Growing Dividends And Total Returns Down Under

by: David Dittman

Most Australian companies' fiscal years run from Jul. 1 to Jun. 30. They typically report earnings twice a year, in February and August. Most also declare dividends when they announce earnings-interim dividends when they report fiscal first-half results in February, final dividends when they report full-year results in August.

Dividend growth is not an infallible measure of company health, but it's pretty good. Boosting a payout is management's best commentary on the ability of its underlying business to continue to grow.

Dividend growth does not necessarily translate into immediate share-price appreciation, but over the long term, a rising dividend is the best indication of a company's ability to grow revenue and earnings. And it's a pretty good way to build wealth for investors as well.

Here's a look at three companies in my coverage that recently announced higher dividends.

Woodside Petroleum Ltd (OTCPK:WOPEF), one of my favorite Australian dividend stocks, boosted its interim dividend from AUD0.55 for the first half of 2011 to AUD0.65 for the first half of 2012, an increase of 18.2 percent.

Management also boosted annual production guidance due to a strong start for its Pluto LNG project, which turned out its first gas last spring. Woodside now expects calendar 2012 output to be 77 million to 83 million barrels of oil equivalent, up from previous guidance of 73 million to 81 million. Production in 2011 was 64.6 million barrels of oil equivalent.

Once thought to be a trouble spot because of cost blowouts and construction delays, Pluto catalyzed a 43 percent increase in second-quarter oil and gas production to 20.1 million barrels of oil equivalent. Pluto came online in March at a final cost of AUD14.9 billion, following three costly delays. It produced its first LNG in April and began shipping its first cargos to fuel-hungry Japanese utilities early in May.

Woodside reported a 1.9 percent decline in net profit after tax to USD812 million for the six months through Jun. 30. The shortfall largely was due to the company being forced to buy cargoes of liquefied natural gas (LNG) to fulfill contracts with Japanese customers after an earlier delay for commissioning Pluto.

Underlying profit was up 4.5 percent to USD865 million in the first half.

Woodside has had some trouble on the exploration front, announcing along with its dividend increase and first-half earnings that its work at Ananke-1 focused on gas for expanding Pluto was unsuccessful.

Management, however, was confident enough in its ability to source third-party gas to feed Pluto to raise the dividend aggressively.

Spark Infrastructure Group (OTCPK:SFDPF) holds 49 percent interests in three separate power companies: SA Power Networks, which was formerly known as ETSA Utilities, CitiPower and Powercor Australia.

SA Power is South Australia's only significant electricity distributor, delivering electricity to over 825,000 customers over an area of approximately 178,200 square kilometers. CitiPower owns and manages the electricity distribution network servicing Melbourne's central business district (CBD) and inner suburbs, delivering electricity to more than 300,000 customers. Powercor owns and manages the largest electricity distribution network in Victoria, delivering electricity to approximately 722,000 customers across 65 percent of the state.

The other 51 percent interest in each of SA Power, CitiPower and Powercore is held by Cheung Kong Infrastructure and Power Assets Holdings, which are part of the Cheung Kong Group, one of Hong Kong's leading multinational conglomerates.

Spark has delivered a solid distribution, supported significant organic growth in its assets and explored external opportunities consistent with its strategy and risk profile during this period of global economic uncertainty.

Over the past couple years Spark has internalized its management structure, increased its financial flexibility, simplified its corporate structure and established a sustainable and growing distribution profile - with the payout fully supported by operating cash flows.

Regulated revenue was up 19.1 percent to AUD805.8 million, with aggregated EBITDA up 16.3 percent to AUD635.2 million. Flat electricity sales volumes and working capital timing issues were offset by higher distribution tariffs.

SA Power had to fund the impact of the Solar Photo-Voltaic Feed-in tariff scheme implemented by the South Australian government, where demand for that scheme has far exceeded expectations. Significant tariff increases are in effect in South Australia as of Jul. 1, 2012, which should drive cash flow higher in the second half of the year.

All three companies should benefit from the recovery of revenues related to regulator-approved growth capital spending for network improvements, security supply, the rollout of smartmeters and other efforts to improve service for customers.

All three also continue to invest in the renewal and expansion of their networks to maintain and, where possible, enhance asset performance and reliability. In first half SA Power, CitiPower and Powercor invested a total of AUD368.9 million, a 4.6 percent increase from the prior corresponding period. The Australian Energy Regulator (AER) has approved capital expenditures for the current five-year regulatory periods, which will drive growth in the Regulatory Asset Bases (RAB) of the respective companies at 8 percent per year.

Deleveraging will also reduce the ratio of net debt-to-RAB toward 75 percent at the operating company level by the end 2015.

Along with its first-half earnings announcement Spark reaffirmed its previous full-year distribution guidance for 2012 of AUD0.105 per security. The board approved and management declared a cash distribution of AUD0.0525 per security for the six months to Jun. 30, 2012, up 10.5 percent from the AUD0.0475 paid as an interim dividend in 2011.

The company also reiterated its medium-term distribution growth target range of 3 percent to 5 percent per year to 2015, "subject to business conditions." Spark has a target payout ratio of approximately 80 percent of cash flow through 2015.

Bradken Ltd (OTCPK:BRKNF), which manufactures and supplies equipment and materials to the mining, rail and industrial sectors, posted solid fiscal 2012 results, with earnings before interest, taxation, depreciation and amortization (EBITDA) up 12 percent to AUD220.4 million and net profit after tax up 15 percent to AUD100.5 million, both figures beating management guidance.

It also boosted its interim distribution in February 2012, from AUD0.0185 for fiscal 2011 to AUD0.195, and its final distribution in August, from AUD0.21 a year ago to AUD0.215. All told Bradken boosted its payout 3.8 percent from fiscal 2011 to fiscal 2012.

Management says the company's order book is at a record but also stressed that earnings visibility beyond the first half of fiscal 2013, which commenced Jul. 1, is "limited due to global economic uncertainty."

It has no direct exposure to commodities prices, though it clearly is sensitive to activity in the mining sector. It has no debt maturities through 2013, and its overall debt burden is low relative to total assets and coming down.

Management noted during its fiscal 2012 conference call that the company had got past a couple troubled contracts for the provision of rail wagons and that it had made significant progress with a new ground engaging tool for the mining industry that it developed in-house and so promises higher margins once it's rolled out on a wider geographic basis.

The stock has come well off its 2012 high near AUD8.60 on fear about global economic growth and the fate of Australia's mining/resource boom, but recent dividend increases are pretty solid indications of management's confidence.

Bradken did cut the dividend in 2009 and 2010, and the share price has suffered significant declines during those periods when fear has been highest. But the track record of execution is solid, and management does a nice job with the finances.

Though concerns about the condition of the global economy abound, commodity demand remains strong. This demand is underpinned by the development and industrialization of the developing world and is driving prices and production higher. Bradken's position on the production side of mining operations - as well as its global manufacturing platform, its product lines, its ability to research and develop its own products and solutions and its solid balance sheet - position it to grow revenue, earnings and dividends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.