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Australian Dividend Stocks In Focus


The Australian stock market is filled with dividend stocks with high yields and payout ratios.

That’s because of differences in taxation that make dividend payments more appealing for Australian businesses than for United States businesses.

The result is a country filled with businesses that reward shareholders with high dividend payments.

This article takes a detailed look at 8 Australian dividend stocks. Four of the 8 have strong competitive advantages and are trading at fair or better prices.

Woolworths Limited

Woolworths (WOW) is a Diversified Australian retailer. The company was founded in 1924 by Percy Christmas. The company has grown to reach a $22 billion market cap. Woolworths operates under the following:

In addition to all of the above, Woolworths also offers financial services and an online & catologue only business. The company is very diversified.

Woolworths operates in 5 segments. The percentage of total EBIT each segment has generated through the first half of fiscal 2016 is shown below:

The Home Improvement segment is unprofitable. The segment lost $125 million in EBIT in the first half of fiscal 2016. 33% of the Home Improvement segment was owned by Lowe’s (LOW). Lowe’s partnered with Woolworths in 2009. The company chose to exercise its option to have Woolsworth buy back Lowe’s 33% ownership.

Why would Lowes do this? Because the Home Improvement endeavor was unprofitable and will likely remain unprofitable. Lowes is able to exit without serious losses. Woolsworth is left ‘holding the bag’ – and will either sell or close its Home Improvement segment.

The Home Improvement segment is not the only one struggling for Woolsworth.

Note: Results are from the 1st half of fiscal 2016 versus the 1st half of fiscal 2015

The company is taking action by shaking up management and refocusing its business. Woolworth is exiting Home Improvement (as discussed earlier).

The company was forced to cut its dividend 34% due to struggling operations. The company’s stock is down ~38% since June of 2014.

Woolworths stock is currently trading for a price-to-earnings ratio of 14.6. For comparison, investors can purchase shares of the far-more-streamlined discount retail industry leader Wal-Mart (WMT) for a price-to-earnings ratio of 14.7.

Woolworths stock has some upside if operations rebound. The company is not cheap enough at current prices to justify its risk operations.

Australia & New Zealand Banking Group

Australia & New Zealand Banking Group (ANZ) is the 4th largest bank in Australia. The company has a market cap of $56 billion. Australia & New Zealand Banking Group has a very long corporate history. The company was founded in 1835.

The company’s dividends have fairly consistently trended up over the last several decades.

Australia & New Zealand Banking Group Dividend History

The company generates ~80% of its operating income in Australia & New Zealand, with most of the remaining 20% coming the Asia Pacific region.

Australia & New Zealand Banking Group has an especially high payout ratio for a bank. The company typically pays out around 70% of its earnings as dividends.

The stock currently offers investors an exceptionally high 7% dividend yield. As the company’s dividend history image above shows, dividends do fluctuate. With that said, long-term investors will very likely have higher dividends from Australia & New Zealand Banking Group a decade from now than today.

The company’s high payout ratio makes its growth even more impressive. Australia & New Zealand Banking Group has compounded its earnings-per-share at 8.3% a year over the last decade.

The company will very likely continue to compound its earnings-per-share at favorable rates. Growth will be fueled by continued expansion in Australia, New Zealand, and the Asia-Pacific region. Australia & New Zealand Banking Group is growing particularly fast in New Zealand, where earnings have compounded at 20% a year over the last 4 years.

The company appears undervalued at this time. Australia & New Zealand banking group is trading for a price-to-earnings ratio of just 10. This does not reflect the company’s excellent total return potential and shareholder friendly management.

Wesfarmers

Wesfarmers (WES) is a large Australian conglomerate with international operations. The corporation was founded in 1914 as a farmer’s cooperative. Today the company is worth $35 billion.

Wesfarmers operates in many of the same industries as Woolworths. Wesfarmers operates in the following industries:

Woolworths failed in home improvement because it could not compete against the industry leading Bunnings.

While Woolworths saw earnings-per-share nose dive by more than 30%, Wesfarmers showed 2.1% earnings-per-share growth for the first 6 months of its fiscal 2016.

The percentage of EBIT from each of the company’s 4 segments through the first half of fiscal 2016 are shown below to give a better idea of the company’s operations:

Note: Industrials EBIT is depressed due to the decline in energy and mineral prices. In the 1st half of 2015, the Industrials segment generated 8.6% of company EBIT.

The image below shows the EBIT growth of the company’s segments.

Wesfarmers Results
Source: Wesfarmers 2016 Half Year Results presentation, slide 8

The company’s retail operations are performing very well. This is in stark contrast to Woolworths’ poorly performing operations. It shows how important an effective management team is for the success of an organization.

The industrials segment was barely profitable due to the steep decline in commodity prices over the last year. This is a temporary condition. The segment will rebound when commodity prices do. The industrials segment is not a large part of Wesfarmers’ total business and poses no real business obsolescence risk.

Wesfarmers stock is currently trading for a price-to-earnings ratio of 19.0 and has a high dividend yield of 4.9%. The company’s stock appears to be trading around fair value at this time. The company’s management team should be applauded for paying out a large portion of earnings as dividends while still growing the business.

Wesfarmers is a high quality business that is likely trading around fair value at current price. The company should continue growing organically and through bolt-on acquisitions. Investors will likely see above-average total returns from the company through dividends and earnings-per-share growth.

Amcor Limited

Amcor (AMC) is one of the largest packaging companies in the world. The company’s history dates back to the 1860’s when it began as a paper mill. Today Amcor has a market cap of $12.3 billion.

The packaging industry is not known for its excitement. It is a great industry to invest in for stable, consistent dividends, however.

Amcor is more than twice the size (based on market cap) of Bemis (BMS) – which was a long time Dividend Aristocrat before being removed from the index for falling out of the S&P 500 (dividend increases never stopped).

Amcor’s management is expecting excellent total returns going forward.

Amcor
Source: Amcor 2016 Half Year Presentation, slide 13

The company is growing through a mix of organic growth, share repurchases, and bolt-on acquisitions. Amcor has made 6 acquisitions over the last 12 months. The company has realized 10.1% earnings-per-share growth in the first half of 2016 versus the first half of 2015. In addition, Amcor stock currently has a 3.9% dividend yield.

Amcor is currently trading for a price-to-earnings ratio of 19. The company is likely trading around fair value given its low-risk industry and excellent total return potential.

Amcor’s business is very low risk. It is very difficult to imagine a society in which we no longer need packaging. As long as we need packaging, Amcor’s business will remain viable. The company is virtually immune from industry obsolescence.

This robustness combined with a high 3.9% dividend yield, solid growth prospects, and average price-to-earnings ratio make Amcor a compelling choice for long-term dividend growth investors.

BWP Trust

The BWP Trust (BWP) is an Australian REIT established in 1998.

Do you remember Wesfarmers Bunnings home improvement chain? The BWP Trust’s primary business is to lease large retail properties. They primarily lease properties to Wesfarmers for their Bunnings home improvement stores.

BWP Trust’s business is largely dependent upon the performance of Bunnings. Fortunately for BWP Trust, Bunnings is the industry leader in home improvement in Australia.

That is good news for the trust, Australia has around 38% more home improvement selling space per capita than the United States. There is some evidence that the market may be reaching saturation.

Saturation in the Australian home improvement market may be reached, but there is still plenty of room for Bunnings (and BWP Trust) to continue growing. Bunnings has just 17% market share in the fragmented market.

With the exit of the Woolworths/Lowe’s home improvement stores in Australia (discussed in the Woolworths section of this article), there is more room for growth from Bunnings and the BWP Trust.

The performance of the BWP Trust has been excellent over the last decade. The Trust has realized compound annual total returns of 12.3% a year over the last decade. For comparison, the ASX index has grown at just 5.7% a year over the same time period.

BWP Trust has done well to stick with a low risk, above-average return strategy. The company’s management is not straying too far from what works. Following the same formula will likely lead to continues above-market growth for BWP Trust shareholders.

The downside to BWP Trust is that it is trading well above its historical average dividend yield at current prices. The REIT has a yield of 4.3% which is high, but not compared with its historical averages. Investors interested in owning a portion of this business should wait for the share price to fall before entering into a new position in BWP Trust.

Sydney Airport Holdings

Sydney Airport Holdings (SYD) controls the Sydney Airport. The company has a market cap of $14.4 billion.

Investing in commercial air traffic has a unique set of risks and rewards. On the positive side, air travel is a necessity for international business. Owning an airport is like owning a toll booth that anyone entering or leaving the country must pay. This is a clear, strong, durable competitive advantage.

On the negative side, airport traffic declines steeply during recessions and airline scares (crashes, hijackings, etc.). The business is subject to steep drawdowns which could impair dividend paying ability in any year.

The image below shows the company’s different operating segments and revenue streams.

Syndey Airport SegmentsSource: Sydney Airport Holdings Full Year 2015 Presentation, slide 9

Sydney Airport Holdings has a very high debt load. The company currently has an interest coverage ratio of 2.45x. If the global economy were to falter, the company could have difficulty servicing its debt.

Sydney Airport has a strong competitive advantage, but it is also subject to economic forces that make the dividend less-than-certain in difficult economic times. Investors should understand these risks before investing in Sydney Airport Holdings.

The company pays out the majority of its earnings as dividends. Sydney Airport currently has a dividend yield of 4%. The company’s stock has been on a bull run since 2012. Sydney Airport stock appears somewhat overvalued at this time.

Investors looking to build a position in Sydney Airport Holdings will likely find their best opportunity to do so when the global economy enters into a recession. The company’s stock fell 67% during the worst of the Great Recession. The nature of airport economics dictate the company’s stock will likely fall again (creating a buying opportunity) during the next recession (whenever that occurs).

Coca-Cola Amatil

Coca-Cola Amatil (CCL) is a large beverage bottler and distributor serving Australia, Indonesia, New Zealand, Fiji, Papua New Guinea, and Samoa.

The company works closely with Coca-Cola (KO). Coca-Cola owns the brands and syrups which Coca-Cola Amatil bottles and distributes.

The image below shows the percent of total company EBIT each segment generates for Coca-Cola Amatil.

CCA Segment
Source: Coca-Cola Amatil Full Year 2015 Presentation, slide 8

The Coca-Cola parent company headquartered in Atlanta, Georgia only sells non-alcoholic beverages. That is not the case with Coca-Cola Amatil. Coca-Cola Amatil bottles and distributes the following alcoholic brands (among others):

Coca-Cola Amatil is committed to paying out ~80% of its earnings as dividends. The company’s high payout ratio gives the stock a high 5.0% dividend yield. The company’s high dividend yield should appeal to income oriented investors.

The company is targeting mid-single digit earnings-per-share growth of 4% to 6% a year. This earnings-per-share growth combined with the company’s 5% dividend yield gives investors in Coca-Cola Amatil an expected return of 9% to 11% a year.

Coca-Cola Amatil plans to grow its earnings-per-share through organic expansion in core brands in Australia. Double-digit growth is expected in Indonesia and New Zealand. The company is also expecting double-digit growth in its alcohol and coffee businesses.

The company currently trades for a price-to-earnings ratio of 16.9. Coca-Cola Amatil is likely either fairly valued or slightly undervalued at current prices. The company combines a high yield with reasonable growth prospects and a high level of safety.

QBE Insurance Group

QBE Insurance Group (QBE) is a large insurance and reinsurance business headquartered in Sydney, Australia.

The company was founded in 1886 in Townsville, Australia. Today QBE Insurance has a $14.5 billion market cap.

QBE operates in 5 segments. Each segment is shown below along with the percentage of total earnings generated for QBE in fiscal 2015:

QBE has not performed well since 2007. The stock’s price (in Australian Dollars) has declined from highs near $35 in 2007 to $10.57 today.

The company’s dividend payments have declined considerably as well. QBE reduced its dividend by 75% from 2011 through 2013 off of dividend highs in 2010.

QBE has struggled to maintain profitability in its operations. The company posted its first year of underwriting profit in North America since 2011 in 2015. The company is still posting underwriting losses in Latin America.

The company’s European, Australia & New Zealand, and reinsurance operations are profitable. The company struggles in the Americas.

QBE is not one of the highest quality insurers available. Where it stands out from many other insurers is its relatively high yield. The stock currently offers investors a dividend yield of 4%.

QBE currently trades for a price-to-earnings ratio of 15.8. The company is likely a bit overvalued at current prices given its inability to consistently achieve combined ratios under 100% in many of its segments.

Final Thoughts

There are 4 high quality businesses trading at fair or better prices discussed in this outline. The 4 that offer dividend investors the best mix of value, yield, growth, and stability are:

The other 4 businesses in this article are either likely overvalued or do not have as strong of a competitive advantage as the 4 listed above.

Australian laws differ from those in the United States. They encourage dividend payments. As a result, Australian companies tend to have higher yields and payout ratios than United States stocks.

There is a downside to investing in Australian stocks for United States investors; dividend withholding taxes.

There is a 30% dividend withholding tax on Australian stocks for United States investors. This makes it difficult for United States investors to fully benefit from investing in Australian stocks.


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