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Dividend Stocks Philosophy Technical Picks

ASX Interest Rate Pressures to Abate From Economic 2023

with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. The ASX has long been protected by two significant barriers to competition through regulation and network effects. 

The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome. In March 2016, the government reiterated its desire for competition in cash equities clearing, which constitutes just 7% of ASX group revenue, but not in cash equities settlements, which make up a further 6% of group revenue. There are currently no proposals to introduce competition in derivatives clearing, ASX’s largest business (comprising around a third of group revenue), with obstacles such as cross-margining acting as a barrier to competition.

Financial Strength 

ASX is in good financial health due to its dominant Australian securities exchange, high margins, and capital-light business model. The wide economic moat has protected consistently strong and stable EBIT margins of around 70% over the past decade, and we forecast an average EBIT margin of around 70% over the next five years. Although revenue is vulnerable to market declines to some degree, the large margins limit leverage at an EPS level. 

ASX lacks an appetite for acquisitions, which is not a bad thing in our opinion. The company seeks to drive growth organically through product innovation and cost efficiencies. Our fair value estimate excludes the value of ASX’s franking credits, which are received by Australian resident taxpayers. However, as discussed in our recent special report, “10 Franked Income Stock Ideas for Australian Investors,” franking credits can effectively boost the fair value estimate for investors that receive them. 

Revenue was 4% above our forecast due to stronger than expected performances from the cash equities, listings, and information services divisions, but a weaker-than-expected performance from the derivatives and OTC division. Our fiscal 2022 expenses growth forecast of 5% is at the lower end of management’s guidance range of 5% to 7%, and lower than the 8% reported for fiscal 2021. Our fiscal 2022 capital expenditure forecast of AUD 114 million is at the top end of the AUD 105 million to AUD 115 million guidance range, and lower than the AUD 125 million in fiscal 2021.

Bulls Say’s 

  • Long-term earnings growth is underpinned by growth in the value of the stock market and protected by a wide economic moat. However, in the short term, earnings can be affected by market weakness, although EPS fell just 7% during the global financial crisis.
  • ASX has a wide economic moat underpinned by network effects and regulation. We expect this competitive advantage to protect EBIT margins of around 70% over the next decade and a low-single digit EPS CAGR.
  • ASX is financially robust with a good balance sheet, strong cash flow, and tight cost control.

Company Profile 

ASX is the largest securities exchange in Australia with an effective monopoly in listing, trading, clearing, and settlement of Australian cash equities, debt securities, investment funds, and derivatives. Other activities include the technology services, enforcing exchange rules, and exchange-related data. The ASX demutualised and listed on its own exchange in 1998 and subsequently acquired the Sydney Futures Exchange in 2006.

(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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Technology Stocks

JB Hi-Fi Ltd (ASX: JPH) Updates

  • Being a low-cost retailer and able to provide low prices to consumers (JB Hi-Fi & The Good Guys) puts the Company in a good position to compete against rivals (e.g. Amazon). 
  • The acquisition of The Good Guys gives JBH exposure to the bulky goods market.
  • Market leading positions in key customer categories means suppliers ensure their products are available through the JBH network.  
  • Clear value proposition and market positioning (recognized as the value brand). 
  • Growing online sales channel. 
  • Solid management team – new CEO Terry Smart was previously the CEO of JBH (and did a great job and is well regarded) hence we are less concerned about the change in senior management. 

Key Risks

  • Increase in competitive pressures (reported entry of Amazon into the Australian market). 
  • Roll-back of Covid-19 induced sales will likely see the stock de-rate. 
  • Increase in cost of doing business. 
  • Lack of new product releases to drive top line growth.
  • Store roll-out strategy stalls or new stores cannibalize existing stores. 
  • Execution risk – integration risk and synergy benefits from The Good Guys acquisition falling short of targets). 

FY21 group Summary

Group sales were up +12.6% to $8.9bn, consisting of JB Hi-Fi Australia up +12.0%, JB Hi-Fi NZ up +17.4% (NZD) and The Good Guys up +13.7%. The Company saw strong demand for consumer electronics and home appliances during the period. Operating earnings (EBIT) followed strong top line growth, with group EBIT up +53.8% to $743m – driven by JB Hi-Fi Australia up +33.6% and The Good Guys up +90.2%. Group EBIT margin expanded +233bps to 8.33%, highlighting the strong operating leverage in the business. The Company declared a final dividend of 107cps (up +18.9% YoY), taking the full year dividend to 287cps (up +51.9% YoY).

Company Description  

JB Hi-Fi Ltd (JBH) is a home appliances and consumer electronics retailer in Australia and New Zealand. JBH’s products include consumer electronics (TVs, audio, computers), software (CDs, DVDs, Blu-ray discs and games), home appliances (white goods, cooking products & small appliances), telecommunications products and services, musical instruments, and digital video content. JBH holds significant market-share in many of its product categories. The Group’s sales are primarily from its branded retail store network (JB Hi-Fi stores and JB Hi-Fi Home stores) and online.

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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Technology Stocks

Walmart’s Second Quarter Suggests Continued Strength Despite Normalization

 to last year’s pandemic-sparked sales surge (5.2% comparable growth for U.S. namesake stores, 14.5% two-year stack). While Walmart beat our expectations, we attribute the outperformance to pandemic-related volatility, so our long-term targets of lowsingle- digit percentage top-line growth and mid-single-digit adjusted operating margins are intact. The top-line outperformance extended across Walmart’s segments (5.2% and 7.7% comparable growth, excluding fuel, at Walmart U.S. and Sam’s Club, versus our respective 2.6% and 4.3% forecasts, and $23.0 billion in international revenue against our $22.3 billion mark). 

Recovery in pandemic-affected categories like auto care and party augmented another strong quarter in grocery, where Walmart gained share domestically on mid-single-digit comparable growth. Cost leverage contributed to a 5.3% adjusted operating margin, up nearly 80 basis points. Management lifted full-year guidance, now calling for $6.20 to $6.35 in adjusted diluted EPS, up from around $6.03 (which was near our prior estimate, which should rise toward the top of the new range).

Walmart’s advertising business (Walmart Connect) was particularly strong, with U.S. sales nearly doubling and the

number of active advertisers up more than 170%. Although e-commerce sales consolidated gains (up 6% in the U.S. for the quarter, and 103% on a two-year stacked basis), we believe Walmart is still in the earlier stages of capitalizing on its ancillary online revenue potential

Company Profile 

America’s largest retailer by sales, Walmart operated over 11,400 stores under 54 banners at the end of fiscal 2021, selling a variety of general merchandise and grocery items. Its home market accounted for 78% of sales in fiscal 2021, with Mexico and Central America (6%) and Canada (4%) its largest external markets. In the United States, around 56% of sales come from grocery, 32% from general merchandise, and 10% from health and wellness items. The company operates several e-commerce properties apart from its eponymous site, including Flipkart and shoes.com (it also owns a roughly 10% stake in Chinese online retailer JD.com). Combined, e-commerce accounted for about 12% of fiscal 2021 sales.

(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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Commodities Trading Ideas & Charts

Investors Overlooking Occidental’s long term Cash Generation Potential

fair value is estimated to $37 per share, from $32. The increase primarily reflects a reduced cost of capital assumption. Given how quickly the firm is deleveraging it is appropriate to penalize the firm with an above average cost of debt.

The preoccupation with near-term capital returns has driven investors away from Occidental. The firm is still coping with uncomfortable leverage ratios following the ill-timed 2019 acquisition of Anadarko Petroleum, making debt reduction the only prudent use of its excess cash. The market is overlooking the firm’s relatively modest base decline. 

Oxy has a diversified portfolio, with oil and gas contributions from non-shale assets in the Middle East and the Gulf of Mexico to complement its unconventional operations in the Permian Basin and the DJ Basin. So it can more easily sustain its production than shale pure plays that must continually invest in new drilling to offset steep declines from existing wells.

Company’s performance

The firm’s enhanced oil recovery operations further reduces the base decline. The firm also generates stable cash flows from its extensive midstream and chemical segments. As a result, the firm can hold its volumes flat with a long term reinvestment rate of about 35%. And when the firm reaches its target debt level, which it can realistically do in 6 months from now, given how quickly it is generating excess cash, then that very low reinvestment rate should leave plenty of free cash to distribute. The three firms we highlighted earlier–Pioneer, Devon, and EOG–have 2025 discretionary cash flow yields of about 10% at current prices. 

Company’s Future Outlook

That means the market is baking in long-term dividend yields of around 5%, assuming these firms plan to return half of their surplus cash. In contrast, Oxy’s discretionary cash flow yields in 2025, after accounting for all capital spending and preferred dividends, is over 20% at the current price. This underscores our view that shares are undervalued.

Company Profile

Occidental Petroleum Corporation (NYSE: OXY) is an independent exploration and production company with operations in the United States, Latin America, and the Middle East. At the end of 2020, the company reported net proved reserves of 2.9 billion barrels of oil equivalent. Net production averaged 1,306 thousand barrels of oil equivalent per day in 2020 at a ratio of 74% oil and natural gas liquids and 26% natural gas.

 (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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Funds Funds

Lazard Global Small Cap Fund Updates

Well-resourced team

The Lazard Global Small Cap Fund is managed by an experienced team of 7 Portfolio Managers (most with >20 years industry experience) working as regional generalists led by Edward Rosenfield. The Portfolio Management team has been working together for 13 years on average with the lead PM having worked on the strategy for ~20 years. This makes the team one of the largest, well-credentialed and experienced teams managing FUM in the asset class. Further, the team is supported by the broader Lazard family of analysts (categorized as Global Sector Specialists). This team comprises of more than 100 investment professionals and is considered one of the largest teams. The back and middle office support provided by the wider Lazard group is a positive in our view, as it leaves the PMs to focus on investing rather than other activities.

Disciplined investment process rooted in fundamentals analysis

The Fund uses a rigorous investment process with the Managers employing an active investment style, characterised by incorporating bottom-up investment research, which is underpinned by extensive visitations and meetings with Companies and experts, in assessing fundamentals and valuations of individual securities. In our view, this should lead to the team being able to garner informational advantages and insights over their peers. Indeed, the team’s focus on companies in emerging markets, with capitalisations of between US$300m and US$5bn, or in the range of companies included in the MSCI World Small Cap Accumulation Index, is under researched and a less efficient part of the market (i.e. where mispricing of asset valuations are more prevalent), makes sense in our view.

Solid absolute performance but relative underperformance

Although past performance is not an indicator for future performance, it is an indicator of whether the Fund’s strategy has worked in the past. Although the Fund has performed well on an absolute basis, the Fund has now underperformed relative to its benchmark by ~3.6% p.a. (5 years performance numbers) and a marginal -0.8%, since inception.

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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Funds Funds

Perpetual Pure Equity Alpha Fund Updates

Highly rated PM backed by a strong team

The Portfolio Manager of the Fund, Mr. Paul Skamvougeras has extensive experience and track record as an analyst and fund manager, with 25 years industry experience and 15 years with Perpetual. Further, Mr. Skamvougeras is well supported by Mr. Anthony Aboud and the wider Perpetual team of analysts and PMs. Whilst we think highly of Mr. Skamvougeras, we are concerned about his ever-increasing responsibilities (as he is also PM of the Concentrated Equity, Pure Equity Alpha and Pure Value strategies, and Head of Research) and the time he has available for the Fund. Likewise, in our view, Mr. Aboud has significant other responsibilities as he is also PM of Perpetual’s other funds (Industrial Shares, SHARE-PLUS Long-Short) and is also an analyst.

Solid investment process backed by bottom-up research

The investment process is a bottom-up selection approach focused on quality and valuation for both long and short positions. In our view, the Fund is able to take advantage of rising and falling markets and provides useful protection for investors against falling markets.

A note on fees and benchmark

In our view, investors should be comfortable with the Fund’s fees, which are higher than its wider peer group. Furthermore, in our view, we note that the Fund’s performance is measured against the RBA cash rate (which is currently a low hurdle in our view); and in our view, a ‘more appropriate’ benchmark would be an equity benchmark, such as the ASX200 or ASX300, especially when charging performance fees.

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 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.

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LICs LICs

Australian Foundation Investment Company (ASX: AFI) Reports FY21 Earnings & Maintains Final Dividend

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

The portfolio’s dividends and distributions remained basically constant from the pcp, with the revenue fall driven entirely by a decrease in interest income from deposits.

The Company’s pre-tax NTA per share climbed to $7.45 per share at the end of June 2021, before accounting for the final dividend. This represents a 25% increase above the pre-tax NTA as of 30 June 2020.

In keeping with the FY20 final dividend, the Company declared a final fully franked dividend of 14 cents per share. The full-year dividend will be 24 cents per share, fully franked, which is the same as the full-year dividend in FY20.

The dividend paid as on 31st august is expected to be 14 cents. The current P/E is marked at 58.10 and dividend yield at 2.81%

During this time, the Company dabbled in international stocks by investing a modest portion of its capital (0.5 percent of the portfolio) in an i-”-nternational equities portfolio. (

The worldwide portfolio includes of high-quality companies with a significant competitive advantage, good growth prospects, and a diverse range of industries, as determined by the investment team.

Company profile

Australian Foundation Investment Company (ASX: AFI) is Australia’s largest life insurance company, and it has been investing in Australian and New Zealand equities since 1928. The Date of Listing of Australian Foundation Investment Company (ASX: AFI) is 30 Jun 1962. Incorporated in VIC as Were’s Investment Trust Ltd on 13/07/1928; name changed to Australian Foundation Investment Company Ltd on 25/10/1937. Australian Foundation Investment Company (AFIC) is a closed-end investment corporation. The firm focuses in Australian stock investments. The Company’s investment goal is to provide investors with investment returns in the form of steam franked dividends and capital appreciation. 

(Source: FactSet)

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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Technology Stocks

ViacomCBS Posts In-Line Q2, but Streaming Momentum Clearly Building

Top-line growth of 8% was driven by the rebound in advertising, the return of live sports, and continued streaming growth. The firm’s streaming platforms posted a strong quarter both in terms of new subscribers and monetization. ViacomCBS also announced a distribution deal with Sky to launch Paramount+ in 2022 in its Western European markets.

Global streaming subscribers increased by 6.5 million during the quarter to 42.4 million, and Pluto, a free platform, added 2.8 million monthly active users to end the quarter at 52.3 million. The recent results and the Sky agreement reinforce our view that the long-term guidance of 65-75 million streaming subscribers by 2024 is very conservative. 

While Paramount+ is only available in 25 markets, we expect much wider distribution by 2024, making the high-end target of another 33 million net adds seem very modest.

Streaming revenue exploded, up 98%, as ad revenue bounced back at Pluto and the smaller streaming platforms like Showtime and BET+ continued to grow their subscriber bases. Streaming subscription revenue improved to $481 million, up 82% year over year and subscription average revenue per user increased 4% sequentially.

 On the ad side, streaming revenue jumped by 102% to $502 million as Pluto continues to improve engagement with domestic time watched per MAU up 45% in the quarter. The June launch of Paramount+ Essential, a lower priced ad-supported tier, should help boost advertising growth.

TV Entertainment revenue increased 23% year over year. Broadcast ad revenue was buoyed by the return of the NCAA Final Four and golf tournaments along with the overall rebound in ad demand. 

Affiliate revenue, up 10%, was driven by strong reverse compensation and retransmission fee growth at the CBS broadcast network. Adjusted EBITDA for the segment dropped by 45% to $216 million as the firm continues to invest in Paramount+.

Cable networks revenue grew by 8% versus a year ago to $3.5 billion. Cable ad revenue increased by 24% as the higher pricing in the U.S. and international growth more than offset lower ratings. 

Affiliate revenue was up 9% as the expanded online distribution from services like YouTube TV and rate increases more than offset the ongoing cordcutting trend.

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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Commodities Trading Ideas & Charts

Williams’ Deepwater Whale Project One of Several High-Return Growth Opportunities

 The 2018 consolidation of William Partners strengthened Williams’ financial position and lowered its cost of capital. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets.

Most of Williams’ growth investment will be directed toward Transco expansions and projects to reduce carbon emissions. Transco capacity will reach 20 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats.

Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strength

Williams has strengthened its balance sheet and dividend coverage in recent years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and possibly repurchase shares starting in 2022. 

Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders.

The flip side was an improved credit profile, higher dividend coverage, and ability to invest in growth without issuing equity. Williams remains engaged in litigation with Energy Transfer over its $1.5 billion payment due to Energy Transfer for its alleged breach of the merger agreement. Williams is seeking damages from Energy Transfer as well and to date has not reserved anything for the $1.5 billion potential payment.

Bulls Say’s 

  • A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles.
  • After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future.
  • Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Profile 

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(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.