Two of our better ASX income picks right now
Those seeking income might find the high forecast yields in these two undervalued companies attractive.
What matters most when it comes to deciding if a share is right for your portfolio?
Valuation may play a role. The quality of the business may be a consideration. But before you get to those things, it’s important to ask whether the share fits with the financial goal you are trying to achieve.
If your goal is to build a stream of passive income, it’s unlikely that a share with no dividend will fit the bill. Likewise, if you are targeting long-term capital growth, you might lean towards companies that can invest more of their profits back into the business.
This article is for those of you in the income camp. More specifically, it reveals two stocks from our recently updated Australia and New Zealand Best Ideas list that had prospective yields north of 5%.
Aurizon (AZJ)
- Moat rating: No Moat
- Projected yield: 5.5% (70% franked)
- Fair Value estimate: $4.50
- Share price Feb 25: $3.27
Aurizon comprises of three main business segments: its management of the Central Queensland Coal Network railway, its coal haulage operations, and its non-coal haulage operations.
Recent earnings headwinds and concerns about longer term coal demand have left Aurizon's shares at a multi-year low.
On the coal front, most of the coal hauled by Aurizon and other users of the CCQN is coking coal, an essential steelmaking input that does not yet have a commercially viable alternative. Morningstar’s forecasts for Australian exports of this product are essentially flat for the next decade.
In a near-term boost for earnings, Atkins expects coal haulage volumes can continue to recover after being held back by abnormally wet weather in Queensland. Meanwhile, the CQCN is due for a tariff adjustment in 2028 and Atkins expects that Aurizon’s investments in non-coal haulage will eventually bear fruit.
Despite these potential positives, Atkins feels that a lot of pessimism is baked into the share price. As a result, Atkins thinks that AZJ currently provides an opportunity for investors to buy a better than average company at a discount.
At a recent price of $3.27, the shares offered a forecast yield of 5.5% that Atkins thinks may be 70% franked. And as Atkins expects 8% annual growth in earnings per share over the next five years, there seems to be plenty in favour of the dividend increasing over time.
Endeavour (EDV)
- Moat rating: Wide Moat
- Projected yield: 5% (100% franked)
- Fair Value estimate: $6.10
- Share price Feb 25: $4.40
Endeavour shareholders have suffered a torrid few years, with shares down almost 50% since August 2022. This has left Australia’s leading liquor retail group with what we see as an attractive forecast yield of 5% that we expect to be fully franked.
Our analyst Johannes Faul has assigned Endeavour a Wide Moat rating on account of the scale advantages enjoyed by its liquor retailing segment, which makes up 80% of group profits and comprises the well-known Dan Murphys and BWS chains.
Johannes expects Endeavour’s liquor sales to grow in line with those of the Australian liquor market, which could be supported by population growth, inflation, the market’s defensive nature and its increasing slant towards more pricier products.
Overall, Johannes thinks that Endeavour can average sales and pre-tax profit growth of around 5% per year over the next five years. Taken together with Endeavour’s suitably strong balance sheet, this has the potential to support a growing dividend over the medium term.
As for the share price, investors still appear to be concerned that Endeavour’s liquor business will be hit by consumers cutting down on non-essential items. Yet Johannes points to the potential for tax cuts to boost household budgets over the course of this fiscal year.
He also thinks that the potential impact of increased regulation on Endeavour’s gaming segment (derived from its large portfolio of hotels) is more than priced in at current levels. At a recent share price of $4.42, EDV lagged Johanne’s Fair Value estimate by over 25%.
Related reading
My colleague Mark LaMonica recently featured a controversial income pick in his Unconventional Wisdom column. But remember, you shouldn’t consider any individual shares before defining an investment strategy. See how to make yours in this article.
Terms used in this article
Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.
Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.
Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.
