One of the best investing books I think you can read is Pat Dorsey’s The Little Book That Builds Wealth.

The book is an excellent guide for identifying businesses with robust economic moats or competitive advantages. Economic moats surround many of the best-performing companies in the world. Companies like Apple (NASDAQ: AAPL) and Xero Limited (ASX: XRO). Companies that we wish we had discovered a decade ago! 

Why you should own businesses with economic moats

In his book, Dorsey explains how economic moats protect companies from the fierce attack of competitors to help them to earn above-average returns on the cash they invest:

“Just as moats around medieval castles kept the opposition at bay, economic moats protect the high returns on capital.”

If a company has less competition it can charge a higher price for its products and spend less money on marketing. Now, imagine owning a portfolio full of companies like this, earning high returns year-in, year-out. What impact could that have on your wealth?

What are intangible asset moats?

One important economic moat which can be difficult to spot is the intangible asset moat.

Intangible assets are things like brands, patents and regulatory licenses which cannot be easily matched by competitors. These can create what Dorsey calls, ‘mini monopolies’. They prevent competitors from making and selling the same products and provides the company with pricing power.

3 companies with strong intangible asset moats

Blood product company CSL Limited (ASX: CSL) is an example of a company with a strong intangible asset moat. Through research and development, as well as acquisitions, CSL holds the rights to produce and sell lifesaving medicines and immunotherapies.

These rights aren’t impenetrable. Patents can be challenged and have a finite life. However, because CSL has a diverse portfolio of products, rather than relying on a single product, the moat is far more robust.

Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) is another company supported by a moat of patents. The Fisher & Paykel Healthcare share price has surged over 300% in the last 5 years and the respiratory device manufacturer has been known to battle with rival ResMed Inc (ASX: RMD) over patent infringement.

If patents are the moat around the castle, regulatory licencing is the crocodile swimming in the waters. Regulatory licencing increases the barrier to entry for healthcare companies like CSL. It does this by requiring products to get regulatory approval for sale, but with no restriction on what price products can be sold for.

Finally, milk product company A2 Milk Company Ltd (ASX: A2M) is an example of a company with a growing brand for which customers are willing to pay a premium. Along with an impressive supply chain, the a2 milk brand is very hard for competitors to replicate.

Foolish takeaway

Although intangible assets are hard to see, they can create valuable economic moats that help us to build wealth. A great way to test if an intangible asset gives a company true protection is to ask, “does it give the company pricing power and is it sustainable?”

More reading

• Why CSL, Harvey Norman, IPH, & Saracen shares are charging higher
• 3 top ASX shares for growth, income, and value investors to buy today
• 5 things to watch on the ASX 200 on Wednesday
• How to become a millionaire before your parents with ASX shares
• Why the CSL share price continues to trail the ASX 200

Regan Pearson owns shares of A2 Milk and Xero.

You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. and Xero. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended ResMed Inc. 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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In late morning trade the S&P/ASX 200 Index (ASX: XJO) has fought back from a sharp decline to edge higher. At the time of writing the benchmark index is up slightly to 6,145 points.

Four shares that are climbing more than most today are listed below. Here’s why they are charging higher:

The CSL Limited (ASX: CSL) share price has pushed 3% higher to $287.15. This morning analysts at Goldman Sachs reiterated their buy rating and $336.00 price target on this biotherapeutics company’s shares. This follows the announcement that CSL is taking up its option to acquire Vitaeris. The clinical-stage biotechnology company is currently focused on the phase 3 development of a treatment for rejection in solid organ kidney transplant patients.

The Harvey Norman Holdings Limited (ASX: HVN) share price has jumped 4.5% higher to $3.72 after the release of a sales update. Although its international operations have been a bit mixed due to forced closures during the pandemic, Harvey Norman’s local operations have delivered very strong growth. Another positive is that the board has declared a special dividend of 6 cents per share. This will be paid to shareholders later this month.

The IPH Ltd (ASX: IPH) share price is up 4% to $7.54 after announcing an acquisition. The company’s AJ Park subsidiary has agreed to acquire New Zealand intellectual property firm Baldwins Intellectual Property. It will be paying approximately NZ$7.9 million, including deferred consideration of NZ$0.4 million. Baldwins’ FY 2020 EBITDA after normalisation adjustments for partner salaries was approximately NZ$2 million.

The Saracen Mineral Holdings Limited (ASX: SAR) share price has surged 9% higher to $4.62. This follows a rebound in the gold price overnight ahead of the U.S. Federal Reserve’s June meeting this week. It isn’t just Saracen on the rise today. The S&P/ASX All Ordinaries Gold index is up a sizeable 2.5% at the time of writing.

More reading

• 3 companies with great intangible asset moats
• ASX winners and losers from last week’s rally
• Harvey Norman share price flat on sales update and special dividend announcement
• Why the CSL share price continues to trail the ASX 200
• ASX 200 jumps 2.4%, unloved shares keep rising

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

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Morgans Senior Technical Analyst Violeta Todorova has rated the Afterpay Ltd (ASX: APT) share price as overbought. Violeta points out that the share has risen by 571% from its March trough to its peak in intraday trading last week. She further points out the technical indicators are in overbought territory. 

Afterpay has pioneered the buy now, pay later (BNPL) sector within Australia. Accordingly its share price has largely been on a bull run since 2019 and the company posted a sales increase of ~100% for FYTD 2020 when compared with the prior corresponding period. Afterpay has become quite ubiquitous in the Aussie retail sector with its branding displayed across a plethora of retailers and ecommerce websites. 

However, the time of large-scale growth in the Afterpay share price is likely over in the analyst’s view, and I couldn’t agree more. 

Why the Afterpay share price stalled early this week

Last week’s explosion of interest in BNPL companies underscored the low barriers to entry within the sector. At the time of writing, the Zip Co Ltd (ASX: Z1P) share price is up 10% from its trading open on Friday. Zip Co also operates in the BNPL sector. However, unlike Afterpay, it offers other services such as lines of credit and the Pocketbook personal budgeting tool.  In addition, Zip Co targets a generation of older millennials, people aged around 35 years and over.

Furthermore, Zip Co has more stringent credit worthiness checks in place than Afterpay. Therefore it is less exposed to credit defaults as the global economy continues down an uncertain path.

Afterpay is starting to establish itself in the United States. Meanwhile, however, Sezzle Inc. (ASX: SZL), another BNPL player, is a native of the US$5 trillion retail economy and is headquartered there. Sezzle has built a network of 1.3 million users and 14.9 thousand merchants.

The company is laser focused on the credit card shunning generations of Gen Z and Millennials; Afterpay’s core demographic. 

The problem with large numbers

The Afterpay share price values the company at $13.9 billion. This makes it larger than Santos Ltd (ASX: STO). If Afterpay doubles its price once more, it would be valued at more than Woodside Petroleum Limited (ASX: WPL). While this could happen, I sincerely and absolutely doubt it. Afterall, in FY19, Afterpay made $236 million in sales revenue. In contrast, for Sezzle to multiply its share price 10 times would value the company at ~$2.5 billion.

Foolish takeaway

Afterpay is no longer alone in a wide blue ocean. With little barriers to entry, the BNPL marketplace is increasingly crowded. Moreover, larger entrants like the 5% Commonwealth Bank of Australia (ASX: CBA) owned Klarna are yet to really start moving.

Lastly, it has a lower creditworthiness threshold exposing it to credit defaults and is pressing into markets where other competitors are already established. If all that isn’t enough, the company is already valued at more than Santos even though its gross sales are 24 times less.

More reading

• How to be like Warren Buffett and not lose money investing in ASX 200 shares
• Why Flight Centre, Smartgroup, Woodside, & Worley shares are dropping lower
• ASX winners and losers from last week’s rally
• Why the CBA share price is lagging its big four cohorts
• These ASX shares could defy the market sell-off this morning

Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia has recommended Sezzle Inc. 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 TPG Telecom Ltd (ASX: TPM) share price grew very strongly between 2011 and 2016 on the back of a series of acquisitions. This included the acquisitions of retail telcos AAPT and iiNet.

This significantly increased TPG’s market scale. It became the second-largest fixed broadband provider after Telstra. However, since then the TPG share price generally failed to gain momentum. This is despite solid gains over the past few months.

Is TPG a good long term buy and hold option for investors?

Let’s first take a closer look at TPG’s business model.

TPG continues to face NBN headwinds

Consumers are migrating from TPG’s legacy of fixed voice and broadband networks to the lower-margin National Broadband Network (NBN). As this continues, this is negatively impacting TPG’s earnings before interest, taxes, depreciation and amortization (EBITDA) and placing downward pressure on the business’s price for shares. In addition, there has been a recent decline in the profitability of its existing NBN customer base.

This trend is reflected in TPG’s financial results for 1H20. Total revenue only grew by a very modest 1% to $1,246.5 million. While underlying EBITDA actually declined by 6% to $399.1 million.

All retail telcos in Australia are in the same boat here. The margins that they receive by purchasing wholesale fixed broadband services from the NBN are wafer-thin and not growing. As their legacy networks shrink further, their overall profitability is also declining.

Higher margin fixed voice still contributes a very significant 29% of gross profit in TPG’s consumer segment. So, profitability will be further impacted as legacy fixed voice is transitioned over to NBN plans over the next few years.

This impact can also be seen from observing TPG’s mix of group broadband subscribers. Only 1,403 of a total of 1,940 broadband subscribers at the end of last year were on NBN plans. As the remainder transition to lower margin NBN products, this will further impact profitability.

In addition, NBN average revenue per user (ARPU) has been steadily declining. It has dropped from $67.4 million in 1H19 to $67.0 million in 2H19 and $66.4 million in 1H20.

Merger with Vodafone places TPG in a stronger position

In March, the ACCC decided not to appeal the Federal Court’s decision to approve the merger of TPG with Vodafone.

I believe that the merger will place TPG-Vodafone in a potentially stronger position to compete with its two main rivals: Telstra Corporation Ltd (ASX: TLS) and Optus. In particular, TPG-Vodafone will be well placed to roll out a competitive 5G offering, driven by Vodafone’s current network.

However, competition will remain tough in the fixed broadband sector. Vodafone currently has a very limited fixed broadband option, so the merger doesn’t provide much initial benefit in that market segment.

Are TPG shares are good long term buy?

I believe TPG’s merger with Vodafone places it in a potentially good position to grow revenues over the next few years.

However, I still have some concerns about declining margins on TPG’s fixed broadband network over the short term. I am therefore not quite convinced it is in the buy zone right now.

This view may change in the months ahead, as we gain more information about the details of the merger.

More reading

• Why the CSL share price continues to trail the ASX 200
• Not keen on Westpac? Then buy these top ASX dividend shares instead
• ASX 200 Weekly Wrap: ASX bulls crash through 6,000 points
• Want high-paying dividends? Try Wesfarmers shares and these 2 other ASX options
• These were the worst performers on the ASX 200 last week

Motley Fool contributor Phil Harpur owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Last week, the ASX continued its upwards trajectory with the All Ordinaries Index (ASX: XAO) rising by 4.3% across the week. The market was buoyed largely by a mini boom in buy now, pay later (BNPL) companies and very large volumes being traded in the Australian real estate investment trusts (A-REITS).

Buy now pay later 

The optimism in the emerging BNPL sector was pretty hard to miss last week. Zip Co Ltd (ASX: Z1P) opened the batting with news of a US acquisition to help it expand further into that market. After surging by 30% on Monday, the Zip share price finished 11.2% up for the week. Zip shares rose by another whopping 15.78% yesterday.

All BNPL challengers experienced double digit share price growth last week, with the smaller companies leaping the highest. Openpay Group Ltd (ASX: OPY) ended the week up by 139% on news of a $30 million placement to fund growth. The BNPL provider dipped slightly yesterday, dropping back by 4.87%.

Real estate

The A-REITS also had a very good week and led the large cap and mid cap market in terms of volumes traded. Vicinity Centres (ASX: VCX) led the charge with a successful $1.2 billion placement at a discount and an announcement to cancel distributions for the 6 months to 30 June. The Vicinity share price ended the week up by 13.7% and gained another 5.74% in yesterday’s trade.

Others also saw share price rises and heavy trading. Scentre Group (ASX: SCG) was the breakaway A-REIT, with a share price gain of 16.7% across the week. Scentre shares continued that upward trajectory yesterday with a gain of 9.52%.

Market surprises

Surging share prices raised up several companies last week. Yet among those, the Kogan.com Ltd (ASX: KGN) share price’s 10.24% gain last week is notable because of what it indicates. The company reported surges in sales in April and May, even as stay at home restrictions were lifted. This underlines the ongoing shift in Australian consumer behaviour to online shopping – a move hastened by the recent lockdown.

The most enjoyable story for me last week was the sudden leap by West Australian robotics company FBR Ltd (ASX: FBR). Formerly Fastbrick Robotics, the company manufactures a robot called Hadrian X – a construction robot that can build the walls of a structure from a 3D CAD model. Investors seemed pleased by the company’s announcement that its robot had achieved a rate of 200 bricks per hour in recent trials. FBR Ltd’s share price finished the week up by 173.9%. 

ASX sliders

The gold sector saw a plunge in share prices last week. As sentiment in equities has increased, gold and other precious metals have seen their prices stabilise in US dollars. However, the rising Australian dollar has exacerbated this for our gold miners. Saracen Mineral Holdings Limited (ASX: SAR) saw its share price fall by 13.3%. Gold Road Resources Ltd (ASX: GOR) also saw double digit share price decay. Its share price was down by 14.6% over the week. Both shares continued to slide in yesterday’s trade, with Saracen down another 6.6% and Gold Road down by 9.35%.

Outside of the gold mining companies on interesting story was Nufarm Limited (ASX: NUF). The agricultural chemical company’s share price fell by 7.5% after the company disclosed impacts to its business by the COVID-19 pandemic. It appears this will have a long term impact that is only now coming to light. Nufarm shares dropped another 3.04% in yesterday’s trade.

More reading

• Kogan announces $115 million capital raising to fund future acquisitions
• Can Kogan.com survive Amazon?
• Why you should be buying the dip in ASX gold stocks
• ASX 200 jumps 2.4%, unloved shares keep rising
• Why Credit Corp and Zip Co shares jumped over 15% higher today

Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. 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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One thing the Australian share market is not short of is quality growth shares. But with so many to choose from, it can be hard to decide which ones to buy.

To narrow things down for you, I have picked out three top ASX growth shares which I think could beat the market over the next 10 years.

Here’s why I would buy them:

BetaShares Asia Technology Tigers ETF (ASX: ASIA)

The BetaShares Asia Technology Tigers ETF is not strictly a growth share. However, I’m including it in this list because it provides investors with exposure to a collection of top growth shares. As the name implies, the fund is invested in some of Asia’s biggest and brightest tech companies. BetaShares notes that due to its younger and tech-savvy population, the Asian market is surpassing the West in respect to technological adoption. As such, the sector is anticipated to remain a growth sector for a long time to come. Companies included in the fund are Tencent Holdings, JD.com, Alibaba, Samsung, and Baidu.

Bubs Australia Ltd (ASX: BUB)

Another ASX growth share to consider buying is Bubs Australia. It is an infant formula and baby food company which specialises in goats milk products, but has recently expanded its range into cows milk. Given how much bigger the latter market is, I think this was a smart move and allows the company to benefit from the best of both worlds. Overall, I believe Bubs is well-positioned for long term growth thanks to its expanding distribution footprint in Australia and online and increasing demand in Asia. 

Domino’s Pizza Enterprises Ltd (ASX: DMP)

A final ASX growth share to buy right now could be Domino’s Pizza. I think the pizza chain operator could be a long term market beater. This is due to its ambitious but achievable growth plans. As well as aiming to grow its same store sales by 3% to 6% per annum over the next five years, the company is planning to expand its store network at a strong rate. Management is targeting annual organic new store additions of 7% to 9%. If it delivers on both of these and at least maintains its margins, it should underpin strong earnings growth this decade. For this reason, I think it would be a great buy and hold option.

More reading

• Why Fortescue and these ASX shares are flying high right now
• How to become a millionaire before your parents with ASX shares
• Can you get rich by investing $5,000 a year into ASX shares?
• Invest like Warren Buffett with these ASX 200 shares
• How to turn $20,000 into $275,000 in 10 years with ASX 200 shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BetaShares Asia Technology Tigers ETF and BUBS AUST FPO. The Motley Fool Australia has recommended Domino’s Pizza Enterprises 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 Kogan.com Ltd (ASX: KGN) share price has been a very strong performer in recent weeks but won’t be going anywhere on Wednesday.

This morning the ecommerce company requested a trading halt prior to the market open.

Why is the Kogan share price in a trading halt?

Kogan has taken advantage of the recent surge in its share price to raise capital via a placement and share purchase plan.

The company revealed that it is aiming to raise a total of $115 million. This comprises a $100 million fully underwritten placement at $11.45 per share and a non-underwritten share purchase plan to raise up to $15 million.

The placement price represents a 7.5% discount to its last close price.

Why is Kogan raising funds?

The company revealed that it intends to use the proceeds from the placement and share purchase plan to provide the financial flexibility to act quickly on future value accretive opportunities that broaden the company’s offering, expand its customer base, or enhance its operating model.

Last month Kogan announced that it had acquired replica furniture and homewares retailer Matt Blatt for $4.4 million. But judging by this capital raising, it doesn’t plan to stop there.

In fact, the company notes that multiple opportunities are presenting themselves. Though, it will focus only on opportunities that it believes add value.

Kogan’s CEO, Ruslan Kogan, commented: “Kogan.com is committed to making the most in-demand products and services more affordable and accessible. Our long-term strategy has enabled us to thrive in the current challenging environment, and we are now in a better position than ever to take advantage of growth opportunities. Our low cost of doing business and digital expertise have put us in the driver’s seat to capture market share as the retail industry undergoes significant change.”

More reading

• ASX winners and losers from last week’s rally
• Can Kogan.com survive Amazon?
• The Kogan share price makes it 5 times bigger than Myer
• Why I’d buy Appen and these ASX growth shares for the 2020s
• How I would invest $50,000 into ASX shares right now

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

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There is a belief that to invest in S&P/ASX 200 Index (ASX: JXO) shares you need to be a part of the ‘rich person’s game’ and that it’s out of reach for the average Joe on the street.

It’s easy to understand why. In popular culture, the only investors we hear about are rich scoundrels. Think about it: Gordon Gekko, Jordan Belfort… these guys were hardly model citizens.

Up until recent years, it was quite difficult to start investing. You had to find a stockbroker, pay them through the nose, and try and find winners in the pages of your daily newspaper.

Now, it’s a different world. You can literally buy shares in under a minute through an online broker, all without having to pay usurious brokerage fees and commissions. Anyone can access a company’s annual report with the click of a button and read 100 different investor’s opinions about a share without leaving their desk.

This might not have been great for the finance industry, but it has undoubtedly been for the average Australian. Democracy has come to the share market.

Why it’s important to invest in ASX 200 shares

But with this power has come responsibility. In days of yore, investing wasn’t really necessary. The government promised to fund everyone over 65s retirement through the Age Pension. Sure, you could top this up with some cash. But with a bank account or term deposit typically paying real interest rates, you didn’t really need to ‘take a punt’ on the share market.

As comfortable as that world might sound, we live in a different one today. With interest rates at close to zero, cash instruments like term deposits don’t really cut the mustard as a real investment anymore. Job security is more or less a thing of the past. Most of us won’t be working with a single employer for our whole lives. And the Age Pension has moved from a ‘universal income’ to a ‘safety net’. Considering our ageing population, I have severe doubts over its long-term viability.

That’s why, in my view, investing is no longer optional. And investing in ASX 200 shares are a great place to start. Now, there are other ways of building wealth, such as property. But ASX shares have several advantages making them an ideal pathway for wealth creation in my opinion.

You can start with as little as $500, for one.

Shares are liquid, which means (unlike a house) you can buy and sell them easily for another.

And many shares will pay you tax-advantaged income (in the form of fully franked dividends) along the way.

So if you haven’t already started to invest in 2020, why not take the plunge? Your future self will undoubtedly thank you for not putting it off. And in this brave new world we live in, I don’t think any of us can afford not to.

More reading

• These ASX shares could defy the market sell-off this morning
• Is the Woodside Petroleum share price cheap today?
• 5 things to watch on the ASX 200 on Wednesday
• Why you should be buying the dip in ASX gold stocks
• Why the CSL share price continues to trail the ASX 200

Motley Fool contributor Sebastian Bowen 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 Harvey Norman Holdings Limited (ASX: HVN) share price is trading flat on Wednesday after releasing a sales update.

At the time of writing the retail giant’s shares are changing hands for $3.55.

What did Harvey Norman announce?

Today’s update reveals that Harvey Norman’s Australian business has been on form during the pandemic.

During the crisis, only two franchised stores in Tasmania were closed for two weeks due to a mandated closure of the region by the Tasmanian State Government.

All other Australian franchised stores remained open. This was because, like supermarkets, Harvey Norman was seen as an essential service by the Australian Government during the crisis.

In light of this and increasing demand for many of its products, as of 31 May 2020, the Harvey Norman franchise network has delivered a 17.5% increase in sales in the second half.

This compares to just a 0.1% increase in sales during the first half and means that its year to date sales are up 7.4% on the prior corresponding period.

What about the rest of the business?

Things weren’t quite as positive for its overseas operations, where the vast majority of its stores were forced to close for certain periods during the pandemic.

In Australian dollar terms, New Zealand company operated sales are down 7.3% during the second half. It was a similar story in Slovenia and Croatia, with sales down 5.5% half to date.

Things were much worse in Northern Ireland and Singapore. Second half sales were down 38.2% and 21.7%, respectively, as of 31 May.

Positively, its Ireland and Malaysia stores were still growing their sales. Ireland sales are up 25.4% during the second half and Malaysia sales are up 1.3%.

Special dividend.

In April, Harvey Norman revoked its decision to pay shareholders a 12 cents per share interim dividend due to the pandemic.

It appears as though things haven’t turned out as bad as it first feared. As a result, it has decided to pay a special dividend to shareholders later this month.

Harvey Norman will pay a 6 cents per share fully franked dividend on 29 June 2020. To be eligible, you will need to be a registered shareholder at the close of business on 23 June 2020.

More reading

• How to build a $20,000 passive income with ASX shares
• Can ASX 200 retail shares outperform this year?
• ASX retail shares best placed to benefit from wall of industry bankruptcies
• How to be an ASX 200 share millionaire in 15 years
• The Aussie dollar just hit an 8-week high. Here’s how it affects your ASX shares

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

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The Commonwealth Bank of Australia (ASX: CBA) share price has lagged behind the other major banks since the market turned on 22 May. Since then, CommBank’s share price has risen by 22%. While impressive, all of the remaining major banks saw increases of over 30% across the same period. This includes Australia and New Zealand Banking Group Limited (ASX: ANZ) which saw a 36% rise in its share price. Even the out of favour Westpac Banking Corp (ASX: WBC) has seen greater share price rises than the largest Aussie bank.

The Commonwealth Bank has, however, been moving forward in preparing itself for the future. This includes by selling off distracting assets not focused on its core business of banking, as well as entering the buy now, pay later market via a deal and 5% stake in Swedish company Klarna. 

So, what is holding back the CBA share price?

CommBank was the first Aussie bank to signal its intention to cut back on Covid-19 support by 30 June. Principally via assessing all claims for loan deferrals on a case by case basis, rather than automatic acceptance. This means customers with ongoing hardship as a result of the coronavirus crisis will have to contact the bank for alternative support. I believe this move is weighing heavily on the CBA share price. 

While this approach seems fiscally prudent at face value, it creates two problems. First, there are issues related to auditing.

Most loans deferred from 20 March, the date the conditions were commenced, would be 90 days overdue. After 90 days default, notices are required to be sent by auditors. A default notice demands payment of the overdue amount plus the current repayment. Debtors can apply for a hardship variation at this stage. With the other banks, when the period finishes on (say) 30 September, customers will just start paying again at that time.

Second, CommBank will likely be the first of the majors to start to see loan defaults for those customers unable to pay who do not qualify for whatever the ‘alternative’ support may be.

Commonwealth Bank is by far the largest of any Aussie bank in the mortgage market with 14.75% market share, according to a report by Australian Finance Group Ltd (ASX: AFG). Therefore, it is exposed to the greatest economic impact of both loan deferrals and potentially loan defaults. 

Alan Kohler opined in The Australian this week that the total amount of the deferred loans is equal to 90% of the market capitalisation of the big four banks. In fact, it is $224 billion across mortgages and business loans. This is a frighteningly large amount of money. Even a small percentage is a frighteningly large amount of money.

Foolish takeaway

CommBank is the country’s largest mortgage lender, a major player in business loans and the country’s largest digital payments institution. As such, Coronavirus is likely to impact the CBA share price more than the other major banks. In response, CommBank has taken the decision to stem the bleeding by cutting short its 6-month coronavirus support measures to finish on 30 June.

At the close of trading on Tuesday, Commonwealth Bank had the lowest price to earnings ratio of the big four banks. It also had the second lowest trailing 12-month dividend yield, even though dividends are presently on hold. The CBA share price remains 9.6% down year to date. 

I would recommend Commonwealth Banks shares to anyone willing to buy and hold over the medium to long term who is prepared to deal with the inevitable bad news to come as the economy normalises.

More reading

• 3 top ASX shares for growth, income, and value investors to buy today
• Is the CBA share price a buy right now?
• 5 things to watch on the ASX 200 on Wednesday
• The ASX bank dividend recovery may be better than what the market thinks
• Not keen on Westpac? Then buy these top ASX dividend shares instead

Motley Fool contributor Daryl Mather 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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