The Buddy Technologies Ltd (ASX: BUD) share price jumped higher today. In afternoon trading, the Buddy share price was up more than 18% to close the day’s trade at 5.1 cents. The increase came after the release of the company’s unaudited July 2020 results in a letter to shareholders from chief executive officer, David McLauchlan. 

Today’s gains follow on a series of strong trading days that have seen the Buddy share price rocket 70% higher in August. Year to date, Buddy’s share price is up 30%. Though shareholders who bought as recently as 23 July would be sitting on gains of 420%.

What does Buddy Technologies do?

Founded in 2006, Buddy Technologies provides cloud-based technology that aims to make its customers’ work and living spaces smarter, via IoT (internet of things) connected devices.

Buddy is a leading provider of smart lighting solutions. The company’s Wi-Fi-enabled lights are currently used in nearly 1 million homes and sold in over 100 countries.

The company’s platforms include Buddy Cloud, allowing access to storage and data from any environment and Buddy Ohm. Buddy Ohm is intended to improve operations, savings and sustainability by providing real time building operational data.

What did Buddy’s letter to shareholders say today?

In his letter to shareholders, chief executive officer David McLauchlan announced that July had just marked the company’s first earnings before interest, tax, depreciation and amortisation (EBITDA) positive month in 2020. Consolidated revenue came in at $4.9 million. That was up 90% from June and 80% from July 2019.

McLauchlan noted that government subsidies related to COVID-19 were down 66% from June. That means that July’s unaudited customer revenue was up 138% from June and 72% from July 2019.

The company’s total current assets also increased 18% over the previous month, to $10.7 million. That includes cash holding of $1.9 million.

Looking ahead, McLauchlan cautioned investors to set appropriate short-term expectations, noting investors “should not necessarily expect linear or ‘straight line’ results from here on out. This month’s results were strong in large part because of significant deliveries of LIFX White lights.”

But McLauchlan assured that the remainder of the year still holds a lot of promise for the company, with record orders of LIFX White lights received last week portending a strong October. He said demand across the board remains high.

More reading

• Buddy share price soars 19% on record orders
• Why the Buddy Technologies share price more than doubled in a week

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

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Dividends are one of the great benefits of holding shares. They represent the distribution of company profits to the owners of a company – its shareholders.

Dividends provide shareholders with a passive income stream that can be used to fund a lifestyle, or be reinvested. They often come with tax benefits too – franked dividends include imputation credits, which can be used to offset tax payable by the investor.  

Why invest for dividends? 

Dividends come in the form of cash, so provide a periodic realised return on your investment. Capital gains are the other form of return on shares. To realise capital gains, however, shares must be sold. Potential capital gains can also disappear where the share price falls. 

Reinvesting dividends is a quick and easy way to grow your portfolio. Many companies and exchange-traded funds (ETFs) offer dividend reinvestment programs that will automatically reinvest distributions back in that company or ETF. Investors can also direct dividends be paid into a separate bank account, and save them to fund new investment opportunities.  

There can be tax advantages associated with receiving dividends. Franked dividends come with tax credits attached which means investors receive a rebate for tax already paid by the relevant company. If an investor’s personal tax rate is lower than the company tax rate, they can receive a refund.

How to find dividends

Company profits can either be paid out as dividends or reinvested in the company to fuel future growth. Generally, mature, lower growth companies are in a better position to pay out a higher proportion of profits as dividends than smaller, higher growth companies. Companies in stable industries with predictable cash flows are more likely to be able to pay reliable dividends. Companies in emerging or cyclical industries are less likely to be able to sustain a high level of dividends.  

Dividend yields and payout ratios 

A company’s dividend yield is its annual dividend divided by the share price. It represents the dividend-only return on the investment in the share. When dividends remain the same, the dividend yield on a share will rise when the share price falls and fall when the share price rises. Investors must be wary when using the dividend yield to guide investment decisions – it may be inflated due to a falling share price, and dividend cuts can and do occur. 

A company’s payout ratio shows the percentage of earnings that are paid out to shareholders as dividends. It is calculated by dividing the total dividends paid over a period by the company’s earnings over that period. The payout ratio can indicate how sustainable a company’s dividend payments are. A low payout ratio indicates a company is reinvesting most of its earnings into its business to spur future growth. A high payout ratio indicates that the opposite is true. 

Different industries tend to have different payout ratios. Defensive industries with stable income flows such as telecommunications and utilities tend to have higher payout ratios. For example, AGL Energy Limited (ASX: AGL) has a target payout ratio of 75%. Industries with fluctuating cash flows or in cyclical sectors such as resources tend to have lower payout ratios.

Traditional dividend shares no longer so reliable 

Banks, utilities providers, and real estate investment trusts have all historically been known for dependable dividend income. But the banks have taken a knife to dividends as profits plunge in the wake of COVID-19.

Commonwealth Bank of Australia (ASX: CBA) cut FY20 dividends by 32% as FY20 profits fell 11.3% to $7,296 million. Westpac Banking Corp (ASX: WBC) scrapped its interim dividend entirely last week and Australia and New Zealand Banking Group (ASX: ANZ) cut its interim dividend to 25 cents a share from 80 cents a share in 2019. 

Utilities providers have been more reliable sources of dividend income this reporting season. 

AGL Energy has a dividend yield of 6.31% and paid dividends of 98 cents per share in FY20, 80% franked. AGL targets a payout ratio of approximately 75% of underlying profit after tax where a minimum franking level of 80% can be maintained.

Telstra Corporation Ltd (ASX: TLS), with its high proportion of mum-and-dad investors, maintained its full year dividend of 16 cents a share, despite its net profit after tax decreasing by 14.4% to $1.8 billion. 

Mining shares have also been known to pay substantial dividends when conditions allow. Rio Tinto Ltd (ASX: RIO) paid $3.6 billion in dividends in 1H20. Other than 2016, Rio has increased its dividend every year since 2010 and currently has a dividend yield of 5.62%.

BHP Group Ltd (ASX: BHP) paid dividends of 55 US cents per share in FY20, giving a payout ration of 72%. Both the big miners have benefitted from the increases in the iron ore price, which has been on the rise since March. 

Dividend scans

A quick Google search will reveal the ASX shares with the highest dividend yields. Currently, these include Whitehaven Coal Ltd (ASX: WHC), which has a dividend yield of 11.65% and Yancoal Australia Ltd (ASX: YAL) which is yielding 15.70%.

Whitehaven Coal paid dividends of 1.5 cents a share in 1H FY20 despite a 30% drop in revenue, with CEO Paul Flynn saying, “the payment of a modest dividend reflects our confidence in the fundamentals of the business and prospects for a stronger second half.” 

Yancoal Australia also saw a fall in revenues in 1H FY20, but profits increased thanks to non-operating items of $575 million. Nonetheless, challenging conditions in coal markets meant Yancoal declined to declare an interim dividend in order to preserve cash. This is a timely reminder that high dividend yields are no guarantee that dividends will actually be paid. 

Foolish takeaway

Dividends represent a tangible return on share investments. Whether used to fund current lifestyle needs or fuel future portfolio growth, dividends serve a crucial purpose in portfolio construction. But identifying shares that will consistently pay decent dividends is easier said than done. This is why diversifying sources of dividend income is recommended. 

More reading

• Top fund manager sees sharp fall in global dividend payouts
• 6 ASX giants pay $1 billion for ripping off customers
• Here are the highlights of this ASX reporting season
• ASX 200 Weekly Wrap: Blue chips, earnings drag ASX lower
• Why I would buy CBA and this top ASX dividend share

Motley Fool contributor Kate O’Brien owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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) went up by 0.3% today with reporting season continuing.

Afterpay Ltd (ASX: APT)

It was acquisition news that sent the Afterpay share price higher by 4.4% today.

The buy now, pay later business announced plans to expand into Europe by acquiring European business Pagantis.

Afterpay thinks that Europe is the next logical step for growth because of its “large millennial population, vast fashion and beauty retail markets, and significant debt card usage.” Afterpay has said that the ecommerce market in the EU is worth more than €300 billion.

Pagantis is a buy now, pay later provider operating in Spain, France and Italy. It also has regulatory approval to operate in Portugal.

Afterpay’s Clearpay plans to rollout across the EU market in the third quarter of FY21, however this acquisition will accelerate and de-risk the roll-out for the ASX 200 share, according to Afterpay’s leadership.

The acquisition price is at least €50 million with €5 million of cash on completion and at least €45 million in cash payable on completion.

Pagantis has around 1,400 active merchants and 150,000 active customers.

Fortescue Metals Group Limited (ASX: FMG) reports large dividend

Fortescue reported that its FY20 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 38% to US$8.4 billion with the EBITDA margin rising to 65%.

Underlying net profit after tax (NPAT) went up by 49% to US$1.75 billion. This earnings strength allowed Fortescue to increase its final dividend by 19% to $1 per share. That took the annual FY20 payout to $1.76 per share, 54% higher than last year.

Net debt at the end of FY20 was US$258 million, which was US$1.8 billion lower than the net debt of US$2.1 billion at 30 June 2019. Net cash from operating activities rose by 47% to US$6.4 billion.

In FY21 the ASX 200 company is aiming for iron ore shipments of 175mt to 180 mt. C1 costs are expected to be between US$13.00 to US$13.50 based on an assumed exchange rate of AU$1 to US$0.70. Capital expenditure is expected to be between US$3 billion to US$3.4 billion.

Reliance Worldwide Corporation Ltd (ASX: RWC)

The top performer in the ASX 200 today was Reliance Worldwide after reporting its FY20 result.

Net sales were up 5% for the year to $1.16 billion. Americas revenue grew by 6% for the year. Asia Pacific external sales rose by 2% in FY20 despite the slowdown in Australian new residential construction. However, UK and European sales were adversely impacted by COVID-19 but there was a gradual recovery evident towards the year end.

Adjusted EBITDA, which excludes $33.4 million of restructuring and impairment charges, fell almost 10% to $251.3 million. EBITDA was $$217.9 million.

Adjusted NPAT fell 18% to $130.3 million with reported NPAT falling 33% to $89.4 million.

The ASX 200 company said that during the year it undertook cost reduction initiatives to ensure the company was appropriately placed to pursue future profit growth. In the US it closed its Tennessee manufacturing facility with production transferred to the company’s main US plant in Alabama. John Guest synergies delivered during the year was $13.8 million.

Net debt was reduced by $124.4 million to $302.2 million. Operating cash flow rose 56% to $278.3 million. Despite the improving balance sheet, the final dividend payment was 2.5 cents per share, causing the annual dividend payment to be 7 cents per share – down 22.3% from the 9 cents per share annual dividend.

The outlook for FY21 is uncertain due to COVID-19, so it didn’t provide formal guidance. However, sales growth in the US has been 22% higher in July than for the same month in the prior year. Other regions have displayed solid sales too.

The first three weeks in August have continued to show positive momentum.

More reading

• Is this ASX 200 market too greedy right now?
• On a day when the ASX 200 is going nowhere, these popular “coronavirus shares” are hitting record highs
• Why reporting season isn’t the bloodbath we expected
• Meet the group reaping the biggest profit from the gold bull run
• ASX 200 up 0.2%: Afterpay expansion, Fortescue’s monster dividend, NIB disappoints

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 Reliance Worldwide Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Reliance Worldwide 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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Make no mistake, I think dividend income is one of the best things you can get from an ASX share. It’s truly passive income — it doesn’t discriminate on who you are, where you are or what you do. If you own a dividend-paying share, you shall receive it.

Now, some ASX investors only invest for dividend income. If a share pays no dividend, these investors just won’t be that into it.

On one level, I understand this perspective. Some dividend investors, such as retirees, for example, rely on shares to fund their living expenses. Capital appreciation isn’t as useful as a regular stream of cash flow. Even for those investors who don’t need dividends to fund their lifestyles, I understand the appeal of having cash regularly coming through the door. It can supplement your other sources of income, help give you extra capital to invest or otherwise just give you that tangible reassurance that your money is making you more money.

But I also believe that a complete focus on dividend income can be a mistake for many investors. Here’s why:

The downside of a dividend share

To understand the downside of a dividend, we first have to understand where dividends come from. When a company makes a profit, it has three things it can do with the money: reinvest it back into the business, keep it on its balance sheet or return it to shareholders via share buybacks or dividends. Thus, like everything in life, the payment of a dividend comes at an opportunity cost. If a company chooses to pay a dividend, it is concurrently choosing not to invest that money back into the business. That’s why some companies don’t pay dividends at all – they prefer to maximise growth for the company.

Now, some companies are large and mature, with no real growth opportunities in front of them. Take Woolworths Group Ltd (ASX: WOW). There are very few Australian towns or cities left that don’t have a Woolworths within driving distance. It’s simply not viable for Woolies to keep building extra stores on every street corner because the Australian grocery market is pretty much at saturation point. Rather than ploughing every cent of its profits into adding 200 new Woolies stores every year, the company is instead choosing to pay out a reasonable dividend. That’s an action I’m sure the shareholders of Woolworths think is appropriate, given the absence of any massive growth opportunities in front of the company.

Should you go for growth instead?

So, if you’re only choosing to invest in companies like Woolworths that offer substantial dividend income upfront, you will likely have a portfolio full of mature businesses operating in fairly saturated markets. That’s not a recipe for a market-beating ASX portfolio. You are excluding a lot of companies that are investing in growing their own future at the expense of companies that simply can’t grow too much larger. Remember, a company will usually only pay a substantial dividend if it has nothing better to do with the money. So if you rely on this income to fund your lifestyle, you might be ok with that. But if you’re looking to use ASX shares to build wealth as fast as possible, I think dividends should be a secondary consideration.

More reading

• Ecofibre share price on watch after doubling profits
• ASX 200 Weekly Wrap: Blue chips, earnings drag ASX lower
• 5 blue chip ASX 200 shares a beginner can use to start a share portfolio
• Meet the latest ASX stock that’s more than doubled its full year COVID-19 earnings
• Woolworths share price higher on acquisition news

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

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Today, the iSentia Group Ltd (ASX: ISD) share price plunged by 10.20%, closing at 22 cents. This slide came after the company released its annual results for the 2020 financial year (FY20).

What was in the announcement?

iSentia reported revenue of $110.3 million in FY20, down $12.2 million compared to the 2019 financial year. According to the company, revenue growth in South East Asia was offset by declines in Australia and New Zealand, along with North Asia. iSentia stated that revenue in Australia and New Zealand was affected by competitive pressures.   

The company posted net profit after tax before amortisation of -$4.9 million. According to iSentia, this loss was due to costs associated with the closure of its North Asia business.

iSentia revealed earnings before interest, tax, depreciation and amortisation (EBITDA) of $20.9 million in the 2020 financial year. EBITDA was down $2.2 million when compared to the 2019 financial year.

The company reduced its net debt by $3.7 million in FY20, with net debt standing at $24.6 million at 30 June 2020 versus $28.3 million on 30 June 2019.

According to iSentia, its cost base was reduced by $10 million or 10% during the 2020 financial year, which it stated meant that the company was yielding a more sustainable, adaptable business model. The company reported that cost savings were evenly split between operating expenses and cost of sales.

iSentia did not provide earnings guidance for 2021, however, it did comment on the current outlook, stating: “Despite the economic uncertainty, we expect both the media intelligence sector and Isentia’s subscription model to remain resilient, allowing continued focus on the strategic plan and ongoing investment in new products and technology.”

About the iSentia share price

iSentia is a media monitoring and data analytics provider, with most of its revenue coming from software-as-a-service products. It operates in Australia, New Zealand and South East Asia and has been listed on the ASX since 2014. In June, iSentia announced that it would exit its loss-making North Asia business.

The iSentia share price is up by 120% on its 52-week low of 10 cents, however, it is down 24.14% since the beginning of the year. The iSentia share price is down 42.10% since this time last year.

More reading

• Four companies that got crushed (and why you had to own them)

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

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If you’re looking to invest $2,000 evenly across a couple of growth shares, then you might want to take a look at the ones listed below.

Combined, I believe these ASX growth shares could turn those funds into something much larger over the next decade. Here’s why I think they are in the buy zone:

Bravura Solutions Ltd (ASX: BVS)

The first ASX growth share to consider buying is Bravura Solutions. It is a leading provider of software products and services to the wealth management and funds administration industries. It offers a number of quality products such as the world class Sonata wealth management platform. This popular wealth management platform allows advisers to connect and engage with clients via computers, tablets, or smartphones.

It also has the Rufus transfer agency solution, the Garradin back office solution, and the recently acquired Midwinter financial planning software. The latter gives Bravura a new avenue for growth in an industry benefiting from structural tailwinds. Overall, I believe these quality products leave the company well-positioned in a very lucrative market. This could lead to the company delivering above-average earnings growth over the 2020s and make the Bravura share price a market beater over the period.

Xero Limited (ASX: XRO)

I think Xero is a growth share to consider buying right now. It is one of the world’s leading cloud-based business and accounting software providers which has been growing at a rapid rate over the last few years. This certainly was the case in FY 2020 results when Xero revealed further strong growth in sales and operating earnings. This was driven by stellar customer growth, price increases, and its sky high retention rate.

The good news is that Xero still has a very long runway for growth over the next decade. This is thanks to its global expansion and particularly its opportunity in the United States. At the end of FY 2020, Xero had just 241,000 subscribers in the North American market. This compares to 914,000 subscribers in a significantly smaller ANZ market.

More reading

• 2 of the best ETFs for investing in ASX shares
• 3 exciting mid cap ASX tech shares to buy for the long term
• Where I would invest $10,000 in ASX shares right now
• Nextdc and 2 other thriving ASX tech shares to buy
• 2 top ASX tech shares to buy and hold beyond 2026

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 Xero. The Motley Fool Australia owns shares of and has recommended Bravura Solutions 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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The Ramelius Resources Limited (ASX: RMS) share price edged higher on Monday following the release of an impressive full year result for FY 2020.

The gold miner’s shares ended the day 0.5% higher at $2.02. This means the Ramelius share price is now up 58% since the start of the year.

How did Ramelius perform in FY 2020?

During the 12 months ended 30 June 2020, Ramelius recorded a 17% increase in gold production to 230,426 ounces. Combined with a solid rise in the average realised gold price, this led to the gold miner delivering a 31% increase in revenue to $460.6 million.

And thanks partly to a reduction in its all-in sustaining cost (AISC) to A$1,164 an ounce, Ramelius’ earnings before interest, tax, depreciation and amortisation (EBITDA) margin expanded to 56%. Management notes that this is one of the highest margins among its peers. This margin expansion resulted in the company posting a massive 128% increase in EBITDA to $256 million.

On the bottom line it was even better, with net profit after tax growing 420% year on year to $113.4 million. As a result of this strong performance, a fully franked final dividend of 2 cents per share was declared.

Ramelius’ Managing Director, Mark Zeptner, commented: “This is the sixth consecutive year that Ramelius has posted a net profit after tax, which demonstrates the operating and financial strength of the Company, its quality assets and the success of our growth strategy.”

“It is very pleasing to also announce a 2.0c per share fully franked dividend after our record breaking year, building on the 1.0c per share dividend paid in October 2019. Ramelius is proud of the fact that it is now rewarding shareholders with a dividend yield, in addition to the significant share price growth achieved over the last 12 months.”

What about FY 2021?

Management expects to grow its production again in FY 2021 and is targeting 260,000 to 280,000 ounces. This represents an increase of 12.8% to 21.5% year on year.

One slight disappointment is the company won’t be capitalising fully on the recent gold price increase due to an expected increase in costs. Ramelius has provided AISC guidance of A$1,230 to A$1,330 an ounce. This will be a 5.7% to 14.3% increase year on year.

More reading

• Take a look at last week’s worst performing ASX shares
• Indiana Resources share price jumps to 3-year high on acquisition news

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 Altium Limited (ASX: ALU) share price has grown strongly over the past three years, despite not making any significant ground over the past 12 months. The Altium share price is up nearly 50% from its March low but only 7.5% in year-to-date trading.

Altium released its full year results for FY 2020 last week. It was a reasonably strong set of numbers in light of the challenging market conditions. Altium achieved its ninth year in a row of solid revenue growth.

Is the Altium share price a buy in light of these results?

Another solid financial year for Altium

Altium achieved revenue growth of 10% to US$189 million for the full year ended 30 June 2020. Performance was solid across all of its core global operating regions and core business units. Profit before tax for Altium climbed by 12% to reach US$64.6 million. Meanwhile, earnings before interest, taxes, depreciation and amortisation (EBITDA) grew by 13% to $75.6 million.

Altium recorded a 17% increase in its overall subscriber base to 51,006. Altium Designer seats grew by 15%, with 9,251 new licenses sold throughout FY2020. Altium Designer is now the most widely used professional PCB design tool globally. It is used by over 100,000 engineers worldwide.

The Aussie WAAAX share also ended the financial year with a strong balance sheet. The company’s cash balance at the end of June was US$93 million. That was up 16% on the prior year.

What’s been driving the Altium share price?

Altium has now recorded nine consecutive years of double-digit revenue growth. Annual revenue has increased from $71 million in FY2014, to $111 million in FY2017 and now $189 million during FY2020, as reported above. Equally impressive is that Altium’s operating margin has expanded each consecutive year during that time. Back in FY2014, Altium’s operating margin was only 30.1%, and during FY2020 it has now reached 40%.

Altium’s customer base now extends across a broad range of industries. This includes everything from automotive, aerospace and defence, mobile device and consumer electronics to industrial controls and research and education.

Altium’s target of US$500 million in revenue and 100,000 subscribers by 2025 is still in place. However, it may now be delayed by around 6 to 12 months due to COVID-19.

Foolish takeaway

The Altium share price was hit hard in the first phase of the pandemic. Since then, it has only made a partial recovery, and is currently trading at $36.91. Combined with a very solid set of numbers for FY 220, this in my opinion, offers investors a good buying opportunity right now. Altium now has a proven track record of strong financial performance and has an entrenched global market position in its technology niche.

I believe the growth prosepcts for the Altium share price over the next five years look very positive. In my view, a growing number of smart connected devices globally is likely to lead to continued strong demand for Altium’s products in the years to come.

More reading

• 2 of the best ETFs for investing in ASX shares
• Are these ASX shares future millionaire makers?
• Where to invest $100,000 into ASX shares right now
• Where to invest your Commonwealth Bank dividends in September
• 3 stellar ASX growth shares to buy in FY 2021

Phil Harpur owns shares of Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. 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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If you’re building a quality ASX blue chip share portfolio then I think there are a couple of names that I think should be in there.

There are plenty of ASX 20 shares that I wouldn’t want to own in my portfolio because I’m not confident about their longer-term growth prospects. Names like BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), Scentre Group (ASX: SCG) and Woodside Petroleum Limited (ASX: WPL) look challenged to me.

I don’t think it’s worth buying a blue chip just because it’s a big name. It needs to have growth potential in my opinion.

That’s why I’m attracted to these two names:

Wesfarmers Ltd (ASX: WES)

I think Wesfarmers could be the best ASX blue chip share with how it operates. It has a number of operating businesses including Bunnings, Officeworks, Kmart and Catch.

I like the business model because it allows Wesfarmers to buy businesses in whatever industry management think is a growth opportunity. For example, not too long ago it invested into Kidman Resources, a lithium business. Retail and lithium mining are completely different – but both could be good investments for Wesfarmers to pursue.

COVID-19 has been tough for some of Wesfarmers’ businesses like Target with the trading restrictions, but other sections have seen strong growth in FY20 like Bunnings, Officeworks and Catch. Bunnings benefited from a surge of households doing DIY projects, its revenue grew by 13.9%. Officeworks saw lots of people needing home office supplies, this helped revenue rise by 20.4%. Catch, as an online retailer, benefited from the rocketing ecommerce growth with grass transaction value growing by 49.2% since the acquisition.

The ASX share seems well placed to grow whatever happens next with COVID-19 and the economy. It has a solid balance sheet and a reliable dividend. I’m interested to see what happens in FY21 – a vaccine could be very beneficial for sentiment regarding the medium-term prospects for retail.

At the current Wesfarmers share price, it’s trading at 27x FY22’s estimated earnings.

Macquarie Group Ltd (ASX: MQG)

Macquarie is Australia’s global investment bank and one of the biggest financial businesses on the ASX.

It has shown good resilience during COVID-19 so far. As one of the world’s biggest infrastructure managers, it generates attractive recurring revenue from the management fees.

In the first quarter of FY21 Macquarie reported that its group operating net profit was only slightly down on the first quarter of FY20. There were mixed trading conditions for the different segments. For example, whilst there were lower numbers of acquisitions and initial public offerings (IPOs), there were increased numbers of capital raisings to shore up balance sheets. 

The reason why I think it’s one of the best ASX blue chip shares around is because of its global nature and its diversification. Unlike most financial shares, Macquarie has different segments – its earnings aren’t reliant on loans.

Macquarie generates two thirds of its earnings outside of the domestic Australian and New Zealand market. Most ASX20 shares are largely reliant on Australia (and perhaps China) for their earnings.

Macquarie can decide to invest and expand into whatever country or industry it thinks is a good growth opportunity. The investment bank’s Green Investment Group continues to grow with new renewable energy projects.

At the current Macquarie share price it’s priced at 16x FY22’s estimated earnings.

Foolish takeaway

I think both of these ASX blue chips offers investors compelling diversification and good growth potential. They both have good dividend credentials too. 

At the current prices I’d probably more inclined to go for Macquarie – Wesfarmers has had a strong run since the COVID-19 crash. However, I’d be more confident about owning Wesfarmers for the ultra-long-term because it could grow into any industry with its business model. I think Wesfarmers will be a solid dividend share for a long time to come.

More reading

• On a day when the ASX 200 is going nowhere, these popular “coronavirus shares” are hitting record highs
• 6 ASX giants pay $1 billion for ripping off customers
• Here are the highlights of this ASX reporting season
• ASX 200 Weekly Wrap: Blue chips, earnings drag ASX lower
• 2 of the best ETFs for investing in ASX shares

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. 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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AMP Limited (ASX: AMP) chair David Murray and AMP Capital chief executive Boe Pahari stepped down Monday after investor pressure arising from a sexual harassment scandal.

But it seems these supposed acts of contrition haven’t satisfied.

S&P Global Ratings announced Monday afternoon that risks were still “on the downside” for the finance giant.

“In our view, the changes highlight governance challenges as well as potential dependency on key individuals within the group,” the ratings agency stated.

“Most of our ratings on AMP group entities remain on CreditWatch with negative implications, where we initially placed them on June 12, 2020.”

The company was under fire last week after details of Pahari’s alleged sexual harassment of a subordinate were revealed.

The board’s judgment was questioned as it was accused of overlooking the seriousness of the case when promoting Pahari to the plum position of AMP Capital CEO.

AMP insisted all along that the offences were “low level” and that the board took sufficient action in penalising some of Pahari’s annual bonus.

But the public pressure became too much to bear. 

Resignations are self-serving

On Monday morning, AMP announced Murray’s departure and Pahari’s exit from the CEO role. Non-executive director John Fraser also resigned as a result of Murray’s exit.

RMIT University senior lecturer Warren Staples said Murray’s departure was self-serving.

“Chairman David Murray has always pushed back against public sentiment on board matters – [such as] gender quotas and responding to the Royal Commission,” he said.

“Murray’s decision to leave AMP is far more about his lack of interest in bowing to public pressure than it is about him taking the ultimate accountability for conduct at AMP.”

Australian Council of Superannuation Investors (ACSI) chief executive Louise Davidson welcomed the resignations – but said AMP still had much to fix.

“The company must now get on with [the] job of rebuilding public confidence, and in particular, the trust of their staff,” she said.

“Investors will be continuing to engage with AMP to understand how these decisions were made and how the company intends to strengthen company culture.”

Corporate stars seem to get away with bad behaviour

Pahari’s promotion showed a general inclination for companies to support moneymakers regardless of their behaviour, according to RMIT sessional lecturer Andrew Linden.

“Longstanding governance problems at AMP reflect a wider endemic problem across corporate Australia,” he said.

“Boards and CEOs almost always back in ‘rainmakers’ regardless of a history of poor personal conduct at work.”

More reading

• 6 ASX giants pay $1 billion for ripping off customers
• AMP executives resign over sexual harassment scandal
• AMP to release sexual harassment details, won’t sack anyone
• Investors call for AMP Capital CEO’s head
• Why today is a great day to add to your ASX share portfolio

Motley Fool contributor Tony Yoo 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.

The post AMP still looking pretty sick even after sackings appeared first on Motley Fool Australia.

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