Buy Hold Sell: 5 stocks with sustainable and fully franked dividends

Franking credits are important for many investors, particularly those operating in a low or no-tax environment. A company paying a 5% fully franked yield, for example, gets grossed up to around 7% after franking. Juicy.

More than half of the companies listed on the S&P/ASX200 either fully pay or partially pay franked dividends, and it is important to know the relevant franking level.  

With that in mind, Livewire's Ally Selby recently sat down with Peter Gardner from Plato, and Andrew Fraser from Merlon to discuss five stocks with sustainable and fully franked dividends. 

For those unfamiliar with franking, they also discuss why franking is important and how it factors into their respective investment processes. 

Note: This episode was recorded on Wednesday 5 June 2024. You can watch the video, listen to the podcast, or read the edited transcript below. 

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Edited Transcript

Ally Selby: Hey, how you doing and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today we're taking a look at five stocks with sustainable and fully franked dividends. To do that, we're joined by Pete Gardner from Plato, and Andrew Fraser from Merlon. Okay, just to start the episode out today, I want to know why franking is actually important. Pete, I might start with you.

Why is franking important?

Peter Gardner: So franking for us is no more important than anything else, but it is 100% valued by our investors. So we manage our income fund specifically for zero tax investors, and so we value franking just as high as we value cash dividends.

Ally Selby: Okay, and are you looking for stocks that have 100% fully franked dividends? Could it be 60% fully franked dividends? What are you looking for when it comes to fully franked yields?

Andrew Fraser: Like Pete said, franking is extremely valuable for our investors and we actually include franking credits in the value of our company. So when valuing companies, we actually add the value of franking credits to those valuations, which does give us a skew towards companies that have high franked dividend yields, whether it's 100/80/90, we're agnostic about that. It's more around, do the share prices reflect an opportunity to preserve capital and grow capital over time?

Stocks with 100% fully franked yields

Ally Selby: Let's take a look at a few stocks with that 100% fully franked dividend yield number. First up, we have oil and gas giant, Woodside Energy. It has a dividend yield of around 7.73%. Pete, I'm going to start with you today. Is it a buy, hold or sell?

Woodside Energy (ASX: WDS)

Peter Gardner (HOLD): Woodside is a hold for us. It's interesting you mentioned 100% fully franked in nature because Woodside have actually flagged in their last result that they're likely not to be able to continue to fully frank their dividends as more of their assets, after the BHP assets they took on are offshore and therefore they'll be paying less Australian tax.

And so yeah, they won't be able to fully frank their dividends going forward. The challenge in Woodside is their Sangomar asset, which is in Senegal. And Senegal just recently had a change of government and there's talk of extra taxation on that. And so that's kind of causing us to be a bit wary on Woodside, but it's certainly looking very cheap.

Ally Selby: Okay. Its share price has fallen around 20% over the last 12 months. Andrew, over to you. Is it a buy, hold or sell?

Andrew Fraser (BUY): It's a buy for us. We've just recently added that to the portfolio. We do recognise there are some concerns around that particular asset, but post the BHP Petroleum Asset Acquisition, the portfolio of producing assets that the company has is highly cash generative.

At a macro level, there's been continued underinvestment in future oil production, which should be supportive over the medium term of the oil price. But regardless of that, their cost of production including CapEx for the majority of their assets is around $20 a barrel, compared to US onshore producers which are around $60 a barrel. So even if prices fall, they'll wear less pain than some of their major competitors.

Ally Selby: Okay. If you like chicken, this next stocks for you. It's Ingham's Group. Staying with you, Andrew, is it a buy, hold or sell?

Ingham’s Group (ASX: ING)

Andrew Fraser (SELL): I'm not going to bite on that one. It's definitely a sell for us at the moment because we don't own it. Having said that, it has underperformed a lot, so we are doing some more work on it. I think over the short term there are some concerns about revenue growth slowing and also costs being harder to manage. The other concern for us is that it still appears to be a consensus long with the majority of analysts that cover the stock have a buy recommendation.

Ally Selby: The share price has lifted around 28% over the past year and has a dividend yield of around 6.18%. Pete, is that finger licking good and is it a buy, hold or sell?

Peter Gardner (BUY): It is. We definitely like to have a bite of Ingham's. We think more consumers are going into the chicken market with the kind of higher cost of living. Chicken is obviously cheaper than beef or lamb at the moment and so that's giving tailwinds to Ingham's.

The other thing that's providing opportunity for Ingham's is there was the bird flu scare down in Victoria, but that was nowhere near any of Ingham's facilities and Australia's been able to manage these pretty well in the past.

There's actually been eight bird flu scares in the last 50 years in Australia and we've been able to control each of them. And so we think because the share price dropped after the scare, we think this gives investors a good opportunity to get in.

Ally Selby: Okay. Next up, we have Nine Entertainment. There's quite a lot of scandal there at the moment in its newsroom. Pete, do you think investors can look through that drama and is it a buy, hold or sell?

Nine Entertainment (ASX: NEC)

Peter Gardner (SELL): It's a sell for us. We still think the challenges in that industry are very difficult. They're competing with the likes of Facebook and Google for advertising revenue. And so it's a tough environment to be in, even though the current management we think have done a pretty good job despite the scandals with regards to Stan or 9Now. And then the other thing that these scandals bring is that generally management focus lowers and management stability comes into question and so it's a sell for us at the moment.

Ally Selby: Its share price has fallen around 27% over the past 12 months, but it does have a dividend yield of 6.25%. Andrew, do you think that's attractive and is it a buy, hold or sell?

Andrew Fraser (SELL): For us, it's a sell as well. Notwithstanding that underperformance, I agree with Pete. The outlook is challenging both in a more cyclical sense in the short term, but longer term structural issues around free-to-air TV and publishing. The other area of concern for us is with Domain, it is the clear number two player in a great industry structure, but somehow realestate.com continues to grow its market share. Means you can't rule out a winner takes all scenario and given they own 60% of Domain, that's an area of concern for us.

Guest picks

Ally Selby: We asked our guests to bring along a fully franked stock that they're buying today. What have you brought for us, Andrew?

Australian Stock Exchange (ASX: ASX)

Andrew Fraser: It may not be the most high-profile stock, but for us it's the Australian Stock Exchange. It's started to look interesting to us. We've been adding it to the portfolio over the last couple of months. At the moment, they're suffering from a cyclically depressed trading activity and IPO volumes. We do expect over the medium term that to recover to more normal levels.

The other big issue with the ASX is the well publicised cost blowout and then eventual canning of the CHESS settlement replacement system. That's also been coupled with a period of excessive cost growth. New management are very much focused on reigning in those costs over the next few years, which should be supportive of top line growth, and costs coming down should be supportive of earnings and ultimately dividends growing through the next few years.

Ally Selby: Okay. Over to you, Pete. Your time in the hot seat. Which fully franked dividend darling are you backing today?

Origin Energy (ASX: ORG)

**Please note that since the episode was filmed, Origin Energy has amended its shareholder distribution policy and is now targeting an ordinary dividend payout in each financial year of a minimum of 50% of free cash flow per annum - an increase from the previous payout ratio of 30-50%

Peter Gardner: We're backing Origin Energy, which works well for your hot seat because they produce energy. We think Origin Energy have increased their dividends quite significantly in the last 12 months and we think they can continue to do that. Their investment in their APLNG asset has reduced, which allows them to pay out more going forward.

And there's also growth areas in that business as well in the form of Octopus Energy, which is a UK company that they've got a big stake in and that's growing quite strongly. So we think Australian Super has actually done us all a favour by rejecting the Origin Energy takeover. It's currently trading above the takeover price and we think it's going to continue to go up going forward.

Ally Selby: Well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like. Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.