In the search for good yields with inflation protection, many investors have neglected to look overseas, and particularly at the lower half of the globe.
Australia has a number of utilities that sport tasty yields, well supported by cash flow and mostly adjusted for inflation. Tops in this sector is the Duet Group (DUETF.PK), with a whopping 12.7% payout. As Paul Hogan might say: “Now that’s a yield.”
|Company||Symbols||Market Cap.||EV/EBITDA||Yield||Price/Book||Main Business|
|APA Group||APA.AX |
|2.2 Billion||10.3||8.4%||1.6||Gas transmission and distribution|
|Duet Group||DUE.AX |
|1.4 Billion||8.1||12.7%||0.9||Gas transmission and distribution; electric distribution|
|800 Million||8.8||8.9%||1.6||Gas distribution|
|Spark Infrastructure||SKI.AX |
|1.5 Billion||6.0||8.2%||2.8||Electric Distribution|
|SP Ausnet||SPN.AX |
|2.4 Billion||8.3||9.3%||1.1||Electric Distribution; Gas Distribution|
What the Market Doesn’t Understand (Besides Vegemite)
Australian companies don't feel as compelled to maintain regular dividends as most U.S. companies. It's not entirely unusual for a company to suddenly slash its dividend because management wants to raise capex (Spark did this recently). Most of these companies also have convoluted ownership and management structures. For that reason, investors regard them much as they regarded U.S. Master Limited Partnerships for many years. Take the Duet Group for example. Duet is technically a “stapled security.” It has partial ownership stakes in a gas transmission pipeline, two electric distribution networks, and a gas distribution network. It also has made subordinated loans to each of these assets. Both dividends and loan interest from the assets are passed through the managing entity to shareholders.
If you are able to look past this weirdness, you can see companies that are generating terrific recession-proof cash flow that is mostly adjusted for inflation.
And the "Ashes" Go to……
Of this group, I think Duet has the most upside. Duet recently reported half-year earnings. After adjusting for one-time items and revenue timing issues, their dividend coverage was 130%, by far the best in the sector. To have that level of coverage on a 12.7% dividend is truly remarkable. By comparison, several of the larger U.S. pipeline MLPs have distribution coverage under 110%.
Duet’s share price has been clobbered recently for a few reasons:
- S&P issued a credit caution because Duet and other investors have injected equity into some of its utility assets. The assets have in turn repaid their subordinated debt to Duet. Although this has increased Duet’s cash position more than proportionately, S&P deems the dividends from the assets to be less creditworthy than interest payments Duet used to receive. I think this will be resolved as Duet uses cash from the repaid loans to pay down its own debt. It also has an asset sale pending from last year that will greatly bolster its cash position.
- Moodys downgraded the credit of one of Duet’s assets. I see this as a non-issue since the rating was simply moved to match where the S&P rating has been for a while. This particular asset constitutes less than 5% of Duet’s overall portfolio, in any case.
These companies are traded on the Australian ASX, and as “foreign ordinaries” OTC (pink sheets) in the U.S. The OTC variety are “trade by appointment” stocks, with limited liquidity. Some brokers charge extra commissions to trade them.
If you are interested in Spark Infrastructure, consult their website about ownership restrictions for U.S. citizens (it is generally disallowed).
Australia does deduct dividend taxes, but you may be able to get a U.S. credit or deduction for it. There is no U.S. tax credit or deduction if you own the shares in a tax-deferred account. SP Ausnet’s dividend is roughly 40% “franked,” meaning part of the Australian taxes are pre-paid. This makes it a little more desirable than the others for holding in a tax-deferred account. As always, this should not be construed as tax advice: you should consult your tax advisor for your specific situation
Disclaimers: I am a random guy posting stuff on the Internet and not a registered investment advisor. I do not dispense investment advice. If you buy or sell anything, it's your own responsibility.
Disclosure: I am long the following stocks on the ASX: APA.AX, DUE.AX, SPN.AX, SKI.AX