Buy Hold Sell: 6 stocks set to supercharge their dividends

It was Paul Kelly who famously sang that "from little things, big things grow". And that sure has been true of our waistlines during lockdowns. 

On the other hand, consider the ASX. 

When it gets bigger (an all-time high at the time of writing) it also gives something back. To wit, billions in market dividends. You need only skim the pages of this very publication to learn that $60 billion in dividends were paid out to investors in S&P/ASX 200 companies over the 2021 financial year.

Meanwhile, the banks (in addition to recently announced buybacks) and iron ore miners are expected to return tens of billions to shareholders over the coming months. 

In this episode of Buy Hold Sell, we've invited two income experts - Dr Don Hamson of Plato and Neil Margolis of Merlon Capital - to share their thoughts on four stocks set to supercharge their dividends this reporting season. 

Plus, they'll also share two dividend darlings they are backing for their payout potential in August and beyond. 

Note: This episode was filmed using Zoom on the 4th of August 2021. You can watch or read an edited transcript below.

Edited Transcript 

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell, I'm Ally Selby. And it's no secret Australians love a bit of bang for their buck. Perhaps, that's why so many of us gravitate towards the markets dividend darlings. According to Bloomberg, over the past financial year, the ASX 200 generated $60 billion in dividends for investors. So in this episode, we'll be talking about six Aussie players set to supercharge their dividends over the months to come. I'm joined by Neil Margolis from Merlon Capital, and Don Hamson from Plato.

First up, we have Westpac, which analysts believe is set to return $8-10 billion to shareholders over the coming months. I'll start on you, Don. Is it a buy, hold or sell?

Westpac (ASX:WBC) 

Don Hamson (HOLD): Right now, from us, it's a hold. We do like the banks and we do think they'll be increasing their dividends, but we'd probably put a couple of the others ahead of Westpac at the moment. So, it's a hold from us.

Ally Selby: Neil, it has an annual yield of around 3.6%, but its share price has been down around 17% over the past five years. What do you think? Is it a buy, hold or sell?

Neil Margolis (BUY): Look, it's a buy for us. Just putting it next to CBA is very stark. It's got so many levels of surplus capital, say $8-10 billion, similar for franking. But its market value is $90 billion, and CBA is $180 billion. So it's quite extraordinary. One of the reasons it's a lot cheaper is because they've lost control of their costs. So they do need to get their costs under control. They've had much more management turnover. But putting that all aside, there's a big opportunity to take cost out, and the dividends look pretty safe to us. At a sector level, I had a look today, the four major banks spent $36 billion a year on costs, which is roughly the same as Afterpay's valuation. And I'm not sure which number actually astounds me more.

Aurizon Holdings (ASX:AZJ) 

Ally Selby: Next up we have Aurizon Holdings, which is Australia's largest rail freight operator with a nice dividend yield of around 7%. Neil, I'll stay on you. Is it a buy, hold or sell?

Neil Margolis (BUY): That is a buy for us. It's been out of favour because they do haul coal, and China's trying not to buy coal at the moment. And coal has also got some environmental issues. I would note 70% of their coal is met coal, not thermal coal, which is used to make steel alongside iron ore. And they've got a monopoly rail track, which is quite low risk. And they've got very manageable debt levels and they generate fantastic cash flow, which is why Warren Buffet always liked railroads. So, it's a buy for us.

Ally Selby: As you mentioned there coal hasn't been the flavour of the month, or the year for that matter, with Aurizon's price suffering as a result. Don over to you, is it a buy, hold or sell?

Don Hamson (BUY): It's a buy from us too, because we do think the price is too cheap. Way too cheap. It's been affected by the sentiment on coal. Agree with Neil, it's a good solid business. Great cashflow, great yield. So yeah, it's a buy from us. And you are seeing coal prices come back very strongly. So we like Aurizon.

BHP Group (ASX:BHP) 

Ally Selby: Don, I'll stay on you. Speaking of coal, next we have BHP. It's got an annual yield of nearly 4%. Is it a buy, hold or sell?

Don Hamson (BUY): It's a buy from us, mostly because we're very bullish on the iron ore prices. There'll be some big dividend increases from BHP. Remember, it's also got copper assets and potentially it's looking to sell its oil and gas, which I think will make it look a lot more attractive from an environmental perspective. So, great yield, great business momentum at the moment. Making a fortune out of iron ore, and not bad out of copper too. So, it's a buy from us.

Ally Selby: It's set to report on August 17th, should investors expect a cash splash? Neil, over to you. Is it a buy, hold or sell?

Neil Margolis (SELL): Look, it's a sell for us. Fantastic company, very low-cost production, but iron ore's gone from about 35% of the group's earnings to about 70%. And the iron ore price, while incredibly high, is eight times the cost of production. So it only costs $25 to produce iron ore, and it's selling for $200. And it's called a commodity for a reason. So normally supply does catch up, and there's also a risk that the mine moderates. I agree with Don, fantastic dividends this reporting season. No problem at all. I just think the share price could come under pressure if iron ore starts moving towards the cost of production. It's a long way to go.

Telstra (ASX:TLS)

Ally Selby: Last up, we have old faithful Telstra, which has a dividend yield of around 4%. Neil, I'll stay on you. Is it a buy, hold or sell?

Neil Margolis (SELL): Telstra's a sell for us. They're paying 16 cents, and the sustainable dividend I think is only around eight cents. There's still lots of unsustainable elements to their earnings from obviously government payments and the copper network - there's still some earnings from reselling services via the copper earnings. It's possible they could gouge more on the mobile side, and make more money there. That is one upside risk. But standing away from the detail, the company has almost $15 billion in debt. So it's got a market value of equity and debt of close to $60 billion. And that generates about $3 billion in pre-tax earnings, and it could generate less. So, it's a sell for us.

Ally Selby: Telstra hasn't been that kind to shareholders over the past few years, its share price is down around 33% over the past five. Don over to you, is it a buy, hold or sell?

Don Hamson (BUY): It's a buy from us, at the moment. I understand what Neil says, but they're actually making some good pricing decisions in their mobile. Just actually got a great price for selling half of their towers. And they're going to return that capital to shareholders in one form or another. So for us, it's a buy, actually. But it's probably more a trading buy than necessarily a long-term buy.

Fortescue Metals Group (ASX:FMG) 

Ally Selby: Okay Don, we've asked you to bring along a stock that you have high hopes for this reporting season and beyond. What have you brought for us today?

Don Hamson (BUY): Well, no surprise I like iron ore. And Fortescue is a pure-play and we expect some great dividends out of them. In fact, they're trading on a huge yield already, but we expect with the dividend increase, it's going to get even better. But even now it's trading on a historic yield of 15% when you include franking. So that's incredible. Yes, there are risks on the iron ore price, but it's going to deliver a very good result and a great return of cash and franking credits to shareholders.

New Hope Corporation (ASX:NHC)

Ally Selby: Neil, over to you. Can you beat FMG? What stock do you have high hopes for in reporting season and beyond?

Neil Margolis: We have bought New Hope Coal recently, which is a smaller coal mining stock. It's the old Wesfarmers Bengalla Mine, which is very low cost. It's actually $10 a tonne less than BHPs cost. It has half a billion dollars of surplus franking credits, and the coal price has actually also doubled. It was a bit late to move, but it's also doubled recently. And unlike iron ore, it reflects more broad-based global demand recovery, whereas iron ore is very much dependent on China's infrastructure plans. So we do think it's on a massive cashflow yield. Look, we fully support decarbonization. We actively engage with the company to not expand their mines, and to wind them down orderly over the next 10 years. But it is high quality, low-cost coal. And where the coal price is trading the company is on two times cashflow. So again, we don't expect the coal price to stay at these levels, but every month it does, the company's paying off debts. And with half a billion of surplus franking we actually expect a pretty good dividend.

Ally Selby: Well, there's definitely upside on the Aurizon, you just need to know where to look for it. That's all we have time for today. We hope you enjoyed this episode of Buy Hold Sell. If you did, why not give it a like. Remember to subscribe to our YouTube channel, we're adding new content every week.

What dividend darling are you backing? 

Don has picked Fortescue Metals Group and Neil is backing New Hope, but we would love to know what you think. Let us know what dividend darling you are backing for reporting season and beyond in the comments section below. 

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