Income investors should brace themselves for the worst dividend hit since the GFC when ASX companies present their profit results next month.

You can blame this on the COVID-19 meltdown with Bloomberg estimating that stocks on the S&P/ASX 200 Index (Index:^AXJO) could crash by up to 40% in 2020 and a further 11% in 2021.

The August reporting season is the first time ASX stocks will have to put their cards on the table since the coronavirus pandemic triggered a shutdown of the global economy.

ASX banks dividend disaster

We’ve already gotten a small taste of what’s to come with three of the big banks slashing or suspending dividends two months ago.

This explains a big part of why the Westpac Banking Corp (ASX: WBC) share price and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price are underperforming. They both held back from paying any dividend, while the National Australia Bank Ltd. (ASX: NAB) share price is under pressure from a cap raise and a 60% plus cut to its interim dividend.

Their financial year end is different from most other companies.

Risk of CBA suspending dividend is growing

I have written about how Commonwealth Bank of Australia (ASX: CBA) may have dodged a bullet as it releases its full year results next month. My initial thoughts were that the worst of the COVID-19 impact would be behind us and that management didn’t have to be as conservative on dividends as its peers.

But I wasn’t counting on a dreaded resurgence in coronavirus infections. Large parts of Victoria have gone back into a stage three lockdown and conditions seem to be worsening.

There’s talk that the state will have to go into a stricter stage four lockdown, while New South Wales may be next to shutdown vast parts of its economy if the spike in cases can’t be controlled soon.

Given the heightened level of uncertainty, it’s reasonable to think that CBA might suspend its dividend till later this calendar year. If our biggest home lender does this, it won’t be due to the lack of cash as its balance sheet can fund a decent payout. It will be because of fear.

Why many ASX stocks will be tempted to cut dividends

Other ASX stocks will be quick to leverage on this climate of anxiety too. The risk-reward for cutting dividends is too attractive for management teams to ignore.

In the first instance, boards won’t be flogged for committing the cardinal sin of dividend cuts during a global crisis. It’s almost like a “hall pass”.

On the flipside, if they don’t cut dividends to shore up their cash position, and they run unexpectedly run thin on capital later, they will be punished severely then.

Further, extra cash on the balance sheet will give ASX companies greater flexibility to boost their share prices later. This can be trough capital returns, business expansion or acquisitions.

On that last point, the COVID-19 turmoil is bound to throw up some opportunistic targets as several industries will likely be forced to consolidate.

Other ASX stocks at risk of dividend disappointment

Another sector that’s at risk of slicing or suspending their dividends in August is property. Retail and office landlords like Vicinity Centres (ASX: VCX) and Stockland Corporation Ltd (ASX: SGP) are doing it tough.

Any stock related to travel like Flight Centre Travel Group Ltd (ASX: FLT) and Sydney Airport Holdings Pty Ltd (ASX: SYD) will also be under pressure to keep as much capital on their balance sheets as they can. The recovery in international travel looks to be a long way off.

More reading

• Is the BHP share price about to surge?
• This could be a problem for the Afterpay share price
• Why the Mirvac share price is a good relative buy
• COVID-19 second wave concerns just sent these ASX shares to record highs
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

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

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Believe it or not, there are a handful of shares that you can still buy today on the ASX that are exempt from tax when you finally sell them. I’m talking about ASX-listed pooled development fund (PDF) companies, which, despite their attractiveness, still tend to fly under the radar of most investors.

First, the history lesson: the PDF program was launched by the Paul Keating government in 1992 to help increase the supply of capital to small and medium-sized (SMEs) enterprises, based on certain criteria. A PDF raises capital and makes equity investments in SMEs and under the program, pooled development funds were offered generous tax concessions. While the PDF program has been closed to new registrations since 2007, existing registered funds continue to operate, and as such continue to have PDF status for tax purposes.

What are the tax breaks?

Buy one or more of these ASX PDF shares, and you’ll receive a double-whammy in tax benefits.

Firstly, companies with PDF status are taxed at 15% on their income and capital gains received from their investments. By comparison, the full company tax rate sits at 30% and the lower company tax rate is 27.5%.

Secondly (and more importantly), as a shareholder in an ASX-listed PDF, you’re exempt from the capital gains tax after selling. Assuming you’re an Australian resident, you’ll also receive franked and unfranked dividends that are also exempt from tax. There’s also the option to use the imputation credits attached to the franked dividends to offset other tax obligations.

However, the benefit doesn’t come without a potential downside, which is that you’re not entitled to deductions or capital loss on the sale of these shares.

PDFs trading on the ASX

If you like the idea of investing in Australian SMEs, while also locking in some future tax breaks, here’s a closer look at the 6 PDF shares trading on the ASX.

Authorised Investment Fund (ASX: AIY)

AIY invests in innovative SMEs within high-growth industries that capture the multiples of future consumer spending. For example, it has a 30% stake in Aenea Cosmetics, which offers customers a full range of epigenetic skin care products, and a 30% stake in global media representation company Asian Integrated Media.

AIY also owns a stake in NSX-listed company, Endless Solar, which has exposure to the renewable energy market.

While the company is currently suspended from trading pending its responses to an ASX enquiry, at 3 cents per share the last trade is undervalued relative to Morningstar’s fair valuation of 4 cents.

MEC Resources (ASX: MMR) 

This exploration company offers investors the opportunity to secure equity in companies exploring for large energy and mineral discoveries like oil, uranium, nickel, iron ore and gold. Its primary focus is on companies with the potential to yield significant returns by advancing their discoveries into production.

The company has called for a voluntary suspension of trading until 17 July pending a meeting of shareholders to effect an in-specie distribution of the Advent Energy shares that it holds. At 0.4 cents the stock is currently trading a discount to Morningstar’s fair value of 1 cent per share.

Strategic Elements Ltd (ASX: SOR)

Strategic Elements is advancing its in-house developed ‘printable nanocube memory ink’, which hopes to revolutionise the ability to print onto multiple surfaces, while remaining flexible and transparent. Its chosen tech field targets the global multi-billion dollar printed electronics market for use in advanced computing applications and improving data storage capabilities.

The company is also working with the University of New South Wales and has attracted 2 other significant development partners – CSIRO and VTT Finland – both world leaders in their prospective fields. Strategic Elements is also involved in a collaborative working group called PrintoCent, which includes large global companies in printed electronics, such as Nokia, Merck and BASF.

Its subsidiary Stealth Technologies is developing technologies to help vehicles to drive autonomously, and do physical tasks with robotics.

BTC Health Ltd (ASX: BTC)

This Australian specialty biopharmaceutical company provides partnering, product development and commercialisation capabilities to partners across the Asia-Pacific. It’s dedicated to assisting these partners through the final stages of product development, regulatory submissions, reimbursement, distribution and post-marketing compliance and is actively seeking new investment opportunities in the biotechnology life-science sectors.

Demand for BTC’s specialty health products reduced significantly following the cancellation of category two and three elective surgeries by the Australian Government on 25 March. As a result, the share price was heavily sold-off in February, and at 9.5 cents per share, it remains significantly undervalued relative to Morningstar’s fair value of 13 cents.

I expect the full resumption of elective surgery to be reflected in the share price – sooner or later.

Generation Development Group Ltd (ASX: GDG)

Formerly known as Austock Group, Generation Development Group is a specialist provider of investment bond product solutions. The group established Australia’s first flexible investment bond product over 15 years ago.  

Generation Development Group also operates Austock Financial Services, which provides administrative services, including unit pricing, fund valuation, investment and fund accounting, fund administration and business registry services.

The stock currently trades for 76 cents, slightly higher than Morningstar’s fair valuation of 66 cents.

Acrux Limited (ASX: ACR)

Acrux listed in 2004 as a biotech share dedicated to developing and commercialising topical pharmaceuticals. Its early claim to fame was as the provider of roll-on testosterone, but its fortunes deteriorated when the US Food and Drug Administration (FDA) linked testosterone drugs to heart failure and strokes.

Since then, Acrux has focused on developing a pipeline of 10 topical generic drugs, and currently has 3 pharmaceutical products approved and marketed. The Acrux share price surged by as much as 62.96% in late May 2020, following revelations it has entered into an exclusive sales, marketing and distribution agreement with US-based private company TruPharma.

What I think is appealing is TruPharma’s proven track-record of building niche product portfolios and getting difficult products FDA-approved and into the market. Subject to approval by the FDA, TruPharma will be responsible for the commercialisation of 6 existing products from the Acrux pipeline.

More reading

• ASX tech star ELMO Software delivers strong growth in FY 2020 despite the pandemic
• This could be a problem for the Afterpay share price
• Why the Mirvac share price is a good relative buy
• Fortescue share price hits new record high: Is it too late to invest?
• Woodside announces a $6.2 billion hit

Motley Fool contributor Mark Story 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 Buy these ASX shares today and pay no CGT when you sell appeared first on Motley Fool Australia.

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The ELMO Software Ltd (ASX: ELO) share price will be one to watch on Wednesday.

This follows the release of the growing software company’s fourth quarter and full year update this morning.

How did ELMO perform in FY 2020?

During the fourth quarter, the cloud-based HR and payroll software provider continued its growth trajectory despite the challenges associated with COVID-19.

ELMO reported cash collections of $16.4 million during the three months, which represented a 26.2% increase on the previous quarter and 8.4% on the prior corresponding period.

The company’s growth during the quarter was supported by the launch of ELMO Connect. This is a new communications module allowing businesses to instant message and initiate Zoom Conference calls from within its cloud-based platform.

This ultimately led to the company reporting record cash receipts of $57.5 million during the financial year, up 27.4% on FY 2019’s cash receipts.

At the end the financial year ELMO had a cash balance of $139.9 million with no debt. This cash balance was boosted by its successful $70 million placement institutional placement and $2.8 million share purchase plan.

Pleasingly, this strong balance sheet means ELMO remains well capitalised to continue investing in organic growth and executing strategic acquisitions.

In respect to the latter, ELMO’s CEO, Danny Lessem, revealed that the company has “an active acquisition pipeline.”

FY 2021 outlook.

Mr Lessem appears optimistic on the company’s prospects in FY 2021.

The chief executive commented: “ELMO’s focus remains on delivering organic growth supplemented with strategic acquisitions, continuing our growth trajectory into FY21 and beyond. We are well placed to benefit from the acceleration in the adoption of cloud-based business tools, including HR technology.”

Further details in respect to its earnings and its expectations for FY 2021 will be released with its full year results on 6 August.

More reading

• Are these small cap ASX shares future tech stars?
• Why the RPMGlobal share price could be a bargain buy right now
• The rise and rise of ASX SaaS shares
• 4 top small cap ASX shares to watch in FY 2021
• 5 exciting small cap ASX shares to watch

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 Elmo Software. The Motley Fool Australia has recommended Elmo Software. 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 Afterpay Ltd (ASX: APT) share price has been one of the great gravity defying shares of FY20. Although not the first buy now, pay later (BNPL) company in the world, Afterpay has definitely done it very well. It is head and shoulders above any Australian rivals, and is already starting to see early success in foreign markets, particularly the US.

However, The Australian reported yesterday on an unlisted start up called Limepay, which is already seeking to disrupt the BNPL business model. Limepay allows merchants to integrate an online payments platform with their own branding, and to add their own BNPL functionality if they wish.

So, what does this mean for the future of the Afterpay share price?

The battle of the business models

The secret to the Afterpay share price miracle has been a business model where supposedly everybody wins. Consumers with limited discretionary funds can purchase items using no interest instalments, merchants see an increase in sales and pay a small 3–6% fee. Seems like a good thing all round, doesn’t it?

Limepay has a counter argument, and it may be right. First, vendors get it. The BNPL wave of short term credit has taught everyone that customers want instalment plans. So why should they allow another company to get in between them and their customers? Couldn’t they just do this themselves? That would enable them to maintain a long-term relationship with their customers.

Both the Afterpay website and the Zip Co Ltd (ASX: Z1P) website have an entire catalogue of merchants you can buy from. So they have taken customers as part of a sale in one store, and targeted them with competitors’ products. The longer I think about this, the more I think this could be a threat to the BNPL business model.

The Limepay model is to enable companies to do their own instalment plans, and works with businesses such as the Accor group, which uses the platform for its 40,000 loyalty members.

The Afterpay share price

The Afterpay share price rose by 178.3% over the past year. This is despite bushfires, a pandemic and a lockdown. At this price, the company has a market valuation greater than Santos Ltd (ASX: STO) and Crown Resorts Ltd (ASX: CWN) combined. Nevertheless, there is some justification for this.

Afterpay is the clear leader in Australia. In overseas expansion, its UK subsidiary, Clearpay, already has over 1 million active shoppers. Similarly, Afterpay announced it has 5 million active shoppers in the US, and a total consumer count of approximately 9 million. Across the entire business the company has reported 9.9 million active shoppers for FY20. 

Lastly, there was the recent stake purchased by Tencent Holdings Ltd, which holds at least 5%. Tencent is one of the world’s largest companies and operates China’s leading digital payments service, Weixin Pay. Although no specific plans have been disclosed to move into Asian markets, there is a lot of speculation.

So, what has all this growth delivered? In the company’s unaudited release it reported total sales of $11.1 billion in FY20. Sales represent the transactions that have passed through the Afterpay system through whatever means. The company is forecasting a net transaction margin of approximately 2%.

In contrast, Tyro Payments Ltd (ASX: TYR) recently announced the company’s total transactions for FY20, in just Australia, stood at $2o.131 billion. However, the transaction margin in this case is approximately 1%. Tyro is a payments processing company, not a BNPL company. The example is to illustrate the scale of the raw figures.

Foolish takeaway

In summary, I think the Limepay business model is likely to appeal to predominantly large companies that are well branded. For many small-to-medium companies the Afterpay association helps generate sales. However, this is only one of the areas where the Afterpay share price is likely to hit headwinds.

First, a raft of other competitors have already sprung up, such as the Commonwealth Bank of Australia (ASX: CBA)-backed BNPL product, Klarna. The appearance of the Limepay model, as well as the number of BNPL competitors, highlight the low barriers to entry in the space. Second, Afterpay already seems to have roused the ire of regulators in Australia. 

While Afterpay is growing very fast, I see its current share price as totally overvalued. It may reach $100 as forecast by analysts at Morgan Stanley, but I do not believe it is sustainable. For instance, in raw growth alone, it had to expand across 3 continents to achieve a level of transactions other companies have been able to achieve within Australia.

More reading

• ASX 200 drops 0.6% today, Afterpay share price down 7%
• Top brokers pick the latest ASX small cap stocks to buy today
• Which ASX shares will benefit from the second lockdown?
• Afterpay share price sinks 7.5%: Is this a buying opportunity?
• New investors could invest $1,000 into these top ASX shares

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 Tyro Payments. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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 Mirvac Group (ASX: MGR) share price could be trading cheaply right now, in my opinion.

Shares in the Aussie real estate investment trust (REIT) are down 32.3% in 2020, compared to an 11.2% loss for the S&P/ASX 200 Index (ASX: XJO).

So, let’s take a closer look at what’s driving the real estate share lower and why it could potentially be in the buy zone this year.

Why the Mirvac share price is a potential buy

Almost all the Aussie REITs have been hammered lower this year, but Mirvac is looking like a decent relative value buy. 

With a price-to-earnings (P/E) ratio of 8.4, the Mirvac share price is looking cheap compared to its sector peers. Rivals Scentre Group (ASX: SCG) and Stockland Corporation Ltd (ASX: SGP) trade at P/E ratios of 9.7 and 15.0, respectively.

There’s also the question of its market capitalisation versus its book value. Mirvac’s website claims the group manages $18 billion of real estate assets. However, the company’s market capitalisation is just $8.5 billion. That could mean the Aussie REIT is a strong buy given its extensive asset base in 2020.

To be fair, those asset values are probably heading lower thanks to the coronavirus pandemic and subsequent restrictions. However, that would have to be a significant (more than 50%) haircut to get back to $8.5 billion.

What is driving the Mirvac share price lower this year?

Unlike some REITs that have a specific niche, Mirvac is quite a diverse real estate investment group.

The group has built an impressive portfolio comprising its residential, office and industrial, retail and built to rent segments. According to Mirvac’s 1H20 Fact Sheet from 6 February 2020, its office ($7.1 billion) and retail ($3.5 billion) segments dominate the portfolio.

The group’s residential pipeline is strong, with 27,551 lots amounting to $13.9 billion worth of projects.

Clearly, office and retail real estate is not in high demand right now. Many Aussies are working from home and/or restricted from shopping, let alone in large numbers.

The Mirvac share price has been hammered in 2020 as investors have been spooked into selling. Mirvac did report a strong 99.1% occupancy in its February half-year results. While that’s likely to have materially changed thanks to the pandemic, I think it shows that Mirvac is a high-quality real estate manager.

There are certainly big headwinds facing both office and retail real estate right now. Lower foot traffic (retail) and more remote working (office) looks likely to slash demand from tenants in the coming years. However, Mirvac did report a 5.9-year weighted average lease expiry (WALE) in February. The long-term nature of those leases could mean the REIT’s earnings withstand the short-term impacts from the pandemic.

Are there other ASX REITs to buy?

While the Mirvac share price has fallen lower this year, there is still a lot of uncertainty ahead. It’s true that Mirvac and its peers like Scentre and Stockland are heavily invested in office and retail real estate. Most investors aren’t bullish on the sector right now but I do think it’s worth a look given the recent sell-off.

For another ASX REIT in a more in-demand sector, I’d check out National Storage REIT (ASX: NSR) in 2020.

More reading

• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 drops 0.6% today, Afterpay share price down 7%
• Is the Coles share price still attractive after it surged to a record high today?
• Investor in your 30s? Buy these cheap ASX shares
• Top brokers pick the latest ASX small cap stocks to buy today

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. 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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The Fortescue Metals Group Limited (ASX: FMG) share price was on form on Tuesday and pushed higher again.

The iron ore producer’s shares climbed over 1% to reach a record high of $15.56.

This latest gain means the Fortescue share price is now up a massive 44% since the start of the year.

As a comparison, the S&P/ASX 200 Index (ASX: XJO) is down 11% over the same period.

Why did the Fortescue share price hit a record high?

Investors were buying Fortescue’s shares on Tuesday after the iron ore price jumped higher again.

The good news for shareholders is that the price of the steel making ingredient has continued its rise overnight. According to CommSec, the spot iron ore price rose a further 0.5% to a lofty US$112.40 a tonne.

The strong rise in the iron ore price this year has been driven by supply disruptions in Brazil and stronger than expected demand in China. The latter is been caused by the Chinese government’s efforts to boost economic growth after the pandemic.

How profitable is Fortescue?

With iron ore prices at these sky high levels, Fortescue’s Pilbara-based operations are now extremely profitable.

For example, during the third quarter, Fortescue shipped 42.3 million tonnes of iron ore at a cost of US$13.27 per wet metric tonne.

And while Fortescue’s iron ore doesn’t command the full spot price due to its lower (but improving) grades, it is still generating material free cash flows.

Is it too late to invest?

While I have a preference for BHP Group Ltd (ASX: BHP) due to its diversified operations and growth opportunities, I still feel Fortescue could be a good option even after its strong rise this year.

Especially if you’re an income investor. Given the strength of its balance sheet and the high level of free cash flow it is generating, I expect Fortescue to reward shareholders with bumper dividends this year and next.  

More reading

• 3 blue chip ASX 200 dividend shares to buy in the next market correction
• Macquarie picks ASX stocks that can deliver positive earnings surprises next month
• Is the gold price too high for investing in ASX gold shares?
• Why the Fortescue share price rallied over 40% to a record high in 2020
• 3 ASX shares with incredible cost moats

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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