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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Telstra Corp – Show Off Infrastructure Strength

The strategic intent is taking shape: segregate the AUD 200 million EBITDA-generating InfraCo Towers for potential monetisation (akin to Optus’ current moves to do the same), maintain the optionality of keeping the AUD 1.5 billion EBITDA-generating InfraCo Fixed stand-alone (as NBN mulls its future ownership), and continue refocusing the AUD 5.7 billion EBITDA-generating ServeCo on its transformation to become a more simple, efficient, and digital-centric competitor.

Rather than having investors obsess over the ebbs and flows of Telstra’s near-term earnings still suffering from the margin-crunching impact of NBN and competition, the restructure is likely to shift investor focus to the group’s underlying asset values. We expect a flurry of favourable sum-of-parts asset valuations to hit the market over the coming months, underpinned by the current low-interest rate environment and possibly “inspired” by the lucrative investment banking and advisory fees on offer.

The cloud surrounding Telstra’s near-term earnings is also clearing. Management not only reiterated fiscal 2021 earnings guidance (second-half-weighted and driven by cost-cuts, COVID-19 recovery, mobile earnings growth), but also provided encouraging signs for beyond. Return to underlying EBITDA growth in fiscal 2022 (excluding one-off NBN receipts) and an upgrade to fiscal 2023 return on invested capital, or ROIC, to 8% (from 7%) are all broadly in line with our unchanged estimates. But they are still comforting, especially after the shock of the August update when management (too conservatively) trimmed fiscal 2023 ROIC target to 7%-plus (from 10% previously).

As an illustration of the type of sum-of-parts valuation that investors may see in the coming months, traditional infrastructure entities typically trade at low-to-mid-teen EBITDA multiples. We see no reason why Telstra’s InfraCo Towers and InfraCo Fixed won’t attract similar multiples, given their recurring, predictable and indexed earnings growth (at margins of well over 60%) and likely long-term contracts with Telstra and NBN as anchor tenants. Applying, say, a 12 times multiple to both InfraCo Towers’ fiscal 2020 pro forma AUD 200 million EBITDA and InfraCo Fixed’s AUD 1.5 billion EBITDA, and 8 times to the still-rationalising ServeCo’s AUD 5.7 billion EBITDA produces total enterprise value of AUD 66.0 billion. Subtract AUD 16.8 billion in net debt and one can come up with an asset-based valuation of around AUD 4.10 per share for Telstra. And we are likely to witness much more creative ways to boost this value from the investment community in the future. Our unchanged AUD 3.80 fair value estimate for Telstra will remain based on a discounted cash flow methodology.

 (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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Merck MRK High-Margin Drugs and Vaccines

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Management expects Organon, after it’s spun off in the second quarter, “to pay a meaningful dividend that will be entirely incremental to that of Merck.” It also intends to keep Merck’s payout ratio in the 47%–50% range. Based on consensus earnings for 2021 and 2022, Merck should be able to maintain solid dividend growth while remaining within that range.

“Merck’s combination of a wide lineup of high-margin drugs and vaccines along with a pipeline of new drugs should ensure strong returns on invested capital over the long term. Merck is well positioned to gain further entrenchment in immuno-oncology with Keytruda, which holds a strong first-mover advantage in the large first-line non-small-cell lung cancer market with excellent data. Also, we expect Keytruda to gain ap-provals in early-treatment settings, which should open up underappreciated sales potential.

“Merck’s vaccines look ready to drive further gains, led by human papillomavirus vaccine Gardasil, which continues to generate excellent clinical data. While the firm’s late-stage pipeline lacks several new blockbusters, we expect early-stage assets focused on cancer to move through trials rapidly.

Even though Merck faces some patent losses over the next five years, including diabetes drug Januvia, we expect new drug launches and gains from currently marketed products to more than offset generic competition.

Merck & Co., Inc., d.b.a. Merck Sharp & Dohme outside the United States and Canada, is an American multinational pharmaceutical company headquartered in Kenilworth, New Jersey. It is named after the Merck family, which set up Merck Group in Germany in 1668. Merck & Co. was established as an American affiliate in 1891. 

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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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Coach’s Enduring Popularity Provides Stability as Tapestry Establishes Its Acceleration Program

Due to the pandemic, all three of Tapestry’s brands suffered sales and operating profit declines in fiscal 2020, but its results are improving rapidly in fiscal 2021 as it implements its three-year Acceleration Program strategy to cut costs and improve margins.

Coach shares many of the qualities of other luxury brands per the Morningstar Luxury Brand Power Framework and, therefore, has the brand strength and pricing power to continue to provide a narrow moat for Tapestry. Coach struggled with excessive distribution and competition in the past, but we think Tapestry has turned it around through store closures, restrictions on discounting, and increased e-commerce, which has grown by triple-digit percentages during the pandemic. Further, we expect growth in complementary categories like footwear and fashion. We anticipate China to be a key growth region for Coach as, according to Bain & Company, Chinese consumers will compose 46% of the worldwide luxury goods spending in 2025, up from 35% in 2019. We forecast Coach’s greater China sales will increase to nearly $1.2 billion in fiscal 2030 (21% of sales) from $601 million in fiscal 2020 (17% of sales).

We do not believe the acquisitions of Kate Spade and Stuart Weitzman contribute to Tapestry’s moat. Spade was a natural fit for Coach as both generate most of their sales from Asia-sourced handbags. However, Spade merchandise is priced lower than Coach and lacks its international reach. Still, we think Spade can grow in both North America and Asia through store openings and new products, such as shoes (currently licensed). Tapestry has a stated goal of $2 billion in Spade revenue, which we forecast will not be achieved until fiscal 2030. As for Stuart Weitzman, while its women’s shoes achieve luxury price points, we view it as a niche brand (less than $300 million in fiscal 2020 sales) with fashion risk. Stuart Weitzman is struggling so much that Tapestry recently wrote off all the goodwill and intangibles related to its purchase and is downsizing its store base.

Real Value and Profit Maximisers

We are raising our per share fair value estimate on Tapestry to $43.50 from $40.50, which implies a fiscal 2022 P/E of 13 and an EV/EBITDA of 8. The COVID-19 pandemic forced the temporary closure of Tapestry’s stores and continues to affect consumer spending on accessories and apparel in some regions. However, Tapestry’s third quarter of fiscal 2021 was better than expected as e-commerce and strong sales in mainland China (up more than 40% as compared with two years earlier) partially offset store disruptions. Given this momentum, we have raised our fiscal 2021 sales growth and adjusted operating margin expectations to 14.7% and 19.0%, respectively, from 9.8% and 17.8%.

We now forecast adjusted EPS of $2.94, up from $2.64 previously. For fiscal 2022, we estimate EPS of $3.23 (up from our prior estimate of $2.80) on 7% sales growth.

Tapestry has started its three-year Acceleration Program to boost sales and profits. This program, which includes store closures and cost cuts, could reduce sales of Kate Spade and Stuart Weitzman in the short term. We project sales growth rates of 20% and 4.1% for Coach and Kate Spade, respectively, in fiscal 2021, but a decline of 7% on permanent store closures for Stuart Weitzman in Europe and Asia (excluding China).

We forecast selling, general, and administrative expenses as a percentage of sales for Tapestry of around 51% in the long term. While we expect the firm will achieve some expense savings under the Acceleration Program, we also think it will invest in advertising and other selling expenses to support each of its brands. As sales shift rapidly to digital channels, we expect only moderate increases in individual brand store bases over the next decade. We anticipate little or no store growth in North America, but some expansion in China and other international territories. At the end of fiscal 2030, we forecast Tapestry will operate 959 Coach stores (958 at fiscal 2020), 561 Spade stores (420 at fiscal 2020), and 173 Weitzman stores (131 at fiscal 2020). We have raised our long-term tax rate to 19.0% from 16.5% in anticipation of a possible increase in the U.S. corporate tax rate.

Tapestry Inc’s Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. 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 colourful 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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ViacomCBS Poised to Capitalize with Paramount+; International Streaming Expansion Key to Growth

The flagship service offers not only a strong on-demand library from the firm’s deep library but also access to CBS and its wealth of sports rights including the NFL and March Madness which helped to drive streaming growth over the first four months of 2021. With the recent renewal of the Sunday afternoon NFL rights, ViacomCBS now controls two of its most important sports rights into the next decade.

Like its larger peers, Netflix and Disney+, we expect that Paramount+ and Pluto will both benefit from international expansion. While the rebranded flagship service launched in 23 international markets in March including 18 in Latin America, the service has yet to launch in most of Europe, the largest non-U.S. market for Netflix, or India, the biggest international market for Disney+. Given the opportunity internationally and the relatively low guidance of 65-75 million subscribers by 2024, we think it’s likely that management raises the guidance in the next two years similar to the increase that Disney management made in December 2020.

In order to support the streaming growth, we project that ViacomCBS will continue to invest in content creation for the linear networks, theatrical slate, and the streaming platforms. Additionally, we expect that the firm will likely exceed its minimal target of $5 billion in streaming content spending as it ramps local language content to better compete with Disney+ and Netflix around the world. This spending will not help to drive subscription revenue but also ad revenue for both the lower-priced ad-supported tier and Pluto.

ViacomCBS Inc’s Company Profile

ViacomCBS is the recombination of CBS and Viacom that has created a media conglomerate operating around the world. CBS’ television assets include the CBS television network, 28 local TV stations, and 50% of CW, a joint venture between CBS and Time Warner. The company also owns Showtime and Simon & Schuster. Viacom owns several leading cable network properties, including Nickelodeon, MTV, BET, Comedy Central, VH1, CMT, and Paramount. Viacom has also built several online properties on the strength of these brands. Viacom’s Paramount Pictures produces original motion pictures and owns a library of 2,500 films, including the Mission: Impossible and Transformers series.

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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Vocus Group Ltd – Spin Off Business

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The February 2016 merger between these companies transformed the enlarged Vocus into a full-service, vertically integrated player with the necessary ammunition to materially lift its share in all segments of the Australian and New Zealand telecommunications markets. However, the group has been beset by integration and execution risks, leading to a string of board and management changes. Under new management, the turnaround is now progressing solidly.

Key Considerations

  • Vocus’ extensive fibre network infrastructure has the potential to materially lift the company’s share of the corporate and small business telecommunications markets.
  • Vocus’ Australian retail unit faces margin pressure in the National Broadband Network, or NBN, era.
  • Vocus is well and truly past the “fix and repair” stage, and is on the “shed and grow” phase of its journey, with network services clearly identified as its core unit longer-term.
  • Vocus owns and operates an extensive fibre network that drives attractive economics in its fibre and Ethernet business and provides a durable competitive advantage.
  • The marriage of Vocus’ infrastructure and M2’s strong salesforce has the potential to materially lift the company’s share of both the corporate and the small business markets.
  • Vocus’ presence in the New Zealand telecommunications market is underappreciated by investors and is a fertile source of growth.
  • The merger with M2 has exposed Vocus to the margindilutive NBN regime.
  • While steps are being taken to improve in these areas, it is abundantly clear Vocus has bitten off more than it can chew with its recent spate of mergers and acquisitions, with reporting and technology systems woefully inadequate for what is a major player in the telecom big leagues.

 (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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Wesfarmers Ltd – Exceptional Growth

Wesfarmers is one of Australia’s largest private-sector employers, with more than 100,000 employees. Wesfarmers has a wide moat, which is sourced from cost advantages derived from its significant retail scale. After the demerger of Coles in 2018, returns on equity are no longer affected by goodwill associated with the 2008 acquisition of Coles and returns on invested capital comfortably exceed the group’s weighted cost of capital.

Key Investment Consideration

  • Leading Australian hardware retailer Bunnings generates about half of the group’s operating income and we expect the chain to continue building its market share. Bunnings is exposed to the health of the Australian housing market and the cyclical weakness in home prices is likely to negatively affect sales and profitability.
  • Wesfarmers offers investors an opportunity to diversify across different categories in the discretionary retail sector, beyond hardware, with additional diversification provided by its smaller industrials division.
  • Wesfarmers is Australia’s best-known conglomerate. Activities span discount department stores, office supplies, home improvement, energy manufacture and distribution, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial.
  • The company’s hardware store footprint across the Australian economy and its leading market positions within several segments, combined with strong underlying return on invested capital (before goodwill), lead to our wide moat rating.
  • Wesfarmers is one of Australia’s largest retailers, and despite the Coles demerger, still earns around 80% of sales from the retail channel across discount department stores, hardware/home improvement, and office supplies.
  • The Bunnings is the undisputed leader in Australian home improvement retailing. Based on its market position, Bunnings could start giving up some volume growth and improve profitability by increasing prices. OThe diversification of Wesfarmers’ revenue streams across multiple retail categories and industrial businesses lowers earnings volatility and better predictability of dividends for income investors.
  • Wesfarmers’ strong balance sheet lowers funding costs, but also provides the financial firepower to opportunistically pursue acquisitions.
  • Wesfarmers’ retailing businesses are pro-cyclical and the near-term outlook for the Australian economy and consumer spending is mixed at best.
  • Mergers and acquisitions are risky and can be value destructive to shareholders. Wesfarmers’ most recent acquisition, Homebase in the U.K. and Kidman Resources were ill-timed and cost investors dearly.
  • The department store segment is grappling with intense competition from online, international apparel retailers and most importantly Amazon Australia, but are also confronted with the secular decline of thedepartment store format.

 (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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Westpac Banking Corp– Earnings To Retrace

Margins are currently being compressed as cash rates fall to historically low levels and demand for credit growth remains weak. Starved of revenue growth opportunities, the bank will focus on cost-cutting initiatives. A significant penalty for breaching anti-money-laundering laws has been agreed hurts 2020 earnings, as will higher loan impairment expenses over the next few years. During tough economic conditions, capital strength is paramount, with the dividend payout ratio expected to remain between 50% and 70%.

Key Investment Considerations

  • Market concerns about housing and weaker economic conditions are exaggerated. After a period of exponential growth Australian house prices cooled in 2017 and 2018, but a collapse remains unlikely without a sustained spike in unemployment.
  • Cost-saving initiatives are needed to further improve operational efficiency and increase returns.
  • Common equity Tier 1 capital exceeds regulatory requirements but changes to capital requirements in New Zealand, regulatory penalties, rising credit stress, and additional customer remediation costs have the potential to reduce this comfortable position.
  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2022.
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth.
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.
  • The withdrawal of personal financial advice by Westpac salaried financial advisors reduces compliance and regulatory risk.
  • Slow core earnings growth has resurfaced because of low loan growth, margin compression, subdued wealth and markets income, lower banking fee income.
  • A sound capital position will be tested by inflation in risk weighted assets.
  • Increasing pressure on stressed global credit markets could increase wholesale funding costs.
  • Bad debts remain under control, but large provisions are being taken in anticipation that COVID-19 will have a large negative impact on many businesses and households.

 (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

“Can Lives Here” Is No Marketing Gimmick for Commonwealth Bank

Amber markets itself as a provider of cheap electricity, which Commonwealth Bank will promote to its mobile banking customers. Little Birdie will help the bank provide rewards and exclusive offers for Commonwealth Bank customers, probably a way of winning back share from the likes of Afterpay. The initiatives will not appeal to everyone, with these product enhancements likely appealing more to younger demographics who in the future become more profitable home loan customers. Generating annual profit north of AUD 8 billion, the bank has the luxury to: 1) invest in new and even unproven products; and 2) respond to consumer preferences.

It’s hard to say if recent investments will lead to material revenue windfalls, but we think the bank’s relatively small investments make sense as it attempts to build more engaged and satisfied customers. Our buy now, pay later analyst expects the market to grow materially over the next 10 years, but the incumbents will lose share, partly due to the major banks rolling out their own offerings. Commonwealth Bank shares are up over 50% in the last 12 months, and while we agree confidence in the earnings and dividend outlook is warranted, shares trade at a 30% premium to our fair value estimate. The fully franked dividend of AUD 4 per share, or 4% yield is likely attracting retail investors, but we caution against chasing shares for income. It is not hard to imagine the share price falling more than AUD 4 in a tough year, or even a month for that matter. Hopefully the earnings share price volatility of 2020 has not already been forgotten.

Commonwealth Bank’s consumer lending business, less than 2.5% of loans but we estimate around 8.5% of operating income, includes credit cards which are being impacted by growth in the buy now, pay later, or BNPL, sector. It’s not a surprise the bank is fighting back. It owns 5% of Klarna (50% of Klarna Australia), has the CBA BNPL offering, and a no-interest card called Neo.

Company Profile

Commonwealth Bank is Australia’s largest bank with operations spanning Australia, New Zealand, and Asia. Its core business is the provision of retail, business, and institutional banking services. An exit from wealth management is ongoing, with the bank still holding a 45% stake in Colonial First State. The bank has placed a greater emphasis on banking in recent years.

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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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Regis Resources

Gold grades for resources yet to be converted to reserves at Duketon are on about 30% below reserves and if converted will likely be far less profitable. If developed, the McPhillamys mine should add another mine with just under 10 years of reserves in the medium term. Excess returns for the five-year forecast period are a function of sound acquisitions and developments. However, it will be difficult to replicate this investment success. The potential development of McPhillamys is likely to come at a higher unit capital cost and generate lower returns than the existing operations.

Regis’ gold mines do not represent in-perpetuity businesses, and this is a key reason we see the shares as overvalued. To illustrate the importance of finite life, if we were to assume production continued indefinitely, our fair value estimate would almost double to around AUD 7 per share. Reserves at the operating Duketon mines are sufficient for just over five years production at forecast fiscal 2020 rate. Short reserve life means additional resources, in the shape of exploration and development expenditure, will need to be spent to extend operations. But ultimately there’s no guarantee exploration will be successful.

Profile

Regis Resources is one of Australia’s largest gold companies, producing around 350,000 ounces of gold per year. Cash costs are below the industry average. Operating mines are located in Western Australia, which brings relatively low sovereign risk. Management has a sound operating track record and an appropriate bias towards strong balance sheets and dividends; however, the gold price and new investments will be the primary arbiters of long-term returns. Development of the McPhillamys deposit in New South Wales, if approved, should add approximately 200,000 ounces of gold production a year in the medium term.

 (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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Qube Holdings Ltd– Weathering the Storm

However, Qube’s strategy to consolidate a fragmented industry should deliver above-market rates of growth and scale benefits. Qube is developing the Moorebank intermodal terminal and warehouses, located on the Southern Sydney Freight Line, to help alleviate congestion at Port Botany and drive efficiencies in the distribution supply chain. Moorebank, on full completion and ramp-up, should materially contribute to group earnings and deliver a strong competitive advantage for the group’s logistics operations.

Key Investment Consideration

  • Logistics and bulk operations are cyclical and highly dependent on container and bulk volumes. Operating conditions are challenging, with COVID-19 and tough competition pressuring margins and volumes.
  • Our forecasts assume mid single-digit revenue growth in the medium term for Qube, supported by organic growth, scale benefits, investment in new projects, and acquisitions.
  • The development of Moorebank as an intermodal precinct should significantly improve the economics and efficiency of managing container volumes to and from Port Botany over rail.
  • Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains.
  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration.
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving
  • strong returns for Qube.
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders.
  • A corporate structure of associate companies, acquired businesses, and newly purchased assets limits transparency. Meanwhile, a strategy focused on acquisitions adds integration risk. OWhile Qube’s long-term prospects are attractive, its businesses are cyclical and cash flow may be affected by a deterioration in economic conditions.
  • There are still risks surrounding the development of Moorebank and other projects. Currently trading on a high P/E ratio, any disappointments could hit the share price hard.
  • A key positive is the firm’s strengthening financial health, which will get a major boost if the Moorebank Logistics Park, or MLP, is sold. Net debt/EBITDA was a relatively aggressive 3.8 times in fiscal 2020, and could fall below 1 times if Moorebank sells, which we consider conservative.
  • The sale of MLP is progressing well. After receiving nonbinding indicative offers from a range of potential suitors, Qube has entered exclusive negotiation with LOGOS Property Group, an Asia Pacific property investor. There is no guarantee an attractive offer will be made but values for good-quality industrial property are holding up well, as seen in Goodman Group’s security price. The coronavirus hasn’t hurt–online shopping, which requires investment in logistics and industrial property, is booming and interest rates have reduced.

 (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.