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Yield-oriented investors have not had an easy time of it in recent years, and with the Reserve Bank of Australia (RBA) still committed to rates staying low for some time, the yield squeeze looks like continuing this year.
There are, however, strong inflationary pressures continuing to build, as the impact of global supply chain issues, rising energy prices and pandemic-driven demand simmer away. Yet despite the threat of rising inflation forcing the RBA to raise interest rates, the return to what many investors came to believe was normal settings in the income investing space still looks a long way off.
The world of equity dividends has welcomed many yield refugees in recent years, with return streams well above what are available elsewhere – especially when franking is taken into account. For those streams, however, the yield refugees have had to understand the capital risk being borne, in terms of the risk of the share prices of their dividend-paying stocks being slashed. But on the flip side, judicious selection of stocks can enable the investor to think in terms of “total return” – dividend yield plus capital gain.
The backdrop for the share market is potentially becoming more concerning by the day, as both frothy valuations and geopolitical clouds combine to worry investors. But businesses continue to chug along, and the revenue streams they generate can give yield-oriented investors at least some confidence in the robustness of the yields they “offer” – with all of the caveats of uncertainty that accompany any discussion of equity dividends.
Here are two attractive yield candidates.
Market capitalisation: $2.6 billion
Three-year total return: 25.4% a year
Estimated FY22 dividend yield: 5.2% fully franked (grossed-up, 7.4%)
Estimated FY23 dividend yield: 5% fully franked (grossed-up, 7.2%)
Analysts’ consensus price target: $14.00 (Thomson Reuters), $14.20 (FN Arena)
Another retailer that looks to be very attractive to yield-focused investors is Super Retail, the group behind the BCF, Macpac, Rebel, and Supercheap Auto brands.
The brand portfolio appeared purpose-made for the lifestyle changes brought about by COVID, with Super Retail reporting “unprecedented” consumer demand in its lifestyle and leisure categories, which powered a terrific FY22 performance. Sales were a record $3.45bn, up 22.2%. On a comparable-stores-number base, which strips out the impact of new stores, sales rose by 22.8%, driven by BCF (up 48%) with Rebel up 17.5%, Supercheap up 16.4% and Macpac up 14.2%.
Online sales surged 43%, to $415.6 million, to represent 12% of total sales. In October, the annual general meeting was told that online sales growth was running at 96%, and was hitting 30% of total sales.
Profit rocketed in FY21, with statutory (reported) profit up 173%, to $301 million, and normalised (underlying) net profit up 107%, to $306.8 million. Earnings per share (EPS) rose 139%, to 133.4 cents. But what really caught the eye of yield-focused investors was a four-fold increase in full-year dividend, to 88 cents, in line with the company’s dividend payout ratio of giving shareholder 65% of full-year underlying net profit.
Since then, COVID-19 volatility has forced Super Retail to close stores in several states, and like-for-like sales fell by 12% in the first quarter of FY22, largely because of lockdowns affecting stores. The “cycling” effect – which refers to how the great growth numbers in FY21 are going to be very hard to repeat in FY22 – will come into play in Super Retail’s FY22 numbers, with declines forecast in EPS and dividends. But even with a lower dividend than 88 cents expected by analysts – FN Arena’s consensus figure sees 62.9 cents expected in FY22, while Thomson Reuters/Stock Doctor’s consensus projects 60 cents – the forecast grossed-up yield still comfortably exceeds 7%. Ditto for FY23. With healthy capital gain expected as well, yield investors will like those prospects – with the caveat that the December 2021 half-year result contains no shocks.
Market capitalisation: $24.4 billion
Three-year total return: –5.7% a year
Estimated FY21 (December year-end) dividend yield: 5.2%, fully franked (grossed-up 7.5%)
Estimated FY22 (December year-end) dividend yield: 7.1% fully franked (grossed-up, 10.1%)
Analysts’ consensus price target: $28.26 (Thomson Reuters/Stock Doctor), $27.79 (FN Arena)
Much of the news around Woodside Energy has been driven by the merger news with BHP, announced in August, which if approved (the merger will see BHP shareholders issued with Woodside shares: this is expected by the end of June) will create a global Top 10 independent energy company by production, and the largest energy company listed on the ASX. Perhaps overshadowed by that prospect is the improving operational performance underpinning Woodside, as the market awaits the full-year 2021 result (Woodside uses the calendar year as its financial year). Last week, Woodside reported its highest quarterly sales revenue ever – an 86% increase in sales revenue for the December 2021 quarter, to $2.9bn, driven by a 22% increase in sales volume and a 53% surge in the average realised price, to $90 a barrel-of-oil-equivalent (BOE).
On the back of a solid return to profit at the half-year result – in which revenue rose by 31%, to US$2.5bn, and Woodside reported net profit of US$317 million compared to the impairment-driven loss of US$4.1bn in 2020 – the market is crunching the numbers on both the increased scale of the merged Woodside/BHP Petroleum entity and the environment for oil and LNG pricing.
The merged company will start a diversified production mix of 46% LNG, 29% oil and condensate and 25% domestic gas and liquids, as well as a wide geographic reach with production from Western Australia, east coast Australia, US Gulf of Mexico, and Trinidad and Tobago. The enlarged Woodside would have 2P (that is, “proven and probable” reserves of more than 2 billion BOE, comprising 59% gas and 41% liquids (an industry term covering crude oil, condensate, and any finished or intermediate products manufactured or extracted in a petroleum refinery.)
The fourth-quarter report last week also formalised the final investment decisions that were made to approve the Scarborough and Pluto Train 2 projects in November, including new domestic gas facilities and modifications to Pluto Train 1. Scarborough in particular is a world-class resource, a globally competitive project; Woodside stressed that it is “amongst the lowest-carbon-intensity projects for LNG delivered to north Asia”.
Woodside expects to report 2021 net profits in February 2022 of about US$1.1bn – a significant increase over the 2020 net profit of US$447 million. There is a strong outlook for global gas demand, and the sector is yet to benefit from recovering oil prices. Further, analysts expect 2022 to be an even better year, as gas prices look increasingly buoyant. The cash flows pulsing through Woodside could lead to a dividend bonanza: analysts have dividend expectations for Woodside in 2022 that should comfortably result in a grossed-up yield of at least 8.7% – and possibly, even a double-digit yield in AUD terms.
Investors must understand that expectations are only that: it is uncertain what dividend payout ratio Woodside will apply to the dividend. Until recently, analysts were expecting about 66% of net profit – and there were expectations as high as 80% – but the final figure could come in as low as 50%. On the flipside, whatever payout ratio Woodside uses will apply to increased earnings.
However, an added bonus for yield-seeking investors is that WPL is still viewed as under-valued in share price terms – which raises hopes of a quite attractive total-return scenario.
James Dunn is an author at Switzer Report. All prices and analysis at 24 January 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.