Perpetual's Sean Roger on finding real opportunities at a time of volatility

"From an income perspective, whilst there's not a whole lot of attractive yield at the top of the market, if investors are willing to look into some of those areas that have been hit and where there is a little bit of uncertainty, there is some good income there if you can get comfortable with the earnings outlook for those businesses."

He believes two sectors are now throwing up interesting income opportunities.

One is the cyclical sector, where companies like JB Hi-Fi (ASX: JBH) are potentially offering 5-6% dividend yield at current prices, alongside a net cash balance sheet and strong business model. 

The other is the REIT sector, where higher interest rates have hit share prices and subsequently improved yields. GPT Group (ASX: GPT) is a company now offering dividend yields above 5% along with a strong balance sheet and underlying assets. 

"There is income out there if you're willing to look into some of the places that have been knocked around a little bit."

"It's got the manufacturing at scale, but it's also got a decentralised distribution model servicing just the trades. And the combination of those two means that the company's been able to deliver high quality product at very affordable prices to its customers whilst also delivering attractive returns to shareholders."

The company has managed to sustain profits and grow market share through a weak UK economy, and is now well-placed for further growth, says Roger. 

It also represents better value than many of the bellwether ASX income stocks.

"From a valuation perspective, it's on sub-15 times PE, net cash balance sheet, really well run, pays a dividend and also buying back stock."

Closer to home, Soul Patts (ASX: SOL) is similarly well-placed, says Roger. 

Perpetual uses four quality filters when identifying opportunities - strong balance sheet, sound management, recurring earnings and a quality business model - which are especially relevant at times of macro uncertainty. Soul Patts is currently demonstrating most - if not all - of them, says Roger.

The merger with Brickworks has given the company options in terms of capital allocation, and a selldown in TPG has also freed up liquidity at a time when that can be beneficial. "They've got a lot of flexibility now in terms of a broader asset portfolio and being able to move that asset mix around," says Roger. 

"The liquidity, the flexibility and the experience of the management team have them really well placed to take advantage of this volatility."

His read on the CGT changes

The federal government's much-publicised changes to capital gains tax have attracted their fair share of critics. 

While he's waiting to see how the changes play out in practice, Roger says one potential upshot for investors could be in how it improves the relative appeal of income.

"The end result of [the CGT changes] is that, in most scenarios, the tax impost on investors for capital gains is going up and therefore the post-tax returns from the capital component of growth is coming down.," says Roger. 

"If we think about capital versus income components of return from a relative perspective, there isn't any change to the tax efficiency of the income that comes from dividends if they're fully-franked. From a relative perspective, that income's now become more attractive to capital growth in most scenarios."

"For companies that pay fully-franked dividends, or listed investment companies, I think there's a relative attractiveness that's come from that change."

In that context, a turnaround in yields may come at the perfect time. With plenty else to worry about, it could be a welcome boon for income investors. 

LIC

Perpetual Equity Investment Company Limited (PIC)

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