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Dividend Stocks in Times of Investor Uncertainty

Dividend Stocks in Times of Investor Uncertainty

By Bob Kohut 12.11.2018


Australia based global market research firm Investment Trends published its Investor Intentions Index for Australian investors as of October 2018, with surprising results.  The following graph appeared in a 6 November article on the website of Business Insider Australia.


As you can see, for the time frame indicated investor expectations began to decline on 12 October while the XAO (All Ordinaries Index) was rising.  Even more surprising was the finding that the descent into negative territory is a result not seen since the GFC.

Year over year the XAO is down a little more than 1% and year to date the index has dropped about 2.4%, hardly the stuff of roaring bear markets.

However, since the start of the Fiscal Year in July the ASX 200 (XJO) has dropped 6%, prompting the research director at Investment Trends to make the following statement:

Investors now believe we’re in a bear market, on average expecting domestic markets will be lower in 12 months’ time than where they are today.

The major concern driving the negativity is actions being taken by the US administration, followed by tensions between major global economies; global debt levels; and an economic slowdown in China.

Note the expectations do not include dividend payments, suggesting investing in low risk, high quality dividend paying stocks may be an alternative to fleeing the market.

Conventional wisdom without exception warns against investing in a stock solely because of its high yield, yet dividend scans you find on financial websites across the Internet invariably list their picks by yield in descending order.  

Understanding how a dividend yield is calculated – annual dividends per year divided by current share price – points to the danger of this approach.  Even a “math-challenged” investor understands that the lower the current share price, the higher the yield.  The caveat is those mouth-watering high yields could actually be a sign of something seriously wrong with the stock.

Dividend sustainability is another caveat investors are warned to consider.  Dividends are not guaranteed with the potential for being reduced in challenging times or eliminated altogether ever present.   

What then do you look for?  As is the case with all investments in share markets, there are no “sure-fire” indicators of success.  However, key among them are a company’s historical performance and growth estimates.  The idea is simple and appeals to common sense.  A company with a solid record of dividend payments and earnings growth over the last five to ten years along with solid future growth estimates for both is likely to continue performing.

There are other factors to consider, such as the size of the company, with bigger companies in a better position to maintain dividends, and the sector in which the company operates.  As an example, the Australian property market is cooling rapidly, making investing in an ASX property stock a riskier proposition.

Australian publisher of ASX stock market information – marketindex.com.au – publishes a bi-weekly dividend scan of the top ASX large cap stocks by yield, with current analyst recommendations.  

From that list we identified three stocks with yields exceeding 5% and analyst consensus BUY or STRONG BUY ratings for further research.  Here is the table, ranked by highest dividend growth forecasts.


There is no such thing as risk-free investing in stock markets.  There are only stocks that appear to be less risky than others.  Despite solid historical performance as well as future growth estimates, each of these dividend payers come with risk.

Alumina Limited (AWC) is a vertically integrated aluminum producer through its wholly owned bauxite mines and its refining and smelting operations through its 40% Joint Venture with Alcoa Incorporated -- Alcoa World Alumina and Chemicals (AWAC).

Commodity prices can be wildly volatile, and aluminum is no exception.  Following a steep decline in the GFC the price has rebounded, fallen, and rebounded again. The following chart is from the website of global data analysis firm Knoema. 


The company has two bauxite mines in Australia, one in Suriname and one in Brazil in South America and a fifth in the Republic of Guinea in Africa.

The AWAC JV operates seven refineries around the world and a smelter here in Australia.  AWAC is also a JV partner with Saudi Arabian Mining Company for the building of a bauxite mine and an aluminum refinery.  

The company had a tough year in FY 2016, dropping from a reported NPAT (net profit after tax) of $353 million in FY 2015 to $117 million in 2016.  FY 2017 saw a strong rebound to $485 million and the company’s Half Year 2018 results showed an impressive 110% increase in NPAT.

The company’s dividend payment history dates back to 1996, with dividends suspended in 2009 following the GFC but resumed in 2010.  Alumina management was bullish about the second half of 2018 and the World Bank sees the recovery in aluminum prices to continue 2030.


Over the past five years the AWC share price has appreciated 150%.


The company has a consensus STONG BUY rating.

Global fund manager Magellan Financial Group (MFG) offers three different funds to retail and high net worth investors here in Australia and New Zealand and to institutional investors internationally.  

Its principal funds are the Global Equities Fund and the Infrastructure Fund, each with between 20 and 40 holdings.  The High Conviction Fund comprises 8 to 12 of the world’s best global stocks. 

Magellan was formed in 2006, paying its first dividend that year before suspending dividend payments until 2011. With the exception of a reduction in FY 2016 Magellan has grown dividend payments every year.  

Given the decline in investor expectations here in Australia, Magellan appears to be high risk at best, given its high net inflows from retail investors -- $1.9 billion – compared to institutional net inflows of $2.5 billion.

However, the company’s Full Year 2018 Results Presentation made the case Magellan has a history of upside performance in falling markets.


Magellan has made two key acquisitions -- Airlie Funds Management (“Airlie") and the Frontier Partners Group (“Frontier") -- expected to benefit both its Australian retail investment and its international distributions, primarily in North America.  

Prior to the GFC Magellan’s stock was trading around $1.50, dropping to $0.32 by February of 2009 before beginning a dramatic recovery.


Retirement Village operator Aveo Group Limited (AOG) renamed itself in 2013, shedding its property development business to focus exclusively on the retirement village sector.  The prior entity, FKP Property, had seen its dividend payments decline from a high of $0.165 per share in FY 2007 to $0.01 at the time of the strategic change and renaming.  Dividend payments have risen every year since, from $0.04 in FY 2014 to $0.09 in FY 2018.

The company has 5 retirement properties in the US and 90 retirement and aged care properties across Australia, with the process of divesting its non-retirement assets almost completed.  Aveo has expanded into health care for the aged, through residential accommodations staffed with on-site and visiting healthcare professionals and its Freedom Care, a unique offering providing a home-like setting for nursing care.

The company operates in a high growth sector and has grown both rental income and net profit in each of the last three fiscal years, with rental income up 68% between FY 2016 and FY 2018 and net profit up 44%.  The company reported EPS (earnings per share) of $0.012 in FY 2018, with forecasted growth to $0.194 in FY 2019 before declining slightly to $0.187 in FY 2020.

Despite this solid financial performance, the stock price has been declining since August of 2016.


The slide began following a capital raise in mid-2016, with the bottom falling out in early 2017 on the release of an ABC Four Corners and Fairfax Media investigation that uncovered bewilderingly complex legal contracts for residents along with reportedly exorbitant fees and safety issues.  In mid-year 2017 the Australian Competition & Consumer Commission (ACCC) announced its own investigation into Aveo.  Toward the close of the year Aveo was facing inquiries from the Victorian government and a class action lawsuit.

The company has promised to simplify its contracts and improve its complaint process. Commenting on the class action suit in a 1 May 2018 Investor presentation, company management said “Aveo will continue to deny the applicant’s allegations and strenuously defend its practices and product offerings.”

The risk with Aveo should be obvious – regulatory oversight.  Although there is little news on the ACCC investigation, on 19 September the federal government announced yet another Royal Commission, this one to look into quality and safety issues in the sector.   The RACGP (Royal Australian College of General Practitioners) has made a submission to the commission regarding Government oversight and management. 

The terms of reference for the commission do not directly mention increased government oversight and the demand for retirement living and aged care will continue unabated, but more regulations could impact profitability. 


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