Australian Dividend Stocks In Focus by Ben Reynolds, Sure Dividend
The Australian stock market is filled with dividend stocks with high yields and payout ratios.
That’s because of differences in taxation that make dividend payments more appealing for Australian businesses than for United States businesses.
The result is a country filled with businesses that reward shareholders with high dividend payments.
This article takes a detailed look at 8 Australian dividend stocks. Four of the 8 have strong competitive advantages and are trading at fair or better prices.
Australian Dividend Stocks – Woolworths Limited
Woolworths (WOW) is a Diversified Australian retailer. The company was founded in 1924 by Percy Christmas. The company has grown to reach a $22 billion market cap. Woolworths operates under the following:
- Grocery stores under the Woolworths, Countdown, and Thomas Dux names
- Gas stations under the Caltex name (joint venture with Caltex Australia Petroleum)
- Liquor stores under the Dan Murphy’s, BWS, Cellarmasters, and Langton’s names
- Big box discount retail under the Big W name
- Home improvement stores under the Masters name
- Hotels and restaurants through ALH Group
Woolworths operates in 5 segments. The percentage of total EBIT each segment has generated through the first half of fiscal 2016 is shown below:
- Australian Food, Liquor, & Petrol generated 85% of EBIT
- New Zealand Supermarkets generated 10% of EBIT
- General Merchandise generated 4% of EBIT
- Hotels generated 9% of EBIT
- Home Improvement generated -8% of EBIT (lost money)
The Home Improvement segment is unprofitable. The segment lost $125 million in EBIT in the first half of fiscal 2016. 33% of the Home Improvement segment was owned by Lowe’s (LOW). Lowe’s partnered with Woolworths in 2009. The company chose to exercise its option to have Woolsworth buy back Lowe’s 33% ownership.
Why would Lowes do this? Because the Home Improvement endeavor was unprofitable and will likely remain unprofitable. Lowes is able to exit without serious losses. Woolsworth is left ‘holding the bag’ – and will either sell or close its Home Improvement segment.
The Home Improvement segment is not the only one struggling for Woolsworth.
- All segments saw EBIT decline
- The Australian Food, Liquor, and Petrol segment saw EBIT fall 32%
- The General Merchandise segment saw EBIT fall 38%
Note: Results are from the 1st half of fiscal 2016 versus the 1st half of fiscal 2015
The company is taking action by shaking up management and refocusing its business. Woolworth is exiting Home Improvement (as discussed earlier).
The company was forced to cut its dividend 34% due to struggling operations. The company’s stock is down ~38% since June of 2014.
Woolworths stock is currently trading for a price-to-earnings ratio of 14.6. For comparison, investors can purchase shares of the far-more-streamlined discount retail industry leader Wal-Mart (WMT) for a price-to-earnings ratio of 14.7.
Woolworths stock has some upside if operations rebound. The company is not cheap enough at current prices to justify its risk operations.
Australian Dividend Stocks – Australia & New Zealand Banking Group
Australia & New Zealand Banking Group (ANZ) is the 4th largest bank in Australia. The company has a market cap of $56 billion. Australia & New Zealand Banking Group has a very long corporate history. The company was founded in 1835.
The company’s dividends have fairly consistently trended up over the last several decades.
The company generates ~80% of its operating income in Australia & New Zealand, with most of the remaining 20% coming the Asia Pacific region.
Australia & New Zealand Banking Group has an especially high payout ratio for a bank. The company typically pays out around 70% of its earnings as dividends.
The stock currently offers investors an exceptionally high 7% dividend yield. As the company’s dividend history image above shows, dividends do fluctuate. With that said, long-term investors will very likely have higher dividends from Australia & New Zealand Banking Group a decade from now than today.
The company’s high payout ratio makes its growth even more impressive. Australia & New Zealand Banking Group has compounded its earnings-per-share at 8.3% a year over the last decade.
The company will very likely continue to compound its earnings-per-share at favorable rates. Growth will be fueled by continued expansion in Australia, New Zealand, and the Asia-Pacific region. Australia & New Zealand Banking Group is growing particularly fast in New Zealand, where earnings have compounded at 20% a year over the last 4 years.
The company appears undervalued at this time. Australia & New Zealand banking group is trading for a price-to-earnings ratio of just 10. This does not reflect the company’s excellent total return potential and shareholder friendly management.
Australian Dividend Stocks – Wesfarmers
Wesfarmers (WES) is a large Australian conglomerate with international operations. The corporation was founded in 1914 as a farmer’s cooperative. Today the company is worth $35 billion.
Wesfarmers operates in many of the same industries as Woolworths. Wesfarmers operates in the following industries:
- Groceries, merchandise, liquor, and fuel under the Coles name
- Home Improvement under the Bunnings and Homebase names
- Office Supplies under the Officeworks name
- Discount retailers under the Target and Kmart names
- Industrial products (chemicals, energy, fertilizers)
Woolworths failed in home improvement because it could not compete against the industry leading Bunnings.
While Woolworths saw earnings-per-share nose dive by more than 30%, Wesfarmers showed 2.1% earnings-per-share growth for the first 6 months of its fiscal 2016.
The percentage of EBIT from each of the company’s 4 segments through the first half of fiscal 2016 are shown below to give a better idea of the company’s operations:
- Food, Liquor, & Petrol generated 44.4% of total EBIT
- Home Improvement & Office Supplies generated 36.1% of total EBIT
- Department Stores generated 18.5% of total EBIT
- Industrials generated 1.0% of total EBIT
Note: Industrials EBIT is depressed due to the decline in energy and mineral prices. In the 1st half of 2015, the Industrials segment generated 8.6% of company EBIT.
The image below shows the EBIT growth of the company’s segments.
Source: Wesfarmers 2016 Half Year Results presentation, slide 8
The company’s retail operations are performing very well. This is in stark contrast to Woolworths’ poorly performing operations. It shows how important an effective management team is for the success of an organization.
The industrials segment was barely profitable due to the steep decline in commodity prices over the last year. This is a temporary condition. The segment will rebound when commodity prices do. The industrials segment is not a large part of Wesfarmers’ total business and poses no real business obsolescence risk.
Wesfarmers stock is currently trading for a price-to-earnings ratio of 19.0 and has a high dividend yield of 4.9%. The company’s stock appears to be trading around fair value at this time. The company’s management team should be applauded for paying out a large portion of earnings as dividends while still growing the business.
Wesfarmers is a high quality business that is likely trading around fair value at current price. The company should continue growing organically and through bolt-on acquisitions. Investors will likely see above-average total returns from the company through dividends and earnings-per-share growth.