Is it time to buy ASX small caps for your portfolio?

Most Aussie investors have a lot of exposure to the large blue chips on the ASX like Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP) and Telstra Corporation Ltd (ASX: TLS). Whether that’s direct holding, an exchange-traded fund (ETF), a listed investment company (LIC) or in your super fund.

Sadly these businesses have fairly limited growth prospects and don’t look like they’re going to make strong total returns from here.

But ASX small caps offer a different opportunity. It’s much easier for a business to double its revenue from $25 million to $50 million than it is for a business to double revenue from $250 million to $500 million. The law of numbers makes it hard for businesses to keep compounding strongly unless they’re growing globally or have multiple product lines.

Another benefit of ASX small caps is the lower valuation. Not many investors are looking at small businesses. They don’t make the headlines and people may see them as too risky. A lower valuation is obviously attractive for returns, particularly if it’s growing at a good pace.

Once you leave the ASX 200, there’s a large group of small businesses that you wouldn’t ever invest in like the speculative mining shares. But there’s a group of ASX small caps that could be on their way to being the next ASX mid-caps. These are the ones that could make us great returns.

Which ASX small caps are worth buying?

I used to like National Veterinary Care a lot, until it was taken over. I reckon that Pushpay Holdings Ltd (ASX: PPH) and Bubs Australia Ltd (ASX: BUB) are on their way to becoming good success stories. Shares like MNF Group Ltd (ASX: MNF) are seeing a surge in demand due to the coronavirus. Duxton Water Ltd (ASX: D2O) could be another to look into for differentiated returns, a growing dividend and the large discount to net assets. 

Finding those ASX small caps where you can see the profit margins and operating leverage rising over time is very attractive.

You have to do a lot of work to be a proficient small cap investor, but it can be very rewarding. If you’re not sure you have the time or skill then you could perhaps choose quality fund managers to do the ASX small cap investing for you like WAM Microcap Limited (ASX: WMI). In normal times the WAM team can generate impressive returns.

More reading

• Why high yield dividend shares can be detrimental to your wealth
• The Pushpay share price is up 70% in 2020: Why I would still invest
• Top ASX Dividend Stock Picks for May 2020
• 3 ASX growth shares to buy immediately with $3,000
• 3 high quality ASX shares for a retirement portfolio

Tristan Harrison owns shares of DUXTON FPO and WAM MICRO FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of MNF Group Limited. The Motley Fool Australia owns shares of and has recommended BUBS AUST FPO, PUSHPAY FPO NZX, and Telstra Limited. The Motley Fool Australia has recommended DUXTON FPO and MNF 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.

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It certainly is a difficult time to be an income investor. Not only are interest rates at record lows, but many popular dividend shares are deferring or cancelling their payouts due to the pandemic.

While this is disappointing, I believe the selloff of traditional dividend favourites has created an opportunity for income investors that can afford to be patient.

Two top dividend shares which I think will offer generous dividend yields in FY 2021 and beyond are listed below:

Sydney Airport Holdings Pty Ltd (ASX: SYD)

There’s no doubt that Sydney Airport’s terminals are going to be quiet for the next few months. But domestic tourism will pick up in due course and international tourism will follow thereafter. It may take time before its earnings rebound to the same levels as FY 2019, but it will happen gradually.

I expect Sydney Airport to be in a position to pay a 29 cents per share distribution in FY 2021, before lifting it to a more normal 37 cents per share in FY 2022. This represents forward yields of 5.15% and 6.6%, respectively, over the two years. In light of this and the potential capital returns, I think it could prove to be a top long term option for investors.

Transurban Group (ASX: TCL)

Another option for income investors to consider buying is Transurban. Due to the sharp reduction in traffic volumes on its roads during the pandemic, I suspect that it might decide against paying a final distribution in FY 2020. Or if it does pay one, it is likely to be reduced materially from a year earlier.

But I wouldn’t let that put you off investing. I expect its toll roads to start their recovery in the coming months and for traffic volumes to slowly return to relatively normal levels by mid to late 2021. In light of this, I estimate that its shares offer forward distribution yields of 3.4% and 4.5% for FY 2021 and FY 2022, respectively. Once again, I think this makes it well worth being patient with its shares.

More reading

• In a post-COVID world, could Australia be the next superpower?
• Top ASX Dividend Stock Picks for May 2020
• Is this ASX 200 share market recovery “fool’s gold”? This ASX fundie thinks so
• 3 ASX 200 pandemic winners and 3 losers
• Are there any safe havens in ASX aviation shares?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Transurban 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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The AMCOR PLC/IDR UNRESTR (ASX: AMC) share price is outperforming the market after it upgraded its profit guidance.

Shares in the global packaging giant jumped 0.7% to $13.82 when the S&P/ASX 200 Index (Index:^AXJO) slumped 1.2% at the time of writing.

You will be hard pressed to find another stock that is lifting its full-year forecast and growing earnings in this coronavirus-stricken market.

Profit growth in challenging market

But Amcor is doing just that as management unveiled its quarterly results. Underlying earnings per share (EPS) jumped 13.7% in constant currency terms to 44.7 US cents in the nine months ended March 31.

Underlying earnings before interest and tax (EBIT) lifted 6.9% to US$1.06 billion even as revenue dipped a modest 1.8% to US$9.33 billion over the period.

Earnings guidance upgrade

The good news didn’t stop there. Amcor increased its FY20 for the second consecutive quarter with management now tipping a 11% to 12% increase in EPS from its previous guidance of 7% to 10%.

While Amcor isn’t immune from the global recession due to the COVID-19 lockdown, its business is deemed by governments as an essential service.

This means its 250 plants around the world have largely continued to operate as Amcor services clients in defensive sectors like healthcare, food and beverages.

Further, the group isn’t reporting an increase in operating costs due to disruptions caused by the pandemic.

Impact of COVID-19

Interestingly, management commented that the impact of COVID-19 on its business is unclear. While some parts of its business have slowed, others have benefitted from the crisis.

For instance, Amcor experienced good demand from healthcare globally and most food and beverage end markets were relatively strong in developed countries.

However, the group experienced weakness in emerging markets, including China and India.

Other quality ASX stocks to watch

Amcor’s integration of its recent acquisition of Bemis is also proceeding well. It’s managed to deliver pre-tax cost savings of US$55 million this financial year and expects to achieve US$180 million by end of FY22.

And unlike many other blue-chip ASX companies, including the big banks like Commonwealth Bank of Australia (ASX: CBA), there is no need to worry about dividend cuts from Amcor.

The group declared a quarterly dividend of 11.5 US cents a share (or 17.7 Australian cents) and said it expected to complete its $500 million on market share buyback by the end of this fiscal year.

Amcor isn’t the only defensive growth stock that’s well placed to outperform in this market. I also rate glove maker Ansell Limited (ASX: ANN) and ship builder Austal Limited (ASX: ASB) very highly.

More reading

• 3 ASX healthcare shares to buy now for the long term
• 3 ASX dividend kings to buy and hold forever
• ASX 200 sinks 1.3%: Big four banks drag ASX lower & Altium issues sales warning
• Top ASX Dividend Stock Picks for May 2020
• Reality bites: Broker warns CBA shares to underperform this week

Brendon Lau owns shares of Austal Limited, Ansell Limited and Commonwealth Bank of Australia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia owns shares of and has recommended Amcor Limited. The Motley Fool Australia has recommended Ansell 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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