28 ASX stocks have grown dividends each year for the last 5 (but will they in future?)

As part of Livewire's Income Series last year, with the help of IML, we shone a spotlight on the 42 stocks that had paid a dividend for the past 20 years... rain, hail, or shine. 

Equities

42 ASX stocks have a 20-year dividend streak. IML shines a light on 5 of them.

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The list made for interesting reading, particularly because there have been some recent times (e.g., the pandemic) when simply receiving a dividend has been important, particularly for retirees.

Times change, however, and we're far enough removed from those dark days that we can now shift the focus back to sustainable and growing dividends, which, to be frank, is the lens through which investors should consider equity income investments. 

The table below highlights the 28 companies in the All Ordinaries index that have delivered growing dividends in each of the last five years. To be clear, these are not necessarily high-yielding stocks. They have simply grown their dividends consecutively over the five-year period. 

The list

The analysis

Never forget that a list is just a list until you put it in front of someone with the expertise to pick it apart. For that, I engaged Martin Currie Australia Chief Investment Officer, Reece Birtles. He knows his way around a good income stock, co-managing the Martin Currie Equity Income Fund with Michael Slack. 

High-level insights

Exceptional 5-year period

As I had hoped, Birtles is quick to point out the challenges with the list. Before getting to the constituents, he says that "dividends are very much an outcome of profit, cashflow, CapEx, the cycle, and the nature of the business model". 

"While five years might seem like a long time, it's been a pretty exceptional five-year period, with COVID," says Birtles, adding that for "the companies that have done well, especially up to the end of last year and particularly in the consumer space, things could be very different going forward". 

Worse than average

To the constituents themselves, Birtles points out that more than half of the stocks on the list are currently delivering a yield below the market average - which traditionally sits around 4%. So, if you're not going to get a yield above the market average, what's the point of taking on the risk? 

What about next year?

Next up, and this is critically important, Birtles believes that up to a third of the names on the list will cut their dividends this year. 

For example, Sonic Healthcare (ASX: SHL) recently downgraded its profit, so should be considered unlikely, whilst Bapcor (ASX: BAP) has significant C-suite and revenue problems and will almost certainly cut its dividend. The other one that Birtles has a big question mark against is Nick Scali (ASX: NCK): "The consumer has rolled over, profits are down, and they're likely to cut the dividend," adds Birtles.

The bottom of the list

Birtles notes that many of the names at the bottom of the list are higher-growth companies. 

"A lot of them are US-dollar earners, and they're probably going to be able to keep growing their dividend, but of course, at 1%, you're not really buying them for the dividend yield," he says. 

Franking matters

One last note before getting to the names on the list that Birtles likes (as well as a few 'extra' picks for those who are still reading) around franking: "It matters," notes Birtles, "especially to a lot of retirees." 

"If you've got a stock with five-plus percent raw dividend yield on this list and you've got 100% franking, that's an extra 2% yield as a tax refund for retirees", says Birtles. 

"Especially when you get to the top part of the list, if you can get a franked dividend, it means a lot more than an unfranked dividend. And that is worth taking into account as well". 

Stocks Martin Currie likes

There were a handful of stocks on the list that Martin Currie likes. Below are some comments from Birtles on each; 

APA Group (ASX: APA)

"APA we like and think it will keep growing the dividend. It's not growing as fast as it has in the past because it's having to invest a bit more into its business as it's moving into more renewable-energy-type investments, and not just the traditional pipelines that threw off a lot of cash flow from the gas. But we think it's a very resilient business because it's got long-term contracts on those gas pipelines." 

Chorus (ASX: CNU)

"It's a fibre business operating in New Zealand, with quite an attractive regulated structure. The cash flow is quite strong. Interestingly, with both APA and Chorus, EPS is not a great measure because there's quite big depreciation, and the dividends are driven by cash flow. 

"For a lot of investors, they might look at dividend payout ratio - dividend divided by earnings - but in these names, you have to look at the the free cash flow thrown off as EPS is not a reliable measure."

"We're quite confident they're the resilient names that should be able to grow dividends over time. The real asset space is very good for generating good, growing dividends".

Steadfast (ASX: SDF) and AUB Group (ASX: AUB)

"This list doesn't necessarily have the type of industrial names we might own, but Steadfast and Austbrokers are probably good examples of industrials that, even though they're not super-high yield on this list, they're the right sort of industrial companies. 

"Being a broking-style business, their capital intensity is quite low. So, most of the earnings these companies make can be paid out in dividends. These two are fairly focused on growth, so they're making quite a few acquisitions, which is probably a reason they're actually holding back their dividend payout ratio compared to others.

"But that broking model, insurance rates going up, not having the capital intensity, does mean that they have good free cashflow characteristics that can be used to pay and grow dividends over time."

Looking ahead

It's one thing to ponder a backward-looking list; it's another to get some insights into which companies might populate such a list in three to five years' time. Fortunately, Birtles came prepared. Again, the comments below are quotes from our conversation. 

Medibank (ASX: MPL) 

"It's related to insurance, but we think Medibank is a good return-on-equity business. 

"It has a very strong moat in terms of its profitability, due to a better cost structure than most of its competitors, and it has good opportunities to improve the efficiency of the healthcare chain.

"We think the pricing power is with the private health insurers compared to the hospitals at this point, given that hospital usage rates are quite low coming out of COVID. So, that's a name we like and good franking credits as well."

Aurizon (ASX: AZJ) 

"Aurizon is another one, probably similar to your APA and Chorus - it's in that real asset space.  It has good volume growth. It has been weather-impacted in recent years, but we're positive on the stock." 

Ventia (ASX: VNT)

"We like Ventia at the moment. It's an essential services contractor, and we're expecting volume growth in the high single digits in terms of demand for infrastructure and services spending. That also helps their maintenance contracts. 

"They've been a steady provider in terms of profit margin and have not been negatively impacted, so we think they will continue to do well in this sort of environment, which is going to be pretty difficult from a consumer point of view." 

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Martin Currie Equity Income Fund

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