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5 leading dividend stocks

Glenn Freeman  |  21 Nov 2017Text size  Decrease  Increase  |  
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These five moat-rated companies, a couple of which are dual-listed in Australia and New Zealand, are tipped to provide healthy dividends into 2018 and beyond.

Regulated utilities rank strongly in this list, with two of the following five companies in the business of energy distribution.

Genesis Energy (ASX: GNE) is a vertically integrated electricity generator and retailer, with a more than 15 per cent market share in New Zealand. Morningstar research suggests a forward-looking average dividend yield of more than 7 per cent over the next two years.

"It enjoys a strong competitive position, and we rate the firm as having a narrow economic moat based on its position in the oligopolistic New Zealand electricity market," says Morningstar senior equity analyst Adrian Atkins.

Genesis' generation division was the highlight of the latest result, having benefited from stronger wholesale electricity prices combined with higher output from its hydroelectric and thermal power stations.

"We like Genesis' high-quality renewable generation fleet, solid balance sheet, and strong free cash flows," Atkins says, though he has some concerns over earnings headwinds from the depleted Kupe oil and gas field, in which Genesis has a stake.

Another narrow-moat-rated energy stock, Meridien Energy (ASX: MEZ), is also tipped to provide dividend yields of around 7 per cent over the next two years.

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Meridien enjoys a strong competitive position, providing around one-third of New Zealand's electricity output.

"We expect Meridian Energy and the other incumbent energy providers to generate solid returns above the cost of capital in the long term," Atkins says.

He does, however, indicate this view is not without some risk: "From time to time, Meridian will be affected by adverse hydrological conditions, owing to deficient rainfall and/or inadequate snow melt."

"Therefore, the firm's margins and earnings will remain more volatile than those of its peers," he says.

In the telecommunications space, Spark New Zealand (ASX: SPK) also has a strong dividend yield outlook of around 7 per cent over the next two years.

With a narrow moat, Morningstar senior equity analyst Brian Han believes "its underlying quality is solid".

He sees a "relatively clear line of sight for management in terms of growth in mobile, wireless broadband, and its commitment to be the lowest-cost operator in the market".

"The confidence is well-placed given the solid 6 per cent increase in fiscal 2017 mobile revenue across the group, as well as the more than doubling of wireless broadband customers to 84,000 over just the past six months," Han says.

Outside the energy and telecommunications sectors, Sigma Healthcare (ASX: SIG) has a healthy 6.8 per cent dividend yield outlook into 2018 and 2019.

One of Australia's three pharmaceutical wholesalers, it is rated "Accumulate" by Morningstar senior equity analyst, Chris Kallos. Though he notes a reduction in his earnings estimate for fiscal 2019, Kallos emphasises this has not affected Morningstar's fair value estimate or recommendation.

The company has "impressed on a number of fronts" with its capacity to grow both organically and through acquisition.

"Management initiatives have delivered significant efficiency gains at the operational level during the past three years. Nonetheless, ongoing reform of the government Pharmaceutical Benefits Scheme (PBS) remains a major challenge to profitability," Kallos says.

That said, he says Sigma has made significant strategic moves to expand its professional service offering to mitigate the threat of PBS changes.

Another strength is its market-leading array of banner group brands and strategies in the industry.

The sole financial company on this list, National Australia Bank (ASX: NAB), is expected to provide a dividend yield of around 7 per cent over the next two years.

Morningstar senior equity analyst, David Ellis, refers to some of the challenges Australian banks face at present, but still sees long-term earnings upside from National Australia Bank's newly announced strategic initiatives.

Having recently announced it will cut around 4,000 staff--12 per cent of its workforce--he believes the bank will continue to grow.

"The combination of targeted cuts ... and business simplification initiatives are expected to deliver cost savings of at least $1 billion by end of fiscal 2020," Ellis says.

"We think the bank's wide economic moat will enable future cost savings to be passed through to shareholders rather than competed away through lower net interest margin and fee revenue."

Ellis expects the bank's high dividend payout ratio will continue in fiscal 2018, and slowly ease during the next five years to close out fiscal 2022 at around 75 per cent of earnings.

"In the short term, we are comfortable with the high dividend payout as weighted asset growth is kept in check, profitability is strong, and the outlook for credit quality remains benign," Ellis says.

"But, longer term, we believe the payout should decline closer to within the bank's 70 to 75 per cent target range."

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Glenn Freeman is a senior editor at Morningstar.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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