Buy Hold Sell: 5 small caps with big dividends
While large caps usually get all the attention from dividend seekers, small caps often punch above their weight in this respect. In fact, the three stocks named below have paid out an average 6.2% yield (including franking credits) over the last 12 months!
In this episode, Livewire's James Marlay is joined by Montgomery Investment Management's Roger Montgomery and Investors Mutual Limited's Simon Conn for their analysis of three small-cap stocks that also boast impressive dividends.
These include reader favourite Fiducian Group (ASX: FID), administration services provider Smartgroup Corporation (ASX: SIQ) and real estate investment trust Charter Hall Retail REIT (ASX: CQR).
If that's not enough, our fundies also each name a small-cap with big dividend potential in the years to come.
Now that's what I call bang for your buck.
Note: This episode was filmed on Wednesday 13th October 2021. You can watch, listen or read an edited transcript below.
James Marlay: Hello and welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is James Marlay and today we are talking about something that I know our readers are going to love - small-cap stocks with sustainable dividends. And joining me on the line to discuss income and small caps is Simon Conn from Investors Mutual and Roger Montgomery from Montgomery Investment Management.
Now Roger, our first stock today is Fiducian Group. It's a bit of a special one for Livewire's readers, because Ivan, who is one of our regular readers, said it's been one of the absolute standout dividend stocks in his portfolio over the last seven or eight years. I think it's been compounding 18% dividend growth since 2013. Are you a buy, hold or sell on Fiducian?
Fiducian Group (ASX: FID)
Roger Montgomery (HOLD): Well for the reasons your subscriber said it's a hold. If you own it you don't mind owning it. We live in a post-Royal Commission world - most financial services firms are moving away from vertical integration. I've seen it first hand when we are on the road meeting with advisers. And this company appears to be navigating that change pretty well, despite being vertically integrated. Funds under advice are on track to nearly double over the last five years, revenue's been growing at about 12% over the last four years, and EPS is up 16% a year. So I can understand why the dividend has been going up at the rate you mentioned, James.
Now, some reckon the company doesn't have the scale to compete in the industry. But I know the founders of this business and I reckon this is all about relationships. They've got a 35% stake in the business; they are clearly passionate, they are clearly aligned with shareholders. And for the same reason, I wouldn't buy it for corporate action, but the platform and the multi-manager funds management business is very, very attractive, so it's a hold.
James Marlay: Simon are you a buy, hold or sell on Fiducian?
Simon Conn (HOLD): It's a hold at these current prices. It's trading on over 20 times last years profit. It's been positioned well by Indy Singh and the team. So really strong founder management, strong investment performance that they have driven out of their multi-manager business. But a lot of good news is priced in. And I think they have benefited from the dislocation we have seen from the Royal Commission. So maybe going forward, its growth may slow to some extent. Particularly with equity markets being at fairly elevated levels, that always makes you cautious with businesses that are linked to financial markets.
Smartgroup Corporation (ASX: SIQ)
James Marlay: Staying with you, Simon. Smartgroup - the yield was looking a lot more attractive at the beginning of September. It's subsequently received a bid and the share price has jumped nearly $2. Are you a buy, hold or sell on Smartgroup?
Simon Conn (SELL): Controversially, I am a seller of this business because we have seen TPG and many other private equity firms approach companies and then not proceed with the bids. So this is an approach by TPG. It's conditional and non-binding. And so I think there are questions around whether they execute that. And look, we own SG Fleet (ASX: SGF) in the fleet leasing market. It's trading on 15 times and has a 4.5% yield. We much prefer that business - it's better value and I think really well-positioned going forward with its technology platform that they are putting in place to improve their service offering for their customers.
James: Roger, Smartgroup. Is it a buy, hold or sell for you?
Roger Montgomery (BUY): I am going to stick my neck on the block and go the opposite way to Simon. I think it's a buy. It is under takeover as Simon mentioned. I am always interested in what we call post-announcement arbitrage opportunities. And there is still a 12% gap here. I actually think this deal proceeds. In fact, I think the strength of the initial bid, being granted exclusivity, and Aware Super indicating that they will participate in the proposal as an equity co-investor shows the intent to complete. But that's just my view. The discount exists because a few deals have recently fallen over, as Simon mentioned. I think this is a simpler business, it's got a cleaner balance sheet. There is always a risk that a deal as highly conditional as this one doesn't complete, but I back this one going through, so it's a buy.
Charter Hall Retail REIT (ASX: CQR)
James Marlay: Roger, staying with you. Retail and REITs more specifically, were a bit of a challenging area in 2020. The one we are talking about now is Charter Hall Retail REIT. It is still trading 20% below its pre-pandemic highs, but there is a dividend rebuilding story taking place. Are you a buy, hold or sell on CQR?
Roger Montgomery (SELL): I've got a sell on it. And there is a good reason for that. I think bricks and mortar retail, from a retail property owners perspective, was in decline well before COVID-19 hit. And I don't think we are going back to the kinds of rental growth rates we've seen before. I'm not sure that I want to be owning an asset class the Lowy's were prepared to exit. There's an old saying, 'Don't buy what the Lowy's are selling'. They left retail property for good. The reality is, they might come back. So there is a possibility that owning retail makes sense at a discounted price. But look, I actually think for income, I'd rather own a property trust with tenants that suffer less volatility or sensitivity to the economy. For example, healthcare or the one I am going to mention in the next part of the program.
James Marlay: Well, hold onto that thought for now. Simon, what's your view on Charter Hall Retail REIT? As I mentioned, it's still coming back from the pandemic. It's trying to regain those pre-pandemic highs, but the yield story is getting better. Is it a buy, hold or sell?
Simon Conn (BUY): With interest rates at these levels I think it's still a buy. It's trading around NTA, yielding over 6%, and really well managed by Greg Chubb, who I know was out in the market all through COVID negotiating with tenants and making sure they were well looked after and were back on their feet in quick sticks. A large part of the portfolio is underpinned by Coles and Woolworths, and I think we've seen the strength of those retail properties through COVID.
People are spending more time in the regions and suburbs, and this is a portfolio of basically last-mile logistics between the consumer and their home for a lot of daily needs. Whether it's food or the butcher shop or the pharmacy, this portfolio of assets really fulfils that need. And I think it's more relevant than ever. One of the things that is not going away is convenience - even when people buy their groceries online, often they still do click and collect or they will forget three or four things and they will have to go visit their local supermarket. So there is still strong foot traffic.
The portfolio WALE (weighted average lease expiry) is pretty low, it's only a couple of per cent that are expiring in the next couple of years. Gearing is okay. So on over 6% yield and with interest rates where they are, I think it's still quite attractive.
Fundies small-cap dividend winners
James Marlay: Well, I've asked both of you to bring along an ex-100 stock, so a small company, with attractive dividend prospects. Simon, let's hear from you first. What's your dividend pick?
Simon's pick: Pro-Pac Packaging (ASX: PPG)
Simon Conn: A little company called Pro-Pac. I think the complexion of that business has changed quite a bit over the last two to three years. A new management team is in place as well, Tim Welsh runs the business. It's really the second-largest player in the flexible packaging sector of the market. So packaging generates pretty consistent cash flows, and we've seen the other business deliver pretty good outcomes through a pretty difficult time. So behind Amcor (ASX: AMC) they are the number two in the flexibles market. And there is a strong tail of smaller operators. And I think that presents the opportunity for this business to grow through acquisitions and integrating those. Also, this business has a strong footprint. They're consolidating sites. They've just closed their Chester Hill site which delivers $7 million in savings to the P&L of this year, which underpins your earnings growth. So on a P/E of nine times and yielding 3.5-4%, we think that's very attractive and we think that will grow nicely over the next three to four years as they continue to consolidate the market. And also I think a great opportunity to continue to win market share against imports, because of what has happened with COVID. A lot of customers are looking for supply chains closer to home. And an innovative customer-responsive packaging supplier such as Pro-Pac should do well.
James Marlay: Thanks for that Simon. Roger, now it's your chance. What's the small-cap dividend stock you want to talk about today?
Roger's pick: Waypoint REIT (ASX: WPR)
Roger Montgomery: So this is very much about income. We actually like the Waypoint REIT, and I prefer that over a retail REIT. They own petrol station sites that are leased to top-tier tenants such as 7-Eleven, Liberty, and the Shell-Coles express convenience chain. Now during COVID, being an essential service, they operated throughout, they collected 99.9% of their rent in 2020. They enjoy 100% occupancy. WALE is about 10.5 years. And they've got 3% weighted average rent reviews. It yields 5-6%, with an estimated dividend per share growth equivalent to about 3%. So that's a total shareholder return of 9%. And in the real world, their assets are being sold for 20% above what they value them on their books. So there is potential for revaluations. And that's on top of the $189 million dollars uplift in NTA for the six months to last June.
I've personally invested in unlisted property trusts after identifying potential for rebounds and they can be incredibly lucrative. They also have an internal management structure; there are no key shareholders in the way so there is always the possibility of corporate action. And in the meantime, the company has announced a $150 million capital return back on the 30th of July, which is subject to settlement of course, from the sale of some of the properties that they've sold. And that should occur this half.
James Marlay: Alrighty, folks. Well for those of you who have dividends coming out of the banks and are looking for an alternative, it's worth dropping down to some of those smaller companies - there's a great variety of sectors, small companies, but with some really good yields. Thanks to Roger and Simon for sharing their views today. And remember if you enjoyed this video subscribe to our YouTube Channel, we are adding fresh content every week.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.