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Five (unusual) fully franked dividend candidates

For those with the risk appetite, James Dunn looks at five out-of-the-ordinary ideas for income-reliant investors.

With the recent rate cut, the income dilemma for yield-reliant investors only got worse. Investors barely receive 2% for cash deposits these days, and with little prospect of an end to the low-interest-rate environment in sight – in fact, further cuts from the Reserve Bank of Australia (RBA), the simple fact is that investors continue to look to the share market for yield.

As we have mentioned many times in the Switzer Report, there are inherent problems with this strategy: primarily, that the dividend payments that generate the yield from a stock cannot be considered certain. At any reporting period, the dividend can fall (or even, in drastic circumstances, be cut altogether.) Bank investors are dealing with this problem

The other main risk is that while you are holding the shares for yield, the share price can fall – just ask Telstra’s legion of retail shareholders.

But with the average dividend yield on the Australian Securities Exchange (ASX) running at about 4.2%, according to Stock Doctor – which full franking augments to 6% – investors who understand the risks can reasonably expect to push their portfolio yield higher, using shares.

Here are five more candidates to be considered for an ASX yield portfolio.

1.     Fortescue Metals Group (FMG:ASX)

·        Market capitalisation: $26.4 billion

·        12-month total return: 115.5%

·        FY20 forecast yield: 9.4%, fully franked

·        Analysts’ consensus target price: $7.81 (Thomson Reuters), $7.49 (FN Arena)

The rivers of cash flowing out of Fortescue Metals Group’s operations were starkly revealed in May when the iron ore heavyweight declared a 60-cent special dividend, following 30 cents per share of dividends declared in February, of which 11 cents per share was described as a special dividend.

Fortescue’s policy is to pay out 50-80% of net profit: if there is no further top-up when the FY19 results are reported in August, the dividend declared so far would represent a 73% payout – and a fully franked yield of 10.4%.

Iron ore prices were not expected to be above US$100 a tonne by this stage – up more than 40% from the start of the year – but the supply problems that have hit big Brazilian miner Vale in the wake of tailings dam collapses, combined with record Chinese steel production, have pushed it to bonanza levels.

And strong prices will stay around longer than expected: Vale has indicated that it will produce at about three-quarters of its capacity this year, and analysts suspect that the big Brazilian getting back to full production (about 400 million tonnes a year) will take longer than the market expects. Iron ore may well return back to high double-digits in price, but it is likely to remain higher than the Australian miners expected, for longer.

And with Fortescue’s continued efforts on costs delivering a C1 (cash) cost of US$13.11 a tonne in the first half, the iron ore price strength is generating huge amounts of cash for the miner. It is realising a sale price of more than US$80 a tonne.

On Thomson Reuters’ collation of forecasts, analysts expect at least 81 cents a share in dividends from FMG in FY20; FN Arena’s collation has it as high as 106.9 cents (using current exchange rates: FMG reports in US$). Those estimates place FMG on an expected FY20 yield of at least 9.4% – and possibly as high as 12.4%. And with full franking, that means you are talking about a grossed-up yield possibly getting above 17%.

It is a bonanza, and eventually iron ore prices will come down, but Fortescue looks capable of pumping out a stand-out yield in FY20. However, given that the share price has almost doubled in the last 12 months, scope for further price gain is limited. And when the iron ore price falls, so will Fortescue.

2.     Alumina (AWC:ASX)

·        Market capitalisation: $7.0 billion

·        12-month total return: –0.4%

·        FY20 forecast yield: 8.5%, fully franked

·        Analysts’ consensus target price: $2.54 (Thomson Reuters), $2.55 (FN Arena)

Alumina, which owns 40% of the Alcoa World Alumina & Chemicals (AWAC), the world's largest alumina business, in joint venture with US partner Alcoa, is in a similar position to Fortescue, in that it is making hay while the sun shines – its major rival, Alunorte in Brazil, the world’s largest alumina refinery (owned by Norwegian company Norsk Hydro), which is responsible for 6% of global supply, has been running at half-capacity for more than a year, curtailed by Brazilian authorities amid environmental concerns.

Alunorte being hamstrung – and problems at other producers such as Rusal in Russia – has been a major factor in the record alumina prices that powered a 167% surge in revenue for AWC in 2018, driving an 87% rise in net profit and a 68% lift in dividends.

Alunorte has been cleared to resume production, and Alumina Limited has told its shareholders that the high commodity prices and profits enjoyed last year are unlikely to be repeated in 2019 and 2020. The company also said that having spent the past five years trimming marginal assets from AWAC, it was time for the joint venture to resume investing in growth, which will likely affect its shareholder returns for several years. AWA will spend money on assets such as the Pinjarra and Wagerup alumina refineries in Western Australia, and divert money from the flow of cash to shareholders’ pockets.

AWC will not realise the same selling prices in 2019 and 2020 as it did in 2019 – that is obvious. But even at lower revenue, profits and dividends, AWC is still looking an attractive yield proposition. Thomson Reuters’ analyst forecast collation expects 20.7 Australian cents in dividends in 2020; FN Arena expects about 24 cents. That indicates that shareholders can reasonably expect a fully franked yield of about 8.5%–9.9% in 2020 – or about 12.2%–14.1% grossed-up. With a small amount of price gain forecast, plenty of yield-oriented investors would find that a decent proposition.

3.     Adairs (ADH:ASX)

·        Market capitalisation: $321 million

·        12-month total return: –5.9%

·        FY20 forecast yield: 8.3%, fully franked

·        Analysts’ consensus target price: $2.39 (Thomson Reuters), $2.43 (FN Arena)

Home furnishings retailer Adairs is exposed to the housing market downturn, but is defying the headline trend admirably, leveraging its 170-store network, increasing online sales and expanded category range to post good figures. Quite simply, the company’s customers are still furnishing their homes. The first half delivered a 10.6% increase in sales, to $164.4 million, and a 9.1% rise in net profit, to $14.9 million. In the first half result, Adairs lifted its dividend payout ratio from 55%–70% of net profit, to a 60%–85% range, and stated that the second half had begun strongly,

But the company did slightly downgrade its full-year earnings guidance, from a range between $47.5 million–$51.5 million, to between $46 million–$50 million, as it braces for the impact of a weakening dollar and “a potentially more challenging consumer environment.”

Adairs’ strategy is based on being the store to which customers go to furnish their living, entertaining and functional spaces. Through focusing on furnishing more of its customers’ homes it wants to grow its share of their purchases, rather than identifying and converting new customers.

Analysts expect dividend growth to pick-up in FY20: Thomson Reuters’ consensus is looking for 16 cents, while FN Arena expects 16.3 cents. That places ADH, at $1.935, on 8.3%, with full franking grossing that yield up to 11.8%. Trading at a price/earnings (P/E) ratio of just 9.2 times earnings, and with analysts seeing plenty of room for the share price to move higher, Adairs ticks a lot of boxes for investors at the moment.

4.     G8 Education (GEM:ASX)

·        Market capitalisation: $1.4 billion

·        12-month total return: 32.2%

·        FY20 forecast yield: 5.5%, fully franked

·        Analysts’ consensus target price: $3.45 (Thomson Reuters), $3.42 (FN Arena)

Childcare operator G8 Education has built a strong position in the industry with its 502 centres located around the country (as well as 17 in Singapore), a position that means it benefits as childcare centre supply concerns start to ease. The extra childcare spending promised by Labor in the recent election campaign was seen by the stock market as a risk for G8, as it may have attracted into the sector lower-quality operators: the industry had only just seen a supply increase, the result of an overbuild by some participants in 2017, get back toward normal – G8 sees more favourable conditions in the market this year.

G8 is now poised to maximise the benefit of its market position, with the company expecting its 2019 occupancy to come in at the upper end of its previously stated guidance range of an increase between 1%–2%, but with occupancy and profit growth skewed to the second half of the year. With G8 having a December financial year, the implication was that the first-half (June) result may not be all that impressive.

However, analysts expect healthy growth in earnings and dividends for GEM in FY20, with Thomson Reuters’ consensus expectation of a 17-cent dividend in FY20 (up from an expected 14 cents in 2019), and FN Arena only slightly lower, at 16.8 cents. If borne out that would have GEM, at $3.10, on a FY20 fully franked yield of 5.5%, grossing-up to 7.8% – with the added allure of expected reasonable share-price growth.

5.     Accent Group (AX1:ASX)

·        Market capitalisation: $739 million

·        12-month total return: –6.3%

·        FY20 forecast yield: 6.2%, fully franked

·        Analysts’ consensus target price: $1.61 (Thomson Reuters), $1.56 (FN Arena)

Footwear retailing group Accent is the company behind brands such as The Athlete’s Foot, HYPE DC, Merrell, Platypus, Skechers, Dr. Martens, Vans and CAT. The Brett Blundy-backed company posted a buoyant first-half, with a 27.3% increase in net profit to $32.2 million, on the back of an 11% rise in sales. Operating cash flow surged by 59%. This enabled the company to lift its interim dividend by 50%, from 3 cents to 4.5 cents. This represents a payout ratio of 79.1%, and the company says it expects to pay out a range of 75%–80% of net profit.

In terms of guidance, Accent Group says it expects at least 10% growth in EBITDA (earnings before interest, tax, depreciation and amortisation), which gives room for a dividend boost at the full-year in June.

For FY20, on Thomson Reuters’ collation, analysts expect 8.6 cents a share in fully franked dividends; FN Arena posits 8.4 cents. That prices AX1 shares on an expected FY20 yield of 6.1%–6.3%, which grossed-up to 8.7%–8.9% – again, with consensus share price targets implying attractive upside, too.


About the Author
James Dunn , Switzer Group

James Dunn is an author at Switzer Report, freelance finance journalist and media consultant. James was founding editor of Shares magazine, and formerly, the personal investment editor at The Australian. His first book, Share Investing for Dummies, was published by John Wiley & Co. in September 2002: a second edition was published in March 2007, and a third edition was published in April 2011. There have also been two editions of the mini-version, Getting Started in Shares for Dummies. James is also a regular finance commentator on Australian radio and television.