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

Medibank Private Ltd– Will Grow Earnings

Operating in a heavily regulated industry, Australian health insurers typically produce stable and defensive earnings and, in our opinion, Medibank is well placed to produce solid long-term earnings growth. Future changes to regulations could hurt Medibank’s prospects, but we don’t believe the government would materially damage the viability of the private health insurance sector in Australia. Growth is supported by government reliance on private health insurers to partially fund escalating healthcare costs. Government policies and incentives encourage participation, with 53% of the population covered for private hospital and/or ancillary health insurance.

Key Investment Considerations

  • Smaller players on thin margins may need to reign in customer acquisition spend if industry wide claim inflation is not slowed. Medibank can continue to generate attractive returns.
  • Mid-single digit earnings and dividend growth, with Medibank’s ability to pay out 75% to 85% of earnings as dividends sustainable.
  • Medibank is Australia’s largest private health insurer, with 1.8 million policyholders covering approximately 3.5 million people under the Medibank and ahm brands. Medibank Private was established in 1976 to bring increased competition to the private health insurance industry, with the government selling the business in 2014 via an initial public offering. The ahm business was acquired in 2009, with Medibank successfully using the brand to grow its share of younger customers. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Medibank has over 400,000 policyholders under the ahm brand, up from only 160,000 in 2010. In our opinion, Medibank offers steady long-term defensive earnings growth.
  • There are 37 registered health insurers in Australia, with the top five accounting for around 80% of the market by policy numbers. Despite the “free” universal public system in Australia, close to 44% of Australia’s population of 25.5 million have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. We expect government policy settings, which promote the take up and retention of private health insurance products, to remain in place. Long-term growth prospects are supported by government reliance on private health insurers to partially fund escalating healthcare costs. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

 (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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McMillan Shakespeare Ltd

McMillan is the leader in providing salary packaging and novated leases in Australia, and enjoys strong long-term relationships stemming from also being the first outsourced salary packaging service provider in the country. Its integrated business model allows cross-selling of products and also provides bargaining power when sourcing motor vehicles from dealers.

However, these advantages have not delivered significantly higher operating margins than its other major peer, SmartGroup Corporation. McMillan also lacks pricing power, having had to reduce margins to retain its largest employer customer–the Queensland state government—in 2016. Furthermore, the industry’s relatively low capital requirements suggests that barriers to entry are low.

Major risks include material changes to the current fringe benefits tax, or FBT, concessions in Australia, and an economic downturn which will affect employment conditions. These risks have certainly been amplified in the prevailing COVID-19 outbreak, which is likely to see higher unemployment and a recession. Such an environment would reduce demand for salary packaging and novated leases.

Australian government has laid out around AUD 320 billion in fiscal stimulus to date (or about 16% of GDP), with potentially more follow-ups. It’s possible that a future Australian government could revisit the FBT regime to generate more revenue in the face of federal budget deficits. If this were to occur, the high growth and returns generated by McMillan’s salary packaging and novated leasing business–its main source of revenue–would be compromised.

 (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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QBE Insurance – Investment outlook

Management has made good progress improving operational efficiency and strengthening the balance sheet, consolidating the group into a more focused and profitable business after a multidecade acquisition binge. Geographic diversification does little to help margins and returns when large insured events occur without warning and are largely out of management’s control. We expect higher interest rates to benefit in the medium-term, but the competitive landscape mean some of this upside is eroded through competition via premium rates.

  • QBE has failed to demonstrate the underwriting discipline and cost advantages needed to warrant an economic moat.
  • Leveraging scale, brand, and geographic reach, QBE enjoys solid market positions in the U.S., Europe, Australia, and New Zealand. Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but competitors have shown these are not insurmountable barriers.
  • We expect further recovery and an exit from poor performing regions or product lines to benefit the bottom line, but do not believe QBE is gaining the scale necessary to improve its competitive position.
  • Rising competition should erode market share from incumbents, such as QBE, regardless of the impact on short term profits and returns.
  • A higher incidence of large claims events from major catastrophes could reduce profitability such that
  • dividend cuts and potentially dilutive capital raisings are needed.
  • Changes to capital requirements or/and poor profitability could weaken the balance sheet, requiring dilutive capital raisings.
  • Lower investment returns due to very low interest rates may continue for longer than we expect.

 (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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News Corp – Investment outlook

Against this negative backdrop, the fate of a legacy publisher depends on how it maintains audience in the ultracompetitive digital age, and whether it has the financial, as well as the editorial, resources to prevail in the longer term. With still-healthy free cash generation, a solid balance sheet, and ample journalistic resources, we believe News Corporation is well placed to tackle this monumental challenge. Furthermore, the strong balance sheet furnishes management with the ammunition to diversify away from the legacy publishing industry and explore investment opportunities in more structurally stable fields such as digital media assets. Recent efforts to simplify the group is also positive.

Key Investment Consideration

  • News Corporation is in the middle of transforming its legacy print publishing and pay TV business model to one that must compete in the ultracompetitive digital information environment.
  • News Corporation’s editorial resources and solid balance sheet place the company in good stead to maintain readership and stabilise advertising dollars against proliferating news alternatives for consumers.
  • In the meantime, News Corporation is diversifying into new businesses, such as digital real estate advertising in the U.S., while its online real estate classifieds operation enjoys dominance in Australia.
  • News Corporation’s strong financial position and stillsolid free cash generation separate the company from its struggling peers in the traditional print and publishing space.
  • The solid balance sheet provides management with critical flexibility, as it attempts to navigate the treacherous structural landscape and transition the company into the brave new world of digital media.
  • News Corporation also boasts a number of resilient online property classified assets in Australia and the U.S., ones that add to its cash flow profile and provide a template for the kind of businesses that management wishes to acquire as part of a diversification strategy.
  • The structural headwinds that have decimated the industry during the past decade may accelerate in the future, as technology and innovation provide consumers with even more choice in news and information.
  • Management’s efforts to change the legacy publishing model, charge for content in the digital arena, and convince advertisers of the value of its online audience may be overwhelmed by technological and behavioural forces beyond the company’s control.
  • The balance sheet may not be utilised in accretive fashion, with attractive assets that diversify News Corporation’s earnings likely to demand high valuation multiples.

 (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

No-Moat ALS’ Coronavirus-Resistant Fiscal 2021 Earnings as Expected; No Change to AUD 5.50 FVE

We expect consolidation to further strengthen this position, leveraging brand and knowledge across various testing and inspection markets. However capital outlays in establishing a global network of operations and laboratories during the resources boom mean ALS is barely earning its cost of capital on an adjusted basis, and if goodwill is included, returns do not currently meet the cost of capital. This precludes the company from having a moat. Historically, about 60% of earnings were tied to volatile commodity markets, but the end of the resources booms and expansion into segments including environmental, pharmaceutical and food testing reduces this to less than 50%.

Key Investment Factors

Investors should be aware of the inherent volatility around commodity-tied earnings. The mining and energy downturn has demonstrated the vulnerability of businesses tied to resource activity. Although ALS previously benefited from exposure to a robust mining sector, management has astutely grown other parts of the business that are less cyclical. Environmental, pharmaceutical, and asset-care services should remain relatively more resilient. A growing global network reduces region reliance and gives ALS the capability to leverage experience across borders and serve an international client base.

No-Moat ALS’ Coronavirus-Resistant Fiscal 2021 Earnings as Expected; No Change to AUD 5.50 FVE

Our AUD 5.50 fair value estimate for no-moat ALS Limited is unchanged. The materials testing specialist reported a 1.5% decline in underlying fiscal 2021 net profit after tax to AUD 186 million, marginally ahead of our AUD 178 million expectations. We make no material changes to our outlook, including for a 12% increase in underlying fiscal 2022 NPAT to AUD 209 million. ALS paid a higher-than-anticipated fiscal second-half dividend of AUD 14.6 cents against our AUD 12.5 cents target. It brings the full fiscal year to AUD 23.1 cents for a modest 1.9% yield at the current AUD 12.30 share price, franked to 81%. Our fiscal 2022 DPS forecast is little changed at AUD 26 cents, a prospective partially franked yield of 2.1%, again modest.

 That said, ALS remains a prospective growth story, not a yield one. Although in this light we remain perplexed by the level of market excitement, the shares are trading at more than double our assessed fair value, at a fiscal 2021 P/E of 32. We determine the current share price implies a whopping five-year EBITDA CAGR of 16.5% to AUD 817 million by fiscal 2026. Underlying fiscal 2021 EBITDA actually fell 1.6% to AUD 373 million. This wasn’t a bad result in lieu of the coronavirus pandemic, but ALS’ business model was always expected to be resilient given its essential service status.

We think we’re being generous enough forecasting five-year EBITDA CAGR of 5.0% to AUD 487 million by fiscal 2026, including a midcycle EBITDA margin of 21.3%, in line with fiscal 2021’s 21.2% actual. This includes strong 8% growth for life sciences, but essentially flat earnings for commodities and industrial including tribology. Our fair value equates to a fiscal 2026 EV/EBITDA of 8.1, P/E of 14.3 and dividend yield of 4.2%, assuming a 60% payout ratio. Life sciences generated just under half of fiscal 2021 EBITDA and comprises approximately 55% of our fair value estimate, followed by minerals at 40%. Industrial comprises the modest 5% balance of fair value.

With respect to fiscal 2021, life sciences and industrial EBITDAs somewhat undershot our forecast, the former steady at AUD 222 million and the latter falling 13% to AUD 33 million. However, the minerals segment shone, EBITDA up 4.5% to AUD 210 million, considerably ahead of our expectations. This speaks to the quality of fiscal 2021 earnings outperformance given innate volatility in minerals’ earnings in contrast to the comparative stability from life sciences. Fiscal 2021 net operating cash flow increased 4% to AUD 270 million as expected. Free cash flow grew 57% but to a lower-than-expected AUD 145 million, due to higher-than anticipated capital expenditure. This leaves net debt at AUD 614 million, higher than expected but creditably down on the previous corresponding period’s AUD 803 million and September 2020’s AUD 675 million print.

ALS Ltd Company Profile

Founded in the 1880s and listing on the ASX in 1952, ALS operates three divisions: commodities, life sciences, and industrial. ALS commodities traditionally generated the majority of underlying earnings, providing geochemistry, metallurgy, inspection and mine site services for the global mining industry. Expansion into environmental, pharmaceutical and food testing areas and commodity price weakness have lessened earnings exposure to commodities.

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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Nanosonics Rebounds but Outlook Remains Uncertain

While this is a promising rebound, the outlook continues to remain uncertain as the world battles a more severe third wave of coronavirus, particularly in Nanosonics’ key geographies. Our forecast for fiscal 2021 revenue growth of 19% and EPS growth of 25% is unchanged, and we think early performance is tracking in line with our full-year expectations.

Shares continue to screen as overvalued, reflecting the market’s more optimistic view of Nanosonics’ new product in infection prevention, which remains undefined but is expected to begin commercialisation in fiscal 2022.

Despite improvements in hospital access for the company’s sales team, new trophon units installed still declined 9% pcp, with 19% growth in the EMEA segment but a 10% decline in North America. We view the differing growth rates as indicative of the company finding it increasingly difficult to sell additional units in North America where it’s enjoyed most of its success. New capital sales in North America contributed 87% of the total in fiscal 2020 but fell 18% and have fallen 13% on average over the last three years.

Total installed base growth rate to slow to 10% on average over the next three years, followed by lower growth once the device patent expires in 2025 and the more easily addressable markets are heavily penetrated. We maintain our five-year group revenue and EPS CAGR forecasts of 15% and 32%, respectively.

Our five-year revenue growth forecast reflects 17% CAGR in capital sales and 11% CAGR in consumables and service.

 (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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National Storage REIT – Continues Its Acquisition Strategy

It’s the largest owner-operator of self-storage centres in Australia and New Zealand. This gives it another lever to increase earnings by developing centres in its existing portfolio. Its short lease terms, averaging less than two years over its portfolio, also provide it with levers such as dynamic occupancy and rental price management to generate earnings. Shorter rental agreements and reliance on its acquisition strategy make it more sensitive than the average passive REIT to a downturn in economic activity, and availability of capital.

Key Considerations

  • The highly fragmented self-storage industry in Australia and New Zealand provides scope for National Storage to implement its acquisition strategy.
  • National Storage is the largest owner-operator of selfstorage centres in Australia and New Zealand. Its extensive portfolio provides it with the opportunity to generate earnings growth from occupancy and revenue management and via developing existing centres.
  • Its short lease terms and capital-intensive acquisition and development strategy require it to be able to access capital markets and make it riskier than a more passive REIT.
  • Acquiring and developing self-storage centres in a fragmented self-storage industry in Australia and New Zealand is a key part of National Storage REIT’s strategy. National Storage operates under a REIT structure, with the consolidated group comprising a shareholding in National Storage Holdings Limited and a unit in National Storage of its storage centres are located within a 20-kilometre radius of major city CBDs in Australia and New Zealand, and about 10% of its revenue is also sourced from sale of storage packaging, design, development, and project management fees.
  • Australia’s fragmented self-storage industry and National Storage’s relationships with self-storage vendors and stakeholders such as local councils provide it with significant opportunity to successfully implement its acquisition strategy.
  • Its current extensive portfolio of self-storage properties also enables it to generate earnings growth via its development strategy and its dynamic pricing and occupancy techniques.
  • It has had a strong stable management team with strong industry experience in the specialised selfstorage industry that has generated strong underlying earnings per share and net tangible asset growth per share since listing on the ASX.
  • We believe the barriers to entry in self-storage are low. Increased competition and supply of self-storage will likely affect earnings.
  • NSR’s acquisition and development strategy means it is reliant on access to the equity and debt markets. A tightening of credit markets and fall in equity markets may inhibit its ability to implement its acquisition and development strategy.
  • Its short lease terms mean it is more sensitive than the average passive REIT to macroeconomic conditions such as the availability of finance and slowdowns in economic activity and population growth.

 (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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NIB Holdings Ltd – Grow Earnings Over Time

Approximately 53% of the population is covered by private health insurance because of taxation benefits, shorter wait times, a choice of doctor and hospital, and cover of ancillary health services. NIB demutualised and listed on the Australian Securities Exchange in 2007. It is Australia’s fourth-largest health fund. Attractive long-term industry dynamics are supported by a growing population, government taxation incentives and penalties, and regulated pricing.

  • By spending on customer acquisition NIB can continue to take share, but annual growth in policyholders is expected to be low given affordability issues.
  • NIB can continue to generate attractive returns, using scale benefits and modest switching costs in a highly regulated industry. NIB could also participate in industry consolidation if smaller players become unprofitable.
  • We forecast mid-single digit earnings and dividend growth, with NIB’s 60% to 70% dividend payout ratio lower than peers being a reflection of the firm’s strategy to make small acquisitions to strengthen the private health business and diversify revenue.
  • NIB made two acquisitions to grow its travel insurance offering in recent years, with the rationale to diversify revenue outside of private health insurance, add exposure and scale in an industry expected to experience long-term growth, and leverage its claims management capability and existing distribution channels. We believe NIB will find success in cross-selling, but the business remains dependent on travel activity and being commoditised, is vulnerable to pricing pressure. While leveraging the NIB brand in Australia may come with some success, we do not believe insurers can build a competitive advantage on intangible assets.
  • Industry growth is tied to a steadily increasing population, ageing demographics and the unavoidable rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs.
  • Premium growth is generally tied to the increasing cost of healthcare. The government regulator approves/rejects price increases as part of an annual review. Very few have been rejected which helps reduce uncertainty around insurance margins.
  • The symbiotic relationship of private hospital operators, and buyer power over general practitioners, is a key strength of NIB’s business model. Private hospitals are reliant on the private insurance system, as the majority of private hospital income is paid by the insurers.

 (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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United Malt Group Ltd – Result as a Public Company Offers Optimism

Nonetheless, the company is the fourth-largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast-growing craft producers. Although management expects United to face higher near-term costs related to its recent public listing, we think this will be offset by longer-term savings. But despite some attractive aspects of the business, we don’t think United has carved an economic moat. It is a commodity processor, with a high degree of fixed costs and limited ability to substantially differentiate its product.

Key Considerations

  • Although we anticipate craft beer consumption–a key driver for malt demand–will rise as a proportion of overall beer in United’s primary markets, the rate of growth is likely to slow, owing to the already high amount of craft brewers globally and flat overall beer volume trends.
  • Long-term client contracts, and the ability to pass through costs in periods of high barley prices help underpin a stable earnings stream and a manageable dividend policy.
  • We expect slowing end-market demand and limited barriers to supply additions driving returns on invested capital about equal to the company’s weighted average cost of capital.
  • Underlying earnings are stable, supported by longterm client contracts and its ability to pass through costs during periods of high barley prices.
  • United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
  • Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.
  • The commodity products that United Malt provide are readily available from competitors, and the company has little pricing power over the products it buys and sells, making for slim margins.
  • Barley acreage has declined in favour of other adjunct grains like corn or soybean in recent years, which could lead to periods of short supply and higher short-term costs.
  • The loss of key brewing customers, especially if they become self-sufficient for malt, could materially threaten its earnings stream.

 (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.