Why these 4 ASX dividend shares stand out from the crowd: fund manager

Ask a Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part two of this edition, we’re rejoined by Romano Sala Tenna, co-founder of Katana Asset Management.

The Motley Fool: With capital gains under pressure this year, ASX dividend shares are gaining much more investor attention. Do dividends play a role in determining your investment decisions?

Romano Sala Tenna: We’ve got 11 key criteria, which are broken up into other subset criteria. Additionally, there’s up to 154 data points we can look at for a company.

Dividends is one of them; it carries some weight.

Over the last 146 years, the ASX has averaged 10.8% per annum return. That’s made up of roughly 6% to 6.5% capital growth with dividends around 4% to 4.5%. That’s over the ultra-long term.

So, we if can find an ASX stock that has a dividend yield of 10.8% or better, that we believe is sustainable, and may even grow at 5% per annum, then that is definitely worth our attention.

There are a lot of high-yielding dividend stocks at the moment. But I would caution inexperienced investors about taking on some of the yields that we’re seeing currently. Trailing yields count for nothing. That’s the first thing. You need to look at forecast yields.

MF: Are there any ASX dividend shares you currently hold that stand out from the crowd?

RST: Coronado Global Resources Inc (ASX: CRN), which is in our portfolio for yield. They have tier-one assets, long-life mines, a good mix between Australia and the US, and a high-quality product (85% to 90% met coal).

If you look at where Whitehaven Coal Ltd (ASX: WHC) is, for example, and you look at where Coronado is, Whitehaven is producing fewer tonnes and lower grade, and it’s trading at a huge premium to Coronado. So, I think we’ll see some equalisation there at some point.

On 31 October, they announced a 13 US cent special dividend, which is 20 [Aussie] cents, which is over a 10% yield as an interim special, just off the bat.

We think Coronado could pay an average of 35% in dividends over three years. So it pays itself back in three years. But we also think over that time, as the coal price comes off, we could see the capital side of it depreciate by 40% to 50%. So in our base case, we’re going to see between 70% and 100% in dividends over the next three years and maybe a 40% to 50% capital loss. What is the end result of that?

It looks something like 30% to 40% yield, net, over that time frame, so 10% to 15% per annum net. That probably still makes sense.

But it’s not for inexperienced investors. You really do have to be watching a number of drivers. Obviously, watching the met and thermal coal prices closely. And also some more subtle drivers in terms of what we’re seeing in markets that give an indication of where prices are going.

MF: Any other ASX dividend shares you’re bullish on?

RST: South32 Ltd (ASX: S32) is another example. We always say it has tier-one assets in tier-two commodities. But some of those tier-two commodities are coming back into their own in terms of electrification and decarbonisation.

I think they’ve been one of the best companies in terms of capital management. They’ve run the longest continuous buyback in our stable, which we love to see. We don’t like to call it a buyback, we call it a buy-and-back. Management is buying and backing themselves.

Now, some of their commodity prices have come off a bit, and they do run the risk at the moment of some downgrades in the coming months. But I think through the cycle, from these prices, you’re not paying a premium as you are with some of the other resource plays.   The stock price has retraced significantly.

And Woodside Energy Group Ltd (ASX: WDS) is another example. They’re really executing well at the moment.

But people have to understand that there will be a capital loss amongst these ASX dividend shares at some point. They need to take that into the equation when working out what the real net yield will be.

MF: ASX coal shares have been making headlines for their outsized revenues amid record coal prices in 2022. There is a range of forecasts for both metallurgical and thermal coal prices heading into 2023. Do you have an in-house view of where prices are heading?

RST: Yes, the met coal price has been extraordinary. It went down below US$120 per tonne, then it briefly ran up above US$600. Now it’s back at US$320 per tonne on the spot market.

We differentiate the two coals, so met coal and thermal coal.

Met coal, we see it has to have some appreciation and thermal coal some depreciation They have to normalise. In 30 years of following markets, I’ve never seen the met coal price sustainably below the thermal coal price as we’re seeing at the moment.

We’re starting to see that normalise. We’ll see some substitution. At least 10% to 20% of the met coal can be substituted for thermal coal in the markets with the right adjustments and the right time frame.

We’ll see the thermal coal price come back, and we’ll see the met coal price appreciate. In fact, we’re seeing that already.

Secondly, you have to understand we have drawn a line in the sand. Russian gas is not coming back into the European market anytime in the next few years, if at all. The war could literally end tomorrow, but Europe is not going back to Russian energy. That ship has sailed. In the short term, thermal coal is the only way to replace those energy molecules.

I definitely see coal being stronger for longer. Is it US$350 per tonne? Probably not. Is it US$250 or US$200 per tonne for thermal, possibly. But that’s still incredible prices for thermal coal. I think we’ve got some runway on some of the thermal coal plays.

MF: Any particular dividend-paying ASX coal shares that look strong to you?

RST: For example, Yancoal Australia Ltd (ASX: YAL). It’s not without risk. But Yancoal, on our numbers, generated 25% of its market capitalisation in free cash flow last quarter. They’re not doing it just at the moment, but when they turn their attention to capital management,  it could be very substantial..

***

Tune in tomorrow for part three of our interview with Romano Sala Tenna. If you missed part one, click here.

(You can find out more about the Katana Australia Equity Fund here.)

The post Why these 4 ASX dividend shares stand out from the crowd: fund manager appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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