"Mature businesses, with leading market positions and reliable, growing cash flow make excellent, sustainable sources of outperformance in times of volatility." Pic: Getty Images
Experts
MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Luke Laretive, chief executive officer and investment advisor at Seneca Financial Solutions.
“I feel like every retail investor I speak to at the moment is chasing resources, agricultural commodities or a transformational small cap to instantly patch up their portfolio performance and restore their confidence again,” he said.
“Unfortunately, if your investment strategy looks more like gambling (rather than disciplined analysis and proper portfolio construction) chances are you’ll end up with gambling-like expected returns (i.e. 0.00%)
“Somewhat ironically, the opportunity for outperformance is often simpler and more obvious than many people appreciate.”
Mature businesses, with leading market positions and reliable, growing cash flow make excellent, sustainable sources of outperformance in times of volatility,” Laretive adds.
“Their large and growing dividend yields represent a sustainable source of income for retirees, tax-effective returns for those in the higher tax brackets and a great way to accelerate savings for those young people looking to save for a home or overseas trip.”
The three stocks covered below fit the bill, according to Laretive, for sustainable, growing dividends.
GQG is a fund manager with over US$90bn under management.
The ASX lister has a strong performance track record and a highly competitive fee structure.
“Like most well run funds management businesses, they have relatively high, but fixed running costs,” Laretive says.
“This means at a certain size, fund managers like GQG go from profitable to exceptionally profitable. GQG has only recently hit this tipping point, with margins ballooning from 68% in 2019 to 81% at their last full year result.
“This would be less impressive if GQG, like many of their peers globally, generated most of their incremental margin from volatile performance fees.”
Fortunately for investors, GQG generates 95%+ of its revenue from stable management fees and it’s this stability (and scale) that allows the company to generate exceptional free cash flow.
Strong cash flow like this supports sustainably high level of dividends, with the current running yield floating around c. 8% pa.
“Unlike many other high yield stocks on the ASX, GQG is actually forecast to grow their dividends over the longer term, as their fee base organically grows with their funds under management,” Laretive adds.
Amcor is the global leader in packaging, their customers are the multinational fast-moving consumer goods (FMCG) companies that populate the supermarket shelves around the world.
“If you want to think about some real-world examples of what Amcor do, think Nespresso coffee pods, the plastic meat tray your sirloin steak sits in at Woollies, a bottle of Gatorade or a zip lock bag of fresh pet food,” he said.
“Amcor, like many other industrial companies, are facing a range of cost pressures – from raw materials to labour shortages to freight costs – many would assume Amcor would be copping these costs directly to their bottom… those people would be wrong.
“The company’s market position affords the company the flexibility to pass on price rises to customers, protecting their margins, free cash flow and subsequently, dividends.”
Amcor has been one of the more reliable dividend payers on the ASX, with dividends growing at an impressive rate of 8.5% compound annual growth rate (CAGR) over that period.
In recent times, AMC has paid out c. 75% of its free cash flow in dividends every year and the stock trades on a c. 3.8% dividend yield currently.
“We think Amcor can sustainably grow dividends per share at mid-to-high single digits each year making it an attractive investment option at the current price,” Laretive says.
AFG is Australia’s #1 mortgage aggregator, and over the past 7 or 8 years has taken dividends from 6cps in 2015 to 17cps in 2022. Yet, here we are today, buying the stock at 2018-prices and on a pretty much all-time high dividend yield of 8.80%.
“Sure, AFG faces some risks with rising compliance costs and commission rate pressure, but these are risks facing all their competitors, and we see the market leader as best placed to handle these challenges,” Laretive says.
“We think AFG can sustainably grow margins as the securitisation and white label loan businesses overtake the less profitable, legacy ‘third-party’ products.
“We also see AFG’s earnings as somewhat defensive, as like the big banks, has an intrinsic natural hedge with margins rising as volume growth slows (and vice versa).
“It is a reliable dividend payer, with significant potential for a re-rate if they can build on the momentum and transition to these higher margin products.”
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