Australia's Top Dividend Stocks & The ASX 20 - Sure Dividend Sure Dividend

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Australia’s Top Dividend Stocks & The ASX 20


Published on December 11th, 2014

The ASX20 holds Australia’s 20 largest publicly traded corporations.  Of these 20 corporations, US investors are likely only familiar with RIO Tinto Limited (RIO), BHP Billiton (BHP), and Westpac Banking (WBK in US markets).   The Full List of companies in the ASX20 is below, including years of dividend payments without a reduction (excluding effects of spin-offs and special dividends).

Name Ticker Sector Dividend Streak (yrs)
AMP Limited AMP Finance 1
Aus. & N.Z. Banking Group ANZ Finance 6
BHP Billiton Limited BHP Basic Materials 25
Brambles Limited BXB Services 5
Commonwealth Bank of Aus. CBA Finance 6
CSL Limited CSL Health Care 6
Insurance Australia Group IAG Finance 3
Macquarie Group Limited MQG Finance 3
National Australia Bank NAB Finance 6
Origin Energy Limited ORG Utilities 14
QBE Insurance Limited QBE Finance 0
RIO Tinto Limited RIO Basic Materials 6
Scentre Group SCG Finance 4
Suncorp Group Limited SUN Finance 5
Telstra Corporation TLS Technology 15
Westpac Banking WBC Finance 6
Wesfarmers Limited WES Services 6
Westfield Corporation WFD Finance 4
Woolworths Limited WOW Services 21
Woodside Petroleum WPL Basic Materials 5

 

The top 20 Australian stocks by market cap show the Australian economy is dependent on the basic materials and financial industries.  Of the 20 stocks analyzed above, only 4 have dividend streaks longer than 10 years:  BHP Billiton, Origin Energy, Telstra, and Woolworths.  These 4 businesses are discussed further below.

BHP Billiton

BHP Billiton is the only Australian company in the ASX20 that passes the first rule of The 8 Rules of Dividend Investing:  A company must have 25 or more years of dividend payments without a reduction.  BHP Billiton’s stability over the last two and a half decades shows the company can grow under a wide variety of economic conditions.

BHP Billiton is a natural resource producer.  The company produces oil, gas, iron, nickel, copper, diamonds, coal, and other minerals.  The company can trace its history back over 160 years, to 1851 when the company was set up as a tin mining operation on Billiton island in Indonesia.

BHP Billiton’s stock is deeply undervalued at this time due to weakness in oil and metal prices.  The stock currently has a dividend yield of 5.2% and a P/E ratio of just 11.4.  BHP has plans to spin-off its Aluminum, Silver, Nickel, and Coal divisions into a new company called South32 in 2015.  The move will benefit shareholders by focusing BHP Billiton on its most profitable divisions while separating itself from underperofming divisions.  South32 could be worth up to $15 billion; the divisions that will make up South32 were responsible for just 4% of operating income for BHP Billiton in its last full fiscal year.

Investors in BHP Billiton could see strong gains from growth, dividends, and an increase in the stock’s P/E multiple.  BHP Billiton has managed to grow revenue per share at over 10% a year over the last decade.  Rapid growth combined with the company’s 5%+ dividend yield and potential value unlock from the South32 spin-off makes BHP Billiton a compelling investment.

Origin Energy Llimited

Origin Energy ‘s business strategy is to invest in wholesale and retail energy markets in Australia, New Zealand, and the Asia Pacific Region.  The company is invested in energy production, power generation, and energy retailing.  Origin Energy’s operations are divided into 3 primary segments:

  • Exploration & Production
  • Generation
  • Retail

The Exploration & Production segment engages in natural gas and oil exploration in Australia, New Zealand, and the Asia Pacific region.  The Generation segment is involved in natural gas power generation in Australia and New Zealand.   The retail segment acts as a retail and gas and electricity utility for customers in Australia and New Zealand.  The retail segment controls 53.1% of New Zealand’s Contact Energy utility.

Origin Energy has not reduced its dividend payments in 14 years.  The company has a solid dividend yield of 4.7% and a P/E ratio of about 22.  Origin Energy’s adjusted EPS are at the same level they were 5 years ago.  The company’s dividends have not increased over this period, while debt/assets has grown from 12% in 2010 to 29% in 2014.  Sure Dividend looks for businesses that are actively growing their dividend payments so investors receive higher payouts year after year.  Origin Energy’s sluggish growth over the last 5 years casts doubt on its ability to consistently reward shareholders with rising dividend payments.

Telstra Corporation

Telstra is Australia’s more dominant version of Verizon.  The company controls about 40% of the mobile phone carrier market in Australia.  Australia’s mobile carrier market is an oligopoly, similar to the US market.  Telstra is the largest player with 40% market share, followed by Optus with 25%, and Vodafone with about 20%.  Together, the 3 largest players control 85% of the Australian mobile carrier market.  Oligopolies are bad for consumers, but good for investors.  Telstra has managed to increase its dividend payments for 15 consecutive years due to high barriers to entry in the mobile carrier market.

Telstra Corporation has a 5.1% dividend yield and a P/E ratio under 16.  Like other large telecommunications companies, shareholders should not expect rapid growth from Telstra.  Going forward, Telstra will likely generate long-term EPS growth of between 4% and 7% for shareholders.  The company’s high payout ratio of about 85% means dividends will likely increase in line with or slower than overall company growth.

Telstra shareholders can expect stability due to the company’s market leading position in the oligopolistic Australian telecommunications market.  Total shareholder return should be between 9% and 12% a year going forward from dividends (5%) and EPS growth (4% to 7%).  Telstra makes a suitable investment for investors looking for low-risk, high yield investments with growth that will outpace inflation.

Woolworths

Woolworths is a diversified retailer and hotel operator.  The bulk of its operating income comes from its food, liquor, and petrol sales in Australia.  The company operates in 5 distinct segments.  Each segment is shown below along with the percentage of total operating income generated for the company in its full fiscal 2014:

  • Australian Food, Liquor, & Petrol: 8% of operating income
  • New Zealand Supermarkets: 7% of operating income
  • General Merchandise: 8% of operating income
  • Hotels: 8% of operating income
  • Home Improvement: N/A (generated negative operating income)

Woolworths generates the majority of its income from its Australian and New Zealand retailing operations.  The company’s hotel operations seem out of place, and it is new to the Home Improvement industry.  The company has sold off much of its hotel real estate portfolio, but still operates the hotels.  The company is using money from its retailing operations and real estate transactions to invest in future growth.

Woolworths is the largest domestic online retailer in Australia.  The company did $1.2 billion in online sales in its fiscal 2014.  Online sales grew an astounding 50% versus the same period a year ago.  The company acquired Australian e-commerce company EziBuy to boost its digital expertise.

In addition to growth potential online, Woolworths is setting itself up for strong growth in Home Improvement.  US based home improvement retailer Lowe’s (LOW) has partnered with Woolworths (Lowe’s owns 35% of Woolworths’ home improvement operations) in an attempt to gain dominant share in the highly fragmented Australian home improvement market.  The largest Australian home improvement company has only a 17% market share of the $45 billion Australian home improvement market.  Woolworths and Lowe’s together hope to consolidate the fragmented Australian home improvement industry.   They are off to a good start; normalized sales increased about 25% over the last year.

Woolworths currently trades for a P/E ratio of just 15.3.  The company has a dividend yield of about 4.5%.  Woolworths has a high payout ratio of about 70%.  Shareholders can take advantage of the company’s substantial dividend yield while they wait for the company’s new growth drivers to take effect.

Final Thoughts

The Australian market has several intriguing dividend plays.  BHP Billiton appears especially undervalued.  Its strong dividend yield and spin-off plans will likely give shareholders favorable total returns going forward.  Woolworths could also make a solid investment due to its high dividend yield and future growth potential.  Australian investors also benefit from franking credits which offset dividend taxes for Australian bases companies.  Australian investors interested in learning about the Dividend Aristocrats index, which consists of 54 US stocks that have increased dividends for 25 consecutive years can learn more here.


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