Five dividend stocks for the new year

If you are after dividend income, then you probably don’t need to go much further than the likes of Fortescue Metals (FMG), BHP or RIO. Fortescue, for example, is forecast to pay a dividend of 270c in FY21, putting in on a prospective yield of around 11.7% (fully franked), However, for FY22, that’s forecast to drop to 189c and yield of 8.3%.

It wasn’t that long ago that Fortescue was a $4 stock rather than today’s almost $23. This highlights the challenges in looking at resource companies for income – they have absolutely no control over the prices they receive for their output. If China eases back on demand, or the world’s largest producer, Brazilian miner Vale, is able to resume full production, the iron ore price could tumble – and with it – the share price and juicy dividends.

My idea of a good income stock is something that is pretty boring, reliable, and importantly, relatively capital stable. This means that it shouldn’t go down much in price and also, unlikely to go up much in price.

Here are 5 dividend picks for 2021.

 

1.     Charter Hall Long WALE REIT (CLW)

Charter Hall Long WALE REIT is a $4.2bn  property trust that owns a portfolio of high quality real estate assets with a long WALE (weighted average lease expiry). The WALE is currently 14.2 years.

There are 459 assets across industrial and logistics, retail, office, telco exchanges and agri-logistics. By value, approximately 26% is in industrial, 29% in retail (BP service stations, pubs and bottle shops), 24% in office and the balance in telco exchanges and agri-logistics. The portfolio occupancy is 97.3%.

Portfolio credit quality is high with 77% of tenants (by income) independently rated ‘investment grade’. Of the balance, this includes names such as Brisbane City Council, Inghams and Arnott’s.

It has just completed a $250m institutional placement at $4.65 per share, which is being used to fund the purchase of a telco exchange in Sydney (76-78 Pitt St) and a Bunnings development in Caboolture in Queensland.

In FY20, CLW delivered operating earnings of $121.9m, or 28.3c per unit. It has a policy to payout 100% of operating earnings (net property income less operating expenses and finance costs), and paid out 28.3c per unit in distributions.

For FY21, it has guided to operating EPS of no less than 29.1 cents per unit, reflecting operating EPS growth over FY20 of no less than 2.8%. The target distribution payout ratio remains at 100% of operating earnings, or no less than 29.1 cents per unit.

 

Charter Hall Long WALE REIT (CLW) – 12/19 to 12/20

 

At a market price of $4.70, this puts CLW on a prospective yield of 6.2% (unfranked).

The brokers remain favourably disposed. According to FN Arena, of the 4 major brokers that cover the stock, there are 2 buy recommendations and 2 neutral  recommendations. The consensus target price is $5.21 (range $4.81 to $5.47), a 10.9% premium to the last ASX price of $4.70. The reported NTA (post the acquisition) is $4.71.  

 

2.     APA Group (APA)

APA owns and operates about $22bn of energy infrastructure assets. This includes 15,425km of gas transmission pipelines, 29,500km of gas mains and pipelines that connect to 1.4m gas consumers, gas fired power generators, wind and solar energy generators, gas storage and gas processing facilities, and electricity transmission lines.

Overall, approximately 90% of APA’s revenue is ‘take or pay’ being either capacity charge revenue, regulated revenue or contracted fixed revenue. This means it is relatively fixed and not subject to short term variable demand. APA says it is supported by long term contracts with customers of whom 93% are investment grade quality, and that the revenue weighted average contract tenor remaining is 12 years.

Because the revenue is reasonably predictable and the assets are capital rather than labour intensive, APA is able to guide with a high degree of confidence its expected financial outcomes. For FY20, APA delivered EBITDA of $1,654m. This was right in line with the market’s forecast and at the top end of APA’s earlier guidance. For FY21, it has guided to EBITDA of being in the range of $1,625m to $1,665m, with interest expense of $490m to $500m (FY20 was $497m). Importantly, it left its distribution guidance for FY21 to be “substantially in line with FY20 distributions” – 50c per share.

Based on an ASX price of $10.24, the 50c distribution (of which about 7c will be franked), puts it on a forecast yield of 4.9%. With franking it grosses up to 5.2%.

 

APA Group – 12/19 to 12/20

As an investment thesis, APA has a low risk business model built around stable cash flows, majority take or pay contracts with CPI adjustments, long term contracts, established customer relationships and a portfolio of high-quality long life assets. Its strong credit metrics (it has an investment grade rating) provide balance sheet flexibility.

The broker analysts have a target price of $11.42 for APA, 11.5% higher than the last ASX price of $10.24. There are 4 buy recommendations and 3 neutral recommendation (no sell recommendations).

 

3.     Medibank Private (MPL)

Despite the challenges facing private health insurance, in particular participation and affordability, I like Medibank Private because over the last few years, it has increased its number of policyholders and its market share. When you are the clear market leader in a highly regulated market, this is hard – so this tells me that under CEO Craig Drummond, the team at Medibank is executing well. Further, it is advancing a number of initiatives such as in-home care, health and wellbeing services, and telehealth ancillary services to create a competitive advantage in health insurance.

Over the course of FY20, it grew policyholders by 0.6% or 10,600. An increase of 28,400 in the ‘ahm’ brand offset a decrease of 17,800 in the ‘Medibank’ brand. This was lower than anticipated due to Covid-19 suspensions. Market share increased by a net 0.04%. For the first four months of FY21, Medibank reported net customer growth of 41,100, with about one-third in the main Medibank brand.

In Medibank’s main health insurance division, operating profit fell from $542.5m in FY19 to $470.6m in FY20. This represented a deterioration in operating margin (profit as a share of revenue) from 8.4% to 7.2%. An increase in net claims expense of 3.2% couldn’t be offset by an increase in net premium revenue of 1.3% and a reduction in management expenses.

For FY21, Medibank said that it expects net claims expense to increase broadly in line with FY20, implying a small deterioration in margin. Against this, it has a productivity target of $20m and it aims to increase policyholders by 2%.

It also says that the dividend payout ratio is expected to be at the top end of the target range of 75% to 85% of underlying NPAT, compared to a payout ratio of 90% for FY20. This implies either a very modest cut or no change to the 12c dividend paid for FY20.

 

Medibank Private (MPL) – 12/19 to 12/20

On consensus, the major brokers forecast a dividend for Medibank in FY21 of 11.9c (range 11.0c to 13.4c), and for FY22, a dividend of 12.1 cents. Based on the last ASX price of $2.83, his puts the stock on a prospective yield of 4.2% (fully franked), or grossed up, 6.0%. The consensus target price is $2.86.

 

4.     Telstra (TLS)  

At the Telstra AGM in October, Chairman John Mullen removed one of the major uncertainties hanging over the stock and effectively committed to maintaining the dividend at 16c per share. He said:

“the Board clearly understands the importance of the dividend and if necessary is prepared to temporarily exceed our capital management framework principle of paying an ordinary dividend of 70% to 90% of underlying earnings to maintain a 16c dividend”.

Telstra has previously said that to maintain the dividend at 16c post the NBN, it needed to achieve underlying EBITDA in the order of $7.5bn to $8.5bn. In FY20, it earned $7.4bn and for FY21, it has guided to EBITDA of $6.5bn to $7.0bn (due to Covid-19 costs of $400m, up from $200m in FY20, and NBN headwinds of around $0.7bn).

Mullen alluded to a softening on this position, saying that the factors the Board would consider include:

• Whether an underlying EBITDA of $7.5bn to $8.5bn post the rollout of the NBN is achievable.
• Whether the free cash flow dividend payout ratio remains supportive and we retain a strong capital position; and
• Whether there are other factors that would make the payment of the dividend at that level imprudent.

The “guarantee” around the dividend  isn’t a reason to invest per se, but you can make a case that at around $3.00, downside for Telstra looks limited:

• It has convincingly bounced off the $2.50 - $2.75 level again
• Competitive pressures in the mobile market have eased, and Telstra is the clear leader in 5G
• The infrastructure spin-offs are seen by the market to be unlocking value
• There is increasing confidence that headway is being made in achieving “post NBN” earnings growth, and
• Covid-19 pressures are easing.

 

Telstra - 12/19 to 12/20

The major brokers are bullish on the stock. According to FN Arena, the consensus target price is $3.49, 15.2% higher than the last ASX price of $3.03. Range is $3.00 to $3.85, with 4 buy recommendations, 1 neutral recommendation and 1 sell recommendation.

A 16c dividend has Telstra trading on a prospective yield of 5.3% (full franked).

 

5.     JB Hi-Fi (JBH)

One of my favourite stocks, Australia’s best retailer JB Hi-Fi is likely to be more volatile than the other stocks and is arguably “riskier”. But it has a stellar record of increasing sales, increasing earnings and increasing dividends.

It has been a huge winner out of the  Covid-19 pandemic as “stay at home” consumers stocked up on electronic goods, home entertainment products and home furnishings. The market is a touch worried that into 2021 and 2022, earnings will fall as sales return to a more normal trajectory.

The JB Hi-Fi strategy is pretty simple. Two leading retail brands: JB Hi-Fi with a focus on technology and consumer electronics; and The Good Guys with a focus on home appliances and consumer electronics. The former targeting a young tech savvy demographic, the latter home-making families and Gen-X. A value proposition of “the best brands at low prices”, supported by exceptional customer service across multiple channel (in-store, online, phone and commercial).

Underpinning this approach is what the Group sees as its competitive advantages: scale, low cost operating model, quality store locations, strong supplier partnerships and multi-channel capabilities.

In FY20, total group sales rose by 11.6% to $7.9bn. JB Hi-Fi Australia grew comparable store sales by 12.2%. Sales momentum was strong through the year and accelerated in the fourth quarter as customers spent more time working, learning, and seeking entertainment at home. Comparable store sales for the Good Guys grew by 10.8%.

Despite additional operating costs, the increase in sales allowed JB Hi-Fi to improve its net margin, with EBIT as a proportion of sales increasing from 5.25% to 6.14%. Underlying NPAT increased by 33.2% to $332.7m, and dividends increased by 33.1% to 189 cents per share.

Buoyant trading conditions continued into the first quarter of FY21, with JB Hi-Fi Australia reporting comparable stores sales growth of 27.7% (compared to the same quarter in FY20). The Good Guys did even better, with sales on a comparable stores basis up 30.9%.

At its AGM on 29 October, CEO Richard Murray said that “he was pleased to report very strong sales growth”, notwithstanding that this period covered the Victorian lockdowns and the temporary closure of JB Hi-Fi’s metropolitan Melbourne stores. He went on to say that “while the Group is pleased with its start to FY21, due to the uncertainty arising from Covid-19, the Group  does not consider it appropriate to provide FY21 guidance”.

 

JB Hi-Fi -12/19 to 12/20

Each of the major brokers is “neutral” on JB Hi-Fi. According to FN Arena, they see moderate   upside with a consensus target price of $48.05, about 9.2% higher than the last ASX price of $44.02. The range is a low of $41.40 to a high of $50.62.

For shareholders, a fully franked dividend of 208 cents is forecast for FY21 (current yield of 4.7%) and for FY22, 174 cents (current yield of 3.9%.).

Prices, forecasts as at 11/12/20.