Last week saw a number of broker notes hitting the wires once again. Three buy ratings that caught my eye are summarised below.

Here’s why brokers think investors ought to buy them next week:

Afterpay Ltd (ASX: APT)

According to a note out of Bell Potter, its analysts have a buy rating and $140.00 price target on this payments company’s shares. The broker believes there is a significant pipeline of catalysts that will support its growth in the future. This includes further integration with key ecommerce and payment infrastructure players, further growth in customers and underlying sales in the US and UK, and its healthy net transaction margin. It expects the latter to continue into FY 2021. In addition to this, it sees positives from its global expansion and comments by regulators in Australia regarding the buy now pay later industry. The Afterpay share price ended the week at $116.00.

Bapcor Ltd (ASX: BAP)

Analysts at Citi have retained their buy rating and $8.85 price target on this automotive parts retailer’s shares. According to the note, the broker believes Bapcor will benefit from a number of tailwinds. This includes solid new car sales and positive trends in the used car market. The Bacpcor share price last traded at $7.79.

Sonic Healthcare Limited (ASX: SHL)

A note out of Morgans reveals that its analysts have upgraded this healthcare company to an add rating with an improved price target of $37.32. The broker believes that Sonic Healthcare will benefit from a new normal that will see virus testing become part of everyday life because of the COVID 19 pandemic. This led to the broker upgrading its forecasts for the coming years and its price target accordingly. The Sonic Healthcare share price ended the week at $33.92.

More reading

• 3 top ASX dividend shares to buy
• ASX 200 rises 0.7% on Friday
• Leading broker names the ASX tech shares to buy in 2021
• Brokers just upgraded the Sonic (ASX:SHL) share price and this other ASX stock to “buy”
• ASX 200 up 0.4%: Afterpay & Zip charge higher, NAB rises, Harvey Norman hits new high

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Sonic Healthcare Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Once again, a large number of broker notes hit the wires last week. Some of these notes were positive and some were bearish.

Three sell ratings that caught my eye are summarised below. Here’s why top brokers think investors ought to sell these shares next week:

ASX Ltd (ASX: ASX)

According to a note out of Goldman Sachs, its analysts have retained their sell rating and $68.54 price target on this stock exchange operator’s shares. This follows the release of a mixed update for the month of December and calendar year 2020. While the broker feels recent weakness in its share price means that risks are now being more appropriately reflected, its shares have not fallen enough for a change of rating. The broker still feels they are overvalued at the current level. The ASX share price ended the week at $72.75.

Dacian Gold Ltd (ASX: DCN)

A note out of the Macquarie equities desk reveals that its analysts have retained their underperform rating and 34 cents price target on this gold miner’s shares. The broker notes that Dacian Gold outperformed its expectations in the December quarter despite facing some operational disruptions. However, due to the broker’s subdued outlook for the gold price, it isn’t in a rush to make any changes to its recommendation. The Dacian Gold share price last traded at 54 cents.

Medibank Private Ltd (ASX: MPL)

Another note out of Macquarie reveals that its analysts have downgraded this private health insurer’s shares to an underperform rating with an improved price target of $2.70. The broker expects 2021 to be a tough year for health insurance providers due to structural pressures. The broker notes that a sizeable catch up in claims is coming post-pandemic, which it feels could weigh on earnings. As such, it has cut its forecasts accordingly. The Medibank share price ended the week at $3.01.

More reading

• This ASX sector is facing a tough 2021
• ASX 200 up 1.55%: ANZ & Westpac surge higher, Afterpay & Xero tumble
• Why the ASX Ltd (ASX:ASX) share price is pushing higher today
• ASX 200 falls on Tuesday
• Why Dacian Gold, Lovisa, MyFiziq, & Zip shares are dropping lower

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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At the small end of the market there are a number of companies which are growing at a very strong rate.

Three small cap tech shares that investors might want to get better acquainted with are listed below. Here’s how they have been performing:

Avita Medical Ltd (ASX: AVH)

Avita Medical is a global regenerative medicine company best known for its Recell system. This is a spray-on skin treatment used for burns victims. Demand for its offering has been growing very strongly over the last couple of years. Pleasingly, this has continued in FY 2021 after a minor blip in FY 2020 because of the pandemic.

During the first quarter, Avita reported a 59% increase in U.S based RECELL revenue to US$5 million. This strong revenue growth was driven by a 27.2% increase in procedural volumes to 496 and the addition of 9 new accounts in the first quarter. The latter brings its total accounts to 86.

Avita isn’t settling for this and is busy seeking to expand the use of the Recell system. It is hoping to be able to treat vitiligo with the system in the future. In addition, the company recently announced a collaboration with Houston Methodist Research Institute that will see the pairing of Avita’s proprietary Spray-On Skin Cells with Houston Methodist Research Institute’s expertise in reversing cellular ageing. The project is seeking to establish proof-of-concept for the development of a novel approach to reverse ageing and rejuvenate skin.

Bell Potter currently has a speculative buy rating and $15.00 price target on the company’s shares.

Bigtincan Holdings Ltd (ASX: BTH)

Bigtincan is a growing provider of enterprise mobility software. This software allows sales and service organisations to increase their sales win rates, reduce expenditures, and improve customer satisfaction. Bigtincan has been experiencing strong demand for its platform in 2020 from some major companies such as Nike and Red Bull.

This led to it growing its annualised recurring revenue (ARR) by 53% year on year to $35.8 million in FY 2020.

Pleassingly, more of the same is expected in FY 2021, with management providing guidance for ARR of $49 million to $53 million. This is still scratching at the surface of a sales engagement platform market estimated to be worth $6 billion a year by 2021.

Analysts at Canaccord Genuity are fans of the company. The broker has put a buy rating and $1.40 price target on its shares.

More reading

• Leading broker names the ASX healthcare shares to buy in 2021
• 2 explosive ASX tech shares to buy in January
• Why did the Avita (ASX:AVH) share price dive 60% in 2020?
• 2 growing mid cap ASX shares to buy
• Why AVITA, IDP Education, Over the Wire, & Viva Energy shares are dropping lower

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 and recommends BIGTINCAN FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Avita Medical Limited. The Motley Fool Australia has recommended Avita Medical Limited and BIGTINCAN FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There are some ASX dividend shares that have yields of more than 5%.

Higher yields may be attractive to some income-seeking investors that are struggling to find yield.

Here are some examples of businesses with yields of more than 5%:

Tassal Group Limited (ASX: TGR)

Tassal is Australia’s largest fish business. It has a large salmon segment and also a steadily-growing prawn division.

According to the ASX, Tassal has a market capitalisation of $721 million. At the current Tassal share price, it has a grossed-up dividend yield of almost 6%.

In FY20 the company generated earnings before interest and tax (EBIT) growth of 12.7% to $99.8 million and 13.3% growth of operating net profit after tax (NPAT) growth of 13.3% to $64.2 million. Statutory profit also went up 18.3% to $69.1 million. It was in this result that Tassal’s board decided to maintain its annual dividend at $0.18 per share.

A couple of months ago Tassal announced it was building on its prawn growth strategy after it acquired Billy Creek, a 1,300 hectare property which was next to its existing Proserpine prawn farm.

The combination of the two prawn properties provides an opportunity for an additional 350 hectares of ponds, supporting a total of circa 800 hectares of ponds across the wider precinct. Having two neighbouring properties means there is likely to be substantially lower capital investment required at the fish farms and material unit cost benefits and asset synergies such as processing, hatchery and management costs.

Pacific Current Group Ltd (ASX: PAC)

Pacific Current describes itself as a global multi-boutique asset management business committed to partnering with exceptional investment managers. It combines capital, with specific economic structures, with strategic business development to help businesses grow.

According to the ASX, Pacific Current has a market capitalisation of $322 million. At the current Pacific Current share price it has a grossed-up dividend yield of 7.9%.

In FY20 its funds under management (FUM) grew by 62% to $93 billion. Its underlying earnings per share (EPS) went up 18% to $0.51 and the dividend per share jumped 40% to $0.35.

In the three months to 30 September 2020, Pacific Current’s FUM went up 14% to $106.4 billion which was predominately thanks to GQG.

Aside from investing in more managers, such as the recent Astarte Capital Partners investment, the ASX dividend share is planning for growth by thinking about launching a private fund to invest alongside Pacific Current – the company would receive management fee revenues from the fund and co-investment rights.

Nick Scali Limited (ASX: NCK)

Nick Scali is a furniture retailing business. Every year, Nick Scali imports more than 5,000 containers of leather and fabric lounges as well as dining room and occasional furniture.

According to the ASX, Nick Scali has a market capitalisation of $878 million. At the current Nick Scali share price it has a grossed-up dividend yield of 6.3%.

FY20 was disrupted by COVID-19. There was negative same store sales of 6.7%, causing sales revenue to decline by 2% to $262.5 million. However, the underlying EBIT margin improved by 90 basis points to 23.2% which helped maintain underlying net profit after tax at $42.1 million. The operating cash flow before interest and tax grew by 22.6%.

In FY20, Nick Scali decided to grow the final dividend by 12.5% to 22.5 cents per share, bringing the full year dividend to 47.5 cents – an increase of 5.6%.

The ASX dividend share announced a week ago that it’s expecting unaudited net profit after tax for the six months to 31 December 2020 to be $40.5 million, up approximately 100% compared to the prior corresponding period. Total written sales orders went up 45% in the first quarter and second quarter growth is 58% after the reopening of Melbourne stores.

The sales order book was at an all time high at 31 December 2020, which is expected to turn into “material” revenue and profit growth in the second half of the financial year.

More reading

• 2 compelling ASX shares to buy in January
• Why Atomos, Corporate Travel Management, Fortescue, & Nick Scali are dropping lower
• Why Nick Scali, Nitro Software, Silver Lake, & Xero shares are dropping lower
• Why these ASX shares just stormed to 52-week highs or better
• Why Fortescue, Nick Scali, Santos, & Zip shares are charging higher

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Next month’s ASX profit reporting season should be a relatively pleasing one. But there’s one large cap stock that’s facing the pump.

The ASX stock in the hotseat is the AMP Limited (ASX: AMP) share price, but it isn’t for what you might think!

It’s not so much profits but progress on its restructuring that will be dogging management in February.

Clock ticking on AMP share price

Citigroup believes AMP is running out of time to show progress. And that the best way for the embattled wealth manager to create value is to sell some of its key assets.

Macquarie Group Ltd (ASX: MQG) is touted as the most likely buyer. But after its acquisition of Waddell & Reed Financial, Australia’s home-grown investment bank may have too much on its plate to make a bid.

“Still, this is the business which likely most attracts current conditional bidder Ares (at least in part), with Macquarie (and possibly others) still potentially interested in AMP Bank,” said Citi.

“Consequently our proposed route of spinning off these two businesses, realising substantial capital and retaining the harder to sell, but heritage, AWM business may still be possible.

“This would also leave AMP still in control of its ultimate destiny, something we presume the AMP Board would find attractive.”

February reporting season fast approaches

However, the clock is ticking. The broker believes the market may be running low on patience unless management can unveil some concrete plans with its upcoming results.

After all, investors have already been waiting four months. That’s from the time AMP announced it strategic review.

There’s a lot riding on the next update as it will likely trigger a sharp rally or a painful correction in the AMP share price.

AMP share price on edge

“As our current Positive Catalyst Watch indicates we continue to flag potential share price upside if the portfolio review is resolved positively,” added the broker.

“However, we continue to flag downside risk if the outcome of the portfolio review is that no bid eventuates and the status quo is maintain.”

Other M&A transactions to watch

AMP isn’t the only one under the merger and acquisition (M&A) spotlight, although it’s arguably under the most pressure to announce a favourable outcome.

The Coca-Cola Amatil Ltd (ASX: CCL) share price and WPP Aunz Ltd (ASX: WPP) are under takeover offers.

Others that are likely to be selling assets in 2021 include the Boral Limited (ASX: BLD) share price and BlueScope Steel Limited (ASX: BSL) share price.

More reading

• ASX 200 drops 1.1%
• Citi sees bigger takeover offer coming for Coca-Cola Amatil (ASX:CCL) share price
• ASX 200 drops lower
• These were the worst performers on the ASX 200 last week
• Are we heading for a new ASX resources ‘supercycle’?

Motley Fool contributor Brendon Lau owns shares of AMP Limited and BlueScope Steel Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The ASX bull market continues its golden run into the new year, but there’s one sector at risk of falling out of the race.

The S&P/ASX 200 Index (Index:^AXJO) ended the last trading session of the week with a 0.7% gain with the benchmark adding another 1% in value in 2021.

The nearer-term outlook for ASX stocks is bright. But the analysts at Macquarie Group Ltd (ASX: MQG) don’t quite feel the same way about ASX health insurance stocks.

ASX stocks downgraded by Macquarie

The broker warns that the two listed players in this field are facing a number of headwinds and downgraded the Medibank Private Ltd (ASX: MPL) share price and NIB Holdings Limited (ASX: NHF) share price.

“2021 will be a year of structural pressures for the Private Health Insurance industry,” said the broker.

“Although MPL and NHF will likely fare better than peers we do not expect them to be immune.

“Following a significant re-rating and the tougher outlook, the sector no longer appears undervalued.”

Claims are on the rise

There are three main areas of concern highlighted by Macquarie. First is the claims catchup. Health Insurers experienced a lower level of claims during the months of COVID-19 lockdowns last year.

Industry data indicated that the rebound in claims could happen sooner than what the two companies have been guiding.

Another headwind driving the downgrade

The other issue is the level of “participation”, which reflects the number of people holding private health insurance.

The participation rate jumped in the June quarter of last year as customers retained cover during the peak of the pandemic. At the same time, new customers were also added during the period.

“Our analysis also showed as COVID-19 risks subsided across most of the country, normal industry participation declines (~20-30bps per qtr) recommenced,” explained Macquarie.

“Looking forward, participation declines could accelerate as economic stimulus rolls off, although it is unlikely to be a material step down.”

No insurance against politics

Lastly, the next federal election could prove to be a headwind for the sector. Opposition leader Anthony Albanese is rallying his party for a possible election that he thinks could come later this year.

While Albanese has publicly dumped Labor’s so called “retiree tax” policy, he said nothing about capping private health insurance premiums.

The cap was dangled to the electorate at the last election, and he could use this carrot again to restrict premium increases to 2% a year.

Foolish takeaway

Macquarie believes it is “highly likely” that Federal Labor will have a similar policy this year. The federal election must be called before 21^st May 2022.

The broker cut its recommendation on the Medibank share price to “underperform” from “neutral”, and NIB share price to “neutral” from “outperform”.

Macquarie’s 12-month price target on Medibank and NIB is $2.70 and $6.10 a share, respectively.

More reading

• These were the worst performing ASX 200 shares last week
• ASX 200 rises 0.7% on Friday
• Mesoblast (ASX:MSB) share price could be facing more pressure in 2021
• Citi picks the best international share markets that can beat the ASX in 2021
• The Energy Resources (ASX:ERA) share price is falling. Here’s why.

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended NIB Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Analysts at Bell Potter have been busy finding ASX shares from several industries that they believe are best placed to have a strong 2021.

On this occasion, I’m going to look at the healthcare sector. Here are a couple of shares they rate highly:

AVITA Medical Inc (ASX: AVH)

The first healthcare share that Bell Potter rates highly is AVITA Medical. It notes that the medical device company’s shares have fallen heavily after sales of its Recell spray on skin technology suffered during the pandemic. However, it feels this is a buying opportunity, especially with its sales starting to recover now. Bell Potter has a speculative buy rating and $15.00 price target on its shares.

It commented: “As the US economy returns to normal levels of activity as is anticipated over the course of 2021, revenues are expected to continue to increase rapidly. There are no competing innovative therapies to the Recell technology in the treatment of burns.”

It also notes that management is looking to expand Recell’s use into other lucrative markets.

“The company is proceeding with its program to expand into adjacent markets for the treatment of vitiligo, soft tissue injury (trauma wounds) and paediatric burns. Clinical trials are under way in all three indications with the highest levels of interest in the vitiligo indication. We expect an approval in this indication in later calendar year 2022 or early 2023.”

Starpharma Holdings Limited (ASX: SPL)

Another healthcare share the broker likes is dendrimer product developer, Starpharma. Bell Potter has a speculative buy rating and $2.20 price target on its shares.

Its analysts commented: “It’s already generating revenue through its VivaGel franchise and is also working on improved formulations of leading cancer drugs both internally and with external partners including AstraZeneca.”

The broker also notes that Starpharma has a COVID-19 product which has a lot of potential.

It explained: “COVID-19 has taken centre stage for the company, with the rapid development and reformulation of the active used in its VivaGel products into an anti-viral nasal spray called Viraleze for COVID-19 and other viral infections. The company is leveraging its huge dataset on safety/toxicology on the active to fast track the path to market, with the product expected to be on market in Europe in 1QCY21, less than 12 months since the company first started working on it.”

“Market research indicates the product has wide appeal with its broad anti-viral capabilities, one of the key driving factors of enthusiasm around the product and we expect it will be complementary to other prevention strategies like vaccines & PPE (such as masks) in the fight against COVID-19,” the broker added.

More reading

• Are these 4 ASX medical shares set for a healthy 2021?
• Why did the Avita (ASX:AVH) share price dive 60% in 2020?
• Why AVITA, IDP Education, Over the Wire, & Viva Energy shares are dropping lower
• Starpharma (ASX:SPL) share price dips despite positive update
• These are the 10 most shorted shares on the ASX

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 Avita Medical Limited and Starpharma Holdings Limited. The Motley Fool Australia has recommended Avita Medical Limited and Starpharma Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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With interest rates unlikely to improve from their record lows any time soon, it’s very fortunate that the Australian share market has dividend shares offering investors very generous yields.

Two ASX shares dividend shares with above-average yields are listed below. Here’s what you need to know about them:

Fortescue Metals Group Limited (ASX: FMG)

The first dividend share with a generous yield is one of the world’s leading iron ore producers, Fortescue.

Over the last few years the mining giant’s shares have generated staggering returns for investors. This has been underpinned by its significant cost reductions, an increase in its grades, production growth, and favourable iron ore prices.

In respect to the latter, the spot iron ore price climbed to a whopping US$170.60 a tonne last week. This compares incredibly favourably to Fortescue’s current C1 costs of US$12.74 per wet metric tonne.

Given the margins the company is enjoying and its strong balance sheet, it has been tipped to reward shareholders with bumper dividends in FY 2021.

Macquarie, for example, is forecasting a fully franked $2.61 per share dividend over the next 12 months. Based on the current Fortescue share price, this equates to a sizeable 10% dividend yield.

Rural Funds Group (ASX: RFF)

Another dividend share with a generous forward yield is Rural Funds. It is an agricultural property-focused real estate investment trust (REIT) which owns a diversified portfolio of high quality assets. These assets are leased to experienced agricultural operators such as wine giant Treasury Wine Estates Ltd (ASX: TWE) on very long leases.

At the end of FY 2020, the company owned 61 properties with a combined value of $1 billion and a weighted average lease expiry (WALE) of 10.9 years. From these leases, it was generating adjusted funds from operations (AFFO) of 11.7 cents per share.

Thanks to fixed rental increases, the company intends to grow its distribution by its 4% per annum target rate in FY 2021. This will mean an 11.28 cents per share distribution for shareholders. Based on the latest Rural Funds share price, this represents a 4.3% yield.

More reading

• Why Atomos, Corporate Travel Management, Fortescue, & Nick Scali are dropping lower
• 3 ASX mining shares hitting 52-week highs today
• BHP (ASX:BHP) share price storms to new high
• 3 highest yielding ASX dividend shares
• Do ASX mining companies carry the Australian share market?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There are a few reasons why the Commonwealth Bank of Australia (ASX: CBA) share price could be a buy.

Recent financial results

CBA said that its FY20 result reflected the impact of COVID-19 on customers and the economy, however the bank said its performance remained strong due to disciplined execution of the strategy and it continued to improve its balance sheet.

FY20 statutory net profit after tax (NPAT) dropped 12.4% to $9.63 billion and cash NPAT declined 11.3% to $7.3 billion. The loan impairment expense increased by $1.3 billion to $2.5 billion as the loan loss rate increased to 33 basis points. The net interest margin (NIM) declined by another 2 basis points to 2.07% because of the impact of lower interest rates.

The common equity tier 1 (CET1) capital ratio was 11.6%, which was above APRA’s unquestionably strong benchmark of 10.5%.

In terms of the amount of COVID-19 related loan deferrals, at 31 July 2020 there were 135,000 home loans being deferred representing 8% of total accounts (down from 154,000 at the peak) and there were 59,000 business loans still being deferred which represented 15% of total balances, down from 86,000 at the peak. At the end of October, the number of home loan deferrals had reduced to 45,600.

The latest financial result was the FY21 first quarter trading update which showed that CBA generated $1.9 billion of statutory NPAT and $1.8 billion of cash profit, down 16% on the prior corresponding period. CBA said that income was stable, but expenses (excluding customer remediation) were up 2%.

In that latest quarter, the CET1 ratio continued to strengthen as it grew 20 basis points to 11.8%.

What are the reasons that the CBA share price could be a buy?

Rhett Kessler from the Pengana Australian Equities Fund, of Pengana Capital Group Ltd (ASX: PCG), thinks that the banks have a positive outlook.

The first reason is that there’s accelerating home loan growth supported by low interest rates and first homeowner support. Indeed, at the moment the official Australian interest rate set by the Reserve Bank of Australia is just 0.25% right now.

The second reason, or group of reasons, is that there’s a supportive federal budget, improving housing finance approvals and house prices are holding up better than expected.

The third reason was that there has been a meaningful reduction in loan deferrals.

The final reason is that there is lower than anticipated loss provisioning.

Those factors were key for causing Pengana to increase the exposure to the major banks.

Valuation

According to the ASX, CBA currently has a market capitalisation of $150 billion with the CBA share price just over $85.

Looking at the (externally provided) earnings estimates for CBA shares, it’s valued at 21x FY21’s estimated earnings. Looking further ahead, it’s valued at 18x FY23’s estimated earnings.

There are also estimates for the dividends that CBA may pay shareholders. In FY21 it could pay an annual dividend of $2.75 per share, equating to a grossed-up dividend yield of 4.6% at the current share price. In FY23 it’s projected to pay a dividend of $3.23 per share, equating to a grossed-up dividend yield of 5.4%.

More reading

• Why ANZ, Westpac, and the rest of the big four are storming higher today
• ASX 200 drops 1.1%
• What strong jobs data means for ASX 200 shares
• Here’s which ASX bank share this leading broker thinks you should buy
• ASX 200 up 0.8%: CBA storms higher, Link sinks, tech shares rise

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Costco Wholesale Corporation (NASDAQ: COST) and McDonald’s Corp (NYSE: MCD) are venerable companies that have proven popular with consumers over many years. They have become dominant through their focus on providing value to customers.

Last year’s results took divergent paths, which each stock reflected. Costco’s stock price increased by 28%, besting the S&P 500 Index (INDEXSP: .INX) 16%. Meanwhile, McDonald’s shares underperformed the overall index with a more than 8% gain.

But the market typically looks at short-term results. To figure out which is the better long-term stock investment, it is time to dig deeper into each company’s prospects.

A popular destination

With more than 39,000 establishments in more than 100 countries, McDonald’s golden arches are perhaps the restaurant industry’s most recognisable symbol. However, it doesn’t own the majority of restaurants. Rather, it franchises 93% of them, in which the franchisees pay McDonald’s an upfront fee plus an ongoing percentage of its sales. It is also a landlord in many instances, so it also receives rent.

Heading into 2020, McDonald’s, with its inexpensive food and quick service, was doing well. Its 2019 comps rose by 5.9%, with higher guest counts contributing one percentage point. This was due to changes management implemented, such as all-day breakfast, new menu items, and a focus on the “3 Ds”– digital, delivery, and drive-thru. The company’s operating income grew to $9.1 billion, 27% higher than 2015’s $7.1 billion.

Last year, with governments imposing social distancing guidelines, was a different story. Still, results showed an improvement in the third quarter as governments relaxed restrictions, and its previous push of the 3 Ds proved fortuitous. Comps were down 2.2%, but they did better each month.

While cases are surging, creating some near-term uncertainty as governments and people react to contain the virus, McDonald’s long-term prospects look promising with its affordable menu that it is constantly tinkering with to adapt to consumer preferences (including reintroducing the popular McRib for a limited time), and the company continues to push the 3 Ds.

The company’s dividend track record, raising it for 44 consecutive years since its first payout in 1976, is impressive. This includes boosting December’s payment by 3% to $1.29. The stock’s dividend yield is 2.4%.

Offering members a good value

Costco is not your typical retailer. It operates warehouses that offer a variety of goods sold in bulk and services at lower prices than members can typically find elsewhere. It charges members to shop there, and they happily sign up and stay on. The number of paid memberships has grown from 47.6 million to 58.1 million over the last five years. It consistently has a nearly a 90% renewal rate worldwide.

With positive same-store sales (comps) for many years and increased profitability, Costco is executing its plan to serve members by offering them high-quality merchandise at low prices. Over the last five years, its operating income grew by nearly 50% to $5.4 billion.

The company got off to a good start in 2021, too. For its first fiscal quarter, which ended on Nov. 22, comps were up by 17.1% after excluding gasoline price changes and foreign currency exchange translations. Costco’s operating income increased by 35% to $1.4 billion.

Costco’s success is leading management to continue opening new warehouses. Historically, it added 20 to 25 clubs annually. It ended last year with 795 and opened eight in the first quarter, with plans to add 20 to 22 for the year.

The company has also built an impressive track record of raising dividends annually since its initial payment in 2004. Its 0.7% dividend yield pales in comparison to some companies, but it has bright growth prospects. Costco has also paid large, special dividends to shareholders every few years, including a $10 payment last month.

The decision

Choosing between Costco and McDonald’s is a tough call. Both are well recognised, popular destinations. For me, Costco comes out ahead due to its ability to draw in members based on its offerings, which have produced consistently improving results.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Better buy: Amazon vs Costco
• Is McDonald’s stock a buy?
• Costco’s big earnings beat points to further upside

Lawrence Rothman, CFA 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 Costco Wholesale. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Better buy: McDonald’s vs Costco appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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