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7 Stocks for Income & Growth

7 Stocks for Income & Growth

By Bob Kohut 25.03.2013


Do you invest for income or capital growth?  Portfolio theory suggests you can do both by diversifying across high-yielding income stocks and stocks with high growth forecasts. 

US based global investment firm KKR calls this a “dual-mandate” strategy - seeking a stock that can provide both income and growth.  They compared the performance of US stocks with 2-5% dividend yields and 5-15% earnings growth against the US S&P 500 since 2004.  Here's the chart:

Given that interest rates and GDP forecasts are higher in Australia than the US, we decided to stretch the dual criteria to stocks with a minimum 6% yield along with a 2-year earnings growth forecast of 20% or more.  Here are the seven stocks we found: 

Company

Code

Sector

Div Yld

2 Yr Div Growth Forecast

2 Year EPS Growth Forecast

1 Year Total Shareholder Return

P/E

Chorus Ltd

CNU

Telecommunications

7.4%

42.9%

42.3%

-12.5%

7.32

Air New Zealand

AIZ

Transportation

7.27%

92.7%

77.9%

87.2%

10.92

Nuplex Industries

NPX

Materials

7.25%

23.3%

22.5%

44%

8.32

DUET Group

DUE

Utilities

7.19%

3.1%

22.9%

34.7$

30.76

Australian Pharmaceutical

API

Health Care

6.67%

7.6%

34.1%

59.6%

10.59

ALE Property Group

LEP

Real Estate

6.45%

1.1%

25.8%

31.7%

17.09

WHK Group

WHG

Commercial Services

6.2%

1.8%

52.8%

31%

16.89

 

Chorus Limited (CNU) is the largest telecommunications and services provider in New Zealand.  It has virtual monopoly status in New Zealand as both owner and operator of network infrastructure from copper to fibre cable along with local telephone exchanges.  So why is it the only stock in our table to show a negative one year total average shareholder return (dividends plus stock price appreciation)?  Here's the company’s year over year price chart compared to the ASX telecom index the XTJ:

First, astute investors look to historical performance in addition to future prospects and CNU only began trading on the ASX in late 2011.  Chorus was born as an independent company after being spun off from the Telecommunications Company of New Zealand.  

Second, the company is partnering with the government entity responsible for the rollout of that country’s national broadband effort, the Ultra-Fast Broadband (UFB) network.  That entity, the CFH (Crown Fibre Holdings) will invest NZ$929 million in Chorus to allow the company to construct the fibre optic broadband network for a 50/50 split of debt and equity along with future warrants.  Sounds good but the downside is regulatory pricing.

Third, the UFB is experiencing substantial cost overruns and CNU’s gearing is over 300% with long-term debt of $1.3 billion as of June 2012.  Despite the downside, CNU has hefty 2 year growth forecasts of over 40% for both earnings and dividends.  The payout ratio of 62% beats the 89% at Telstra (TLS).  Telstra has a slight negative two year earnings forecast of 0.6% and a meager positive dividend forecast of 0.9%.

Air New Zealand (AIZ) rewarded its shareholders year over year with a healthy yield of over 7% along with share price appreciation approaching 80%.  Here is its chart, compared to the ASX 200 Index, the XJO:

AIZ has paid dividends every year for the last eight with the highest yield of 8.4% in 2008 and a low of 3.5% in its first dividend paying year – 2005.  The growth forecasts for both dividends and earnings are outstanding and the company’s P/E of 10.92 compares very favorably to the sector average of 15.08.  For a little icing on this cake, the P/B is 0.91.  Book value per share for AIZ is $1.30 while the shares are trading around $1.19.

From the chart you can see Air New Zealand’s stock price jumped at the end of August 2012 when the company not only reported solid Full Year results, but also issued guidance far higher than analysts expected.  Following the release of solid Interim results in February 2013 analysts at Macquarie, Deutsche Bank, UBS, and Credit Suisse all reiterated BUY or OUTPERFORM ratings and raised price targets.  

Macquarie highlighted the solid yield and attractive valuation and noted that “improving earnings should see more market interest in AIZ.”  If you look at the trading volume for AIZ in its chart, investors aren't taking note.  To top it off, AIZ has an ongoing share buyback program in place.  

As a global provider of coatings and polymer resins used in a wide variety of industrial and consumer products, Nuplex Industries (NPX) has been hurt by weakening demand.  The company’s recent Interim Earnings release showed a more than 50% drop in earnings per share; from $0.123 for the Half Year 2012 to $0.058 for the Half Year 2013.  However, the company maintained its Half Year dividend at $0.10 per share.  Despite the result, the share price is still up substantially year over year, having dipped only slightly in response to the earnings.  Here is the chart, compared to its Sector Index, the XMJ Materials Index:

Although there have been no analyst revisions of growth forecasts as yet, Nuplex is a company with thin coverage at best, with none of our major firms reporting on the stock.  Although company management did not revise guidance downward in the February 2013 Interim Earnings release, a 50% drop in EPS for the Half Year suggest a real challenge for the company to live up to its growth forecasts.

DUET Group (DUE) is a diversified utility and energy trust and as such suffers from the spectre of regulatory oversight.  A 13 March 2013 tariff decision on the company’s Victorian gas network fell well short of the  expected 8%, with an allowance of only 7.03 to 7.39%.  An analyst at JP Morgan downgraded earnings estimates for DUE, citing the 13% difference between the company’s proposal and the ultimate decision.

The company’s Interim results were released in mid-February and saw declines in earnings but the dividend was maintained.  BA-Merrill Lynch is the only major analyst with a BUY rating on the stock, with medium risk.  Macquarie has an UNDERPERFORM recommendation on DUET Group, believing market participants are valuing the stock based more on its underlying assets than its dividend growth potential.  Note the 2 Year dividend growth forecast is 3.1%.  Here is a year over year chart for DUE compared to the ASX Utilities Index, the XUJ:

Australian Pharmaceutical Industries (API) makes and distributes health and beauty products through a network of over 4000 pharmacies, including its own branded Priceline Pharmacies.  In addition, it provides ancillary services to its wholesalers such as marketing programs, retail service and support, delivery services, and business advisory services and support.

The retail environment has been challenging for all retailers and API is no exception.  The company lowered its earnings estimates for FY 2013 at its January 2013 Annual General Meeting.  The wholesale operation has done well for the company, as the total shareholder return of 59.6% indicates.  That figure, however, was for FY 2012, ending in August of 2012  The most recent major analyst recommendation comes from Credit Suisse on 14 March 203 with an OUTPERFORM rating.  The analyst reckons the shares are “cheaply priced.”  The stock has a P/B of 0.40.  Translate that into dollars and cents and you can buy assets with a book value per share of $1.16 for a paltry $0.45 per share.  Here is the company’s year over year chart compared to the ASX Health Care Index, the XHJ:

Ale Property Group (ALE) is a property trust specialising in real estate near and dear to the hearts of many Aussies – pubs.  The group owns and leases close to 90 pubs across Australia with average leases of 17 years.  The long lease ensures income stability and the company has yearly rent reviews tied to the Consumer Price Index (CPI).  All properties are leased to a Woolworth (WOW) subsidiary, Australian Leisure and Hospitality Group (ALH).

On 25 February 2013 the company released Interim results, showing a 2.7% revenue increase and a 15% increase in distributable profit.  The half year dividend distribution of $0.08 per share was diluted by about 5% because of a 2012 capital raise.  Ale management reiterated full year guidance of $0.16 per share, equaling dividends per share paid in FY 2012.

The share price is up 25% year over year.  Following the Interim release, analysts at Macquarie and JP Morgan reiterated UNDERWEIGHT and UNDEPERFORM ratings, citing lofty valuations.  However, while ALE’s P/E of 17.09 is higher than the Sector P/E of 15.09, its P/EG of 0.66 makes it a standout from its Sector P/EG of 2.29.  Here is the chart for LEP compared to the ASX REIT Index, the XPJ:

WHK Group (WHG) is in the accounting business, operating throughout Australia in two business segments.  The Business Services segment provides accounting, taxation, auditing, and general business advisory and corporate advisory services.  The Business Segment operates in New Zealand as well.  The Financial Services segment offers financial planning, risk management, general insurance, and self managed superannuation and finance services.

On 25 February 2013 the company released Interim results, which reflected the tough business environment of 2012.  While revenues only dropped 2%, net profit fell 22%.  In addition, management lowered guidance for the full year.  However, the company maintained the same dividend payment of $0.03 per share.

Following the release Macquarie downgraded the stock from OUTPERFORM to NEUTRAL while noting the share price is being held up by the potential merger with wealth management firm SFG Australia Ltd.  Talks began in October of 2012 involving a share based merger that could leave WHG shareholders with a $1.20 per share value, compared to the 30 March 2013 closing price of $1.05.  The offer is under consideration and a key issue will be the expected financial improvement due to WHG’s cost cutting measures.  WHK Group management claims there is no “guarantee of a transaction.”  Here is the company’s year over year chart:

Click on the links below to read other articles from this week's newsletter

Watch This Tech Stock

18 Share Tips - 25 March 2013

U.S. Vs. China: Battle To Be The Largest Economy In The World

Twelve Reasons Why Globalisation is a Huge Problem

Is the US Debt Situation Getting Worse?

How To Build A Trading Indicator

Top 10 shorted stocks

Stocks on a roll: ASX rolling 52-week highs

Stock on the slide: ASX rolling 52-week lows

 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.



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