When the dust settles after the election, yield-oriented investors may be facing a rethink on the stock market component of their income portfolio – if Labor wins the election, we know of its policy to remove cash refunds for excess franking credits paid to individuals and in superannuation funds.
There are plenty of caveats about this, not least that the tightening opinion polls show that Labor is far from a shoo-in to win the election. Even if it does win, it is not certain that it will take this policy through to actual proposed legislation, and then, far from certain that Labor could, in government, get it through both houses of Parliament.
And when this could happen is also highly uncertain: Labor intends to introduce the changes from July 2019 onwards, but a hung Parliament and/or a fresh batch of neophyte independent Senators on the cross-benches of the upper house could easily complicate matters further.
However, all things being equal, yield-oriented investors should at least be thinking carefully about their portfolios, and whether companies paying franked dividends will be as attractive if the investors no longer qualify for a refund of unused franking credits.
For some investors – particularly self-managed super funds (SMSFs) – companies and trusts paying unfranked dividends that represent high yields could become more attractive. The benefit of a franked yield over an unfranked yield could be eroded, and bring down the higher return usually required by investors if a dividend is unfranked.
Here are 5 candidates for high unfranked FY20 yields
1. Air New Zealand (AIZ, $2.60)
Market capitalisation: $2.9 billion
FY20 forecast unfranked yield: 8.4% (FN Arena)
Analysts’ consensus target price: $2.47 (NZ$2.615 at current exchange rate)
The Kiwi flag carrier, which is also listed on the Australian Securities Exchange (ASX), started 2019 poorly, with a January trading update in which it slashed its earnings outlook in January, after bookings were hit by a softening tourist market, amid ongoing issues with the Rolls-Royce Trent 1000 engines used in its Boeing 787-9 fleet. Air New Zealand has had to ground aircraft and lease replacements as a result of the engine problems.
The airline cut its expected earnings by as much as 37%: the shares, which had started 2019 on the ASX at $3, fell as low as $2.27 in March. Air New Zealand has since recovered to $2.60, where the expected dividend yield (on FN Arena’s collation of analyst forecasts, at the current A$/NZ$ exchange is now about 8.1% for FY19 and 8.4% for FY20. An unfranked 8.4% looks to be one of the best deals on the ASX for yield-seeking investors at present.
The share price recovery has come on the back of the airline announcing a cost reduction programme, deferral of NZ$750 million (A$707 million) of aircraft orders and a winding-back of its network and capacity growth plans to a more conservative bent. AIZ was intending to grow its capacity by up to 6% this year, but has pulled that back to 4% for the full year. Similarly, where Air New Zealand was planning for network growth of 5%–7% over the next three years, that growth aspiration has been pulled back to 3%–5%, on average, to reflect a slower demand growth environment.
(Australian shareholders in New Zealand companies are subject to non-resident withholding tax of 15%: but where the New Zealand dividend is fully imputed, the impact of the withholding tax may effectively be offset by the company paying the Australian shareholder a supplementary dividend.)
2. 360 Capital Total Return Fund (TOT, $1.17)
Market capitalisation: $81 million
FY18 historical unfranked yield: 7.7%
Analysts’ consensus target price: $1.27 (Thomson Reuters)
Part of the 360 Capital property investment and funds management stable, the 360 Capital Total Return Fund (TOT) is a real estate-based investment fund with a mandate to generate a total return of 12% a year through selective investment in real estate assets and undervalued listed-REITs (real estate investment trusts.) According to Stock Doctor, the fund has fallen slightly short of that since listing in April 2015, but not by much – it is showing total return of 11.7% a year since inception.
At present, TOT has guidance for distribution per share (DPS) of 12 cents in FY19, up from 9 cents in FY18, which implies an expected yield, at $1.17, of 10.2%. The fund has already paid a 6-cent distribution for the December 2018 half-year, a one-third boost on the 4.5 cents paid for the December 2017 half-year. There are no FY20 estimates in the market, but the recent track record of distribution growth is impressive.
At present, TOT invests mainly in real estate debt, specialising in residential, hotel, medical centre and accommodation across three states – mostly New South Wales and Victoria. The loan book is 93% senior loans, with riskier mezzanine loans at 7% of the book.
TOT is one of the institutions filling the gap that has arisen on the back of the regulatory changes, added to the implementation of Basel IV capital controls, which have restricted Australian banks’ exposure to real estate construction and development. These conditions have created an opportunity for entities like TOT to provide real estate construction and development finance to middle-market developers in major Australian cities. In the current market, TOT says it can make secured loans with higher risk-adjusted returns than equity. It sees this strategy continuing for several years, but does expect eventually to re-enter equity investing into real estate, initially through distressed opportunities and later, mainstream real estate investing again.
The fund owns 50% of AMF Finance Pty. Ltd., which originates alternative lending and structured financing solutions to Australian real estate investors and developers and receives all establishment fees on development transactions written by 360 Capital Group entities, including TOT. AMF gives the trust the potential for active earnings to supplement the interest income on the loan book.
3. Aventus Group (AVN, $2.28)
Market capitalisation: $1.2 billion
FY20 forecast unfranked yield: 7.5% (Thomson Reuters), 7.4% (FN Arena)
Analysts’ consensus target price: $2.23 (Thomson Reuters), $2.207 (FN Arena)
Having “internalised” the management of the Aventus Retail Property Fund in October 2018, Aventus Group is the largest pure-play large format retail (LFR) landlord in Australia. They are described as such because they require bigger warehouse-type premises with easy vehicle access. The LFR sectors includes the likes of Bunnings, JB Hi-Fi, Costco, Rebel Sport, Officeworks, The Good Guys, and Home Consortium (the group redeveloping former Master’s sites into Homemaker centres). The LFR sector is seen as holding up reasonably well in terms of consumer spending: the sector captures 25% of Australian retail sales, or more than $80 billion a year.
Aventus owns 20 such centres, with 22% of the LFR market, with anchor tenants such as Bunnings, The Good Guys, and Officeworks as tenants, and an occupancy rate of more than 98%. In the first half of FY19, AVN lifted funds from operations (FFO) by 6.3% to $47 million, which flowed into a lift in the distribution from 8.1 cents to 8.2 cents, wholly cash-covered. Given that LFR centre supply is forecast to be limited, investors can expect the Aventus portfolio to be a strong cash generator: the trust has FY19 guidance for FFO per security of 18.4 cents, up from 16.3 cents in FY18. For FY20, Thomson Reuters’ collation of analysts’ estimates expects 17 cents, while FN Arena’s collation expects 16.9 cents. That prices Aventus at 7.4%–7.5% projected FY20 yield.
4. Stockland (SGP, $3.95)
Market capitalisation: $9.4 billion
FY20 forecast unfranked yield: 7.1% (Thomson Reuters), 7.2% (FN Arena)
Analysts’ consensus target price: $3.70 (Thomson Reuters), $3.74 (FN Arena)
Stockland is arguably not as well-understood on the market as it should be: usually considered a proxy for the Australian residential market, the property giant has large exposure to office, logistics, retirement living and retail properties, and is progressively reweighting its portfolio away from the troubled residential sector and into the booming industrial sector, and in particular, logistics and supply-chain properties. Stockland currently has 16% of the portfolio in logistics, and says it is on track to have “workplace and logistics” properties at up to 35% of the portfolio. And its residential assets are in attractive and well-located defensive markets.
Stockland is showing that it is prepared to get out of residential and retail holdings that it considers non-core – it has a programme of up to $1 billion of divestments – and surprised the market in this regard in December, when it sold out of the prime The Grove housing estate in Melbourne’s west, to Frasers Property Australia, for $202.5 million. That was a prized asset that the stock market did not think would be sold. The group is de-risking its retirement living portfolio by inviting potential capital partners to buy into the portfolio – but it won’t do any deals at less than book value.
The first-half result was weaker than expected – with a 56% decline in net profit and 6.7% decline in funds from operations (FFO) – and SGP is now targeting FFO per security growth of about 5% for FY19, at the lower end of the previously stated 5%–7% range, reflecting weak market conditions. In terms of distribution, SGP is guiding for 27.6 cents, which would represent growth of 4%, and come in at bottom end of the target payout ratio of 75%–85% of FFO. The FY19 guidance prices SGP on a 7% yield: for FY20, Thomson Reuters expects 27.8 cents, for a 7.1% yield, while FN Arena is slightly more optimistic, projecting 28.4 cents, implying a 7.2% yield.
5. Centuria Metropolitan REIT (CMA, $2.54)
Market capitalisation: $905 million
FY20 forecast unfranked yield: 7% (Thomson Reuters), 7% (FN Arena)
Analysts’ consensus target price: $2.56 (Thomson Reuters), $2.545 (FN Arena)
Now a pure-play office REIT, having sold the last of its industrial assets, Centuria Metropolitan REIT owns a $1.4 billion portfolio of 20 high-quality metropolitan office assets, with an occupancy rate of almost 99%. Three-quarters of its rental income comes from either multinational or ASX-listed companies, or government departments, producing a highly reliable income flow. CMA has a geographically diversified portfolio, weighted to eastern seaboard markets, with 34% of portfolio assets in Queensland, 26% in Victoria and 23% in New South Wales, complemented by 7% in WA, 4% in South Australia and 6% in the ACT. CMA’s FY19 distribution guidance of 17.6 cents a unit places it on a 6.9% yield: for FY20, Thomson Reuters’ collation of analysts’ estimates expects 17.8 cents, lifting the projected yield to 7%. FN Arena expects 17.9 cents, also 7%.
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