Tag: Motley Fool Australia

The curtain is about to be lifted on the Commonwealth Bank of Australia (ASX: CBA), ladies and gentlemen. Yes, on Wednesday, we are set to get a good look at the CBA books.

CommBank has been the holder of one of the biggest secrets on the ASX over the past few months. Due to a quirky reporting schedule, it was the only ASX bank that has not (until now) had to give investors a look at its numbers since the coronavirus pandemic hit our shores.

That means CBA is the only ASX bank yet to deliver a dividend cut or cancellation to its army of yield-hungry retail investors. The debate has been raging for months now as to what kind of final dividend CBA shareholders can expect this year.

After all, the ASX banking sector, formerly renown for its fat, fully franked dividends, has run dry in 2020. CBA’s banking stablemates Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) have ‘deferred’ their dividends entirely this year. National Australia Bank Ltd (ASX: NBA) did pay a 30 cents per share interim dividend last month. But that was down a long way from 2019’s interim payout of 83 cents per share. It was also accompanied by a dilutive capital raising. So in effect NAB shareholders were being billed with one hand and paid with the other.

An ASX banking dividend crisis

Of course, we can’t really blame the banks for this situation. The coronavirus crisis has severely damaged the economy — of which the fortunes of the banks are intrinsically tied. There are simply fewer people who want credit during a period of high unemployment and low (or negative) economic growth. And the banks’ hands were tied anyway.

The Australian Prudential Regulatory Authority (APRA) pretty much forbade the banks from paying substantial dividends between March and July. Although this ‘guidance’ was downgraded in June, the banks’ are still expected not to pay out more than 50% of their earnings as dividends. Seeing as CBA’s $4.31 in dividends per share in 2019 represented a payout ratio of around 80% of earnings, it’s my view that CBA shareholders will almost certainly not be spared a pay cut on Wednesday.

Are CBA shares a buy before earnings?

Even if CommBank does pull a dividend rabbit out of its hat on Wednesday, I’m not too wild about this bank as an investment in 2020 – for dividends or anything else. Why? Well, I think CBA shares do not offer much in the way of value in their current pricing. At the time of writing, Commonwealth Bank is trading at $73.84. That is (believe it or not) is just 7.6% below where the shares were this time last year.

That isn’t a great buffer for any future coronavirus-induced complications in my view. What if mortgage arrears pick up in 2021? Or what if credit growth grinds along at zero for a couple of years? What if there is a crash in house prices? These are all entirely conceivable events in the current climate. And yet it doesn’t look to me like investors are pricing in any of these risks. As such, I’m staying away from CBA shares right now, probably regardless of what happens on Wednesday.

More reading

• Bank savings rates fall as Buffett racks up record cash pile and analysts tip Qantas share price rebound
• ASX 200 jumps 1.2%: Big four banks rise, Qantas update, Mesoblast surges
• It’s ASX reporting season! Here’s what to watch out for this week
• BHP and 2 more ASX dividend shares for beginners
• CBA and 2 more ASX 200 shares to watch this week

Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. 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 searching for some blue chip ASX shares to add to your portfolio this month, then the three listed below could be worth considering.

I believe these blue chip ASX shares have the potential to provide strong returns for investors over the next few years. Here’s why I would buy them in August:

Goodman Group (ASX: GMG)

The first blue chip ASX share to consider buying is Goodman Group. I’m a big fan of the integrated commercial and industrial property group due to its high quality portfolio of assets. Many of its assets have exposure to structural tailwinds such as ecommerce through agreements with Amazon and DHL. I believe these will be in demand for a long time and are likely to drive strong rental income growth over the next decade and beyond.

REA Group Limited (ASX: REA)

Another blue chip ASX share to consider buying is REA Group. I think the property listings company has an outstanding business model and have been very impressed with the way it has performed through both the housing market and coronavirus crises. And although trading conditions may remain tough for the next couple of quarters, I believe its growth will accelerate materially once things return to normal. Especially given its strong market position, growing global operations, potential price increases, and cost cutting.

Wesfarmers Ltd (ASX: WES)

A final blue chip share to consider is Wesfarmers. I think it is a great blue chip share to buy due to its positive long term outlook. I believe the conglomerate is well-positioned to deliver solid earnings and dividend growth over the next decade. This is thanks to the quality and diversity of its portfolio which includes the key Bunnings brand and the likes of Kmart, Catch, Officeworks, and several chemicals and industrials businesses. The company also has a hefty cash balance which is likely to be used for acquisitions in the near future.

More reading

• Are ASX retail shares buys right now?
• Is the REA Group share price in the buy zone? This broker thinks it is
• Kogan share price in spotlight after it releases new profit update
• These were last week’s best performing ASX shares
• ASX 200 Weekly Wrap: Surging commodity prices snap ASX 200’s losing streak

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended REA 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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The 4DMedical Ltd (ASX: 4DX) share price has surged more than 7% today after the technology company released an investor presentation outlining its market opportunity.

The company says its lung diagnostics software will create a step change in the capacity of physicians to diagnose and manage patients with lung diseases, which gave the 4DMedical share price a boost in today’s trade.

What does 4DMedical do?

Founded in 2012, 4DMedical is a Melbourne-based software company focused on diseases of the lung. The company is seeking to commercialise its four dimensional lung imaging technology which converts X-ray images into scan data. 4DMedical says existing lung diagnostics are “decades out of date, not fit for purpose, and ripe for displacement.”

4DMedical says its technology provides a non-invasive way of understanding regional lung motion and airflow in real time. Use of the technology is expected to improve patient and health outcomes and reduce costs of care. The company runs a software-as-a-service business model, allowing hospitals to access its technology without issues associated with hardware integration, capex or additional staff. 

How does the technology work? 

4DMedical’s technology integrates with existing X-ray equipment, meaning clients are not required to make a capital investment. The XV technology converts X-ray images into 4 dimensional data (3 dimensional plus time) which can be used to inform patient treatment. The platform allows the company to rapidly deploy a suite of respiratory diagnostic products across its network of clinics and hospitals. This provides a strong ability to defend market share from future competitors. 

4DMedical’s technology has won influential fans, with the head of the Alfred Hospital’s Lung Transplant Service saying, “4DMedical lung imaging technology provides a rare and exciting opportunity to improve lung health outcomes for patients globally.” 

What’s next for 4DMedical?

The respiratory diagnostic sector represents a global market of over US$31 billion per annum. The United States market is worth $13.7 billion. 4DMedical’s initial focus is on rapid penetration of the US market – given the large market size, even low market penetration could see substantial revenue generation with high gross margin. FDA approval is in place for 4DMedical’s XV Ventilation product, which is set to launch into the US in FY21. 4DMedical will commence TGA and CE Mark approval process for the XV Ventilation product in FY22. Launch in Australia and New Zealand is also slated for FY22. Launch in Europe is expected to take until FY23. 

The 4DMedical share price is currently up by 7.23% to $1.70 per share at the time of writing, giving the company a market capitalisation of $262.69 million.

More reading

• Why I would buy Goodman Group and these blue chip ASX shares
• Top broker thinks the IDP Education share price is going a lot higher
• The ASX stocks that could enjoy a consensus earnings upgrade this reporting season
• Are ASX retail shares buys right now?
• Here’s why the Mineral Resources share price rocketed 22% in July

Motley Fool contributor Kate O’Brien 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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When your business deals with international students, the closing of borders globally is never going to be a good thing.

This is what has happened to IDP Education Ltd (ASX: IEL) in 2020 and unsurprisingly has been reflected in its share price.

The IDP Education share price is down a disappointing 46% from its 52-week high.

Is this a buying opportunity?

While the short term will undoubtedly be tough for IDP Education, I believe this is priced in by the market now. In light of this and its very positive long term outlook, I feel this is a buying opportunity for investors.

I’m not the only one that would class it as a buy. According to a note out of Goldman Sachs, its analysts have retained their buy rating but cut the price target on the student placement and language testing company’s shares to $17.00. This compares to the current IDP Education share price of $13.43.

What did Goldman Sachs say?

Although it acknowledges that the next couple of years will be impacted by tough trading conditions in the core Australia and India markets, the broker remains very positive on its long term prospects.

It commented: “We now expect volumes across all of IEL’s key student placement markets to remain soft during 1H21E, and now only expect a recovery to commence from 2H21E. Whilst near-term uncertainty is likely to persist, we continue to see the longer-term structural growth profile of international education remaining robust.”

“Surveys on prospective students continue to suggest that plans to continue pursuing a higher level of education remains the case for the majority of students, and we expect this deferral of volumes to result in a build up of the student pipeline when markets reopen. We expect a sharp recovery in SP volume in FY22E, with a pick up in IELTS volume to lead student placement volumes,” the broker added.

In addition to this, Goldman believes that IDP Education will be in a strong position when conditions return to normal thanks to its strong balance sheet and access to capital markets.

It commented: “A strengthened balance sheet has allowed IEL to maintain its existing levels of capacity, particularly student placement agents, and we expect, that when international education markets fully reopen, this will place it in a favourable position to take a higher share of student placement volume vs. peers which may have had to reduce capacity during this period.”

I think Goldman Sachs is spot on and would be a buyer of IDP Education’s shares right now.

More reading

• Why I would buy Goodman Group and these blue chip ASX shares
• ASX stock of the day: 4DMedical share price surges 7% on market opportunity
• The ASX stocks that could enjoy a consensus earnings upgrade this reporting season
• Are ASX retail shares buys right now?
• Here’s why the Mineral Resources share price rocketed 22% in July

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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This reporting season is described as the worst on record for the S&P/ASX 200 Index (Index:^AXJO). But there are a few stocks that could get upgraded this month.

The problem is that we will likely see more downgrades than upgrades post results. While profit expectations are low for FY20, the market is pricing in a V-shape recovery in the current financial year.

ASX Christmas Grinch

That looks optimistic and even our prime minister pained a sombre outlook for Christmas. Up to 400,000 Aussies is expected to be out of work by the end of this year as Prime Minister Morrison is bracing for three quarters of negative growth, reported the SMH.

While stocks at the mercy of economic cycles may see their FY21 earnings downgraded further, consensus expectations for some healthcare stocks may be set too low.

That’s the view taken by Credit Suisse as it reviewed the sector before these companies hand in their profit results.

ASX stocks on upgrade cycle

The broker pointed to the Sonic Healthcare Limited (ASX: SHL) share price and Healius Ltd (ASX: HLS) share price as two cum-upgrade candidates.

“Both SHL and HLS have pre-announced FY20 results; as such, there is little earnings risk going into the results,” said Credit Suisse.

“In addition, both companies are benefitting from robust COVID-19 testing levels, which is more than offsetting any potential weakness in the base businesses.”

The broker’s FY21 forecast net profit for Sonic is 7% above the street and Healius is 20% ahead of consensus.

 Structural upgrade story

Another in the sector that I like is the Ansell Limited (ASX: ANN) share price. The glove maker is on the cusp of a structural shift, according to Credit Suisse, and I couldn’t agree more.

“We expect ANN to meet its FY20 guidance and expect strong growth for FY21 as the strong healthcare demand will persist through FY21,” added the broker.

The demand for personal protective equipment (PPE) is expected to stay stronger for longer even if a vaccine is found for COVID-19.

I believe the Ansell share price will continue to hit new record highs in FY21.

Possible reporting season downgraders

But not all healthcare stocks will see upgrades. In fact, Credit Suisse warns that two may even be hit by broker downgrades.

One at risk stock is the Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) share price. The stage four lockdown in Victoria will weigh on the hospital operator’s earnings growth for longer than expected.

Meanwhile, the Mayne Pharma Group Ltd (ASX: MYX) share price could also lose favour in the coming weeks.

The drug supplier is facing persistent and intense pricing pressure from generic medication and demand for its drugs is likely to be soft from the COVID-19 distraction.

If there is any delay in the launch of its generic NuvaRing in the current half, brokers may be forced to take an axe to FY21 estimates.

More reading

• These ASX healthcare shares could be fantastic long term options
• Why I’ve gone cold on ASX REITs
• Sigma share price jumps on $172 million deal
• Got $3,000 to invest? Try these 2 dirt-cheap ASX shares
• Why the Breville share price gained 14% in July

Motley Fool contributor Brendon Lau owns shares of Ansell Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has recommended Ansell Ltd., Ramsay Health Care Limited, and Sonic Healthcare 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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Plenty of ASX retail shares are doing incredibly well. Are some of them buys right now?

When you look at the performance of the share prices since the 23 March 2020 low, it’s staggering how hard some of these ASX shares have bounced.

The Adairs Ltd (ASX: ADH) share price is up 504%.

The Kogan.com Ltd (ASX: KGN) share price is up 402%.

Plus-size women’s fashion retail City Chic Collective Ltd (ASX: CCX) has seen its share price go up 326%.

The Kathmandu Holdings Ltd (ASX: KMD) share price is up 127%.

The JB Hi-Fi Limited (ASX: JBH) share price is up 88%.

Even the Wesfarmers Ltd (ASX: WES) share price is up 52%.

In hindsight it was a great buying opportunity to buy many of these shares at much cheaper prices.

I don’t think you can say that investors are purely bidding up the smaller retailers on speculation. They are delivering fantastic growth numbers.

Retail growth examples

In today’s FY20 results announcement, Adairs said that in FY20 its online sales grew by 61.4% during the year and underlying earnings before interest and tax (EBIT) grew by 39.7%. Statutory net profit was up 195%.

In the first five weeks of FY21, online sales were up 103.2%, Mocka sales were up 46.8% and like for like store sales were up 15.8%.

Kogan.com also delivered an update to investors today for July 2020. It showed that gross sales were up 110% year on year, gross profit was up 160% and it achieved more than $10 million of adjusted earnings before interest, tax, depreciation and amortisation (EBITDA).

When you look at today’s ASX retail share prices and the growth they’re delivering, it doesn’t actually seem too bad.

But there’s a big question:

Will the sales growth continue?

I think there are two main elements that are supporting the growth of some of these businesses.

The first is that they have a strong online presence. Indeed, some of them like Kogan.com and Temple & Webster Group Ltd (ASX: TPW) are set up as online-only retailers.

Businesses with an effective, easy-to-use website like Adairs or City Chic can simply shift most of their sales from stores to online fulfillment. The lockdowns and restrictions didn’t affect them too much.

The shopping centre shares like Scentre Group (ASX: SCG) are still substantially down from their pre-COVID-19 levels. If most of these stunning retail sales were being done in-store then Scentre and others would have recovered further.

The other thing that seems to be boosting them indirectly is the government stimulus. I don’t think it’s a negative at all – the country needed it. I think the government payments are the main reason why the economy is in better shape than it could have been, aside from controlling the spread of COVID-19 effectively.

Jobkeeper is now scheduled to last until March 2020, at a lower rate than the first six months. Once the government help turns off it will be interesting to see if the economy is back to normal operations or not.

Government assistance can’t go on forever like this. If businesses are being boosted by temporary measures then I don’t think that we can project a permanent uplift of sales like we’re seeing today.

Which ASX retail shares I’d buy today

Of the ones I’ve mentioned so far, I think City Chic has the best chance of continuing to perform. I really like the direction the business has gone on over the past two and a half years with its international growth and improving margins. It looks pretty reasonably valued to me – at the current City Chic share price it’s trading at 23x FY22’s estimated earnings.

City Chic is rapidly expanding overseas with both organic sales growth and acquisitions of troubled competitors. The company could be one to watch, particularly as there’s not much strong competition in the plus-size fashion space.

More reading

• Why I would buy Goodman Group and these blue chip ASX shares
• Why I’ve gone cold on ASX REITs
• 4 ASX shares I’m expecting big things from this reporting season
• Adairs share price soars 14% following results announcement
• 3 ASX shares to buy and hold for the next decade

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 Kogan.com ltd and Temple & Webster Group Ltd. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended Kogan.com ltd, Scentre Group, and Temple & Webster 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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Australian mining services company Mineral Resources Limited‘s (ASX: MIN) share price rocketed 21.6% in July. The increase in the Mineral Resources share price put it in the top five gainers on the S&P/ASX 200 (INDEXASX: XJO), which itself gained 0.5% for the month.

Notwithstanding these gains, the company’s share price wasn’t immune to the COVID-19  selloff. The Mineral Resources share price dropped 36% from 20 February through 23 March, almost in line with the losses incurred by the ASX 200.

Since then, the company’s shares have trended steadily higher, ending July up 104% from their 23 March low at $25.74 per share.

Year-to-date, Mineral Resources’ shares are up 69.9%. At its current price of $28.06 per share, the company has a market capitalisation of $5.3 billion.

What does Mineral Resources do?

Mineral Resources is a mining services company with a portfolio of operations across multiple commodities. Services are provided to clients in Western Australia and the Northern Territory, with the company operating mine sites in the Pilbara and Goldfields, and shipping through Utah Point and Esperance.

Mineral Resources has a portfolio of subsidiary businesses comprised of industry leading brands. These include Process Minerals International Pty Ltd, Energy Resources Limited, and Mining Wear Parts.

Why did the Mineral Resources share price rocket 22% in July?

Although this wasn’t reflected in the 36% share price drop from late February into late March, Mineral Resources’ operations weren’t negatively impacted by the COVID-19 shutdowns hampering so many other companies.

In fact, the company reported a record breaking June quarter for its iron ore business with total iron ore production reaching 4.2 million wet metric tonnes (wmt). That was up 22% on the previous quarter. Its full year shipments of 6.7 million wmt were in line with guidance.

Additionally, the company hit record production levels at its Mt Marion Lithium Project.

Mineral Resources also sold its non-core manganese assets to Resource Development Group Ltd (ASX: RDG) for equity equivalent to a 75% shareholding in RDG.

High iron ore prices — currently US$105.59 per dry metric ton — have helped support Australia’s iron ore miners’ share prices across the board. Mineral Resources is no exception.

In late afternoon trading, the Mineral Resources share price is at $28.06 putting the company’s shares up another 9% since 31 July.

More reading

• These were the best performing ASX 200 shares in July

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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With populations around the world getting older and chronic disease burden increasing, I think the healthcare sector could be a great place to look for long term investments.

Three healthcare shares that I feel could be long-term market beaters are listed below. Here’s why I like them:

iShares Global Healthcare ETF (ASX: IXJ)

The first healthcare option to consider buying is this exchange traded fund. I think the iShares Global Healthcare ETF is a great option due to its exposure to many of the biggest healthcare companies in the world. This includes CSL Ltd (ASX: CSL), Johnson & Johnson, Novartis, Ramsay, and Sanofi. Given the positive outlook for the healthcare sector over the next couple of decades, I believe it could provide strong returns for investors.

Ramsay Health Care Limited (ASX: RHC)

Another healthcare share to consider buying is Ramsay Health Care. Although trading conditions are tough for the private hospital operator right now, I believe its long term outlook is very positive. This is because as the global population ages, demand for its services is likely to increase substantially. I feel this puts Ramsay and its sprawling global network of private hospitals in a strong position to deliver solid earnings growth for decades to come. Ramsay also has a history of growing through acquisitions. I suspect this will remain the case in the future.

ResMed Inc. (ASX: RMD)

A final healthcare share to consider buying is ResMed. I’m a big fan of the sleep treatment focused medical device company and believe it could be a fantastic long term option. This is due to its very positive outlook thanks to its world-class products and massive addressable market. Last week on its earnings call, management stated that there are 936 million people with sleep apnoea globally. There are also over 380 million people who suffer from chronic obstructive pulmonary disease (COPD) and over 340 million people living with asthma. From these, ResMed is aiming to improve a total of 250 million lives by 2025. I expect it to achieve this.

More reading

• The ASX stocks that could enjoy a consensus earnings upgrade this reporting season
• Sigma share price jumps on $172 million deal
• Got $3,000 to invest? Try these 2 dirt-cheap ASX shares
• Why CIMIC, oOh!Media, ResMed, & Resolute shares are dropping lower
• These were the worst performing ASX shares last week

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited and 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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It isn’t just Qantas Airways Limited (ASX: QAN) that has completed its share purchase plan on Monday. Also completing its respective share purchase plan has been personal care products company, BWX Ltd (ASX: BWX).

But unlike Qantas, which was only able to raise $71.7 million of its targeted $500 million, BWX’s share purchase plan was in great demand with retail investors.

What did BWX announce?

This afternoon the company behind the Sukin skincare brand announced that its share purchase plan was strongly supported by eligible shareholders.

So much so, it was oversubscribed and BWX received applications totalling approximately $30.3 million at an issue price of $3.40 per new share. This represents a discount of 19% to the current BWX share price, which is up 1% to $4.19 this afternoon.

This was over triple the original target of $10 million. In light of this strong demand, the company elected to increase its share purchase plan slightly to $12 million.

Combined with its $40 million institutional placement, which was undertaken at the same price, this means BWX has raised a total of $52 million.

Why did BWX raise funds?

In contrast to Qantas, these funds were not raised to help the company navigate the coronavirus pandemic. In fact, BWX has performed in line with expectations in FY 2020 and delivered revenue growth of 25% and EBITDA growth of 30%.

These funds were raised to fund the development and construction of a new manufacturing facility to support its future growth.

Last month, BWX’s Chief Operations Officer, Rory Gration spoke about the new facility and the impact it is expected to have on its future growth.

He said: “This future world-class facility is expected to significantly boost BWX’s in-house manufacturing capacity, capability and competitive advantage; provide up-skilling opportunities for our team; and enhance the ways in which we serve our retail partners, customers, and consumers all over the world.”

“Importantly, this initiative supports local manufacturing and Australian jobs at a time when the retail landscape is being heavily disrupted, and as more companies look to future-proof their business models. As part of this significant investment in Australian manufacturing, we are working with the Government to look to broaden the scope and speed of how we implement this exciting project,” he added.

More reading

• Fund managers have been buying BWX and this ASX share
• Fund managers have been buying these ASX shares
• Why AGL Energy, Alumina, BlueScope, & BWX shares are dropping lower
• ASX 200 finishes up 0.4%, Rio Tinto grinds higher
• Brokers name 3 ASX shares to buy 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 BWX 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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ASX real estate investment trusts (REITs) have had a tough year in 2020 so far. Formerly favoured for their income potential, REITs were among the hardest hit sector in the coronavirus-induced market crash in March.

Take the Vanguard Australian Property Index ETF (ASX: VAP) – an exchange-traded fund that tracks the REIT sector on the ASX. VAP units fell almost 50% in value between 31 February and 23 March this year. That compares very unfavourably against the broader S&P/ASX 200 Index (ASX: XJO), which fell by 36.3% over the same period. The ‘recovery’ period hasn’t been kind to REITs either. Today, the ASX 200 is down around 8.7% year to date, whereas VAP units are still down around 22% since 1 January.

So are REITs a bargain buy at these prices? The economy, although still very much compromised as a result of the pandemic today, will no doubt recover in the months and years ahead, right? That means REITs should follow suit… right?

Well, perhaps not. As you’ve probably gathered from the headline, I’m not too wild about REITs today or for future investment. Here’s why.

What does an ASX REIT offer investors?

A REIT is a company that makes its profit from the rental of property and land assets — think retirement villages, apartments, warehouses, offices, shopping centres, and business parks. A REIT benefits from a special tax structure, in which company tax isn’t paid on earnings. In return, a REIT is normally required to pay out 90% or more of its profits as shareholder distributions. Because this money is untaxed, these yields will typically offer a higher yield compared to other ASX dividend-paying shares (albeit without the benefits of franking credits).

As such, I used to believe REITs were a useful income area to explore and useful shares for dividend investors to own as part of a diversified, income-focused portfolio.

What’s changed for REITs in 2020?

So why have I gone cold on REITs as an avenue for dividend investors to explore? Well, (as you might have guessed) it’s all to do with the coronavirus pandemic.

REITs have been among the worst hit sectors of the economy as a result of the pandemic. Lockdowns (both past and ongoing) have resulted in shopping centres closing, businesses shuttering and rental payments being deferred. All of this is terrible news for REITs. Consider Scentre Group (ASX: SCG), a REIT and owner of the Westfield-branded centres in Australia and New Zealand. It has already cancelled its dividend payment this year, and I’m not convinced they’ll be coming back this year or perhaps even in 2021.

Even if the economy returns to some state of normalcy in the next few years, I think the outlook for most property assets has irrevocably changed.

Think about the trends that the pandemic has accelerated. Online shopping – through the roof. Working from home – a new normal today. Sure, some of these trends might recede once the pandemic is over. But I don’t think it will be anything like it was in 2019.

I believe we have seen a decisive shift in economic behaviours that is set to become permanent. And what does more online shopping and working from home mean? It means fewer people going to the shops less often. It means fewer people going to the office less often.

And that, in turn, means the land that houses shops and offices is less valuable. That is a great big problem for the companies that own these assets.

Foolish takeaway

REITs have been smashed in this pandemic, and I think the changes in consumer behaviour that have accompanied it have permanently damaged the investment prospects of REITs. As such, I’ve gone cold on REITs as viable, income-producing assets. It’s a shame, but one must never invest on sentiment alone! Thus, I’ll probably be avoiding the REIT sector from now on.

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Motley Fool contributor Sebastian Bowen 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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