Australian Dividend Stocks In Focus

The Australian stock market is filled with dividend stocks with high yields and payout ratios.

That’s because of differences in taxation that make dividend payments more appealing for Australian businesses than for United States businesses.

The result is a country filled with businesses that reward shareholders with high dividend payments.

This article takes a detailed look at 8 Australian dividend stocks. Four of the 8 have strong competitive advantages and are trading at fair or better prices.

Woolworths Limited

Woolworths (WOW.AX) (WLWHY) is a Diversified Australian retailer. The company was founded in 1924 by Percy Christmas. The company has grown to reach a $22 billion market cap. Woolworths operates under the following:

Grocery stores under the Woolworths, Countdown, and Thomas Dux names

Gas stations under the Caltex name (joint venture with Caltex Australia Petroleum)

Liquor stores under the Dan Murphy’s, BWS, Cellarmasters, and Langton’snames

Big box discount retail under the Big W name

Home improvement stores under the Masters name

Hotels and restaurants through ALH Group

In addition to all of the above, Woolworths also offers financial services and an online & catologue only business. The company is very diversified.

Woolworths operates in 5 segments. The percentage of total EBIT each segment has generated through the first half of fiscal 2016 is shown below:

Australian Food, Liquor, & Petrol generated 85% of EBIT

New Zealand Supermarkets generated 10% of EBIT

General Merchandise generated 4% of EBIT

Hotels generated 9% of EBIT

Home Improvement generated -8% of EBIT (lost money)

The Home Improvement segment is unprofitable. The segment lost $125 million in EBIT in the first half of fiscal 2016. 33% of the Home Improvement segment was owned by Lowe’s (LOW). Lowe’s partnered with Woolworths in 2009. The company chose to exercise its option to have Woolsworth buy back Lowe’s 33% ownership.

Why would Lowes do this? Because the Home Improvement endeavor was unprofitable and will likely remain unprofitable. Lowes is able to exit without serious losses. Woolsworth is left ‘holding the bag’ – and will either sell or close its Home Improvement segment.

The Home Improvement segment is not the only one struggling for Woolsworth.

All segments saw EBIT decline

The Australian Food, Liquor, and Petrol segment saw EBIT fall 32%

The General Merchandise segment saw EBIT fall 38%

Note: Results are from the 1st half of fiscal 2016 versus the 1st half of fiscal 2015

The company is taking action by shaking up management and refocusing its business. Woolworth is exiting Home Improvement (as discussed earlier).

The company was forced to cut its dividend 34% due to struggling operations. The company’s stock is down ~38% since June of 2014.

Woolworths stock is currently trading for a price-to-earnings ratio of 14.6. For comparison, investors can purchase shares of the far-more-streamlined discount retail industry leader Wal-Mart (WMT) for a price-to-earnings ratio of 14.7.

Woolworths stock has some upside if operations rebound. The company is not cheap enough at current prices to justify its risk operations.

Australia & New Zealand Banking Group

Australia & New Zealand Banking Group (ANZ.AX) (ANZBY)is the 4th largest bank in Australia. The company has a market cap of $56 billion. Australia & New Zealand Banking Group has a very long corporate history. The company was founded in 1835.

The company’s dividends have fairly consistently trended up over the last several decades.

Australia & New Zealand Banking Group Dividend History

The company generates ~80% of its operating income in Australia & New Zealand, with most of the remaining 20% coming the Asia Pacific region.

Australia & New Zealand Banking Group has an especially high payout ratio for a bank. The company typically pays out around 70% of its earnings as dividends.

The stock currently offers investors an exceptionally high 7% dividend yield. As the company’s dividend history image above shows, dividends do fluctuate. With that said, long-term investors will very likely have higher dividends from Australia & New Zealand Banking Group a decade from now than today.

The company’s high payout ratio makes its growth even more impressive. Australia & New Zealand Banking Group has compounded its earnings-per-share at 8.3% a year over the last decade.