With income-oriented investors in despair at paltry sub-2% term deposit yields – and the outlook for interest rates indicating that official rates could go even lower – investors are having to look further and wider than ever before, for income. The income aspect of share dividends has become a major attraction, with investors prepared to take onboard the fact that the dividends cannot be considered certain until they are paid; that dividends are paid at the company’s discretion, and can be cut at any time – even abandoned.
And it is not just the big banks and miners that are attracting investors: some small industrials are showing interesting dividend situations, at share prices that deliver mouth-watering yields – if the above caveats hold.
Here are two candidates from the smaller end of the industrial market where, if investors are prepared to take the equity risk, a lucrative yield situation could result.
1. Collection House (CLH, $1.21)
Market cap: $170 million
FY20 estimated yield: 7.5%, fully franked
FY20 grossed-up yield: 10.7%
Analysts’ consensus price target: $1.52 (Thomson Reuters), $1.09 (FN Arena)
Debt collection is not a business area that is unanimously liked, but if you have debtors, you definitely want those debts collected. Collection House (CLH) is one of several businesses on the ASX that do this: the company describes itself as an end-to-end receivables management company, “providing solutions to organisations and individuals that span the entire credit management lifecycle and beyond.” The company’s biggest business is purchased debt ledgers (PDL), where it buys debt ledgers from other companies cheaply, backing its ability to generate larger returns by collecting the debt. debt collection services on default accounts by credit providers. The other main business, debt collection services, sees CLH collecting debts for clients in the Australasian financial services, insurance, public utility, telecommunications credit and government enterprise markets.
CLH is modernising the debt collection business, using technology and better communications with debtors as a way to manage receivables, rather than just writing them off. For example, it uses machine learning and data analytics to analyse consumer behaviour to determine when and how they should be contacted about their debt, as well as suggesting the best payment options. The company will take bankruptcy action, it says, as a last resort. As such, any Google search will find criticism of Collection House – but again, businesses with debtors need this service performed. Yes, the government and community want to see this done ethically and sensitively, and Collection House (and others in this business) are highly aware of their social licence to operate.
On business metrics, Collection House posted an 8% increase in net profit in FY19, to $30.7 million, on the back of a 12% rise in revenue, to $161.1 million. The PDL business was the big driver, lifting revenue by 25%, to $93.7 million.
CLH paid a fully franked dividend of 8.2 cents a share in FY19, which, if repeated, would represent a yield of 6.8% at the current share price of $1.21 – equating to a 9.7% grossed-up yield. On Thomson Reuters’ collation of analysts’ estimates, a full-year dividend of 9.1 cents is expected in FY20, rising to 9.4 cents in FY21. That implies a projected FY20 yield of 7.5% (grossed-up 10.7%) and projected FY21 yield of 7.8% (grossed-up 11.1%).
This could come with capital growth potential, as well. Thomson Reuters has a consensus target price of $1.52, from six analysts, while FN Arena has $1.09, from two analysts.
CLH is positively exposed to increasing debt levels. Interestingly, Collection House acts for Afterpay as its debt collection agent, so investors could view CLH as a hedge against the often-expressed concern that buy-now, pay-later operators like Afterpay encourage people to take on debt. On the negative side, CLH has about 8% of its stock short-sold at the moment – which tells you that quite a few speculators believe its share price will fall. But say the price did fall, to $1.10 – for income-oriented investors, that would boost the yield. In that case, a dividend held at the FY19 level would represent a fully franked yield of 7.4%, grossing-up to 10.6%.
2. Vita Group (VTG, $1.225)
Market capitalisation: $199 million
FY20 estimated yield: 7.6%, fully franked
FY20 grossed-up yield: 10.8%
Analysts’ consensus price target: $1.63 (Thomson Reuters)
For much of its existence, retailer Vita Group was solely a telecommunications reseller, operating retail stores for Next Byte, FoneZone and Telstra stores – with the latter relationship the most important. Under a master licence agreement with the telco giant, Vita operates more than 100 Telstra retail stores, selling information and communication technology (ICT) products and services to retail customers, and four Telstra Business Centres which enables the technology and communication needs of small-to-medium business customers.
Over the last couple of years, Vita has begun a transition to a new operating model for its ICT business, as well as diversifying its portfolio, with investments in markets such as non-invasive medical aesthetics and athletic wear. That approach was vindicated in June this year when the company announced a re-negotiated deal with Telstra, under which Vita agreed to forgo “legacy” networking sales revenue from Telstra – valued at $12 million–$13 million a year – so that it can boost its retail store presence from 102 to 115, and extend its master licence tenure, which currently runs to June 30 2024.
The two companies are transitioning small business customers into the retail store network, giving Vita the opportunity to boost its sales of hardware, accessories and add-ons. While Vita will earn lower remuneration from sales of connections to the Telstra network, under the new deal, Vita expects to enjoy higher remuneration attached to the sale of devices, including smartphones, tablets, connected devices, wearables, and non- transactional performance metrics.
Vita is also expecting increased contributions from its inhouse technology accessory brand Sprout, which has products stocked in more than 350 locations across Australia, and the two business areas it has entered in recent years to diversify away from telecommunications: these are SQDAthletica, a men’s athletic wear brand built around the premise of “inspiring men to find balance and get fit for life,” and Artisan Aesthetic Clinics, which offers non-invasive medical aesthetics services, such as cosmetic injectables, laser and light-based therapies, body contouring and skin treatments. The company has 14 clinics and says it plans to grow this portfolio to 70–90 clinics over coming years.
In FY19, Vita lifted revenue by 10%, to a record $753.7 million, boosted net profit by 10%, to $24.3 million, and raised its full-year dividend from 9.1 cents to 9.2 cents.
The company has not given FY20 guidance, saying the net impact of the renegotiated Telstra deal on its earnings will depend on Vita’s success in selling across the ecosystem of Telstra products and services, as consumers and small businesses transition to the new plans. Analysts polled by Thomson Reuters see earnings per share falling from 14.9 cents in FY19 to 14.2 cents in FY20, rising to 15.7 cents in FY21. The analysts see the dividend actually increasing in FY20, to 9.3 cents, lifting to 10 cents in FY21.
On that basis, VTG, at $1.20, is trading at a 7.7% historic FY19 fully franked dividend yield (grossed-up 11%), or on a prospective basis, a 7.8% prospective FY20 yield (grossed-up 11.1%) and an 8.3% prospective FY21 yield (grossed-up 11.9%).
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