Fresh income ideas for a low yield world

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
30 April 2020, 12:30 PM
Sectors Covered:
Equity Strategy and Quant

COVID-19 Roadmap

Given the current economic outlook and structural shifts in demographics and risk aversion, we think the demand for yield thematic will continue in the near term.

But with an increasing number of companies either suspending or cutting their dividend, finding sustainable income is becoming more challenging even as equity market valuations have come back.

We identify 15 stocks that provide income safety for a prolonged period of low interest rates.

Morgans best income ideas

Key to yield sustainability

  1. Sustainable payout ratio
  2. Solid balance sheet
  3. Dividend well covered by cashflow
  4. Low reliance on government support

Price appreciation is secondary for the purpose of this exercise. The research team has identified 15 income ideas below: 


JBH has lower leverage, strong cash flow generation, relatively resilient earnings profile in this environment given strength of working from home/tech/white goods product angle. The group has traditionally paid out around 60-65% of its profit in dividends while still retiring debt nicely each year. It is still a discretionary retailer and therefore risk remains.

Coles Group (COL)

One of the key beneficiaries of COVID-19 as people buy more from supermarkets and liquor stores due to social distancing restrictions. All of COL’s businesses are essential.

Woolworths Group (WOW)

Similar to COL, WOW’s sales should be materially stronger due to COVID-19. The offsetting factor will be the indefinite closure of the Hotels business which represents ~10% of group EBIT. Balance sheet remains strong nonetheless

Amcor Plc (AMC)

History of maintaining or increasing dividends. All plants globally continue to operate given packaging is an essential service. Earnings should be very resilient from an economic downturn.

Orora (ORA)

Some downside risk to earnings from decline in beverage volumes and weaker economic conditions in North America but sale of Australasian Fibre Business should net ORA ~$1.55bn. ORA was planning to return $1.2bn to shareholders but may opt to hold onto the cash and just maintain the dividend instead.

Aurizon Holdings (AZJ)

Provides for rail transportation of thermal (for power generation) and metallurgical (for steel making) coal for export. Below rail business (~50% of earnings) is volume protected via regulatory regime. Above rail coal haulage business (~43% of earnings) is partly protected by capacity charges covering 50-60% of its revenues. Strong balance sheet, with capacity to return more capital to shareholders over time. Key risks are regulatory, competition, and health of coal export markets.

BHP Group (BHP)

We view BHP as relatively low risk given its superior diversification relative to its major global mining peers. The spread of BHP’s operations also supply some defence against direct COVID-19 impact on earnings contributors. While there are more leveraged plays sensitive to a global recovery scenario, we see BHP as holding an attractive combination of upside sensitivity, balance sheet strength and resilient dividend profile.

Rio Tinto (RIO)

Our top pick amongst large-cap resources. RIO is one of the most resilient global resource franchises, with total net debt of just US$3bn for gearing of 7% (compared to gearing at the end of the last cycle of ~25%). While we see continuing volatility in metal markets, RIO’s high earnings watermark and strong balance sheet see it well placed to weather the current storm and benefit from an eventual recovery cycle.

APN Convenience Retail REIT (APN)

AQR owns a portfolio of 80 service stations. AQR remains a preferred REIT given the underlying portfolio fundamentals and balance sheet. We remain comfortable with tenant quality and exposure. We also expect service stations are categorised as essential services.

Viva Energy (VVR)

VVR’s portfolio is valued at $2.65bn (comprising 469 service stations/73% by value in metro areas). Gearing at December 30.4%. VVR currently has $250m in undrawn debt. Weighted avg debt maturity is around 2.8 years. ICR 5.8x. VVR was recently assigned a Baa1 corporate rating by Moody’s.

Centuria Industrial REIT (CIP)

Balance sheet position solid. Following the recent raise gearing moves to 27.7% vs covenant of 55%. The weighted average debt expiry is 3.6 years with the next expiry Dec 2021. Interest cover is 4.8x (vs covenant of 2x). CIP remains one of the few listed REITs offering investors pure exposure to Australian industrial property which is leveraged to the growing e-commerce/logistics thematic.

APA Group (APA)

FY20 DPS guidance remains unchanged at "in the order of 50 cps". Our forecast is for 51.25 cps over the next 12 months, implying 4.7% cash yield at current prices (plus 35%+ franking). We think APA has the capacity to grow its DPS at a compound rate in the mid-single digits across FY20-24.

Ausnet Services (AST)

AST is an energy delivery services business, with electricity distribution and transmission and gas distribution networks located in Victoria. Over 90% of earnings are generated from its regulated energy networks (the Australian Energy Regulator is the regulator), with regulatory cycles running for five years. The distribution reductions that we had feared by the regulated utilities due to macro headwinds coming into regulatory resets now looks relatively less of a concern.

Spark Infrastructure Group (SKI)

Direct fund manager with investments in into electricity distribution networks in SA and VIC and the NSW transmission network (as well as a solar farm in NSW). About three-quarters of revenues are subject to a regulated revenue cap, which insulates it from volume risk. Strong asset company balance sheets. Risk of further distribution cuts from regulatory resets, but not many companies are immune to this in the current environment.

AGL Energy (AGL)

Aggregate electricity demand has been stable (We estimate ~5% decline in FY20) despite COVID. Insulated from lower spot electricity prices by high vertical integration. Customer bad debts are the key earnings risk this year. One-off insurance claim next year should repair some of the damage of falling spot prices as some contracts roll over.

More information

Morgans clients can view further analysis by logging in to the research section of the client website. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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