Buy Hold Sell: 3 ASX stocks dropping their dividends (and 2 on the way up)

If there is one thing Livewire readers love just as much as lithium stocks, long-term compounders, and lithium stocks that are long-term compounders, it's dividend darlings. 

After all, Plato Investment Management has found that if investors had put $100,000 in the ASX in 1980, they would have earned around $85,000 in income in 2022. In comparison, if you had left that money in the bank, they would have earned $1308.33 during the year. 

But what if some of the ASX's highest yielders are dropping their dividends? Particularly, those that had a stellar year in 2022?  

In this episode, Livewire's James Marlay was joined by Plato's Peter Gardner and Antares Equities' Andrew Hamilton for their analysis of three dividend darlings that could be heading lower from here. 

Plus, we also asked them to each name a stock with sustainable, growing dividends in the years ahead. 

Note: This episode was filmed on Wednesday 3 May 2023. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited Transcript

James Marlay: Hello and welcome to Livewire's Buy Hold Sell. My name is James Marley. And today we're taking a look at stocks that are cutting their dividends. Yes, a bit tough for the investors out there, but we will hopefully help you dodge a few of those potholes. I'm joined by Andrew Hamilton from Antares and Dr. Peter Gardner from Plato. 

Pete, let's start with you. Cromwell Property Group's dividends per share peaked back in 2016. It's been a tough time for property. Buy, hold or sell?

Cromwell Property Group (ASX: CMW)

Peter Gardner (SELL): So it's a sell for us. So 64% of Cromwell's book is in office and obviously, office has challenges at the moment with everyone working from home. And we haven't even seen the downturn in the economy yet, which is probably down the track. It's trading 30% below its NTA, so it is pretty cheap. But yeah, we're not a big fan of the office market at the moment.

James Marlay: Okay. They have a funds management business as well, which is not bad. Buy hold or sell on Cromwell? 

Andrew Hamilton (SELL): It's also a sell for us and I agree exactly with what Peter said. I'll just add that they are trading at a 30% discount to NTA. They are predominantly office and the problems in office are well known, but their balance sheet is under a bit of duress. They've been selling assets. So they're selling assets well below NTA. They obviously have some restructuring that's required. They've had a board spill because a major investor got pretty active. We'd just stay clear.

Whitehaven Coal (ASX: WHC)

James Marlay: Next up we have Whitehaven Call, it's in that resources space, which has been spewing off cash. Buy, hold or sell on Whitehaven?

Andrew Hamilton (SELL): This is also a sell for us, even if you're prepared to invest in thermal coal, I'd make a couple of observations. One is the thermal coal price has pulled back from US$450 to about US$180. That is still well above the long-run average. So there's potential that that coal price falls a mighty long way and obviously, that's going to flow straight through to the dividend. So we see the dividend where it is as unsustainable for a dividend portfolio like ours, it's a sell.

James Marlay: Pete, 2022 was a hard year to beat for Whitehaven. It paid out so much money to investors. Buy, hold or sell in 2023?

Peter Gardner (BUY): I definitely agree that 2023 is not going to be as good for Whitehaven, in terms of the dividends as 2022. However, we've still got it on a buy because we still like the thermal coal dynamics at the moment. Obviously, in the long run, thermal coals going to be phased out, but there's too much value to be made in the short to medium term. We saw Germany turn back on their coal-fired power plants after the Russian invasion of Ukraine. But the other area of the coal industry that people aren't taking note of is India. And India is just building more coal-fired power plants and their demand for coal is going up significantly, which isn't great for the environment, but it's good for producers like Whitehaven Coal.

Incitec Pivot (ASX: IPL) 

James Marlay: Next up today is Incitec Pivot. It's paid dividends consistently albeit in a slightly lumpy fashion. Buy, hold or sell?

Peter Gardner (HOLD): We've got a hold for Incitec Pivot. It was obviously a dividend darling after the Russian invasion of Ukraine. They've got an ammonia plant in the US and it uses gas. And the price of US gas was a lot cheaper than the price of European gas that a lot of its competitors were using. And so people saw it as having a competitive advantage. But as that European gas prices come back, that competitive advantage has gone away and Incitec's underperformed since then. However, it's just announced it's sold its ammonia plant for about $2.5 billion. So that's improving its balance sheet significantly. And so it's not a buy for us, but it's a decent hold with the ability to pay out dividends from here.

James Marlay: Andrew, there's a restructure on the table with Incitec as well. Buy, hold or sell?

Andrew Hamilton (SELL): Sell. I agree with most of the things that Peter said, in terms of the sale and the cash they're going to get from that. But they want to redeploy that cash to find other avenues of cash flow and that creates uncertainty. For us, it's a sell, given they've just been massively over-earning on the fertilizers. That will unwind. This stock is a really classic deep cyclical when times are good, they make loads of cash and they can pay great dividends and when times are bad, it's the opposite. I don't see the dividend sustainability in it. Sell.

James Marlay: I've asked each of you to bring along a stock with a sustainable dividend and one that can potentially grow. Andrew, you're first off the rank. What have you got?

Aurizon Holdings (ASX: AZJ)

Andrew Hamilton (BUY): For us, and this is unusual I think for many people, it's Aurizon. So we were talking about thermal coal. Among their businesses, Aurizon hauls thermal coal on their railways, as well as coking coal and bulks, minerals that are mined etc. They are the only red-marked stock that we own in our portfolio from an ESG perspective that is red for the environment, but that will be moving off as a result of the proportion of thermal coal in their mix declining. The dividend growth has been delayed slightly because they're clearly investing in CapEx because they want to grow their bulks business. That's better for diversifying the business. In addition to that, for the below rail infrastructure that they own that regulatory asset base is going to be reset. And given interest rates have moved higher, they'll be able to earn a higher return on those assets. So we see, over the next couple of years, earnings and dividends not just being solid, but growing.

James Marlay: Okay, Have you got a dividend grower that you can talk to us about today, Peter?

Macquarie Group (ASX: MQG)

Peter Gardner (BUY): Our one is Macquarie Group. It's sitting on a 4% yield at the moment in terms of gross after franking credits. So it's not too high, but we see growth going from here. We see Macquarie, in terms of their home loan business, they're growing at about three times the market and taking a lot of share off the major banks. So that area of the business is growing. They've got a commodity business that is benefiting massively from the fluctuation in commodity prices that we're seeing and we see those fluctuations continuing. So we see strong earnings from that. And then they've got some funds management businesses that are fairly annuity-like in terms of what they earn. So we see good areas of growth for Macquarie. And then the real area of growth for Macquarie is that they're investing a lot in decarbonisation projects around the world. They're one of the few Australian stocks, apart from the lithium miners, that really have exposure to the decarbonisation thematic. And so we like Macquarie going forward from here.

James Marlay: Well, folks, that wraps up our series on dividends. I hope you've picked up a few insights from our guests over the past few shows. Remember, check out our YouTube channel. We're adding fresh content every week.