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The fund manager L1 Capital believes that Chorus Ltd (ASX:CNU), an ASX dividend stocks, could be an attractive choice for generating passive income. Despite a more than 10% decrease in the Chorus share price since mid-August, L1 Capital sees several compelling reasons to consider the stock.
Chorus, New Zealand's largest telecommunications infrastructure company, focuses on expanding its fiber cable network and increasing the adoption of high-speed internet.
L1 Capital's favorable view on Chorus shares is based on several key factors:
- Protection Against Inflation and Higher Interest Rates: The fund manager highlights that Chorus (ASX CNU) is well-positioned to weather inflation and rising interest rates. This resilience is attributed to the weighted average cost of capital (WACC) and regulatory asset base (RAB) adjustments expected in the 2025 regulatory reset. The RAB represents the company's invested capital in its network, which generates revenue.
- Strong Adoption of High-Speed Plans: Chorus has a high uptake of high-speed internet plans. It boasts a 68% adoption rate for plans with speeds between 100 Mbps to 500 Mbps, compared to the NBN's 21% uptake. For speeds of at least 1 Gbps, Chorus has a 24% adoption rate, while the NBN lags behind at 1%. Furthermore, only 8% of Chorus plans have speeds of less than 100 Mbps, compared to 78% of NBN plans.
- Downward Share Price Correction: The Chorus share price has experienced a decline of 13.5% since mid-August, which L1 Capital views as an attractive entry point.
Passive Income from Chorus Shares: Chorus maintains a dividend payout ratio policy of 60% to 80% of free cash flow, derived from net cash flow from operating activities minus sustaining capital expenditure. The company has consistently increased its dividend over the years, with the board guiding a dividend of NZ 47.5 cents per share for FY24. This translates to an approximate forward dividend yield of 6.5% in Australian currency. L1 Capital anticipates further dividend growth due to earnings expansion and the completion of the network build.
Outlook for Chorus Shares: Chorus CEO JB Rousselot acknowledges economic challenges but remains focused on growing the network's adoption to support New Zealand's digital future. The company plans to continue its copper withdrawal program, which is expected to drive fiber adoption. Chorus aims to be an active wholesaler and highlights the value of fiber's reliability and speed for consumers.
Overall, Chorus shares represent a potential source of passive income with growth prospects, supported by strong high-speed plan adoption and regulatory adjustments on the horizon.
