Concerns that the share prices of the big dividend payers had become overheated have been reduced by the better-than-expected results in the February reporting season. Some analysts had said the shares of some of the Australian share market’s biggest yielders were “priced for perfection”. They said the companies would need strong profit increases to justify share prices pushed higher by investors chasing yield over the past two years.
Share researcher Lincoln Indicators is forecasting a gross dividend yield for the 2013-14 year for Woodside Petroleum shares of more than 10 per cent. That is the highest ”gross” yield, which includes franking credits, among the share market’s 50 largest stocks. The company recently reported a fall in its 2013 profit from its 2012 result, which was inflated by asset sales. The company has increased its dividends.
Many companies have increased their dividends, showing confidence in the broader economic outlook.
Most of the big companies have delivered good results during the February reporting season. Lincoln Indicators has identified 10 companies from the top 50 by market capitalisation that it believes will deliver gross yields of more than 7 per cent over 2013-14. “Woodside is on a big yield, not because its share price has gone down, but because it stopped a couple of higher-risk projects and the company is a strong generator of cash,” says Elio D’Amato, chief executive of Lincoln Indicators.
“Woodside is one of our preferred ‘income’ stocks,” D’Amato says. These are stocks the researcher considers to be good investments for those looking mainly for income. They are also the stocks where investors do not have to take “unreasonable” risks that share prices will move sharply lower.
The researcher forecasts a gross yield of 9.98 per cent for Suncorp Group, the second-highest yielder among the top 50. The company recently reported 4.5 per cent fall in net profit to $548 million for the six months ended December 31, compared with the second half of 2012. While life insurance and its banking arm weighed down the result, its biggest division, general insurance, posted a net profit of $470 million and revenue growth of 6.6 per cent. The owner of insurance brands such as GIO and AAMI increased its dividend to 35¢ per share for the second half of 2013, a 40 per cent increase on last year’s interim dividend.
All of the biggest 10 dividend payers are included in Lincoln Indicators’ list of preferred income stocks, with the exception of Toll Holdings. The global transport company has struggled to take advantage of the improved global economic conditions, D’Amato says. It is hard to see a turnaround soon, he says.
When pressed to whittle down these nine preferred income stocks to five picks, D’Amato nominates Commonwealth Bank, ANZ, Telstra, Insurance Australia Group and Woodside. The Commonwealth Bank, whose shares are on a forecast gross yield of 7.33 per cent, is a “quality” company, D’Amato says.
“It is what the other banks want to be,” he says. He has ANZ shares on a forecast gross yield of 7.67 per cent and with its Asian strategy, the bank provides a bit more growth potential. He prefers Insurance Australia Group (IAG) to QBE Insurance Group and Suncorp Group as “we are big fans of general insurance”.
IAG recently announced a 39 per cent increase in net profit to $642 million during the half year to December 31. Its recent Wesfarmers’ insurance purchase includes a 10-year distribution deal with Coles Insurance.
Lincoln Indicators has Telstra shares on the forecast gross yield of 8.09 per cent. Telstra has income stability and recently delivered a strong half-year profit of $1.7 billion with forecast continued profit growth.
It will increase its interim dividend by half a cent to 14.5¢ a share, fully franked and paid on March 28.