Dividend yielding stocks

[McLovin]

I agree, i have taken a position in MND recently for my SMSF, the whole sector has been grossly oversold. I worked for the last 20 years in the mining industry and people just dont understand how it works, sure the 'boom' has finished for now, but most mining companies will continue to operate, just not with the rapid expansion seen previously. Mining services companies will still be widely used to support the ongoing operations.

There will still be work, but when you look at pre-boom (2003) things like asset utlisation, ebit margin, wc etc you do get some idea of where the industry is going. There's going to be a lot of spare capacity for years. If you only look at the last 5 or 10 years then you're only looking at boom years. MND was a tiny company until the resource boom. Occam's razor would suggest the reason they got big was being in the right place at the right time.

Between 2002 and 2007 EBIT went from ~$7m to ~$88m, margin roughly doubled over the period from 4.5% to 9%. At the same time revenue exploded from $150m to $970m. In the preceeding five years (1998-2002) it hadn't moved. As an example of the uplift in asset utilisation, in 2002, PPE as % of revenue was 10.7%, in 2007 it had fallen to 6.4% in 2014 it was 4.6%.

That uplift occurred against the backdrop of this...



Which won't be repeating anytime soon. I don't think we're near the bottom yet for mining services stocks.

 

[galumay]

NWH has other things driving the price at the moment. imo you're better off buying after 25th Nov

Thats a fairly odd comment! Care to enlighten us with what you are referring to, i would reckon the 25th Nov will have the opposite effect on price and buying after then will cost you more.

 

[McLovin]

Thats a fairly odd comment! Care to enlighten us with what you are referring to and what importance 25th Nov has?

AGM

 

[galumay]

Which won't be repeating anytime soon. I don't think we're near the bottom yet for mining services stocks.

We will have to wait and see! There is an enormous amount of extra activity as a result of the 'boom' and even though the rate of expansion has come to an end there is a lot of work supporting that extra capacity that is still required.

The big miners have no appetitie for doing that work in house and will always contract most of it out, the better quality contractors will continue to find work in that space.

The cyclic nature of the industry means its likely we will see another 'boom' in the future which the surviving contractors will be best placed to take advantage of.

I certainly wouldnt want too much of my capital allocated to this sector, but I do believe there are a couple of good quality yield companies in the crop and I think that they are currently priced at a discount to value.

 

[Wysiwyg]

One word - cyclical. These sectors don't turn on a whim. If anything, the well established and diversified will survive. Nice perspective post McLovin.

 

[Julia]

One word - cyclical. These sectors don't turn on a whim. If anything, the well established and diversified will survive. Nice perspective post McLovin.

+1. As usual.

It's also interesting how the comments above so clearly reflect our differing approaches, ie contrarian/value type on the one hand and price action oriented on the other.

 

[skc]

For yields play I think certain sections of the property trust sector (REITs) still offer good relative value
in terms of yield. E.g. TIX, TOF, GMF, AJD, GOZ etc all offer over 7.5%-8% yield (unfranked)... as opposed to the larger trusts (e.g. SGP, GPT, DXS etc) which are anywhere between 4.5-6%.

The sector is obviously very sensitive to interest rate movements so dividend stability is as good as your own outlook on interest rates.

Some of the stocks are quite narrow in terms of asset base (e.g. they may only have 5 to 8 properties) so some of the higher yield reflects concentration risks (i.e. if one property doesn't lease well it is a meaningful % impact to the company's income). However, you might be able to diversify away such risk by holding a collection of them at smaller size, so adverse outcome in one of the names won't impact your overall portfolio anymore than if you invested in a single diversified REIT.

 

[Ves]

Which won't be repeating anytime soon. I don't think we're near the bottom yet for mining services stocks.

I am still thinking the same....

The hit to revenue due to shrinking asset utilisation is one thing.

But when you add this to shrinking asset bases then the hit to the bottom line starts looking exponential (just like it did in reverse on the way up).

For instance... say I had $200m in assets. ROIC was 80% at peak. $160m EBIT. Bottom of cycle 25% ROIC $50m.

Now additionally halve the asset base to $100m. 25% ROIC. $25m EBIT. Now it's an 85% fall from peak to trough. And that's a hypothetic company earning 2-3x their cost of capital, which is a generous assumption in itself.

I did some rough calculations on MND. Asset base and ROIC is shrinking, even on near-term estimates. Whole of cycle EBIT, at a guess, probably wouldn't lead to an FCF yield of more than 5-6% at current prices. I'd be interested if it was closer to 15% (at least then if I'm wrong, I'd probably still get half of that....)

 

[skyQuake]

AGM

1pm on the 25th, and index flow shenanigans at the close.

 

[DeepState]

I agree, i have taken a position in MND recently for my SMSF, the whole sector has been grossly oversold. I worked for the last 20 years in the mining industry and people just dont understand how it works, sure the 'boom' has finished for now, but most mining companies will continue to operate, just not with the rapid expansion seen previously. Mining services companies will still be widely used to support the ongoing operations.

The mining companies always contract out a fair amount of trades work because its simply less economic to do it in house. This will continue and any mining services companies with the capability, low debt and good management will continue to be profitable thru the cycle.

MND, NWH and a few others are fantastic contrarian buying at the moment, and the yields are amazing if you get in now.

Not being from the mining industry, I was wondering what you are seeing.

The company is now experiencing declining revenues and deteriorating margins. The gross margin is the lowest since 2005. The operating margin is the lowest since 2005 also. In other words, it is losing scale benefits across the P&L.

Here is the outlook as presented by management themselves.

First, here is the breakdown of revenue by end customer. Please note that the mix has been changing away from resources and into energy. A good portion of that is simply because the resources segment has shrunk. This includes maintenance contracts.




Here are the segment outlooks as presented by management in investor communications.



Although the data above relates to Australia, the exposure to offshore is not going to be a swing factor.

Please note how the outlook for energy is weak over the medium term. This is the biggest customer segment now. Resources is not expected to do much. Further, (change in) maintenance is not particularly influential as an offset against the movements in the construction blocks.

The combination of the above is not rosy for the company's outlook unless you believe they will dramatically increase market share. It coalesces with very gentle language from the CEO which says that revenue is going down.

One of the reasons why dividends are so high is that management has wound back capex to levels not seen since 2004. It is distributing part of the surplus cashflow, boosting dividends and sacrificing future growth for lack of perceived opportunities. Capex is declining and, on the basis of their outlook, will decline further. Companies wind back capex when the outlook as they perceive it is not strong. As a result the hard operating assets have shrunk to the lowest level since 2010 and will shrink further as they are not being replenished at a sufficient rate.

Either management is not credible because they are far too pessimistic in their forecasts, or they are credible and seeing a much weaker outlook than is being supposed.

What are you seeing?

Valuation concerns are to the side as they have not been raised by you. The stock might still be cheap despite the above. However, the stock may well have been cheap with a low DY than a high DY. DY in isolation doesn't mean that much. That is, unless you perpetuate them for valuation purposes, in which case there is a grievous error being made.

 

[skc]

Here are the segment outlooks as presented by management in investor communications.

View attachment 60215

I remember seeing this chart in the presentation and thought... someone ought to plot the 4 sub charts on the same vertical scale and see the relative size of resource/energy vs maintenance. MND's core strength is in it's top tier build-to-spec capability; maintenance work on the other hand is much simpler. Simpler = more competition = lower margin. Relying on that sub segment for overall company growth doesn't present the most awesome outlook.

 

[McLovin]

I am still thinking the same....

The hit to revenue due to shrinking asset utilisation is one thing.

But when you add this to shrinking asset bases then the hit to the bottom line starts looking exponential (just like it did in reverse on the way up).

Yerp. It's already happening. Asset base is shrinking. As contracts start to roll and new work becomes scarce margins will follow. The big money has always been in the build not the maintenance. FWIW, MND would be interesting below $5, imo. I also think we'll get there at some point.

ETA: Maybe a mod could move this convo to the MND thread.

 

[galumay]

What are you seeing?

Well for one thing I am seeing my language was a little exuberent! "fantastic contrarian buying" is colourful to say the least!

I do think the market has over reacted to the ending of the resources 'boom', its not a belief that i can quantify, its perhaps dangerous exactly because its informed by my long and deep involvement in the industry - and sometimes thats more dangerous than knowing nothing about the business!

My belief is that there will be consolidation, some of the debt ridden and poorly managed contractors will go under in the current position of the cycle, the base line work in resources, energy and maintenance will sustain those survivors and they will be the first to benefit on the next upswing of the cycle.

If I am correct then they will deliver good yield through the transition, at their current prices, and then a recovery in share price as the cycle changes. As you point out the better companies are wallowing in cash, precisely because of the downturn and no short term opportunities for cap ex at any great rate, this will support the high yeolds at least for a couple of years.

 

[skc]

Well for one thing I am seeing my language was a little exuberent! "fantastic contrarian buying" is colourful to say the least!

I do think the market has over reacted to the ending of the resources 'boom', its not a belief that i can quantify, its perhaps dangerous exactly because its informed by my long and deep involvement in the industry - and sometimes thats more dangerous than knowing nothing about the business!

As Confucius says, it's difficult to explain the concept of water to a fish. Great stuff for you to be able to see both sides of the coin.

Speaking to some of my mining friends... most are actually worried about their job. A FIFO guy who just fired 100 people last year knows that he only still has a job because they need him to do more firing - what a $hit position to be in.

However, regardless of what industry and what stage the industry is in, I guess there will always be conflicting anecdotes.

My belief is that there will be consolidation, some of the debt ridden and poorly managed contractors will go under in the current position of the cycle, the base line work in resources, energy and maintenance will sustain those survivors and they will be the first to benefit on the next upswing of the cycle.

I share these beliefs.

If I am correct then they will deliver good yield through the transition, at their current prices, and then a recovery in share price as the cycle changes.

But not these.

 

[DeepState]

Well for one thing I am seeing my language was a little exuberent! "fantastic contrarian buying" is colourful to say the least!

Thanks for sharing the fuller contents of your view. I was just curious. I hope it works out for you in the longer term which you seem to be looking at as a horizon. I hope to join your journey at the low tic of the next decade.

As for exuberance, why the heck not!

 

[galumay]

Thanks to all of you, RY, skc, McLovin & Ves.

Its so valuable to have ones preconceptions and convictions questioned, it always makes me go away and reconsider my judgements. I love that feeling of ones own psycology behaving just like the textbooks!!

If I went just on emotions, following some reading of detailed and financial arguments in favour of this sector being underpriced in another forum, I would have poured capital into them.

Then having read your reasoned and compelling justifications of your positions I would have sold out straight away!

Instead I shall hang on to the 2 positions I have (NWH & MND), hope I am a bit right, rather than entiely wrong, and let my patience go to work!!

Thanks again for all your thoughtful contributions.

 

[luutzu]

We will have to wait and see! There is an enormous amount of extra activity as a result of the 'boom' and even though the rate of expansion has come to an end there is a lot of work supporting that extra capacity that is still required.

The big miners have no appetitie for doing that work in house and will always contract most of it out, the better quality contractors will continue to find work in that space.

The cyclic nature of the industry means its likely we will see another 'boom' in the future which the surviving contractors will be best placed to take advantage of.

I certainly wouldnt want too much of my capital allocated to this sector, but I do believe there are a couple of good quality yield companies in the crop and I think that they are currently priced at a discount to value.

That's a great advantage to have worked in the industry like that.
Maintenance are usually more profitable than the construction phase, and who better to maintain the facilities than the guys that designed and built most of it - the piping, electrical systems along with the main structures.

This should, at least, carry it over until the next mining cycle or/and the infrastructure/LNG division kicks off another phase in the company. From its 2014 AR, Oil and Gas works made up 40.6% of business while infrastructure only 2.3%. So it's not entirely dependent on mining; that and it just got started in infrastructure. So who knows what's really ahead.

MND's profit margin has been relatively stable over the boom years and even with decline in sales last year, its margin is still the same or slightly higher. Its cash and financial position is strong and the MD alluded to possible acquisition ahead soon. When you got the cash and have further borrowing capacity, this might be the best time to pick up smaller rivals or bulk on acquisitions at bargain prices.

One of Fisher's question was: Has the company been fortunate or fortunate and able; or fortunate because it is able.

I agree that the last mining boom was good for them, but they seem to have the people and system in place to ride it well and established themselves. So maybe they could managed into the future and adapt and find new opportunities - which they appear to have been doing at least a couple of years back before the real decline in mining works.

 

[sydboy007]

For pure yield with little in the way of potential capital growth

AKY, AYD, AYH, AYJ, AYK - predominately corporate bonds

AYF - various hybrids (have quite a bit in my SMSF for the reliable 40c div with 5c franking credits)

FST - child care / medical centres

Options with capital growth

CMG - current forecast is nigh on 10% with franking credits on top. Seems they're rebuilding momentum since the drop off before the election last year.

TGA - I keep reading good things about them. Very much regretting not buying in when a newsletter I subscribe to recommended them over a year ago at $1.80ish. They're now at $2.50 with a 12c full frank dividend.

JBH - seems to be riding the litle increase in consummer spending occuring with an 86c div fully franked.

ETFS with a decent yield

IHD, RDV, VHY

Some international ETFs are now offering decent yields

WDIV, HHV

I think with the new(ish) normal 5-6% yield is about where I want to aim for in terms of risk / reward.

 

[McLovin]

If I went just on emotions, following some reading of detailed and financial arguments in favour of this sector being underpriced in another forum, I would have poured capital into them.

Anecdotally, I'd say the best time to buy is when the no one is talking about a stock in the other forum.

 

[pixel]

Just in time to count for the current FY, a large number of stocks will go ex-div tomorrow.
The Last Yield in the attached spreadsheet is the yield of this present payout, including any franking credits, based on the share price at the time the program was run - about half an hour ago (local Perth time).

View attachment EOFY-DiviJun2016.xls