

Year-to-date steel production in China is up a remarkable 2.8% with a sharp recovery from the February COVID-19- related downturn. In July 2020, steel output in China was up 9.1% on the same month in 2019. The uptick in iron ore imports has been even stronger with China imports up 12% to 659 million tonnes in the year ended July 2020. And for the month of July, imports were a record 102 million tonnes and up 24% on July 2019. With China the dominant source of demand for iron ore, accounting for more than 70% of seaborne consumption, strength there has more than offset any weakness everywhere else.

 (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.

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Coca-Cola Amatil Ltd– Uncertainties Remain

While we expect cost control, plans to launch smaller package sizes at higher prices per litre, and an increasing line up of non-carbonated drinks, we forecast volume declines in soft drinks and a negative mix shift from reduced on-the-go sales to drive a double-digit decline in EPS in 2020. Nonetheless, we’re encouraged by the firm’s continued market share gains, and expect earnings growth to rebound in 2021 and beyond. On top of this organic outlook, Amatil has received a non-binding offer to take over the company from fellow bottler CCEP at an attractive price. Uncertainty remains, but we think there is a strong change the deal progresses.

Key Investment Considerations

  • Coca-Cola Amatil is facing declining carbonated beverage consumption and heightened bottled water competition in its core Australian market, which will likely limit the firm’s near-term pricing power. Despite challenges in mainstream soft drinks, Amatil’s distribution deals with third parties, growth opportunities in emerging markets, and launches of smaller package sizes should drive positive annual revenue gains.
  • Amatil aims to pay out more than 80% of its annual earnings in dividends, and we forecast a low-single-digit growth pace. We expect dividends will remain unfranked until 2021, after which we see franking at 50%.
  • Coca-Cola Amatil’s long-standing relationship with The Coca-Cola Company (TCCC) and a solid distribution network and retailer relationships in Australia, New Zealand, Fiji, Indonesia, and Papua New Guinea, afford the beverage bottler sustainable brand intangible assets and a cost advantage versus its competitors and potential upstarts. However, health-led headwinds in developed markets will likely drive further pressure on Amatil’s carbonated beverage portfolio.
  • The Coca-Cola Company’s nearly 31% ownership in Coca-Cola Amatil solidifies the relationship between the parent company and bottler, and an upcoming shift to incidence-based pricing should further align the firms’ goals.
  • Indonesia is a major long-run growth opportunity for Amatil, given the country’s continued economic development and relatively low rate of packaged beverage consumption.
  • Amatil has opportunities to increase its asset utilisation through additional distribution partnerships, such as recent deals struck with Monster Energy, Molson Coors, and Restaurant Brands.
  • Developments such as container return schemes in NSW and other Australian states, and potential sugary beverage taxes, serve as a price increase for consumers, and likely accelerate the decline of CSD volumes in Australia.
  • Pricing has been dented by both competitors and customers; Amatil has driven costs out of its production system, but a continued inability to pass through raw material inflation to consumers presents a long-term challenge.
  • The Coca-Cola Company owns the rights to Amatil’s major brands, and could negatively alter the pricing consideration for beverage concentrate purchasing.

 (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.

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Cochlear Ltd- outlook

As such, we expect growth in this market to fade over the next 10 years.To combat this pressure, Cochlear is actively trying to grow the adult developed market for cochlear implants, which we estimate to be approximately 40% of current annual units. However, the cost of growing awareness and reimbursement support results in minimal operating leverage and the company has specifically guided to flat margins post the initial recovery from the pandemic.

Key Investment Consideration

  • Increasing investment is required to achieve top-line growth resulting in no operating leverage. OThe annuity-like revenue from sound processor upgrades and accessories to growing implant recipient base is set to increase from 30% in fiscal 2020 to approximately 50% of revenue by 2030.
  • Despite forecasting an 11.2% revenue improvement in fiscal 2021 off a depressed base year, we do not anticipate Cochlear to resume paying dividends until fiscal 2022 when it is expected to become free cash flow positive again.
  • There are signs Cochlear is looking to expand beyond the hearing market with the investment in Nyxoah, a company focused on development of a hypoglossal nerve stimulation therapy for the treatment of obstructive sleep apnoea, a large under penetrated market.
  • The annuity-like revenue from sound processor upgrades is an increasingly important component of the revenue stream.
  • Cochlear earns ROICs well ahead of the cost of capital even in our bear case scenario, which is testament to the
  • high quality of the company.
  • Growth in the cochlear implant market is becoming more costly to achieve and the lack of operating leverage limits the potential upside to earnings going forward.
  • The arrival of lost-cost competitor, Nurotron, could disrupt markets other than China should it seek to expand and this could trigger price deflation for incumbents.
  • The COVID-19 crisis could cause a significant outright loss of adult potential cochlear implant recipients as they avoid hospitals and cancel rather than defer elective surgeries. The referral and assessment process takes between nine and 12 months and as such, the impacts will take some time to be visible in the financial results.

 (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.

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Dividend Stocks Shares Technical Picks

Domino’s Pizza Enterprises- Outlook

The stock suits investors seeking exposure to the food and beverage sector. Australia can still increase its store base by around 40% over the next decade. European growth is much more substantial, with potential to substantially increase the existing store base to around 2,850 outlets during the next decade. In its capacity as a master franchisee, Domino’s capital requirements are limited, which means that royalty payments should continue to be paid as dividends.

Key Considerations

  • Domino’s was an early adopter of digital. By migrating orders online, the company has been able to save costs, establish a customer database, and up-sell to customers.
  • Japan and Europe are underpenetrated markets. Replicating its success in Australia abroad presents a significant growth opportunity.
  • Short-term drivers can materially affect year-to-year earnings, including currency movements, raw material input costs, and changes to foreign government policies related to sales taxes and wages.
  • Domino’s is a highly visible brand based on a successful U.S. business model. Across Domino’s three regions, sales have increase at a CAGR of 14% over the past four years. We expect annual growth rates to continue in the low teens over the next five years.
  • The pizza market in Europe is highly fragmented, presenting significant opportunity for Domino’s to take market share with an attractive value proposition, increased convenience to the customer, and a differentiated product offering.
  • The company’s large network size has positive implications for discounted supplier arrangements.
  • There is a high level of competition, stemming from independent pizza stores and other quick-service restaurants.
  • The company might evaluate its target markets in new countries incorrectly, given the geographical distance and cultural variances.
  • The low-price business model may still be affected by slowing retail and discretionary spending.

 (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.

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Costa Group Holdings – Expansion to Drive Costa’s Earnings Growth

The Australian fresh produce industry enjoys some protection from imports, with strict biosecurity restrictions and Australia’s relative geographic isolation. But the local market is highly fragmented, and competing product lines are largely commoditised. Further, Costa’s concentrated customer base prevents the establishment of an economic moat because the balance of bargaining power lies with its powerful customers, notably the dominant supermarket chains.

Key Investment Considerations

  • Costa Group’s earnings are highly exposed to the major Australian supermarkets, which constitutes around 70% of produce revenue.
  • Fluctuations in weather and climate can lead to volatility in pricing and yield.
  • International berry expansion to China is running according to Costa’s original five-year plan and appears set for significant growth.
  • Costa’s strong market share in key categories mitigates its high customer concentration risk.
  • International berry expansion to China is running according to Costa’s original five-year plan, and appears set for significant growth.
  • Costa is well-positioned to capitalise on high growth in emergent product categories, such as blackberries.
  • Costa Group’s earnings are highly exposed to the major Australian supermarkets, which constitute the majority of revenue.
  • Severe weather conditions can lead to undesirable volatility in both pricing and yield.
  • Access to water is also imperative to Costa’s business, and restrictions or termination of water rights due to events such as drought would adversely affect Costa’s ability to maintain its crops.

 (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.

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Dividend Stocks Shares

ResMed Inc ltd – Long-Run Strategy

We forecast the company to gain share in the USD 5 billion sleep apnea treatment market as reimbursement becomes increasingly linked to evidence of patient compliance. We expect to see both commercial and national health insurance payers get on the connected device bandwagon, which benefits the duopoly of ResMed and Philips greatly.ResMed’s recent acquisitions of software services platforms for home healthcare practitioners is a new strategic direction and the company has already pieced together approximately 20% share in this USD 1.5 billion market.

Key Investment Considerations

  • ResMed has a strong position in the structurally growing sleep apnea market, where volume growth has been more than sufficient to offset the price deflation headwind.
  • Cash flow is robust with 100% of earnings represented by free cash flow over the preceding five years, a trend we forecast to continue.
  • Risks remain around tax issues as ResMed has been subject to large tax charges in both the U.S. and Australia in the last two years. We are concerned about the reflection on corporate culture and the potential USD 300 million-plus in taxes and penalties payable.
  • ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payers happier to reimburse the cost of respiratory devices.
  • The global sleep apnea market is only 20%-30% penetrated and respiratory device companies are making headway growing volumes around 10% per year, offset by average price deflation of 2%-3%. It is dominated by ResMed and Philips, which together make up an estimated 80% of the USD 5 billion value. ResMed plays a key role in driving diagnosis with its at-home sleep testing devices and ongoing education drive to create awareness of the disease.
  • ResMed has demonstrated a robust top line despite experiencing pricing pressure, and this together with the low financial leverage, leads us to use a below-average cost of equity of 7.5%. This results in a company weighted average cost of capital estimate of 7.4%.
  • The ResMed initiatives to improve sleep apnea diagnosis could result in an acceleration of revenue growth over the next five years. With the sleep apnea market an estimated 50% diagnosed in the U.S. and less in other major markets, the runway for growth is long.
  • Pricing risk for durable medical supplies has played out and pressure could ease going forward resulting in faster top-line growth and expanding margins.
  • The strategic focus on data to support product purchases positions ResMed well to demonstrate the value of its products to the healthcare system.
  • The tax issues that came to light in 2018 could suggest a corporate culture that allows questionable practices in other areas like selling, which is regulated in the U.S.
  • Future cash flows need to fund the total potential historical tax liabilities of USD 300 million over the upcoming years.
  • ResMed is unproven as a software provider, an area it is currently directing a lot of capital to.

 (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.

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Dividend Stocks Technical Picks

Rio Tinto Ltd- Shares Remain Overvalued

Aluminium should constitute a substantially larger share, given the USD 40 billion that Rio Tinto controversially paid for Alcan in 2007, but Rio overpaid. Rio Tinto and BHP have the lowest operating costs of the iron ore players, but despite this being the bulk of company earnings; adjusted excess returns were destroyed by procyclical overinvestment during the China boom.

Key Investment Consideration

  • Rio Tinto is only mildly diversified. Iron ore generates most of the company’s value, and aluminium and copper nearly all of the rest. It’s highly leveraged to China’s steel demand.
  • Rio Tinto’s procyclical capital investment was poorly timed. The invested capital base grew from USD 16 billion in 2005 to USD 105 billion in 2015, after adding back write-offs. Subsequent cost deflation, and lower commodity prices, exposed the folly.
  • Rio overpaid for Alcan and the large acquisition was the first in a number of serious missteps. However, current management is rebuild Rio’s reputation and is favouring cash returns to shareholders.
  • As a commodity producer, Rio Tinto is a price-taker. The lack of pricing power is aggravated by the cyclical nature of commodity prices. Rio Tinto lacks a moat, given that the bloated invested capital base doesn’t permit returns in excess of the cost of capital. The firm’s assets are large, however, and despite being overcapitalised, generally have low operating costs.
  • Rio Tinto is one of the direct beneficiaries of China’s increasing appetite for natural resources. ORio’s cash flow base is somewhat diversified, and is less susceptible to the vagaries of the market than single-commodity producers.
  • The company’s operations are well run and are generally large-scale, low-operating-cost assets. OCapital allocation is likely to be significantly improved following the China boom. Competition for inputs will reduce substantially, while the reduction in cash flow available for investment will mean only the best projects are approved.
  • Mining is seen as a sin activity, and governments may use it as a source of tax revenue to plug shaky budgets.
  • The global economy is cooling. Demand for natural resources in China has peaked, and commodity markets are starting a painful structural decline.
  • Rio Tinto is being viewed as a high-yielding income stock, but resource companies are notoriously unreliable dividend-payers, with cyclical commodity prices often bringing attractive yields undone. ORio Tinto’s investment track record through the boom was woeful. The company paid too much for acquisitions and expanded when it was expensive, permanently diluting returns.

 (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.

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Lumen Technologies The Best Dividend Payer

“We think the market has overly punished Lumen’s stock and is overlooking the substantial free cash flow generation and margin expansion opportunities.

Lumen Technologies owns an extensive communications network of over 450,000 route miles of terrestrial and subsea fiber in over 60 countries and 900,000 route miles of copper. Three fourths of Lumen’s revenue is from business customers; the remaining fourth is from the consumer business. Both businesses have posted declining sales in recent years, and we expect that trend to continue.

Prices in the enterprise market are deflationary, as technological advances make data transport cheaper and allow software-defined solutions that cannibalize higher-revenue services. Lumen’s copper-based consumer business offers lower quality than cable alternatives, and it has been bleeding customers. We expect both trends to moderate but not cease, as the firm is upgrading its consumers to better speeds and legacy enterprise technologies will gradually make up a lower portion of sales.

“For income investors, the biggest knock on Lumen is the 54% dividend cut the company made in 2019, though Morningstar analysts believe the current dividend is secure: “We project free cash flow to remain fairly steady throughout our five-year forecast and cover the dividend by more than 2.5 times, on average…given the coverage we forecast, we don’t expect another cut in the near term.”

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.