Author: therawinformant

The Westpac Banking Corp (ASX: WBC) share price will be on watch on Thursday following the release of an after-hours announcement.

What did Westpac announce?

This afternoon Westpac announced a fully underwritten offer of ~31 million Pendal Group Ltd (ASX: PDL) shares to institutional investors. This represents approximately 9.5% of Pendal’s shares on issue.

According to the release, the banking giant has agreed to sell the shares for $5.98 per share. This represents a discount of 4% to Pendal’s last close price and a total consideration of just over $185 million.

This sale will complete the divestment of Westpac’s shareholding in Pendal, following earlier share sales in 2007, 2015, and 2017.

Westpac’s Acting Chief Financial Officer, Gary Thursby, explained that this divestment will allow the bank to focus on its core operations.

He said: “Pendal is a highly regarded, independent business, and given Westpac’s commitment to simplify its operations and focus on banking in Australia and New Zealand, now is the right time to complete our divestment.”

What impact will this have?

Once the offer completes, Westpac expects it to add approximately 2 basis points to its Common Equity Tier 1 capital ratio and result in a post-tax accounting gain of $32 million.

It will also have an impact on Pendal’s funds under management. Westpac has gradually been withdrawing its funds from Pendal over the last 12 months and will continue to do so over the next 12 months.

Another withdrawal is expected to occur in two tranches. The first tranche of approximately $1 billion will occur later this calendar year and a further tranche of up to $0.08 billion is expected in 2021.

But unfortunately for Pendal, it may not stop there. Westpac is currently undertaking a strategic review of its wealth businesses and has warned that following this review, “there may be a loss of some or all of the funds that Pendal manages on behalf of the Westpac Group.”

This would be a big blow for the fund manager, given that it currently manages approximately $14 billion for Westpac.

More reading

• Is the Telstra share price a buy?
• Why I think Telstra shares are a strong buy
• Got $3,000? These 5 beaten-down ASX shares are begging to be bought
• ASX 200 Weekly Wrap: ASX bears take control as market volatility returns
• Why I would buy Telstra and this ASX dividend share today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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Is the Telstra Corporation Ltd (ASX: TLS) share price a buy?

Telstra shares are still down 14% from the level it was at on 21 February 2020. But it hasn’t actually recovered much from the date when the S&P/ASX 200 Index (ASX: XJO) hit the COVID-19 low. Since 23 March 2020, the Telstra share price is only up 4.2%.

Perhaps that underperformance now means that Telstra is comparatively good value?

Maybe Telstra’s regular earnings aren’t given enough credit. We all need to pay our telecommunications bill to stay connected to the internet. The last few months has shown how important the internet is for many of us to work at home, be entertained or connect with family and friends.

However, Telstra’s revenue and earnings doesn’t increase by 10% if we use 10% more data in a month. These days consumers get a very generous amount of data so you’d have to watch a lot of online movies in ultra-high definition to use all of your allocated data.

Telstra’s share price has suffered in recent years as Australia shifted to the NBN. It was much easier for Telstra to make good profit when it owned all of the cable infrastructure. Now Telstra must compete on a level playing field with everyone else, with lower profit margins. The NBN has to recoup the money spent on it, which hurts the telco margins.

What is there to be positive about Telstra’s share price?

The FY20 half-year result was actually fairly positive. Telstra’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA) declined by 6.6% to $3.9 billion. However, excluding the in-year NBN headwind, underlying EBITDA increased by approximately $90 million. That’s the first time this figure had grown since FY16. But then COVID-19 hit the world. 

Telstra is now expecting its free cashflow and underlying EBITDA to be at the bottom range of its guidance range. Free cashflow after operative lease payments was expected to be between $3.3 billion to $3.8 billion.

Considering how low interest rates are now, I think Telstra’s cashflow should be valued higher than before. Therefore the Telstra share price should be higher too, in theory. The same could be said about the dividend. The Telstra dividend should be more valuable than it was before interest rates were reduced.

I don’t think Telstra will want to cut the dividend any lower than the current 8 cents per share it’s paying every six months. I don’t think the annual fully franked dividend will go lower than 16 cents per share in the foreseeable future. This equates to a grossed-up dividend yield of 7%. I think that’s solid in today’s environment.

The best reason to be positive about Telstra is the coming of 5G. The world has changed a lot since 4G was released. There will probably be new services that we can’t even think of yet. Automated cars will need a high-quality connection for what they’ll do. The ‘Internet of Things’ change is going to need a good connection to enable our devices to connect where they need to connect. 

Is Telstra a buy today?

Telstra is currently trading at 21x FY22’s estimated earnings. I fear that 5G could turn into a race to the bottom for telcos again like how 4G has done. There’s lots of low-price competition for Telstra like Aldi Mobile, Boost Mobile and Amaysim Australia Ltd (ASX: AYS).

As investors we should want to invest in businesses that can grow over the long-term with good economic moats.

I’m not sure what Telstra’s future looks like because the economics of 5G look unclear. It was companies like Facebook, Alphabet and Netflix that managed to capture a lot of the value creation by the 2010s technology changes. Will telcos be able to change that with 5G? If you think so, then perhaps Telstra is cheap today. But I’m not convinced it is a good buy.

More reading

• Westpac share price on watch after dumping its Pendal stake
• Why I think Telstra shares are a strong buy
• Got $3,000? These 5 beaten-down ASX shares are begging to be bought
• ASX 200 Weekly Wrap: ASX bears take control as market volatility returns
• Why I would buy Telstra and this ASX dividend share today

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 S&P/ASX 200 Index (ASX: XJO) climbed higher today to 5,992 points.

At one point today the ASX 200 was actually in negative territory, hitting a low of 5,934 points. But there was an afternoon rally to ensure the ASX had another positive day.

Here are some of the main highlights from the ASX 200:

Carsales.com Ltd (ASX: CAR) share price driven higher by FY20 guidance

The online car classifieds business released an update today which included FY20 guidance.

Companies with a financial year end date of 30 June 2020 are close to finalising the year. Carsales wanted to provide the market with an estimate for its FY20 result.

The numbers were provided on a continuing operations basis, which excludes Stratton. All of the numbers are unaudited and are subject to the audit process.

Carsales also warned of uncertainty given the impact of COVID-19. Adjusted revenue, which includes $26 million of revenue billed but not charged, is estimated to be in a range of $419 million to $423 million. This would mean revenue will be flat or achieve growth of 1%.

FY20 Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) is estimated to be between $228 million to $232 million, which would equate to growth of 5% to 6%.

Fy20 Adjusted net profit after tax (NPAT) is estimated to be in a range of $134 million to $138 million. This would equate to profit growth of 3% to 6%.

In terms of trading conditions, Carsales said that overall lead and traffic volumes have continued to improve as social distancing measures have eased. According to Carsales, between 22 April 2020 and 16 June 2020 lead volumes have grown very strongly on the prior corresponding period of 2019.

The trends in Brazil and South Korea have continued. Management said that Encar continues to perform well with key operating metrics of inventory, listing volumes and traffic are all growing with continued growth of revenue and EBTIDA on the prior corresponding period. However, escalation of COVID-19 in Brazil is affecting Webmotors’ financial and non-financial metrics.

Carsales has refinanced its debt and also commented that it doesn’t anticipate changing its dividend policy of paying 80% of adjusted net profit after tax.

Highs and lows of the ASX 200

Looking at the best and worst performances in the ASX:

The Clinuvel Pharmaceuticals Limited (ASX: CUV) share price went up 8%.

A2 Milk Company Ltd (ASX: A2M) saw its share price climb 7.8%, perhaps due to a broker note.  

The WiseTech Global Ltd (ASX: WTC) share price went up 5.9%.

The share price of Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) grew by 5.3%.

At the red end of the ASX, the worst three performers were:

The Pilbara Minerals Ltd (ASX: PLS) share price declined 5.4%

Mayne Pharma Group Ltd (ASX: MYX) suffered a share price fall of 5.2%.

The Webjet Ltd (ASX: WEB) share price went down 3.2%.

CSL Limited (ASX: CSL) loses its chief financial officer

ASX 200 healthcare giant announced today that CFO David Lamont is leaving to join BHP Group Ltd (ASX: BHP).

Mr Lamont is credited with transforming CSL’s finance function during a significant period of growth for the company. CSL said he was influential on several important projects including reshaping CSL’s enterprise resource planning.

Mr Lamont said: “I am delighted to rejoin one of the best companies in the world. BHP has strong values and a robust financial position, making this an exciting opportunity to be part of a team that can generate returns to shareholders over the long term and make a positive difference to local communities and global markets. I look forward to working with Mike and the team.”

There will be a handover period where the current BHP CFO ensures an orderly transition and Mr Lamont will fully take over in about six months. 

More reading

• 5 ASX shares that would’ve made you a fortune in 5 years
• The latest ASX 200 shares to be downgraded by leading brokers
• Why I think Xero shares are a great long-term buy
• Forget bank interest, try these ASX 200 dividend shares!
• What a record rebound in oil demand in 2021 means for ASX energy stocks

Tristan Harrison 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. and WiseTech Global. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended carsales.com 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 are still licking their wounds from the dramatic big bank dividend cuts, but there’s another sector that’s at dividend risk.

The decision to slice or skip these precious payouts is a big reason why banks like the Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price and Westpac Banking Corp (ASX: WBC) share price are still well below their pre-COVID-19 levels.

While the worst of the pandemic appears to be behind us, it will be awhile before the big banks can fully restore their dividends.

Income investors beware

There’s another group of dividend disappointers that are likely to reveal themselves during the August profit reporting season – and that’s property trusts.

Property stocks are a favourite among income-seeking investors and Morgan Stanley warns that the payout ratios in this sector may need to be cut.

Falling rents will not only pressure earnings, but are likely to force some to write down the value of these assets.

Properties under pressure

“On a 6- to 18-month view, asset values in Retail property, and Office to a lesser extent, will be subject to downward pressure as rent structures get reviewed, and office vacancies increase,” said Morgan Stanley.

“This means the gearing of these companies is likely to escalate, holding all else constant.”

This means property stocks may need to hold on to more cash to shore up their balance sheets and give themselves more flexibility.

Stocks most at risk

That will come at the expense of dividends with the broker estimating that a 15% drop in asset values could prompt most in the sector to lower their payout ratios to 50%.

It’s those most exposed to retail properties that are the most likely to cut their distributions. These include Scentre Group (ASX: SCG), Vicinity Centres (ASX: VCX) and Stockland Corporation Ltd (ASX: SGP), according to Morgan Stanley.

A 15% drop in property value will drive Vicinity’s gearing up to around 32% from 27%, while Stockland’s gearing is already near the top of management’s target 20% to 30% range.

Falling yields

“Lowering payout ratios to 50% would mean SCG, VCX and SGP’s FY21e yields decline to 3.9%,3.3%, and 4.2% respectively,” said the broker.

“[This is] well below the 5-6% the market has become accustomed to. At headline level, this is not a positive.”

However, Morgan Stanley thinks the market will forgive a dividend cut if it’s used as a temporary (maybe up to two years) measure to strengthen balance sheets.

This is especially so if it means the companies do not need to undertake a capital raising.

Not good enough

In my view, this makes the sector rather unappealing. Not only are the yields low even in this low interest rate environment, but there’s the added uncertainty from looming structural changes for both malls and offices.

I think there are better value stocks to be targeting in this market. If you are looking for other options, the experts at the Motley Fool have picked their best ASX stocks for the post-coronavirus world.

Find out what these are for free by clicking the link below.

More reading

• What a record rebound in oil demand in 2021 means for ASX energy stocks
• ASX 200 down 0.1%: Carsales update impresses, a2 Milk surges higher
• Got $3,000? These 5 beaten-down ASX shares are begging to be bought
• Is the ANZ share price a buy today?
• Can ASX big banks generate an attractive sustainable dividend yield from FY21?

Motley Fool contributor BrenLau owns shares of Australia & New Zealand Banking Group Limited and Westpac Banking. The Motley Fool Australia has recommended Scentre Group. 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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