Australia’s best dividend growers

These top stocks are yielding more, and delivering strong share price growth to boot.

Summary: The stocks on the S&P/ASX 200 index delivering consistent dividend growth and strong total returns include the “big four” major banks, but the best performers are actually in other sectors. For yield hunters, it is evident that the best return harvests have been from areas such as property, while resources stocks have continued to lag.
Key take-out: More than 80% of the top 25 dividend growers have beaten the market’s benchmark total return of 31.2% over the past three years, and their average return to investors has been an impressive 60.3%.
Key beneficiaries: General investors. Category: Shares.

The February reporting season has been a welcome relief to Australia’s yield-hungry investors, with companies dishing out nearly 20% more in dividends than the year before.

Choosing the right companies amidst the growing pool of dividends, however, has never been more challenging. Equity investors are seeing the prospective yields shrink before their eyes as Australia’s biggest blue-chip stocks climb to levels that may be considered expensive.

Indeed, the average yield in the S&P/ASX 200 index has slipped to around 4.5% from 5% since June last year when the market hit a six-month low.

But with interest rates unlikely to climb substantially higher, shares remain the outstanding investment option in the hunt for yield. As Adam Carr argued in Monday’s article Why the hunt for yield will intensify, Australian stocks are still cheap relative to bonds and pay a much higher income.

It is for this reason Eureka Report has researched Australia’s best dividend growers out of the S&P/ASX 200 index. The data only includes companies that have increased their dividends per share for each period in the past three years and that are expected to yield at least 4% up until 2014-15.

These 25 companies, shown in the table below, are the only blue-chip stocks that met these parameters. They are ranked based on their total returns to shareholders since the beginning of 2010-11.

These dividend growers shouldn’t be assessed just on their yield, as they are more than just high yielders. In fact, more than 80% of them beat the benchmark total return of 31.2% over the three years. Even when the laggers are included, their average return to investors has been an impressive 60.3%.

Indeed, the evidence that healthy dividend paying equities also outperform the broader market has been mirrored in the American market. In the US, investors benefit from access to the S&P 500 Dividend Aristocrats: the 50-plus members of the S&P 500 index that have increased their dividends each year for the past 25 years. Over the past decade these 50 companies have made a total return of 163%, compared to 102.7% from the wider index.

Dividend growth can be a far better indicator of overall performance. Generally, companies with sustainable earnings growth can afford to constantly lift their dividends per share. Managers of such companies are clearly confident about the future as they realise the stock will be punished if they were to cut dividends later on.

In contrast, poor-performing companies that have had their share prices smashed can have an attractive income return on investment ... the challenge is share price appreciation, or the lack of it.

For example, Myer – which has lagged the market by 26.5% since 2010-11 – saw its yield leap to 6.9% from 6% after posting a disappointing half-year result last week when the retailer cut its dividend by 10% to 9 cents.

While an earnings miss may be forgiven during periods of instability or structural change, reducing dividend payouts is seen as a severe loss of management credibility as they should have incorporated enough of a buffer to weather risks to profitability.

Dividend growers also offer the power of “double compounding interest”. As their dividends per share rise, investors receive a greater proportion of income to their initial investment – effectively earning interest on a rising interest rate.

The highlights

Each of four banks made the list of dividend growers. Westpac, NAB, ANZ and Commonwealth Bank have increased their dividends per share each year amid Australia’s recovering economy ever since each cut them back in 2008-09.

Last month CBA continued the trend by boosting its half-year dividend by 12% to $1.83 a share, beating expectations for $1.81.

However, the majority of analysts don’t expect our banks to be able to remain on their current trajectory. Though their yields are unlikely to come under pressure, Australia’s leading bank analysts say the banks may be hard pressed to replicate last year’s performances (see Don’t bank on huge earnings growth).

Indeed, in CBA’s interim report chief executive Ian Narev said he remains cautiously optimistic about the economy but believes any improvements will be gradual, with little evidence of investment in the non-resource sectors other than housing.

Meanwhile property groups and trusts figure prominently in the list. Mirvac (MGR), Dexus (DXS), Goodman (GMG), GPT (GPT) and Charter Hall (CHC) have all beaten the market’s total return since 2010-11.

Interestingly, three out of the four of JP Morgan’s key picks among real estate investment trusts (REITs) have grown their dividends since 2010-11. In a broker note to clients earlier this month, the investment house said it preferred Stockland (SGP), Goodman Group, Mirvac, and Charter Hall.

Dexus wasn’t rated because JP Morgan hadn’t yet incorporated the planned acquisition of Commonwealth Property Office Fund, while GPT was recommended as neutral because of the headwinds it faces with occupancy rates in the office and industrial sectors.

Charter Hall– by far the smallest company of its peers with a market cap of $1.2 billion – has returned a whopping 118.5% to shareholders over the period, topping the line-up. The group comprises two segments, with around 60% of earnings from investments in various property funds across the office, retail and industrial sectors and the rest from Australian property funds under management.

Last month the company lifted its interim dividend 12.2% to 11 cents per share and upgraded its earnings guidance, forecasting operating earnings per security to grow to 7-9% for 2013-14, up from 7%. The company also undertook a $140 million placement to repay debt and fund acquisitions.

The second-best performer in the property space has been Mirvac, with a 62.6% return to its shareholders. Unlike Charter Hall, a large proportion of its operating profit – around 20% – is derived from residential property development. This part of Mirvac’s business is booming: exchanged pre-sales contracts surged 49% to a record high of $1.5 billion in the first-half of this year.

But excluding Charter Hall, the best-performing stocks out of the dividend growers have been exceptional industrial businesses across a range of areas.

Telecommunications company M2 Group has returned 115% to its shareholders by providing exceptional earnings growth, largely through a series of acquisitions. The stock has shed 5.6% to Tuesday’s close of $6.20 since its half-year report in late February, with investors expecting a higher dividend than the 15% increase to 11.5 cents a share. Nevertheless, analysts tip a full-year dividend of 13 cents a share – a full-year increase of 22.5%. Citing the fulsome run in its share price, Eureka Report’s Brendon Lau has dropped his coverage of M2 Group (you can read why here in Time to sharpen the selection).

Rounding out the top three is Retail Food Group (RFG), with a 114.1% return. The retail food manager, which owns brands including Donut King, Brumby’s bakeries and Crust Gourmet Pizza, has achieved double-digit earnings growth over the past few years due to its aggressive outlet expansion.

The company said it expects its strong earnings momentum to carry over to the second-half of 2013-14 amid strong franchisee interest, but that it’s premature to revise its full-year guidance of 15% growth to net profits. Brendon Lau has an outperform recommendation on the stock.

The detractors

The main culprits dragging on the performance of the list are in the resources sector. While Fortescue Metals Group (FMG), Mineral Resources (MIN) and Woodside Petroleum (WPL) have managed to grow their dividends since 2010-11, each of them has underperformed the S&P/ASX 200 index in the period.

Iron ore miner Fortescue – the worst performer of the 25 stocks – has lost its shareholders 18.1% of their investments since 2010-11, even after its share price surged more than 30% in the past year.

Despite omitting its half-year dividend in 2012-13 amid a collapse in the iron ore price and a plunge in profits, Fortescue was still able to lift its final dividend that year to 10 cents – above the previous year’s combined dividends of 8 cents as it beat expectations to pay down and refinance its debt.

Fortescue is on track to double last year’s dividend after paying shareholders 10 cents a share, and with analysts forecasting the same for the final dividend. The company plans to introduce a dividend payout ratio of between 30-40% once gearing of 40% is achieved – potentially unlocking further dividend growth.

Woodside Petroleum also has rallied in the past year after a volatile performance in the previous two years by lifting its payout ratio and offering a special dividend, catering to the hunt for yield. The oil and gas company is expected to lift its interim dividend this year by 34.9% to $1.12.

Tim Treadgold said in June last year to buy Woodside for its cash and yield, but to be wary about the company’s growth pipeline. The stock has climbed 11.8% to Tuesday’s close of 38.36 since his outperform recommendation.

The last underperformer in resources, Mineral Resources, isn’t expected to be a dividend grower for long. Though the company has grown its dividend every year except 2009 – where it held it steady at 19.35 cents – analysts anticipate the iron ore miner and mining services company’s final dividend to be cut to 28.5 cents from 32 cents given its payout ratio of 50%.

Only one other company detracted from the dividend growers’ excellent reputation – Cochlear. Shares in the one-time market darling have been slammed over threats to its market position and a product recall over the past two years.

But the medical device company announced last week that it received approval to release its new hybrid hearing device in the US that is targeted at those who are partially deaf – opening up a new market. Given the expectations for sales momentum to pick up in the second-half, analysts are forecasting the final dividend to lift 2.4% to $1.30. This would make Cochlear a dividend grower for the past 10 years, ever since its maiden dividend in 2004.