Author: therawinformant

While it can be tempting to just fill a portfolio to the brim with exciting growth shares, I think it is important to balance it out with some quality blue chip shares.

Blue chips are companies that are large, stable, and have a long track record of operating profitably. They’re also quite often the leader (or one of the leaders) in their industry.

But which blue chip shares should you add to your portfolio? Two which I would buy are listed below:

CSL Limited (ASX: CSL)

If you only buy one blue chip ASX share, then I would make it CSL. I believe this biotherapeutics giant is arguably the highest quality company Australia has produced and feel it could continue to be a market beater over the 2020s and beyond. CSL is made up of two businesses – CSL Behring and Seqirus. CSL Behring is a global biotechnology leader which offers the broadest range of quality plasma-derived and recombinant therapies in the industry. Whereas Seqirus is one of the world’s leading vaccines developers with a focus on influenza. Its name comes from the Latin for “’securing health for all of us.”

Due to their leading therapies and vaccines, growing plasma collection network, and burgeoning research and development pipeline, I believe CSL is well-positioned to grow its earnings at a solid rate over the next decade.

Goodman Group (ASX: GMG)

Another high quality blue chip ASX share to buy is Goodman. It is an integrated commercial and industrial property group which has expertly curated its portfolio over the last few years to give it exposure to industries experiencing positive tailwinds. These include industries such as logistics, food, consumer goods, the digital economy, and ecommerce.

It is the latter that I’m particularly positive on. Especially given its close relationships with the likes of Amazon, DHL, and Walmart. Overall, I believe this has positioned Goodman perfectly to deliver further solid earnings and distribution growth over the next decade.

More reading

• Potential ASX winners from government’s $1.5bn manufacturing blueprint
• Top ASX Stock Picks for October 2020
• Forget day trading and buy and hold these fantastic ASX shares
• 2 outstanding ASX shares to add to your retirement portfolio
• Which ASX REITs are still worth buying in a post-COVID-19 world?

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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Which ASX share is my favourite right now?

Well, that’s a tricky question. There are quite a few shares in my ASX portfolio, and each one is there for a reason. Some provide some portfolio ballast, even though I know they’re not going to be the shares that shoot the lights out over the next few years. Others are just there as a hedge against another share market crash or share market instability in general. And I do have some ‘high-conviction’ ideas that I’m hoping are going to at least offer the chance of a ’10-bagger’ return or better.

But the share I’m going to name as my favourite falls into none of the above categories. It’s a share that I own for market-beating performance as well as providing a decent stream of dividend income. It’s a healthy ‘core holding’ of my portfolio.

This share is the VanEck Vectors Wide Moat ETF (ASX: MOAT).

Moat?

This exchange-traded fund (ETF) gets its name from the ‘moat’ concept. A moat is an idea popularised by the great investor Warren Buffett. He describes a moat as an ‘intrinsic competitive advantage’ a company has that protects it from ‘attackers’ or competition. There are many types of moats a company can have, but the most common are a powerful brand, a product ecosystem that ‘locks’ customer in, and a ‘toll bridge’ moat where customers simply have to use a company’s products or services due to a lack of alternatives.

Think of the companies Warren Buffett is famous for investing in. Apple Inc (NASDAQ: AAPL) arguably has one of the best brands in the world that elicits its customers to pay far more for an Apple product than any competitor. It’s a similar story with the Coca-Cola Company Inc (NYSE: KO), which has one of the most recognisable brands on the planet.

Alternatively, think of Intel Corporation (NASDAQ: INTC). The vast majority of personal computers sold today, whether that be an Apple or a Windows, has an Intel chip in it. That means that consumers can’t really avoid using Intel’s products if they want a computer of most descriptions – a form of a ‘toll-bridge moat’.

The MOAT ETF holds only companies that display these characteristics. That’s why you’ll currently find Intel and Coca-Cola in MOAT’s holdings, as well as companies like Kellogg Company (NYSE: K), Amazon.com Inc (NASDAQ: AMZN) and American Express Co (NYSE: AXP).

Because of this investing philosophy, MOAT has managed to return an average of 18.61% per annum over the past 10 years. That’s an amazing return in my view and one that both exceeds the S&P 500 Index as well as the S&P/ASX 200 Index (ASX: XJO). And that’s why MOAT is my favourite ASX share right now.

More reading

• Will ASX media stocks get a $1.4 bn Google boost?
• Meet the ASX 200 stock with a dividend yield that’ll hit ~14% in FY22
• The Telstra (ASX:TLS) share price is at a new 52-week low
• ASX 200 down 0.95%: Mesoblast crashes lower on FDA update, Afterpay surges higher
• Why WAAAX shares like Afterpay (ASX:APT) and Xero (ASX:XRO) are surging

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of American Express, Kellogg, Coca-Cola, and VanEck Vectors Morningstar Wide Moat ETF. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Apple and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool Australia has recommended Amazon, Apple, and VanEck Vectors Morningstar Wide Moat ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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I think it is fair to say that September was a month to forget for Australian investors.

I’m optimistic that October will be significantly better and that a number of beaten down ASX growth shares will recover some of their sizeable declines.

Two that I would consider buying are as follows:

a2 Milk Company Ltd (ASX: A2M)

The first ASX growth share to consider buying is a2 Milk. It is a leading infant formula and fresh milk company which specialises in a2-only products. Over the last few years the company has been growing at a very strong rate thanks to the expansion of its fresh milk footprint and the insatiable demand for its infant formula in China.

Unfortunately, the company’s impressive run is likely to come to an end in FY 2021. This due to the pandemic’s impact on the daigou channel and the pantry stocking it caused in FY 2020. The latter pulled forward sales from the current financial year. In light of this, management is forecasting a decline in first half sales in FY 2021. And while it expects a stronger second half to lead to full year growth, the level of this growth is significantly slower than the market is used to. While this is disappointing, I’m confident that a2 Milk will bounce back strongly in FY 2022. Especially given its growing Chinese mother and baby stores footprint, strong brand, and relatively small market share.

Afterpay Ltd (ASX: APT)

Another ASX growth share I would buy is Afterpay. Especially with its shares down 15% from their 52-week high. I think this has brought the payments company’s shares down to a level that is an attractive entry point for long-term focused investors.

This is because I remain confident that Afterpay is perfectly positioned to continue its meteoric growth over the next few years. I expect this to be underpinned by its strong position in the massive US market and its ongoing international expansions. In respect to the latter,  Afterpay has recently launched in Canada and acquired its way into mainland Europe. The company also has Asia in its sights and could soon launch there.

More reading

• Meet the ASX 200 stock with a dividend yield that’ll hit ~14% in FY22
• ASX 200 down 0.95%: Mesoblast crashes lower on FDA update, Afterpay surges higher
• Why Afterpay, Genetic Signatures, Qube, & Serko shares are charging higher
• Why WAAAX shares like Afterpay (ASX:APT) and Xero (ASX:XRO) are surging
• Is the Altium (ASX:ALU) share price a buy after slumping?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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When it comes to dividend shares there are countless options for investors to choose from on the ASX.

This certainly is fortunate with rates at record lows and potentially still going lower from here.

But with so many to choose from, it can be hard to decide which ones to buy.

To narrow things down I have picked out three ASX dividend shares that brokers think investors should buy:

Alumina Limited (ASX: AWC)

According to a note out of Citi, its analysts have upgraded this alumina producer’s shares to a buy rating with a $1.80 price target. The broker notes that Alumina’s shares have thoroughly underperformed its sector peers despite a rise in the alumina price over the last few months. In light of this, it sees a lot of value in them at the current level. And based on the current Alumina share price, it estimates that it offers income investors a 5.2% FY 2021 dividend yield.

BHP Group Ltd (ASX: BHP)

Analysts at UBS have retained their buy rating and lifted the price target on this mining giant’s shares to $41.00. The broker notes that base metal prices have been stronger than expected during the third quarter of 2020. This was particularly the case for iron ore prices, which averaged almost US$120 a tonne during the three months. As a result, the broker believes BHP is well-positioned to deliver another strong result in FY 2021. It is forecasting a dividend of approximately $2.49 per share, which equates to a fully franked 7% dividend yield.

Suncorp Group Ltd (ASX: SUN)

A note out of the Macquarie equities desk reveals that its analysts have upgraded this insurance and banking giant’s shares to an outperform rating with an improved price target of $11.00. The broker believes that Suncorp’s COVID provisions are sufficient. In light of this, Macquarie feels the material discount its shares are trading at in comparison to the ASX 100 is unnecessary. It is forecasting a dividend of 36 cents in FY 2021. This represents a fully franked 4.2% dividend yield.

More reading

• Meet the ASX 200 stock with a dividend yield that’ll hit ~14% in FY22
• Brokers name 3 ASX shares to buy right now
• Why BHP, Paradigm, Reliance, & SeaLink shares are charging higher today
• Will the Fortescue (ASX:FMG) share price outperform in 2021?
• Is the run over for ASX lithium shares after Tesla’s battery day? 

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Xtek Ltd (ASX: XTE) share price has surged higher today on the back of a positive market update. At the time of writing, the Xtek share price is up 3.45% to 60 cents. This compares to the All Ordinaries Index (ASX: XAO) which is down 0.42% to 6,051 points.

About Xtek

Defence company, Xtek specialises in a range of products for government agencies, law enforcement, military and space and commercial sectors. Its key products include ballistic armour, lightweight and tactical human load carriage equipment, robotic mechanical systems and unmanned crafts.

International delivery

The Xtek share price was on the move after the company announced it has completed delivery of the first batch of its XTclave manufactured plates to CPE Production OY in Finland. The company said that the shipment of 250 plates will be used by the Finnish Defence Force.

The delivery follows the initial commercial purchase in May and subsequent upsized order in June. The total value of the deal is $2 million.

The company said the acceptance of the plates is one of five Xtek products that are already qualified. The next deliveries are to be fulfilled in the near term, which will complete the contract.

Xtek Managing Director, Mr Phillipe Odouard, commented that the company is confident of continuing to make tailwinds. Mr Odouard said:

We are proud to be able to complete this initial delivery on the back of a long-standing relationship with Finnish Defence. The delivery provides validation of our technical capabilities and products, as well as our international commercialisation strategy.

We continue to make strong progress with other potential customers, including in a range of different channels in the US.

Should you invest in the Xtek share price?

I think that Xtek is an exciting company along with other players in the defence sector such as Electro Optic Systems Holdings Ltd (ASX: EOS). While Xtek is a much smaller company, valued at around $41 million, the potential use for its applications is enormous.

In light of this, I will be adding the Xtek share price to my watchlist and keeping a close eye on its performance over the coming months.

More reading

• 3 booming ASX shares for the new space age

Aaron Teboneras owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Collins Food Ltd (ASX: CKF) share price has inched higher today after the company provided an update on its Sizzler stores. At the time of writing, the Collins Food share price is up 0.77% to $10.46. This compares to the S&P/ASX 200 Index (ASX: XJO) which is down 0.48% to 5,852 points.

What does Collins Foods do?

Collins Foods operates dine-in and takeaway restaurant franchisees in Australia, the Netherlands, Germany and Asia. The group’s brands include KFC, Taco Bell and Sizzler.

Sizzler Australia

Earlier today, Collins Foods announced that it will close its nine remaining Sizzler restaurants in Australia by 15 November. The company said that its network chain of Sizzler has been under constant performance review since 2015. In addition, the group advised it no longer considered Sizzler Australia to be in its core brand portfolio.

Until the start of this year, trading continued in remaining stores with forward lease obligations and cash flow positive earnings. However, since COVID-19 impacted social norms, Sizzler has been slow to recover as compared to Collins Foods’ other brands. Revenue and earnings have effectively been performing at a loss since the onset of the pandemic.

The remaining restaurants are all company-owned leasehold sites, which are due for renewal over the next four months. Costs associated with lease breaks are expected to be minimal.

Collins Foods stated it will continue to licence the Sizzler brand in Asia, and does not see any forthcoming changes to those operations.

Commenting on the closure of the Sizzler Australia restaurants, CEO Drew O’Malley said it had been a difficult decision for the company. He said:

Closing restaurants is not something we do often and not a decision we take lightly, especially for a brand as beloved as Sizzler which has been such an important part of the Collins Foods’ history.

Furthermore, Mr O’Malley pointed to the slight impact on the group’s revenues for FY20 and beyond. He said:

In FY20, Sizzler Australia revenues accounted for less than 3 percent of Collins Foods’ total revenue. While the Sizzler Australia closure will allow us to minimise current-year and future losses, there will be some one-off closure costs that will be reflected in the upcoming half-year results.

Collins Foods share price summary

The Collins Foods share price performed strongly late last year before plummeting to a 52-week low of $3.50 in March. Since then, the Collins Food share price has recovered, sitting just below its 52-week high of $10.96. Collins Foods has a market capitalisation of $1.2 billion and a price-to-earnings (P/E) ratio of 39, indicating investor appetite for its shares.

More reading

• 2 strong ASX shares I’d buy today for growth and income
• ASX 200 down 0.9%: Tech shares push higher, gold miners sink, New Hope results
• Why Collins Foods, ResMed, Regional Express, & Xero shares are pushing higher
• 2 stellar mid cap ASX shares to buy in September

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Collins Foods Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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Is the WAM Global Limited (ASX: WGB) share price a buy for dividends?

Over time it could become one of the most useful ASX dividend shares to own in my opinion.

A quick overview of WAM Global

WAM Global is a listed investment company (LIC) with a focus on international shares. It was set up by Wilson Asset Management (WAM) in June 2018.

The job of a LIC is to invest in other shares which management believe are exciting opportunities.

The WAM investment team have a particular investment style. They try to find undervalued growth businesses where there is a catalyst which could send the company’s share price higher.

The lead portfolio manager of WAM Global is Catriona Burns.

Dividend yield and growth

At the current WAM Global share price it has a grossed-up dividend yield of 4.7%. That may not seem that high, but it’s the dividend growth that is particularly compelling. The WAM Global board decided to declare a final dividend of 4 cents per share, which was a 100% increase compared to FY19.

I think WAM Global can steadily increase its dividend and yield for investors as it generates returns and builds its profit reserve.

However, I’m not sure that investors can expect WAM Global to have as high of a dividend yield as WAM Capital Limited (ASX: WAM) because international shares obviously don’t attach franking credits to their dividends to WAM Global. Besides, not every LIC needs to a have a huge yield – I’d prefer a healthy mix of capital growth and dividends. 

Current investments

ASX shares only represent around 2% of the total global share market. There are plenty of high-quality investment opportunities outside of Australia which WAM Global can give investors access to.

At the end of August 2020, some of its largest investments included: Tencent, Arista, Aon, Avantor, Auto Zone, CME Group, Dollar General, EA, Edwards, Hasbro, Intuit, Lowe’s, Microsoft, Nomad Foods, Stroer, Software One and Thermo Fisher Scientific.

As you may be able to tell by the holdings, there is a noticeable weighting to US shares, but that’s just where a lot of the global share market is based. Just under two thirds of the portfolio was listed in the US, 7.9% was listed in Germany, 3.4% in Switzerland, 3.3% in the UK, 2.7% in Australia, 2.6% in Hong Kong and 2.1% in Japan with another 9.7% listed elsewhere.

It also had 5.2% of the portfolio as cash, which gives it an opportunity to buy other shares if it sees an opportunity.

Is the WAM Global share price a buy?

Aussies, particularly retirees, may be too focused on ASX shares for their portfolios. Particularly large cap ASX shares. Many of those large ASX names don’t offer much growth or global earnings diversification.

WAM Global offers investors a decent starting dividend yield, which is pretty good considering how low interest rates are at the moment.

Over the long-term I think this LIC will be good for dividend income because of the diversification that it offers and its focus on growth.

At the current WAM Global share price it’s trading at a 10% discount to the net tangible assets (NTA) at 31 August 2020 of $2.37.

One sign of whether something is a good buy is whether management are buying shares. It was announced today that WAM founder Geoff Wilson AO has bought $383,846 worth of WAM Global shares this week at an average price of $2.12 per share. He actually sold a similar amount of WAM Research Limited (ASX: WAX) shares to fund the acquisition of shares.

If Geoff Wilson thinks that the shares are worth buying this week then I think it’s worth paying attention.

I’d be happy to buy a parcel of WAM Global shares and buy more if the discount to the share price widens, or if there is a widespread selloff of global shares.

More reading

• 2 ASX shares I would buy for growth and income
• Is the new WAM Alternative Assets LIC a buy?
• 2 ASX dividend shares with fully franked yields over 4%
• ‘We could be heading for a lot of pain’

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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High yield stocks have lost out to high growth momentum stocks. But this could be the time to be buying this generous ASX dividend paying stock.

The stock in question is the Alumina Limited (ASX: AWC) share price and Citigroup just upgraded the miner to “buy” from “neutral”.

This is in part due to the broker’s belief that its dividend yield is set to surge to 13.6 cents a share by FY22. This puts the stock on a forecast yield of around 14% for that year – which will make it one of the best yielders on the S&P/ASX 200 Index (Index:^AXJO).

Time for ASX high-yield dividend stocks to shine

I know ASX income stocks have lagged their growth counterparts over the past year or two. Just look at the Afterpay Ltd (ASX: APT) share price and Kogan.com Ltd (ASX: KGN) share price.

We really don’t need to talk about popular dividend stocks either given where the Westpac Banking Corp (ASX: WBC) share price and Telstra Corporation Ltd (ASX: TLS) share price are currently sitting.

But where valuations stand at the moment, I prefer high yielders and value buys in the current environment.

Value and yield play

According to Citi’s analysis, Alumina is both! The stock tumbled by around 6% over the past six months when the alumina price is up 2% to around US$270 a tonne.

“The market has been reassessing its view on the pace of alumina price recovery and commodity analysts have been trimming nearer term alumina price estimates,” said Citi.

But the downgrade cycle has run its course. The AWC share price is trading at a substantial discount given Citi’s long-term alumina price forecast of US$325 a tonne.

What’s more, the 12-month forward consensus earnings revisions are no longer negative and this could be an early sign that sentiment towards AWC is turning.

Yearly dividend increases

The improving prices for aluminium and alumina will underpin dividend increases over the next few years too.

Alumina is expected to pay a US6 cents-a-share full year dividend for FY20, and this increases to US7.6 cents in FY21 before more than doubling the following year to US13.6 cents (18.9 cents).

Citi’s 12-month price target on the stock is $1.80 a share, which implies a 30% return if you included the dividend.

But Alumina isn’t the only stock that’s well placed to outperform in 2021. The experts at the Motley Fool have picked some of their favourite buys for the year ahead.

Follow the free link below to find out more.

More reading

• The Telstra (ASX:TLS) share price is at a new 52-week low
• ASX 200 down 0.95%: Mesoblast crashes lower on FDA update, Afterpay surges higher
• Why Afterpay, Genetic Signatures, Qube, & Serko shares are charging higher
• Why WAAAX shares like Afterpay (ASX:APT) and Xero (ASX:XRO) are surging
• Why the Domain (ASX:DHG) share price is hot property today

Brendon Lau owns shares of Telstra Limited and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Kogan.com ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Telstra Corporation Ltd (ASX: TLS) share price is at a new 52-week low. Today, Telstra shares have fallen another 0.71% and are trading at $2.78 at the time of writing. That’s a new low for Telstra and quite a remarkable move, considering Telstra shares didn’t even fall below the $3 mark during the share market crash back in March and April. The Telstra share price hasn’t touched levels under $2.80 since December 2018.

Telstra shares are now down 22% year to date, and nearly 30% off of the current 52-week high of $3.94 that was made back in January. That doesn’t look too crash hot against the performance of the broader market.

The S&P/ASX 200 Index (ASX: XJO) is now down 12.9% year to date, meaning Telstra has significantly underperformed the ASX 200 in 2020 so far. That’s pretty astounding, considering Telstra is one of the more stable ASX blue chip shares and has been relatively unaffected by the coronavirus pandemic, at least compared with other ASX blue chips like the big four banks.

So what’s going on with the Telstra share price?

Why Telstra shares are at a new 52-week low

In my opinion, what we are seeing with the Telstra share price is an institutional (read: pension funds and fund managers) rotation of capital out of the company. Put another way, no one wants to own Telstra shares right now, or at least no one with enough money to move the markets. This often happens when an ASX share is on the nose and its outlook isn’t too exciting for at least the next year.

This all comes down to Telstra’s full-year earnings report for FY2020, in my view. In the report, Telstra hit its earnings guidance but also implied that its current dividend of 16 cents per share would come under pressure next year if the company sticks with an earnings payout ratio dividend policy. Currently, Telstra aims to pay out 70–90% of underlying earnings as dividends. Since Telstra is forecasting earnings to come in at below 16 cents per share in FY2021, many investors are assuming that this means a dividend cut is on the cards next year.

Is the market right on this one?

However, I’m not despairing. If Telstra moves to a free cash flow policy rather than using earnings, I think the company could comfortably cover the dividend in FY2021. I think investors are unnecessarily panicking with Telstra right now, and thus, we could be seeing a decent buying opportunity.

Consider this: if Telstra keeps its 16 cents per share payouts next year, the shares at today’s prices are offering a forward dividend yield of 5.76%, or 8.23% grossed-up with Telstra’s full franking. That’s not a guaranteed yield, of course. I could well be wrong on Telstra’s dividend for next year. But I’m not even considering selling my Telstra shares, for whatever that’s worth.

More reading

• Meet the ASX 200 stock with a dividend yield that’ll hit ~14% in FY22
• ASX 200 down 0.95%: Mesoblast crashes lower on FDA update, Afterpay surges higher
• Why WAAAX shares like Afterpay (ASX:APT) and Xero (ASX:XRO) are surging
• Why the Domain (ASX:DHG) share price is hot property today
• 5 things to watch on the ASX 200 on Friday

Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The Over the Wire Holdings Ltd (ASX: OTW) share price has been a very strong performer on Friday.

In afternoon trade the telecommunications, cloud, and IT solutions provider’s shares are up 14% to $4.87.

At one point today, the Over the Wire share price was up as much as 17% to a record high of $5.00.

Why is the Over the Wire share price rocketing higher?

Investors have been buying the company’s shares after it announced a binding agreement to acquire all of the shares in Digital Sense Hosting.

According to the release, Over the Wire has agreed an upfront consideration of $27 million. This comprises $21.6 million in cash and $5.4 million in Over the Wire shares.

It is worth noting that these shares are priced at a sizeable discount of $3.64 per share. Management explained that this was the 10-day volume weighted average price when it first signed a letter of intent.

The cash component will be fully funded by an institutional placement of $20 million and a $5 million share purchase plan. These will be priced at $4.00 per share, which represents a 6.1% discount to its last close price.

In addition to this, Digital Sense is entitled to receive further deferred consideration of up to $12 million (up to $7 million in FY 2021 and up to $5 million in FY 2022) based on achieving agreed targets.

For the 12-month period to 30 June 2020, Digital Sense Hosting recorded revenue of approximately $18.3 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of approximately $5.4 million.

This means the upfront consideration of $27 million represents a valuation of 5 times historical FY 2020 EBITDA.

What is Digital Sense Hosting?

Digital Sense Hosting is a high-quality cloud business that provides a customisable and scalable cloud offering to Enterprise and Government customers.

Management notes that it introduces further solution capability in the areas of Infrastructure as a Service (IaaS), Desktop as a Service (DaaS), Storage as a Service (STaaS), and Data Protection as a Service (DPaaS).

Furthermore, its extensive cloud offering gives the company cross sell opportunities to existing Over the Wire customers. It also offers cross sell opportunities of its own solutions to Digital Sense customers.

In light of this, its high levels of recurring revenue, and strong margins, the acquisition is expected to be earnings accretive.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Over The Wire Holdings Ltd. The Motley Fool Australia has recommended Over The Wire Holdings Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Over the Wire (ASX:OTW) share price rockets to record high on acquisition plans appeared first on Motley Fool Australia.

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