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Here are 2 undervalued shares paying fully-franked dividends

Nicholas Grove  |  06 Mar 2017Text size  Decrease  Increase  |  

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There are two stocks on the ASX that not only deliver fully-franked dividends to investors and carry narrow economic moats, they're currently trading at modest discounts to their fair values following disappointing earnings performances in the most recent half-year results season.

Platinum Asset Management (ASX: PTM), a highly-regarded global equities manager, delivered a weak earnings result for the first half of fiscal 2017, with net profit down 20 per cent to $95.4 million following a 12 per cent fall in funds under management.

Morningstar senior equities analyst David Ellis believes shares of Platinum are currently undervalued, and despite the result, he is retaining his positive outlook on the company which he says is underpinned by "favourable long-term thematics".

He also points out the yield on the stock is an attractive 5.5 per cent, fully franked--supported by high operating leverage, low capital demands, and strong free cash flow generation.

"Short-term investment underperformance and fear of weakening equity markets are currently weighing on the share price," Ellis says.

"Platinum is attractively priced, and while there are short-term pressures, we expect earnings to recover given its strong brand and long-term investment performance track record.

"In the meantime, long-term-focused investors receive an attractive yield, supported by a business with minimal capital expenditures and a very strong balance sheet."

Also delivering disappointing earnings in February was Telstra (ASX: TLS), shares in which are also modestly undervalued at present.

The telecoms giant saw its net profit fall 11.8 per cent to $1.8 billion in the half, after it felt what Morningstar senior equities analyst Brian Han describes as the "pronounced impact" of increasing competition, and the accelerating rollout of the National Broadband Network.

A recent series of network outages also did not help the telco's earnings. However, looking beyond the half just gone, Han believes there is no need for investors to panic.

Firstly, Han points out that Telstra's management reaffirmed full-year guidance for a low- to mid-single digit increase in both earnings and free cash flow.

Second, despite the aforementioned network issues, Telstra still added 200,000 retail mobile subscribers in the half.

"Our thesis is unchanged on Telstra. The solid customer gains show it is competing effectively in a fierce market," Han says in a recent note.

"We believe it will continue to do so on the strength of its infrastructure, scale and balance sheet."

Telstra is currently sitting on a fiscal 2017 dividend yield of around 6 per cent, fully franked.

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Nicholas Grove is a Morningstar journalist.

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