High Dividends – Risks and Opportunities; A look at WAM, WAX

  • Oct 31, 2019 AEDT
  • Team Kalkine
High Dividends – Risks and Opportunities; A look at WAM, WAX
Introduction

This year the Reserve Bank of Australia (RBA) has cut the interest rates thrice and there is an anticipation for it to be cut again for the fourth time. Therefore, the current cash rate is at a record low of 0.75%, the cash deposits like savings accounts, term deposits and the government bonds are now able to very low return which becomes difficult to beat the inflation. As the interest rate is at record low and expected to continue to remain the same for some time, the investors are looking for stocks that give good dividends in the form of income.

Moreover, during September 2019, the data in Australia reflected weak economic growth, rise in unemployment and weak growth in the wages, though S&P/ASX All Ordinaries Accumulation Index has given a return of 2.1%. The equity market in October is affected after the World Trade Organization downgraded the forecast for growth in global trade for this year & even next year, continued US-China trade war etc.

WAM Capital Limited
Average return per annum of 16.9% since inception:

WAM Capital Limited (ASX: WAM) is one of the leading listed investment companies (LICs) that is operated by Wilson Asset Management. The company has performed strongly since its inception, in August 1999 and gave an average return per annum of 16.9% from its portfolio before fees, expenses and taxes. WAM has gross assets of $1,413.7 million, has profit reserve of 13 cents per share and has posted pre-tax net tangible assets of $1.94.

WAM in the September 2019 has outperformed the S&P/ASX All Ordinaries Accumulation Index by 1.2% before fees, taxes and expenses as WAM Capital investment portfolio gave the return of 3.3% in the month of September 2019. The portfolio’s return was driven by the strong performance of Myer Holdings Limited (ASX: MYR) after the company reported robust net profit after tax growth in nine years, which led to 16.2% rise in the stock price.

The second stock that led to the portfolio growth is Clover Corporation Limited (ASX: CLV) stock, which is performing strongly (gave the return of 34.2% in the month of September) after the announcement that as per European regulations the companies that are into the manufacturing of infant formula will have to increase the level of omega 3 oils in their products.

For the month of September 2019, the WAM Capital’s portfolio has the largest holding in Consumer stocks of 20%, then comes the Financials sector with 19.1% holdings, Industrials sector formed 13.1% of the portfolio, IT formed 11.2% of the portfolio etc. with the cash component of 20%.

Additionally, for FY 19, the company has reported the net profit from ordinary activities after income tax expense of ~$14.5 million and profit from ordinary activities before income tax expense of ~$6 million. In FY 19, the company got the tax benefit of ~$8.5 million on the back of receiving of franking credits on franked dividends from the investee companies.

WAM Capital has a good annual dividend yield of 7.01% and has declared 7.75 cents of fully franked final dividend which was paid on 25 October 2019. With this the full year dividends comes to 15.5 cents per share. The company has paid total dividends since inception of 230.75 cents per share. It has been observed that WAM Capital has increased its dividend each year since the Global Financial Crisis up to FY19 period.

History of fully franked dividends (source: Company’s Report)

On 31 October 2019, WAM stock was trading flat at $2.210 (at AEST 1:44 PM). WAM Capital has a market cap of $1.59 billion, with ~721.26 million shares outstanding. In the last three months period, the stock has given a return of 1.84 percent.

WAM Research Limited
Average return per annum of 16.7% since July 2010:

WAM Research Limited (ASX: WAX), an Australian Listed Investment Company managed by Wilson Asset Management Group that mostly invests in undervalued growth stocks, which are mostly small-to-medium sized companies. The company has performed strongly since July 2010 and gave an average return per annum of 16.7% from its portfolio before fees, expenses and taxes. WAM has gross assets of $244.8 million and has posted pre-tax net tangible assets of ~$1.24.

The company in the September 2019 has outperformed the S&P/ASX All Ordinaries Accumulation Index by 1.5% before fees, taxes and expenses as WAM Research investment portfolio gave the return of 3.6% in the month of September 2019. The portfolio’s return was driven by the strong performance of Myer Holdings after the company reported robust net profit after tax growth in nine years, which led to 16.2% rise in the stock price.

The other stock that led to the growth in the company’s portfolio is Brickworks Limited (ASX: BKW) stock, that rose 10.1% in September. BKW for the FY 19 has delivered 68.1% increase in EBITDA on the back of strong performance of global property division & United State brick making segment.

For the month of September 2019, the WAM Research’s portfolio has the largest holding in Consumer stocks of 23.9%, Industrials sector formed 19.3% of the portfolio, IT formed 9.8% of the portfolio, Financials sector holds the 8.4% holdings etc. with the cash component of 22.4%.

Additionally, for FY 19, the company has reported net profit from ordinary activities after income tax expense of $1.6 million and profit from ordinary activities before income tax expense of $0.4 million. In FY 19, the company got the tax benefit of $1.2 million on the back of receiving of franking credits on franked dividends from the investee companies.

The company has a good annual dividend yield of 6.81% and has declared 4.85 cent, which was paid on 18 October 2019. This brought the fully franked dividend for the full year 2019 to be 9.7 cents per share. The company has paid total dividends since inception of 99.45 cents per share.

History of fully franked dividends (source: Company’s Report)

On 31 October 2019, WAX stock was trading at $1.42 (at AEST 2:18 PM), down by 0.351 percent. WAM Research has a market cap of $273.78 million, with ~192.13 million shares outstanding. In the last three months period, the stock has given a return of 1.06 percent.


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