5 stocks tipped to deliver solid dividends
These companies spanning childcare, financials, listed property and fuel retailing are some of the highest dividend-yielding stocks under Morningstar’s research coverage.
These companies spanning childcare, financials, listed property and fuel retailing are some of the highest dividend-yielding stocks under Morningstar’s research coverage.
Retail-centric global listed real estate company Unibail-Rodamco-Westfield (ASX: URW) tops the list, which we generated using Morningstar’s share screener to determine which stocks have the best dividend outlook into fiscal 2020.
The narrow moat company is Europe’s largest listed commercial property manager, overseeing around 65 billion Euros of commercial property – the majority in shopping centres (87 per cent), offices (7 per cent) and convention centres (6 per cent).
Though Unibail-Rodamco's underlying earnings per share declined slightly during the first half of fiscal 2019, Morningstar Australia’s director of equity research Adam Fleck views this as a reasonable outcome given the challenging retail backdrop.
The earnings decline mainly reflected previous asset disposals, which were partially offset by strong operating performance, improved financing conditions, and the implementation of a new accounting standard,” he says.
Management announced a distribution of 5.40 Euro for the first-half last month, which Fleck says is on track to meet Morningstar’s 10.80 Euro for the full year.
“At current levels, the stock is undervalued relative to our fair value estimate, and we think the market is overestimating the impact of retail headwinds ,” he says.
Calling out the challenges of increasing penetration of online shopping and flow-on affects on tenant sales, tenant demand and the rate of rental increases, Fleck believes the company will continue to perform relatively well.
“The retail strategy focuses on premium malls in built-up or inner-city locations, high foot traffic and an affluent demographic, which will support net group rental income growth of around 3 per cent per year on average for the next five years, which is broadly in line with the current pace.”
Trans-Tasman fueler
New Zealand-based dual-listed fuel retailer Z Energy (ASX: ZEL) ranks second in this list, with a projected dividend yield of more than 8 per cent.
Since it was spun out of Shell New Zealand almost 10 years ago, Z Energy has become New Zealand’s largest stand-alone retailer of refined petroleum products, providing almost half the nation’s transport fuel.
Morningstar senior equity analyst Mark Taylor maintained his fair value estimate last week, despite management’s 8 per cent downgrade of its fiscal 2020 earnings guidance.
“We continue to see no long-term implication in the drivers, including unsustainable retail price competition and fuel discounting, exacerbated by cyclically low regional refiner margins.
“These are the same elements detracting from the current earnings of Australian counterparts Caltex Limited and Viva Energy Group,” Taylor says.
He notes yield is the key attraction for investors, and the shares remain material undervalued in relation to this metric.
“We suspect that the market is overly focused on the low growth outlook rather than the income appeal of the stock. We applaud Z’s focus on shareholder returns,” says Taylor.
“The company’s strategy of optimising the asset base and improving operating efficiency continues to pay off – return on equity is consistently above Australasian peers, and we expect this to continue to support the yield if not growth.”
Pendal's 'pristine' balance sheet
In third place sits Australian asset manager Pendal Group (ASX: PDL). Morningstar equity analyst Chanaka Gunasekera notes the challenges faced by Australia’s financial sector in the current environment, which saw Pendal’s first-half net profit after tax decline 26 per cent on the same period a year earlier.
He links this to a decline in funds under management in the company’s European and UK operations, and expects its Australian operations will continue to suffer as structural changes in the financial advice industry take effect following the 2018 banking royal commission.
However, Gunasekera notes Pendal’s balance sheet remains “pristine”, with zero leverage.
“Despite the drop in interim 2019 dividends to 20 cents, we believe that the target payout ratio of 80 per cent to 90 per cent of cash EPS remains sustainable over the long term,” he says.
Fellow asset manager Perpetual closely follows, with a projected dividend yield of 6.68 per cent for fiscal 2020.
Perpetual dodges regulatory fallout
Like Pendal, Perpetual (ASX: PPT) is also struggling with declining funds under management, but management is responding with cost-cutting initiatives that Morningstar’s Gunasekera expects to reform its investments division.
“While we expect the investments division to continue to struggle, Perpetual’s corporate trust, and its private divisions are likely to be the group’s earnings growth drivers,” he says.
Gunasekera expects the two divisions to contribute more than 63 per cent of underlying profits before tax by fiscal 2024, up from 53 per cent in fiscal 2019.
He believes Perpetual’s corporate trust division will benefit from the post-Royal Commission environment, as organisations seek to outsource their responsible entity services to minimise conflicts of interest.
The investment segment of the company currently contributes around 47 per cent of profit before tax, followed by its growing private (24.5 per cent) and trust segments (28.5 per cent).
"Perpetual Private has not faced any direct fallout from the royal commission and its set to increase its financial adviser head count by about 20 per cent, which should drive future earnings.
"Corporate trust’s managed funds services business is likely to continue to benefit from a post-royal commission environment," Gunasekera says.
Riding childcare tailwinds
Childcare centre operator G8 Education (ASX: GEM) rounds out this list of companies, which Morningstar expects to deliver dividend yields of 6.58 per cent in fiscal 2020.
"We expect G8 Education to benefit from long-term demand tailwinds in the Australian childcare centre sector, including a growing population of zero- to 5-year-olds, an increasing proportion of children using childcare, an increasing female workforce participation rate, increasing time spent by children in care each day, and increasing childcare fees," says Morningstar equity analyst Gareth James.
The company's share price fell around 16 per cent after its first-half results were delivered last month, but James views this as an over-reaction. He attributes the softer result, which saw net profit after tax decline by 20 per cent, to a new lease accounting standard.
"The first-half result has caused share price weakness in previous years that is often followed by price strength later in the year, when the market’s focus shifts to the full-year result and the news flow from the annual investor day," James says.
Morningstar reduced its fiscal 2019 earnings before interest and tax forecast, but this remains at the top of management's guidance range of between $140 million and $145 million.
He notes that occupancy rates have continued to grow in the childcare centres operated by G8.
"We think this reflects a combination of a better performance by management, a slowing of industry supply growth, and an increase in demand following the introduction of the child care subsidy in July 2018."
Alongside a return to equilibrium in childcare supply, from a period of oversupply, James also highlights management's 5 per cent increase in dividend in the latest financial results announcement.