Author: therawinformant

WAAAX is an acronym we don’t seem to hear as much as we used to on the ASX share market.

Inspired by the FAANG (Facebook, Apple, Amazon.com, Netflix and Alphabet (owner of Google) stocks of American fame, WAAAX was the term coined to describe a group of high-flying ASX tech shares.

These shares were – sorry, are – WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), Altium Limited (ASX: ALU), Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO).

And back in early 2019, they were all the rage.

All had delivered strong capital growth over the previous few years. All were exciting, innovative tech stars that ASX investors dreamed might one day rival the famous FAANGs.

So what happened? Why do we not hear this WAAAX term as much anymore? Has the WAAAX turned to wane?

WAAAX off?

Well, it comes down to divergence. See, it was easy to pile these 5 companies together when their fortunes were intertwined. But today, it’s a different story, with the 5 WAAAX shares going in 3 separate directions.

Afterpay and Xero have continued to shoot the lights out. These 2 companies are today trading near record highs.

Appen and Altium haven’t really enjoyed the same level of love from investors though. Appen shares have recently had a leg up, but between March 2019 and May 2020 pretty much went nowhere. It’s a similar story with Altium.

WiseTech Global though… ouch. This global logistics company is something of a fallen WAAAX angel. After rising by around 360% in the 2 years to September 2019, WiseTech has been in freefall ever since. Over the past 11 months, WiseTech shareholders are down around 50%.

And that’s why I think we don’t hear much of the ‘WAAAX shares’ anymore. Perhaps because AAAX (or XAAA) doesn’t quite have the same ring to it. Or perhaps ASX investors now accept that we can’t really rival the seemingly-indestructible FAANGs over in the US, at least right now.

Which AAAX share is the pick of the bunch?

As you might have picked up, I’m not a huge fan of WiseTech. But the other 4 ‘AAAXers’ I am more partial to. All have long growth runways ahead of them and could be massive companies in 10 years’ time if their cards are played right.

If pricing wasn’t an issue, Afterpay and Xero would definitely my picks of the bunch. I love Xero’s capital-light, software as a service (SaaS) model, which could turn Xero into a free cash flow machine down the road.

Ditto with Afterpay. If Afterpay can continue carving the US and UK markets up and enter the Asian market, I think its growth potential is almost limitless. Especially if you consider its recent partnership with Chinese e-commerce giant Tencent Holdings.

All of this (and perhaps more) is reflected in the current Xero and Afterpay share prices in my view, so I’m still biding my time with these two. But they are both companies I would love to see in my portfolio and sooner, rather than later.

More reading

• 4 ASX shares to buy now for a post-coronavirus world
• 3 stellar ASX tech shares to buy for the long term
• Why Mesoblast, Northern Star, SEEK, & WiseTech Global shares are sinking lower
• Is the Afterpay share price a buy?
• Why I think the Xero share price is a futureproof buy

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of Alphabet (A shares) and Facebook. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Altium, and Facebook. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO, Appen Ltd, and WiseTech Global. The Motley Fool Australia has recommended Alphabet (A shares) and Facebook. 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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ASX stocks that have delivered pleasant surprises during the reporting season have been outperforming the S&P/ASX 200 Index (Index:^AXJO).

Some recent examples include the GPT Group (ASX: GPT) share price, Aurizon Holdings Ltd (ASX: AZJ) share price and James Hardie Industries plc (ASX: JHX) share price.

Here are two other ASX 200 stocks that may beat expectations when they hand in their earnings report card next week.

Earnings surprise on strong tailwinds

One possible reporting season hero is the AMCOR PLC/IDR UNRESTR (ASX: AMC) share price. Macquarie Group Ltd (ASX: MQG) noted that other packaging companies like Berry, Sealed Air and Huhtamaki have all reported results that exceeded consensus forecasts.

It’s also worth noting that the COVID-19 crisis triggered a surge in demand for a range of consumer goods that Amcor is exposed to. More than 95% of the group’s sales are linked to food, beverages, healthcare and personal care.

Double-digit growth

Macquarie is forecasting Amcor to deliver earnings per share (EPS) growth of between 10% and 11% for FY20, and a further 9% in the current financial year.

Not many companies can boast of having double digit growth in the past year and if the positive tailwinds continue into 2021, the broker’s 9% forecast for FY21 may look conservative.

Amcor will report its results on 18 August. Macquarie is recommending Amcor as “outperform” (or a “buy”) with a price target of $16.81.

Cream rises to the top

Another stock that looks poised to beat the street is the A2 Milk Company Ltd (ASX: A2M) share price.

UBS believes the infant formula (IF) company will post a FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) that is around 4% above consensus.

The broker came to this conclusion by compiling the sales data of A2’s products across different channels and analysed its operating expenses. The market is underestimating A2’s profit margins.

Positive FY21 outlook expected

“Our revenue growth indicator is in line with market consensus with strong IF growth via CBEC [cross border e-commerce] countering headwinds in small daigou and MBS [Mother and Baby Stores],” said UBS.

“Our analysis suggests A2M enters FY21 with a record CBEC market share in July and MBS sales ahead of pre-COVID-19 helped by a larger store footprint.

“Plus channel checks point to wholesale price increase of ~5% phased in over 1HFY21.”

However, Australian distributors may be holding excess stock and weak gift store demand could offset some of these positives.

Nonetheless, UBS is recommending investors buy the ASX and New Zealand listed stocks. It’s price target on A2M is NZ$22 a share.

A2 Milk is expected to report its results next Wednesday.

More reading

• How the Santos share price could gain from COVID-19 stimulus
• 2 easy ASX shares to buy for small cap exposure
• Top brokers name 3 ASX 200 shares to buy today
• ASX 200 down 0.3%: CBA delivers $7.3bn cash profit, gold miners sink, SEEK’s outlook disappoints
• Should you buy these 2 ASX dairy shares instead of A2 Milk?

Motley Fool contributor Brendon Lau owns shares of James Hardie Industries plc. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Amcor Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Aurizon 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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Investors look to have embraced the wisdom of the legendary Warren Buffett in yesterday’s trading, which saw the S&P/ASX 200 Index (ASX: XJO) close up 0.5%. That’s the index’s strongest performance so far this month.

The Oracle of Omaha is almost as well known for his golden investment adages as he is for his incredible success in the share markets. Success that’s seen his personal wealth grow to more than US$70 billion (AU$99 billion).

Here are 3 of my favourite Buffett nuggets – all of which Aussie investors look to have taken to heart on Tuesday.

First, embrace what’s boring, think long-term, and ignore the ups and downs.

Second, never overpay for anything.

And third, the best investments provide real world value, not just market value.

Signs of life in travel and real estate share prices

In today’s COVID-19 world, investors have flocked to technology and healthcare shares.

Technology, because many of these companies’ share prices benefit from the huge societal shift in working, shopping and socialising from our homes.

And healthcare because, well, we are talking about a global pandemic here.

Now the best placed shares in both of these sectors should continue to perform well over the mid-term. But it’s some of the most savaged shares in 2 of the most beaten down industries — travel and property — that have started capturing the attention of value investors.

Here are 2 of the standouts.

First, Flight Centre Travel Group Ltd (ASX: FLT). As the largest retailer of travel in Australia, Flight Centre was absolutely smashed following the virtual shutdown of global and even interstate travel. From its 2020 high on 15 January through its 2020 low on 23 April, the Flight Centre share price fell more than 78%.

Ouch!

But with the Flight Centre share price in the basement, August has seen bargain hunters snap up the shares of this company that provides real world value.

Yesterday, Flight Centre’s share price gained 6%. That brought its share price gains in August to more than 18%. In trading today it has given some of those gains back, likely driven by news of a renewed lockdown in Auckland. That’s certainly not good news for the company in the short-term. But if you’re thinking long-term, ignoring the ups and downs and not wanting to overpay for anything (just like Buffett), you may want to consider adding some Flight Centre shares to your portfolio.

Moving onto to the battered real estate sector, the brick-and-mortar retailers – and their landlords – have been among the hardest hit from the social distancing and lockdown measures intended to manage or eliminate the coronavirus.

Take Shopping Centres Australasia Property Group (ASX: SCP). The real estate investment trust (REIT) has a current market cap of $2.4 billion. It owns a diversified portfolio of shopping centres.

From 19 February through 19 March, the Shopping Centres Australasia share price fell 35%.

But August has seen a solid turnaround for the REIT’s share price. Yesterday’s 4.1% gain brought the monthly gains for August to 6.5%. But like Flight Centre, the Shopping Centres Australasia share price is down in intraday trade today, also likely impacted by the new coronavirus cases reported across the ditch.

Our pitched battle with this virus isn’t over yet. And this will continue to see shares gain on any good news of vaccines and elimination results and fall on any setbacks.

But again, if you’re thinking long-term, ignoring the ups and downs and looking for shares that provide real world value, the current Shopping Centres Australasia share price could look like a bargain in 2 years’ time.

While on the subject of Buffett truisms…

Is the boom over for big technology shares?

Here’s a good lesson in ignoring daily and weekly price swings.

It seems the NASDAQ-100 (INDEXNASDAQ: NDX) – comprised of the 100 biggest companies on the broader tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) – is under pressure.

This headline from Bloomberg caught my attention this morning: “‘Stay-at-Home’ Safety Trade Unravels With Big Tech Left Behind.”

Here’s an excerpt:

An oddity is occurring as the stock market grinds back to an all-time high: Big tech is getting left behind.

A risk-on rotation rippling across markets has the tech-heavy Nasdaq 100 flirting with a third straight loss — which would be its longest slide since March — as the S&P 500 climbs for an eighth consecutive day and approaches its February record.

Batten the hatches! Man the lifeboats!

Is it time to sell your shares of Apple Inc. (NASDAQ: AAPL), Alphabet Inc Class A (NASDAQ: GOOGL) and Facebook, Inc. (NASDAQ: FB)?

Hardly.

We’re talking about 3 days of rather minor losses, down 3.4%.

Highlighting that this is the longest slide since March sounds alarming. But on the flip side, it means the top 100 Nasdaq listed shares (taken together) haven’t lost ground for more than 2 consecutive days since March either.

In fact, the NASDAQ-100 is up 55% since 20 March. And it has gained 23%, year-to-date.

And as far as I can discern, there’s no reason the biggest technology companies can’t see their share prices gain that much or more again over the next 2 years. With some ups and downs along the way, of course.

More reading

• ASX investors have been buying these international shares
• ASX travel shares stuck in suspended animation
• Flight Centre and Zip Co were among the most traded shares on the ASX last week
• Here’s what a stock split means for investors
• Better Buy: Alphabet vs. Amazon

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Apple, and Facebook. The Motley Fool Australia has recommended Alphabet (A shares), Apple, Facebook, and Flight Centre Travel Group 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.

The post Warren Buffett would applaud the share price gains of these undervalued ASX shares appeared first on Motley Fool Australia.

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Oil and gas producer Santos Ltd‘s (ASX: STO) share price is still well down for the year. From its 15 January 2020 high of $9.00 per share, the Santos share price crashed 69% to its low on 19 March. It had the COVID-19 panic selling, which hammered most shares on the ASX, to thank for that.

That’s a steep hill to climb back up. Although the company has come a long way, gaining 110% since the 19 March trough, year-to-date, the Santos share price still remains down 30%. That gives the company a current market cap of $12 billion.

Santos trades at a price to earnings (P/E) ratio of 12.9 times. However, both its share price and its earnings could be in for a boost.

What does Santos do?

Headquartered in Adelaide, Santos Ltd is a leading independent oil and gas producer in the Asia-Pacific region.

With its origins in the Cooper Basin, Santos has one of the largest exploration and production acreages in Australia and extensive infrastructure. It supplies natural gas to Australian, Indonesian and other Asian markets, and develops oil and liquids businesses in Australia, Indonesia and Vietnam. Santos also focuses on liquefied natural gas (LNG) strategy. It has interests in four LNG projects in Australia.

Santos shares have been trading on the ASX since 1970. Today it’s one of the top 200 companies by market cap in Australia, and listed on the S&P/ASX 200 Index (ASX: XJO).

How can COVID-19 lift Santos share price?

The share price hasn’t been helped by falling energy prices, as the pandemic forced border closures and lockdowns, resulting in a huge drop in the demand for oil.

But this same pandemic could offer a welcome boost for Santos’ shareholders. That is if the Australian Government goes through with a proposal to underwrite new gas pipelines and the supporting infrastructure to reduce the cost of energy for Aussie companies and households.

This is the recommendation made by the appropriately named Nev Power. Power is the National COVID-19 Co-ordination Commission chair. And, as the Australian Financial Review reports, he’s also a leading advocate for a gas-led economic recovery.

Santos’ plan to tap coal seam gas deposits in Pilliga State Forest, New South Wales is one of the projects the manufacturing taskforce is recommending for government support.

None of this has passed through legislation yet. But if it does, the Santos share price could enjoy a nice run higher.

More reading

• 2 easy ASX shares to buy for small cap exposure
• Top brokers name 3 ASX 200 shares to buy today
• ASX 200 down 0.3%: CBA delivers $7.3bn cash profit, gold miners sink, SEEK’s outlook disappoints
• Coronavirus: SkyCity share price falls as NZ restrictions tighten
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor Bernd Struben 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 SEEK Limited (ASX: SEK) share price could be a long-term buy at today’s price.

Shares in Seek have been hammered in early trade after the company reported its results for FY20 earlier today. Investors have been quick to dump their shares in the company, with the Seek share price trading more than 9% lower at the time of writing, after hitting an intra-day low of $18.51 earlier today.

Despite the negative price action, I think shares in Seek could be a long-term buy as the online employment group recovers from the COVID-19 pandemic.

How has the pandemic impacted Seek?

In its full-year report, Seek cited weak macro-economic conditions and the COVID-19 pandemic as contributing factors to the result.

Despite reporting a 3% increase in revenue of $1.577 billion, Seek announced a heavy net loss of $111.7 million for FY20 compared to a net profit after tax of $180.3 million a year ago. The company also reported a 9% dip in full-year earnings with earnings before interest, taxes, depreciation and amortisation of $414.9 million for FY20.

The company’s management cited weaker economic conditions induced by the COVID-19 pandemic as a reason for weaker job listings. As a result, Seek was unable able to provide financial guidance for FY21 given the highly volatile nature of the global economic environment.  

Seek also cancelled its final year dividend last week in an attempt for the company to strengthen its balance sheet against the economic downturn.

What’s the long-term outlook for the Seek share price?

Despite the pessimistic short-term outlook, the Seek share price could be a long-term buy in my view.

Seek has always been focused on its long-term growth outlook and the company has benefitted as job ads transition from newspapers to online platforms. The company has an aspirational goal of $5 billion in annual revenue by 2025, however Seek has acknowledged that the COVID-19 pandemic will impact this target.  

In its pursuit to generate growth, Seek has turned to offshore markets. A highlight from the company’s report today was the performance of its Zhaopin business in China, which reported a 12% increase in revenue on a constant currency basis.

Seek has cited the resilience and recovery of Zhaopin in the second half of FY20 as an example of recovery in other markets. As a result, Seek floated a possible scenario which could see the company achieve revenue of $1.47 billion and net profit of $20 million in FY21.

Should you buy shares in Seek?

In my opinion, there could be long-term value in buying Seek shares. The company has an interesting and proven growth profile, however much of the outlook depends on a recovery in economic conditions. 

At the time of writing, the Seek share price has bounced from its intra-day low and is trading more than 9% lower for the day.

More reading

• ASX 200 down 0.3%: CBA delivers $7.3bn cash profit, gold miners sink, SEEK’s outlook disappoints
• Why Mesoblast, Northern Star, SEEK, & WiseTech Global shares are sinking lower
• SEEK share price on watch after COVID-19 profit hit
• 5 things to watch on the ASX 200 next week
• Invest like Warren Buffett and buy these ASX shares

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended SEEK 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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When it comes to investing in ASX shares, the small cap and micro cap sectors are usually out of reach for most ordinary retail investors. That’s because these kinds of shares simply don’t have the coverage and analysis available that companies in the S&P/ASX 200 Index (ASX: XJO) enjoy.

This makes doing your research that much harder, confining successful investing in small and micro cap shares to mostly institutional investors. It’s unfortunate because smaller companies can offer some of the best long-term growth investments out there. In theory, the smaller a company is, the more room and runway it has to potentially grow.

There are still ways that ordinary investors can invest in these companies with confidence. So here are 2 such investments that I think are worthy of consideration today if you’d like some easy small cap exposure in your portfolio.

Wam Microcap Ltd (ASX: WMI)

Wam Microcap is a Listed Investment Company (LIC), which means it is a company that invests in other ASX shares for the benefit of its owners. As the name implies, Wam Microcap focuses on the smaller end of the market.

Its mandate dictates that it only invests in companies with a market capitalisation initially below $300 million. I like this company as a small cap investment for 2 reasons: its diversified portfolio of at least 20 small ASX companies, and its stellar history of delivering returns.

On the former, some of Wam Microcap’s current holdings include Marley Spoon AG (ASX: MMM), Temple & Webster Group Ltd (ASX: TPW) and Redbubble Ltd (ASX: RBL). On the latter, Wam Microcap has delivered an average return of 15.9% per annum (before fees) since its inception in mid-2017. As such, I think this LIC is a great investment if you’re after a sprinkling of small cap magic in your portfolio.

Vanguard MSCI Australian Small Companies Index ETF (ASX: VSO)

This exchange-traded fund (ETF) from Vanguard is another great investment to consider for small cap exposure. It tracks the MSCI Australian Small Companies Index (as the name implies), which includes around 170 ASX companies from the bottom end of the ASX 300. 

As an ETF, VSO offers a low management fee of 0.3% per annum. This fund was hit hard during the coronavirus market crash, with its units still down around 7% year to date.

However, I think the long-term prospects for this investment remain sound. Thus, I think it is a great way to add some easy diversification and small cap exposure to any ASX portfolio.

Some of VSO’s current top holdings include Atlas Arteria Group (ASX: ALX), Altium Limited (ASX: ALU) and Domino’s Pizza Enterprises Ltd (ASX: DMP). If you’d like a passive way to track a large portfolio of smaller ASX companies, then this is a perfect investment for your portfolio.

More reading

• How the Santos share price could gain from COVID-19 stimulus
• Top brokers name 3 ASX 200 shares to buy today
• ASX 200 down 0.3%: CBA delivers $7.3bn cash profit, gold miners sink, SEEK’s outlook disappoints
• Coronavirus: SkyCity share price falls as NZ restrictions tighten
• If you have $12,000, you should invest in these 3 ASX shares now

Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Temple & Webster Group Ltd. The Motley Fool Australia has recommended Domino’s Pizza Enterprises Limited and Temple & Webster Group 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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With interest rates still at record low levels, I think investing in ASX dividend shares for income has never been more important.

After all, paltry interest rates mean there’s little reason to keep too much cash in the bank these days. As such, I think any investor who prioritises earnings income from their investments should be on the hunt for good-quality ASX dividend shares.

So here are 3 income shares that I think are well-worthy of a $5,000 investment today.

ASX dividend share 1) Woolworths Group Ltd (ASX: WOW)

As the largest grocer in the country, Woolworths needs no introduction. Although this company isn’t renown for its massive dividend payouts, I think it’s defensive nature as a consumer staples giant makes it a very useful share to own in these uncertain times.

On current prices, Woolies shares are offering a trailing dividend yield of 2.56% (or 3.66% grossed-up with full franking). Although the shares aren’t what I would call cheap today, I still prefer it to supermarket arch-rival Coles Group Ltd (ASX: COL) right now, which recently reached a new record high.

2) Vanguard Australian Shares High Yield ETF (ASX: VHY)

This exchange-traded fund (ETF) is another income share I would happily consider today. It’s run by the reputable Vanguard Group and only selects a basket of ASX shares that it believes offer the best dividend yields right now.

I like that it has somewhat pivoted away from the ASX banks over the past year as well. Today, VHY’s top holdings include Commonwealth Bank of Australia (ASX: CBA), Wesfarmers Ltd (ASX: WES), BHP Group Ltd (ASX: BHP) and Transurban Group (ASX: TCL). It offers a trailing dividend yield of 5.4% on current prices, which also usually comes with franking credits as well.

3) Telstra Corporation Ltd (ASX: TLS)

Telstra is my final dividend pick today. It’s the largest telco company in Australia and has a formidable market share in both mobile and fixed-line internet services.

The last few years, Telstra has paid an annual dividend of 16 cents per share, which includes its special dividends funded by NBN payments. This gives Telstra a trailing dividend yield of 4.71% (or 6.73% grossed-up with full franking).

Now, Telstra is set to announce whether this dividend will be maintained this year in its full-year earnings report tomorrow. But I’m quietly confident that it will be so. As such, it might be a good idea to pick up some Telstra shares for future dividend income today.

Foolish takeaway

I think all 3 of these ASX dividend shares would make great $5,000 additions to an income-focused portfolio today. The pick of the bunch for me is Telstra on current prices, but I think Woolies and VHY also have a solid thesis as well.

More reading

• Top ASX dividend shares to buy in August 2020
• ASX dividend investors! Ignore shares in consumer staples at your peril
• Is the Telstra share price a buy?
• Investing 101: Humility > Arrogance
• These were last week’s best performing ASX shares

Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited and Vanguard Australian Shares High Yield Etf. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Transurban Group, Wesfarmers Limited, and Woolworths 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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While the big four banks are usually the ones stealing the limelight in the financial sector, I believe regional retail banks such as Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN) remain desirable as investment prospects.

Both of these blue-chip institutions have some of the highest fully-franked trailing dividend yields going around, representing a historically strong income source for shareholders. Likewise, these banks are currently facing similar headwinds that include COVID-19, the weaker national economic environment and the financial recovery from Australia’s unprecedented bushfire season in regional communities.

Despite facing profound challenges, are either of these banks a prudent investment right now?

Bendigo and Adelaide Bank

The slightly larger of these banks, Bendigo maintains a market capitalisation of approximately $3.77 billion and is the largest retail banking institution outside of the big four.

The Bendigo and Adelaide Bank share price at the time of writing is trading at $7.13, thus representing a price-to-earnings (P/E) ratio of 12.04. This P/E sits at a discount to major competitors such as National Australia Bank Ltd (ASX: NAB), which has a P/E of 16.4, and Westpac Banking Corp (ASX: WBC), with a P/E of 13.6, suggesting that Bendigo may be slightly better value at its current share price.

In addition, Bendigo’s trailing dividend yield sits at 9.26%, having paid out a healthy last dividend of 31 cents per share in March. Of course, COVID-19 has chewed up most of the company’s profits and many institutions are seeking to preserve cash. As such, market consensus is that the bank will likely severely cut its final FY20 dividend by as much as 75%. Only time will tell if this proves to be the case with Bendigo reporting its full-year FY20 results next week on 17 August.

In the meantime, brokers from Citi last week placed a price target on the bank of $7.25, rating the company as ‘neutral’. The broker cited concerns over Victoria’s stage 4 lockdowns as a major headwind, particularly in H2 of FY20, highlighting that this may lead to higher loan deferrals and tighter lending margins.

Although the bank’s share price has struggled in recent times due to its exposure to lending in regional areas, worsened by this year’s bushfires, I remain optimistic that heightened domestic travel and spending in regional areas due to COVID-19 may offset some of the losses taken on by Bendigo.

The bank has a long way to get back to its 52-week high of $11.69, but investors with a long-term view will likely see significant upside from a combination of capital gains and upper-end dividend distributions.

Bank of Queensland

This slightly smaller bank comes in at a market capitalisation of $2.8 billion. The Bank of Queensland share price currently trades at $6.17 at the time of writing. Notably, Bank of Queensland’s P/E ratio sits at under 10, making it a slightly less expensive option compared to other financial institutions.

Similarly to Bendigo, the current Bank of Queensland share price is trading at a sizeable discount of 38% to its 52-week high of $9.98, which was achieved in September last year. Bank of Queensland also maintains a fully-franked trailing dividend yield of over 10%, despite choosing to defer its dividends as of April this year.

According to its results for the first-half of FY20, Bank of Queensland saw its net profit slashed by as much as 40%, and earnings per share withdraw by 16%. Operating expenses also grew by 9% due to a deteriorating economic environment.

Despite poor first-half results in what management dubbed a ‘transitional’ year, Bank of Queensland remained positive regarding its strong balance sheet, aided by a $340 million equity raising.

But according to reporting by the Australian Financial Review, last month Bank of Queensland reported a $112 million increase in loans over 90 days overdue, and provided loan deferrals to over 21,000 customers. This is largely inevitable due to the current difficulties facing the institution and it is great to see the bank helping out its customers in their time of need. It may, however, lead to severe write-downs on some of the company’s loans and a slashed valuation of the bank.

Foolish takeaway

Some short-term pain will undoubtedly be felt for shareholders of both banks but, over the long term, I believe these regional institutions will eventually make a comeback. If I had to pick one, I’d go with Bendigo. It’s a bigger player overall and its loan books appear to be holding up marginally better in the current economic climate. In addition, I get to hear from Bendigo and re-evaluate my thesis on it as of next week, rather than waiting until October for Bank of Queensland.

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Motley Fool contributor Toby Thomas 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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