Four income stars from reporting season
Company earnings season, the time when most listed ASX companies report their half year or full year earnings, is drawing to a close. One of the highlights has been the robustness of dividend payments, with many companies increasing their ordinary dividend or adding to the total payment by including a special dividend,
Here are four stocks that stood out from an “income” sense in that they offer attractive dividends with reasonable security.
1. Coles (COL:ASX)
I wrote after the conclusion of the last reporting season that Coles was “boring and reasonably predictable, with annuity like characteristics. A buy around $11.00, sell around $13.00.” This was well before the RBA joined the global bandwagon of cutting interest rates, and this range now looks too low by a couple of dollars.
Coles didn’t disappoint with its full year report last week. While not setting the world on fire, it was able to report its first positive increase in earnings by the supermarkets division since 2016, which contributes almost 90% of group earnings. Sales growth of 3.2% and an improved gross margin offset higher cost of doing business to deliver EBIT growth of 2.2%. Earnings from liquor were up 8.4%, while the convenience business (Coles Express) was impacted by lower fuel volumes.
For shareholders, Coles announced the payment of a final dividend of 35.5c per share, comprising an ordinary dividend of 24c for the half year and a special dividend essentially for the period from the date of separation from Wesfarmers on 28 November 2018 to 31 December 2018. In aggregate, this was higher than expected.
For FY20, the analysts are forecasting a total dividend of 54.7c, rising to 57c in FY21. This is fully franked, and puts Coles on a prospective yield of 4.0% (stock price $13.80). This grosses up to 5.6%.
Cash flow generation remains strong, and while Coles is likely to report weak Q1 comparable store sales growth (due in part to cycling the success of the Little Creatures promotion of 2018), it is on the “up” as the refreshed management team drives it forward. For a number ‘two”, it is not that cheap on a multiple of 21.8 times forecast FY20 earnings. However, it remains “boring and reasonably predictable”.
2. JB Hi-Fi (JBH:ASX)
Australia’s best retailer, JB Hi-Fi reported:
- Net profit up 7.1% to $249.8m. This exceeded JB-Hi Fi’s prior guidance of NPAT to be in the range of $237m to $245m (up 1.6% to 5.1%);
- Sales up 3.5% to $7.095m;
- Earnings per share up 7.1% to 217.4 cents per share;
- Dividends for the full year up 10c to 142c per share (fully franked), with a final dividend of 51c per share (up from 46c);
- Cost of doing business (salaries, rent, advertising) up very marginally from 14.82% of sales to 14.89% of sales;
- Net debt down to $319.9m; and
- Return on invested capital up from 26.1% to 27.3%.
The following graphs show the company’s track record over the last 5 years
Source: JB Hi-Fi
Looking ahead, JB Hi-Fi has provided guidance for group sales in FY20 of $7.25bn (2.4% growth for JB Hi-Fi Australia and 1.5% for The Good Guys). “Whilst we continue to see variability in the sales environment, we enter FY20 confident in our ability to execute and grow market share”. They also reported that July had started well for JB Hi-Fi Australia (sales up 4.1% in total, with comparable store sales up 3.2%).
The brokers forecast JB Hi-Fi to pay a dividend of 143.3c for FY20 and 144.2c for FY21. Based on a stock price of $31.60, this puts it on a prospective yield of 4.5% (fully franked).
The JB Hi-Fi share price has surged since the release of it financial report (up more than 13%, plus paid out a dividend of 52c ) as short sellers rush to cover positions. Although trading on attractive multiples (about 14 times forecast FY20 earnings), it may be a stock to consider when the short squeeze ends.
3. Medibank Private (MPL:ASX)
The encouraging part of the Medibank Private result was that total policyholder numbers rose and Australia’s largest private health insurer gained market share. Over the course of the year, Medibank added a net 15,700 customers. While Medibank’s low cost ahm brand added 28,700 customers and the premium Medibank brand offering lost 13,000 customers, the latter slowed in the second half and almost held its ground. The company expects the trajectory for the Medibank brand to stabilise by end FY20 and grow during FY21.
Financially, group operating profit rose by 1.9% to $528.5m and group NPAT by 3.2% to $437.7m. Health insurance operating profit rose by 1.3% from $535.6m to $542.5, with the important management expense ratio (this is the proportion of health insurance premiums that go to meet administration and sales costs).falling by 0.10% from 8.8% to 8.7%.
For shareholders, Medibank declared a final dividend of 7.4c per share, taking the full year ordinary dividend to 13.1c per share (up from 12.7c for FY18). Medibank also declared a special dividend of 2.5c per share following a reduction in its target capital range (from 12-14% of premium revenue to 11-13% of premium revenue).
Looking ahead, Medibank said that it would also lift its target dividend payout ratio from 70% - 80% of underlying NPAT normalised for investment market returns to a range of 75% - 85% of underlying NPAT (it paid out 80% in FY19).
At a stock price of $3.44, Medibank is yielding a prospective 3.8% (fully franked).
Although Medibank is executing well, industry headwinds (falling private health insurance members, the rising cost of health) means that there are hard yards ahead. The brokers, unsurprisingly, are neutral to somewhat negative on the stock. According to FN Arena, the consensus target price is $3.12 (range $2.75 to $3.60).
A positive is that under the Coalition Government, the risk of Government intervention in the private health insurance market has faded. Another positive is that the dividend is attractive and looks secure, but growing it could be really hard.
4. Telstra (TLS:ASX)
Telstra wasn’t a star of reporting season, but it did do enough to suggest that its dividend is fairly secure. It broadly met market expectations and guidance when it reported NPAT for the year of $2.1bn. Key numbers included:
- Revenue down 3.6% to $27.8bn;
- EBITDA down 21.7% to $8.0bn and underlying EBITDA down 11.2% to $7.8bn; and
- A full year dividend of 16c, fully franked (down from 22c in FY18).
The highlight of Telstra’s report was their guidance for next year (FY20) and a statement that underlying EBITDA, excluding NBN headwinds, could grow by up to $500m or almost 7%. Importantly, this compares to a decline of 4% this year (FY19).
But the headwinds from the NBN (which is the impact of Telstra’s transition from the national wholesale provider, and in the case of fixed broadband to becoming just a retailer) are expected to be between $800m and $1 billion in FY20. This means that Telstra’s EBITDA will decline again in in FY20 to a range of $7.3bn to $7.8bn (this compares to a proforma $8.2bn for FY19, after adjusting for a change in the accounting treatment of leases).
The NBN is estimated to have already cost Telstra an annualised $1.7bn in earnings. Telstra says that it is about “half- way through”, so by the time the migration is complete, the negative recurring impact on Telstra’s EBITDA will be around $3.5bn. This is about $500m higher than previously estimated.
To mitigate against the impact of these NBN headwinds, Telstra has initiated a productivity and cost out program that is targeting an annualised $2.5bn saving in costs by FY22. Savings of $1.17bn have already been identified, and according to Telstra, it is “on-track” for the target.
Bright spots included a net gain of 370,000 post-paid mobile customers, and a share of new NBN retail connections of 49%. The rollout of 5G services is progressing, with Telstra expecting to increase its coverage fivefold over the next 12 months.
The result was sufficient for brokers to confirm their forecast of dividend payments of 16c per share (fully franked) for both FY20 and FY21. This puts Telstra on a prospective yield of 4.3% (which grosses up to just over 6.0%).
They also see some limited upside in the share price of Telstra. According to FN Arena, the current consensus target price is $3.91, with individual broker prices ranging from a low of $3.20 to a high of $4.49. However, with hard yards ahead in relation to its cost out program and translating its leadership in 5G into revenue growth, getting through $4.00 could prove to be a challenge.