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5 top-ranked, fully-franked dividend stocks

Glenn Freeman  |  27 Jul 2017Text size  Decrease  Increase  |  

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These strong performers in telecommunications, banking, healthcare, and retail should be on every Aussie dividend investor's radar.


The most dominant player in the Australian telecom industry, Telstra (ASX: TLS) has considerable brand strength and holds the clear market share majority of domestic fixed voice, broadband, and mobile services. This translates into a considerable competitive advantage--a narrow economic moat, in Morningstar terminology.

Telstra also has a stellar track record of dividend payments, with a more than 90 per cent dividend payout ratio. It paid out a fully-franked 31 cents a share for fiscal 2016, up 1.6 per cent on 2015. Though shifting market dynamics are likely to dampen this somewhat in the years ahead, Morningstar senior equity analyst Brian Han believes shareholders shouldn't be overly concerned.

He refers to the ongoing rollout of the National Broadband Network (NBN), new mobile competition from the likes of  TPG Telecom (ASX: TPM), and a declining fixed-line business as "a whirlwind of recent negatives".

"We urge investors to prepare for a cut to Telstra's dividend payout ratio. We currently forecast its fiscal 2017 payout ratio to be 98 per cent, falling to 87 per cent in fiscal 2018 and 81 per cent in fiscal 2019." Though even at these levels "the stock is showing an attractive near-term dividend yield of close to 7 per cent, fully franked," Han says.

Regarding the NBN threat, which he expects to take a $2 billion to $3 billion bite out of Telstra's annual earnings, Han is confident Telstra can address the shortfall. He expects Telstra will provide more clarity on its capital management review and any changes to its dividend payout ratios in its full-year results in mid-August 2017.

Australia's biggest bank, National Australia Bank (ASX: NAB) has a projected one-year dividend yield of 6.6 per cent. It paid out 99 cents a share fully franked for the first half of fiscal 2017, with a similar dividend expected for the second half, according to Morningstar senior equity analyst David Ellis.

He notes the regulatory and economic challenges facing Australia's big four banks and Macquarie. The most recent of these is new capital requirements from the Australian Prudential Regulation Authority--a change which is already priced into Morningstar's fair value estimate for each of the banks.

"Despite the capital impost, we believe the banks start with a strong capital position and have sufficient capital-generating capacity and flexibility to raise the additional capital organically ... [and] we think dividend payout ratios are unlikely to be affected. NAB retains its wide moat rating, and is "broadly fairly valued, with downside risk priced in," Ellis says.

In terms of projected dividend yield, Sigma Healthcare (ASX: SIG) holds third position, with 6.2 per cent forecast over the fiscal year. One of Australia's three pharmaceutical wholesalers, Sigma "has impressed on a number of fronts, displaying a capacity to grow both organically and by acquisition," says Morningstar senior equity analyst Chris Kallos.

Community pharmacies comprise most of its customer base, who purchase Sigma's broad range of prescription drugs, over-the-counter medicines, and other pharmacy merchandise.

In this latter category, Kallos says Sigma has less exposure to cyclical consumer demand than some of its competitors: "The non-discretionary nature of pharmaceuticals and other health-related products, coupled with ageing of the general population, implies defensive earnings streams".

However, he acknowledges the potential effect of the Australian government's changes to the Pharmaceutical Benefits Scheme.

Kallos expects Sigma's dividend payout ratio of around 80 per cent over the past three years will be maintained at least into fiscal 2021.

In fourth and fifth position are another bank heavyweight, Westpac Banking Corporation (ASX: WBC), and retail giant Wesfarmers (ASX: WES). Each have a projected dividend yield of 5.8 per cent over the next year.

Much like its close competitor NAB and Australia's other big banks, Westpac is well-equipped to address the challenges it faces, according to Morningstar's Ellis.

"Our net opinion and outlook remain strongly positive. Operational discipline, high-quality loan assets, and a diversified funding base provide a good platform to leverage market share gains achieved during the global financial crisis," he says.

Morningstar's fair value estimate for Westpac was unchanged after the federal government's announcement of a bank deficit repair levy in the 2017 Budget. Ellis believes it has the pricing power necessary to recoup most of the bank levy from customers and through productivity improvements.

In the retail segment, though Wesfarmers' core grocery business is facing increased competition from the discount channel--along with the impending entry of AmazonFresh--it is well-placed to weather the threat, says Morningstar equity analyst Johannes Faul.

Along with maintaining the highly respectable dividend yield outlook mentioned above--though down from prior years--Wesfarmers dividend payout ratio exceeds 80 per cent.

The diversity of the overall business is largely responsible for its economic moat. Wesfarmers has exposure to many segments of the Australian economy. Around 90 per cent of group revenue in fiscal 2016 was consumer-related, with the remaining 10 per cent sourced from its resources, coal mining, agriculture, and industrial gas businesses.

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Glenn Freeman is a Morningstar senior editor.

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