Sorting the sexy stocks from the dividend deliverers
To which class do you belong: those playing pass-the-parcel with overpriced growth stocks or those quietly fishing in the dividend stream?
Mentioned: Amcor PLC (AMC), Orora Ltd (ORA), Precinct Properties NZ Ltd & Precinct Properties Investments Ltd (PCT), Pact Group Holdings Ltd (PGH), Westpac Banking Corp (WBC), Zip Co Ltd (ZIP)
While much of the focus this week was on Westpac’s move to swap one buy now, pay later player (Zip) for another (Afterpay), wiser heads were looking at a more pressing question: where to get income.
The best line of the week arguably belonged to Investors Mutual’s stony-faced portfolio manager Simon Conn. “There are two classes of people when you look at the market,” Conn told a webinar on Thursday. “There's people that are speculating—they're playing pass-the-parcel. They're buying a share today, thinking that someone's going to buy it at a higher price tomorrow. And then there's those that are investing; people looking at the underlying quality of the businesses when they buy shares and appraising the valuation and looking to get a reasonable return over the next four to five years through some earnings-per-share growth and a dividend stream.”
Conn backed up his rhetoric with several suggestions on where to look for dividends. In packaging, he likes Pro-pac Packaging (ASX: PPG), Pact Group (ASX: PCT) and Orora (ASX: ORA). In utilities, he suggests AusNet Services (ASX: AST), Genesis Energy (ASX: GNE) and Spark Infrastructure (ASX: SKI), while in consumer staples he singles out Metcash (ASX: MTS).
One man with an even bigger list of companies that have the potential to offer a sustainable dividend is Morningstar equity analyst Brian Han. To whittle down his selection, Han applied four filters: track record of delivery; favourable dividend growth outlook; sustainability of forecast dividends; and whether current prices represent valuation.
This process spat out 18 names, including the aforementioned Orora as well as another packaging name, Amcor (ASX: AMC). Han admits that some investors may baulk at the absence of “sexy” names on his list of “boring but high-yield” shares. But as Conn’s IML colleague Hugh Giddy neatly put it, “we value companies that can pay us a dividend now—not in ten years.”
And while we’re being sensible, we should note Han’s warning: dividends are not guaranteed. Keep in mind that dividend sustainability is inextricably tied to a company’s earnings sustainability and its “moatiness”, or sustainable competitive positioning.
“Seeking highest-yielding stocks in isolation, without recognising the risks accompanying all the precedent variables, is like backing a horse just because it has a high winning percentage, without recognising it has been racing against donkeys in Gulargambone.”
As the world picks the bones out of the final debate before the US election, we examine the possible effect it will have on markets. Graham Hand begins the discussion in Firstlinks by looking at the staggering rise in campaign funding. As it happens, Hand at one point had the ear of former US vice president Al Gore, who revealed that he had raised US$70,000 from his own purse—and that of family and friends—to run.
“If he wanted to run for the same position again,” Hand notes, “he would need at least US$100 million. And that was 13 years ago.
“To an Australian, the numbers spent on political advertising in the US are unbelievable,” Hand writes. “Joe Biden will spend twice as much as Donald Trump by election day, the combined total reaching an estimated US$2.8 billion just on TV advertising.”
Morningstar analysts Dave Sekera and Charles Fishman expand our election coverage by coming at it from a couple of angles. Sekera examines the contrasts between the two parties when it comes to tax, international relations, infrastructure and how companies would fare. Fishman explores what a Biden presidency could mean for utilities.
Andrew Willis looks at it from an investor’s perspective. Before you do anything, consider historical patterns, what’s different, and what you can handle, Willis writes.
As the Democrats and the Republicans continue to wrestle over a covid stimulus package, Sekera delivers a fascinating long read on how the pandemic has changed both consumer behaviour and company valuations. He focuses on what the first pandemic in the era of social media means for technology, hospitality and ecommerce.
On the local front, we talk to Morningstar analysts Nathan Zaia and Shaun Ler about Afterpay in the wake of its tie-up with Westpac (ASX: WBC). Afterpay may have cracked the $100-a-share club this week but it remains significantly overvalued, Ler tells Emma Rapaport. See if you agree by clicking here.
Despite the pandemic, initial public offerings have performed well overall, and much better than they did in 2019 or 2018, writes Nicki Bourlioufas.
Guest contributor Arian Neiron from Van Eck makes the case for real estate investment trusts.
Morningstar’s Mark Preskett gives Holly Black three reasons why bonds should feature in your investment tool box.
Financial blogger and author Jim Dahle, also known as "The White Coat Investor", argues that investors do better when they don't overthink investment selection and asset allocation.
And finally, in Your Money Weekly, Peter Warnes writes that a Melbourne Cup Day rate cut is firming as odds-on favourite with quantitative easing a close second.
And a reminder: the Morningstar Individual Investor conference—now virtual—is fast approaching. Join us on October 29-30 from wherever you are for two days of analysis and insights. Featuring Hamish Douglass, Kate Howitt, Noel Whittaker, Gemma Dale, Anton Tagliaferro, Diana Mousina, Chris Cuffe, Peter Warnes and more. 1700 registrations and counting.
Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.