Dividend dead set for revival

Investors in companies reinstating their dividends could get a nice price gain as well.

The market is rushing to feed dividend habit of investors, with the number of stocks tipped to reinstate or start dividend payments in the current financial year hitting a two-year high.

There are 28 ASX-listed companies that are bringing dividends back to life, or paying a maiden dividend, because their businesses have achieved critical earnings milestones, according to data compiled by Eureka Report.

These dividend revivers can potentially add another $280 million to shareholders’ accounts in the next 12-months, but this doesn’t even come close to being a key reason why investors should care.

The main game is capital gains. If the past few years are any indication, investors will pocket an extra $7 billion on top of dividends in the coming year.

Ignoring newly listed stocks for the periods in question, the 56 companies that restated or initiated dividend payments in 2010-11 and 2011-12 generated an average total return of 49.1% in the year following their dividend declaration.

What is also bolstering my confidence in targeting such companies as an investment strategy is that over 60% of dividend revivers from 2010-11 and 2011-12 have delivered positive alpha (i.e. the difference in performance between the stock and the broader market) over a 12-month period, and the average alpha is a stunning 39% as shown on the chart above.

Performance of individual stocks varies greatly, but this means that exercising some discretion will not only increase the probability of generating alpha but increase the average performance of your portfolio. The trick is to avoid companies that will struggle to sustain a dividend.

Following that thought, if we excluded emerging mining stocks from the group, because it is difficult to think of these stocks as being reliable dividend paymasters (although this is starting to change now as highlighted by Tim Treadgold in last week’s article), you’d find that the proportion of new dividend payers outperforming the market goes up to 70% and the average alpha increases by around 10%.

Drivers of outperformance

The strong outperformance of companies that are reviving or paying first dividends is unsurprising. Starting a regular dividend stream is one of the biggest signs of confidence that managers have about their company’s future.

If managers are not reasonably certain that future earnings will be able to support distributions, they would not generally dare to revive or start paying dividends as the market takes a very dim view of those who cut dividends.

The vote of confidence from restarting dividends is particularly important for embattled companies emerging from a restructure or turnaround, as nothing sounds the “all-clear” quite as loudly as the restarting of regular distributions.

The logic is not dissimilar to another investing strategy we highlighted a fortnight ago looking at how companies that post a maiden profit go on to outrun the broader market. 

Companies resurrecting dividends

There’s a good mix of large- and small cap companies that are expected to bring their dividend programs back to life in the current financial year.

Australian carrier Qantas Airways (QAN), steelmaker BlueScope Steel (BSL) and scrap metal recycler Sims Metal Management (SGM) are some big cap names that are believed to have turned their fortunes around enough to restart dividend payments.

However, the list of 2013-14 dividend resurrecters is dominated by small cap stocks, and what will probably be of most interest to readers are the four Uncapped 100 stocks listed on the table.

ThinkSmart

Consumer financing solutions company ThinkSmart (TSM) is the latest entry to the list, with management stating last week that it was looking to declare a dividend in 2014 – a year ahead of analysts’ expectations.

ThinkSmart suspended dividends in 2011 (its financial year is the same as calendar year) when it became apparent that it would have to book big losses as it had to turn to the securitisation market to fund its leasing solutions.

The company has turned a corner and is confident enough to start paying dividends again, with consensus forecasting a 0.5 cent distribution in 2014.

But the stock remains under pressure, as investment manager Alceon is liquidating its stake in ThinkSmart after doubling its investment to fund an unrelated investment opportunity. This is putting pressure on the illiquid stock, but investors should be using the dip as a buying opportunity, and we reiterate our “outperform” recommendation on ThinkSmart.

Ridley Corporation

Another Uncapped stock worth buying is animal feed company Ridley Corporation (RIC). Management opted not to pay a dividend last year as it hadn’t worked out a dividend policy, but did a capital return of 7.5 cents.

I believe the company is on a much surer footing this financial year and will return to paying regular distributions. The market is anticipating a 4.3 cent a share payout for 2013-14, which puts the stock on a 4.9% yield.

Ridley looks good value on fundamentals and has corporate appeal, as outlined in our October 16 article, and I have an “outperform” rating on the stock.

Regional Express

Junior airline Regional Express Holdings (REX) is another that is tipped to reinstate its dividend, with a 6.1 cent a share payout after a one-year break when it reported a sharp fall in profit for 2012-13.

I think management has done a commendable job in navigating the turbulence in the sector, but you can only feel bullish on Regional Express if you believe the removal of the carbon tax is a done deal and that the Federal Government will reinstate subsidies for regional airlines that were removed by the former Labor government.

Those with a stomach for risk can look to buy the stock now, but I would prefer to wait until there is more clarity on government policy before upgrading the stock. We might get some clarity on the airline’s outlook at its annual general meeting next Wednesday.

I reiterate my “neutral” recommendation on the stock.

RungePincockMinarco

Mining software company RungePincockMinarco (RUL) is the only dividend reviver that I have an “underperform” on.

Analysts are expecting the company to return to the black in the current financial year after it posted a $3.7 million net operating loss and stopped paying a dividend in 2012-13.

The fact that the company is anticipated to return to profit and pay a dividend is a big positive for the stock, which goes a long way to explain its 45% jump since July this year. RungePincockMinarco is expected to distribute 2.3 cents a share in dividends in 2013-14, according to consensus estimates.

Another supportive factor is corporate interest following the takeover of its peer and former Uncapped 100 stock ISS Group (ISS) earlier this year and QMASTOR (QML) in 2011.

However, there are three reasons why I think too much good news is priced into the stock. The first is RungePincockMinarco’s large exposure to greenfield (or new) mining projects. Miners are not looking to start new mines but to improve the efficiency of current assets.

The second is analysts’ margin expectations. Consensus estimates point to an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 15.7% for the current year compared with 2.2% in the previous year.

No doubt 2012-13 was a terrible year for the group, but the forecast margin looks a little optimistic in this environment given that mining services companies have been complaining about cost pressures during this annual general meeting season.

Further, I know it is not operating leverage that is driving the margin expansion as sales is only predicted to inch up 1.8% in the current year. RungePincockMinarco is in the midst of a turnaround, which should take a few years to complete. The strong recovery in margins just feels like it’s coming a little too soon.

The last reason is its forecast price-earnings. Even if the estimates prove right, the stock is on a 2013-14 P/E of over 15 times. That may not look much for a traditional IT company, but I am reluctant to pay more than eight times for what is essentially a mining services contractor – particularly one that is going through a restructure.

Think big, go smalls!

Uncapped 100 - Australia's most interesting small cap stocks

Small cap stocks covered by the Uncapped team
CodeNameRationaleMarket cap ($m)Total return 1-year (%)Sector (GICS)
NHF NIB HoldingsOnly listed health insurer. Widely held. Good performer.1,106.2934.54Financials
MTU M2 Telecommunications Group Amazing growth story and well run company. High free float and strong insto support.1,083.4867.54Telecommunication Services
GEM G8 Education Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.942.95145.5Consumer Discretionary
MMS McMillan Shakespeare One of the best performers since the GFC, but ongoing risk of change to FBT rules will hang over the company.918.141.57Industrials
ARP ARB Corp Well covered but good candidate for core holding due to quality management.877.0216.04Consumer Discretionary
AAD Ardent Leisure GroupWidely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.796.9553.83Consumer Discretionary
MRM Mermaid Marine Australia Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.782.878.25Industrials
BGA Bega Cheese Corporate interest in Australian food companies makes the cheese maker worth following.704.66141.24Consumer Staples
AUB Austbrokers Holdings The insurance broker is a strong performer. Widely held and well liked by small cap investors.681.3052.91Financials
BDR Beadell Resources Will be a very big FY14 for miner as it has to prove it aims to produce 200,000 ounces of gold a year.680.03-8.99Materials
SRX Sirtex Medical A shining star in the biotech space and one of the best performing stocks in 2012. Great product (liver cancer treatment) and bright outlook.657.030.17Health Care
RFG Retail Food Group Owns a number of well know franchise brands. Widely followed by instos.625.7751.25Consumer Discretionary
SGN STW Communications Group One of few companies able to benefit from online shift. Widely held and good insto support.600.6958.03Consumer Discretionary
AMM Amcom Telecommunications Well covered junior telco but good candidate for core holding.500.1261.33Telecommunication Services
CWP Cedar Woods Properties Property developer with good ROE and earnings growth track record.489.5863.48Financials
RCR RCR Tomlinson Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?486.6497.74Industrials
SEA Sundance Energy Australia Analysts have a favourable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.483.4335.71Energy
TOX Tox Free Solutions Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.463.6821.49Industrials
BRU Buru Energy Substantial size but not often covered by press. Widely held with good insto support.461.72-48.93Energy
TGR Tassal Group Salmon farmer is finally turning a corner with an improved harvest strategy and growing demand for product.440.25123.21Consumer Staples
CCP Credit Corp Group Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.425.3417.88Industrials
MYS MyState Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.421.9442.4Financials
ACR Acrux One of the most successful Australian biotechs in recent history. Widely held by instos.420.47-4.23Health Care
NXT NEXTDC The cloud computing company is an IT sector darling. Fairly widely held and followed.417.528.97Telecommunication Services
MYX Mayne Pharma Group Sizeable generic drug maker with interesting board members.390.20151.82Health Care
HZN Horizon Oil One of better regarded small energy stocks that doesn't receive much media attention.383.84-27.06Energy
SLX Silex Systems Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.383.07-33.82Information Technology
CCV Cash Converters International Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.381.54-4.76Consumer Discretionary
MOC Mortgage Choice Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.367.6397.98Financials
FGE Forge Group Good track record has been marred by a recent shock downgrade and capital raising. How long will it take to redeem itself?360.196.25Industrials
TGA Thorn Group One of few retail stocks that is performing well despite its flat outlook for FY14. The Radio Rentals chain owner is also well supported by instos.343.9536.42Consumer Discretionary
NWH NRW Holdings One of the better regarded mining & civil contractors with good track record in delivering on projects.334.67-32.76Industrials
IPP iProperty Group Worth watching as it is trying to be the REA Group of Asia.333.77109.09Information Technology
BNO Bionomics One of the larger cancer treatment developers in this market.315.30136.77Health Care
UXC UXC Company has turned corner and enjoyed re-rating. What's next?299.63-1.57Information Technology
GID GI DynamicsLargely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal liner on diabetics.288.5813.85Health Care
RKN Reckon Fierce competition for cloud base accounting software puts it in firing line.286.95-5.1Information Technology
RIC Ridley Corp High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.277.04-13.64Consumer Staples
GXL Greencross Acquisitive veterinary group. Good profit growth and share price performance, but gets little press.271.31128.2Health Care
AEU Australian Education TrustWell performing childcare centre property owner. Good yield story and outlook. 266.7137.55Financials
VOC Vocus Communications Telecom stocks are in favour but Vocus is one of the least covered263.6695.56Telecommunication Services
IMF IMF Australia Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.261.5913.15Financials
SHV Select Harvests Noteworthy for turbulent past and exposure to soft commodity market.256.70235.6Consumer Staples
SPL Starpharma Holdings Noteworthy for its good pipeline of innovations. Well run, widely followed.250.07-43.23Health Care
TGS Tiger Resources Future lies in its Kipoi copper mine expansion in the Congo but miner is fully funded with DRC govt holding 40% stake in tenement. Next 12mths will be interesting.247.9314.29Materials
AJA Astro Japan Property GroupStrong leverage to Japanese economy makes this an interesting stock to watch.237.5925.72Financials
TFC TFS Corp The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.235.6086.57Materials
NWT Newsat Potential large cap if it can launch its own satellite in 2015.230.67-17.02Telecommunication Services
SIV Silver Chef Strong jump in the share price of the equipment financing group has attracted a good following.221.1863.36Industrials
NAN Nanosonics A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.220.7761.54Health Care
MXI MaxiTRANS Industries Transport equipment maker posted good interim result. Has appealing yield and growth.214.3531.58Industrials
WBB Wide Bay Australia The building society is trying to turn its fortunes around. Also worth watching for its exposure to Queensland housing market, particularly around major resource projects.213.08-1.53Financials
CLH Collection House In similar space as Credit Corp. Strong stock performance has attracted a following and the stock appears to be well placed to run further202.4866.31Industrials
ACL AlchemiaOne of the few biotechs with revenue stream. Good pipeline of oncology treatments.197.856.09Health Care
DWS DWS Will be a big beneficiary if governments start spending on IT again.196.5612.3Information Technology
PFL Patties Foods Illiquid stock but has suite of well recognised consumer brands. Defensive yield.187.84-11.36Consumer Staples
RCG RCG Corp The footwear retailer is one of the best performing consumer stocks as online competition is not a big threat. Company has a good yield as well.181.2990.2Consumer Discretionary
HSN Hansen Technologies Operates in a high potential/growth industry but is not covered by press or brokers.175.8326.65Information Technology
NEA Nearmap A stellar performer with an Interesting business that offers high quality aerial maps to companies & government.174.611359.46Information Technology
ESV Eservglobal Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage174.33112.12Information Technology
IFM Infomedia Interesting tech play in the car parts market. Strong share price gain but gets little air play.172.3059.49Information Technology
DTL Data#3 Well respected IT company that receives little press coverage.161.67-2.56Information Technology
SFH Specialty Fashion Group In early stages of turnaround. Can the women's apparel retailer sustain the momentum?153.7935.38Consumer Discretionary
CKF Collins Foods One of the few food franchise listed companies.151.1338.58Consumer Discretionary
MCP McPherson's The personal care and household products supplier had been relatively insulated from volatile discretionary spend and online threat, but its latest profit warning shows it's not immune.145.22-8.48Consumer Discretionary
BGL BigAir Group The wireless small cap has gained strong following over past year or two but is often overlooked by investors and the press.142.6946.75Telecommunication Services
IMD Imdex Drilling company is well supported by instos and should benefit from any rebound in exploration activity.138.91-50.22Materials
MLB Melbourne IT A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.136.7210.18Information Technology
AZZ Antares Energy Liquid with good insto support. Already in production with exploration upside in Texas.133.88-2.78Energy
GHC Generation Healthcare REITOne of the more interesting REITs. Income is more defensive than typical property stock and its greenfield expansion gives it earnings growth potential.133.0637.5Financials
SAR Saracen Mineral Holdings Emerging gold producer that is widely held by instos. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.127.98-53.26Materials
MNW Mint Wireless Huge market potential if the mobile card payment solutions provider can gain market traction. Management aiming for $1 billion in transaction value a year.126.211983.33Information Technology
AMA AMA Group Good turnaround story but under the automotive services group is radar of most.122.0012.26Consumer Discretionary
WDS WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.118.6963.47Industrials
POH Phosphagenics Sizable biotech with a game changing FY14 year ahead. Good insto following but questions of poor audit and governance standard could dog company.112.25-18.52Health Care
LCM LogiCamms Strong price performance and reasonable valuation attracting interest.109.6156.92Industrials
REX Regional Express Holdings Well run airline that is overshadowed by Virgin and Qantas.105.69-17.95Industrials
JIN Jumbo Interactive Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.103.261.75Consumer Discretionary
RUL RungePincockMinarco IT company to resource industry. Facing tough operating climate with new CEO trying to restructure and turnaround company.96.1170Industrials
CAA Capral An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose. 94.6511.11Materials
DRM Doray Minerals Widely held by instos. One of the more favoured gold explorers by brokers.94.34-20.83Materials
UBI Universal Biosensors IncWell regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.89.94-48.5Health Care
BOL Boom Logistics Crane hire group is riding out the downturn in construction.  It's widely held by instos and is very liquid.87.85-38.33Industrials
CLV Clover Corp One of the star performers in 2012. Operates in growing but relatively stable niche.80.94-3.98Health Care
LGD Legend Corp Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.80.1239.71Information Technology
AOH Altona Mining Noteworthy copper play with Xstrata pull-out of Roseby project in Australia and the good ramp up of its Finnish project.79.83-43.4Materials
EML Emerchants Trying to change way corporates and governments disburse cash with its trackable and controllable debit card offering. If company can get $1 billion in loaded value on cards, the stock will surge.79.79326.67Financials
TAN  Tandou The only direct equity exposure to cotton prices. Also trades water rights and receives little press.68.7214Consumer Staples
CKL Colorpak The small cap packaging company has grown via acquisitions over past few years.68.4958.6Materials
PEN Peninsula Energy Widely held by instos and large free float. It's the only uranium miner on the list.66.91-47.62Energy
YTC YTC Resources Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.65.64-9.26Materials
KOV Korvest The construction products and services supplier has been hit by project delays and deferrals. But its relatively high yield could give it some support.56.59-2.39Industrials
CUV Clinuvel Pharmaceuticals Interesting skin disorder treatment developer that has done reasonably well over past year52.74-24.18Health Care
OTH Onthehouse Holdings Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a competitive edge against REA.52.59-5.88Consumer Discretionary
TSM ThinkSmart Potential turnaround story worth keeping eye on.48.2952.56Financials
GXY Galaxy Resources Good upside potential if it can get its problem-prone Jiangsu plant back on track. Won't be easy to right this ship.46.34-85.32Materials
EBT eBet Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.39.84166.54Consumer Discretionary
UML Unity Mining Growing Tassie gold producer with high free float. Valuation looks compelling too.39.31-53.33Materials
NTC NetComm Wireless Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.29.6070.37Information Technology
PGC Paragon Care Emerging hospital equipment supplier that has been ignored by market.18.52124Health Care
Source: Eureka Report, Bloomberg