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Cheap dividend shares do not only offer a generous passive income today. In many cases, they have the potential to produce strong capital growth and dividend growth over the long run so that an investor can enjoy a rising income in the coming years.

Through buying a diverse range of high-quality dividend stocks at cheap prices, it is possible to ultimately replace a wage. They could deliver a sustainable and resilient income for a wide range of investors.

Buying cheap dividend shares for a long-term passive income

The high yields on offer from many dividend shares suggest that they offer good value for money, as well as a worthwhile passive income. Despite the stock market rally in the second half of 2020, a number of companies trade at prices that are below their long-term averages. This may mean that they provide scope for capital growth over the long run that enables an investor to build a surprisingly large nest egg.

Clearly, some high-yielding dividend shares face difficult operating outlooks in the short run. The impact of coronavirus on some industries has been significant. However, those companies that have solid financial positions, sound growth strategies and affordable shareholder payouts may become increasingly popular in a likely stock market rally in the coming years. An improving economic outlook and stronger investor sentiment may lift their prices – especially as other popular assets offer disappointing passive income opportunities in many cases.

Building a portfolio for a long-term income

Of course, the stock market’s uncertain outlook means that there may be challenging periods ahead for passive income investors. For example, in the short run a portfolio of dividend shares could experience declines that lead to paper losses as a result of political change or a wide variety of other risks.

However, over the long run a diverse portfolio of high-quality income stocks could produce a surprisingly large portfolio. For example, indexes such as the FTSE 100 Index (FTSE: UKX) and S&P 500 Index (SP: .INX) have produced annualised returns of around 8% over recent decades. Therefore, a $500 monthly investment could be worth around $300,000 within 20 years, assuming the same rate of return as the stock market has produced in the past. From this, a 4% annual withdrawal would equate to a $12,000 annual income that may provide greater financial freedom for many individuals.

Capitalising on today’s buying opportunities

It may be difficult for many passive income investors to buy cheap dividend shares today. As mentioned, the world economy faces numerous risks that may derail its prospects.

However, today’s low share prices for many dividend stocks may provide the opportunity to buy high-quality companies while they trade on attractive valuations. Over time, this may lead to higher returns that produce an even greater portfolio valuation and income in the coming years.

More reading

• How to turn $20,000 into $225,000 in 10 years with ASX shares
• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• 2 great ASX growth shares to buy for January
• ASX 200 rises 0.7% on Friday

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

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I’m a big fan of buy and hold investing and believe it is the best way for investors to grow their wealth.

To demonstrate how successful it can be, I like to pick out a number of popular ASX shares to see how much a single $20,000 investment 10 years ago would be worth today.

This time around I have picked out the three ASX shares that are listed below:

Aristocrat Leisure Limited (ASX: ALL)

This gaming technology company’s shares have been strong performers since 2011. During this time the company has carved out a leadership position in the poker machine market and has completed a couple of major earnings accretive acquisitions. The acquisitions of Plarium for US$500 million and Big Fish for $1.3 billion opened up the company to the rapidly growing mobile and social gaming markets and diversified its business. This proved to be especially important during the height of the pandemic when casinos close. The company’s success has led to its shares generating an average total return of 27.5% per annum over the last 10 years. This would have turned a $20,000 investment into $227,000.

Nanosonics Ltd (ASX: NAN)

The Nanosonics share price has been a market beater over the last decade. This has been thanks to the increasing demand for the infection control company’s trophon EPR disinfection system for ultrasound probes. Over the last 10 years the company has consistently grown its market share, which is good for two reasons. One is the unit sales it generates, the other is the growing recurring revenues it generates from the consumable products the trophon EPR system needs to function. This has underpinned strong revenue growth and an impressive average total return of 23.8% per annum since 2011. This means a $20,000 investment would now be worth $169,000.

NEXTDC Ltd (ASX: NXT)

Thanks to the shift to the cloud, a significant increase in demand for data centre services, and its growing network of centres across Australia, NEXTDC’s sales and earnings have been growing at a strong rate for a decade. This has led to its shares smashing the market over the last 10 years. During this time, the NEXTDC share price has provided investors with an average total return of 21.6% per annum. This would have turned a $20,000 investment into $141,000 in 2021.

More reading

• ASX 200 drops 1.1%
• Why a2 Milk, AVZ Minerals, Nanosonics, & Premier Investments are dropping lower
• Are heads in the clouds with these sky high P/E ratios?
• ASX 200 down 0.5%: Energy shares jump, big four banks fall, Zip climbs higher
• 2 ASX growth shares to buy in January

James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Nanosonics Limited. The Motley Fool Australia has recommended Nanosonics Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The S&P/ASX 200 Index (ASX: XJO) had a sensational start to 2021 and recorded a sizeable gain last week. Over the five days the benchmark index rose 2.6% to 6,757.9 points.

While a good number of shares climbed higher with the market, some recorded stronger gains than others. Here’s why these were the best performing ASX 200 shares last week:

Lynas Rare Earths Ltd (ASX: LYC)

The Lynas share price was the best performer on the ASX 200 last week with a gain of 15.6%. Investors were piling into the resources sector after the Democrat’s won control of the U.S. senate. This means it is now quite likely that the incoming Biden administration will be able to push through significant stimulus in the near future. This is expected to underpin solid economic growth and demand for commodities.

Oil Search Ltd (ASX: OSH)

The Oil Search share price wasn’t far behind with a weekly gain of 15.1%. Investors were fighting to get hold of the energy producer’s shares last week after oil prices surged higher. This was driven by the announcement of a surprise production cut by Saudi Arabia. The world’s second largest energy producer plans to cut its production by a massive 1 million barrels per day to help combat lower demand because of the pandemic.

IGO Ltd (ASX: IGO)

The IGO share price was a strong performer and jumped 14% higher over the five days. This appears to have been driven by news that its acquisition of an interest in a global lithium joint venture with Tianqi Lithium is progressing well. On January 5, Tianqi Lithium shareholders voted overwhelmingly in favour of the transaction between Tianqi and IGO. Management believes this is a strong validation of the “win-win” the transaction has created for the shareholders of both companies.

Bingo Industries Ltd (ASX: BIN)

The BINGO share price was on form last week and climbed 12.3% higher. This was despite there being no news out of the waste management company. However, there has been speculation that BINGO could be a takeover target for a private equity firm. This could have given its shares a boost last week.

More reading

• ASX 200 rises 0.7% on Friday
• The Bingo (ASX:BIN) share price is up 8% today, 38% in 6 months
• Why the IGO (ASX:IGO) share price is dropping lower
• ASX 200 up 0.4%: Afterpay & Zip charge higher, NAB rises, Harvey Norman hits new high
• 5 things to watch on the ASX 200 on Friday

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

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The S&P/ASX 200 Index (ASX: XJO) has started 2021 in style and stormed notably higher last week. The benchmark index rose a sizeable 2.6% to end the five days at 6,757.9 points.

Unfortunately, not all shares on the index climbed higher with the market. Here’s why these ASX 200 shares were the worst performers last week:

Link Administration Holdings Ltd (ASX: LNK)

The Link share price was the worst performer on the ASX 200 last week by some distance with a 16.2% decline. Investors sold off the administration services company’s shares after its released an update on a takeover approach by SS&C Technology Holdings. Last month the NASDAQ listed global provider of investment and financial software made a conditional offer of $5.65 per share to acquire 100% of Link. While management felt the offer undervalued the company, it granted SS&C Technology due diligence. However, last week it revealed that the takeover proposal has now been withdrawn. 

PolyNovo Ltd (ASX: PNV)

The PolyNovo share price was out of form and dropped 9% lower over the five days. This was despite there being no news out of the medical device company. However, it is worth noting that the PolyNovo share price was an exceptionally strong performer in 2020, so this decline could be due to profit taking. PolyNovo’s shares recorded a gain of 97% last year.

EML Payments Ltd (ASX: EML)

The EML Payments share price wasn’t far behind with an 8.9% decline last week. This decline may have been driven by concerns that its gift card segment will struggle for longer than expected due to lockdowns in the UK, growing COVID cases in the US, and recent outbreaks in New South Wales and Victoria. Brokers remains positive on the company, though. Last month Wilsons put an overweight rating and $4.55 price target on its shares.

Megaport Ltd (ASX: MP1)

The Megaport share price was out of form last week and dropped 8.5% over the five days. This was despite there being no news out of the global provider of elastic interconnection services. Though, with its quarterly report potentially going to be released in the coming days, some investors may be nervous. Megaport’s first quarter update was a touch weaker than many were expecting.

More reading

• ASX 200 rises 0.7% on Friday
• The Megaport (ASX:MP1) share price is down 8% this week
• Mesoblast (ASX:MSB) share price could be facing more pressure in 2021
• Citi picks the best international share markets that can beat the ASX in 2021
• The Energy Resources (ASX:ERA) share price is falling. Here’s why.

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 EML Payments and MEGAPORT FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Link Administration Holdings Ltd and POLYNOVO FPO. The Motley Fool Australia has recommended EML Payments, Link Administration Holdings Ltd, and MEGAPORT FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The two ASX growth shares in this article could be worth looking at in January.

Businesses which are growing profit could be ones to keep an eye on.

Here are two that have big plans for growth:

City Chic Collective Ltd (ASX: CCX)

City Chic has a market capitalisation of around $890 million according to the ASX.

It’s a retail business that sells plus-size clothing, footwear and accessories to women. It has a number of brands including City Chic, Avenue, CCX, Hips & Curves and Fox & Royal. City Chic has around 100 stores across Australia and New Zealand. It has websites for local and US customers, it has marketplace and wholesale partnerships with major US retailers such as Macys and Nordstrom, and a wholesale business with European and UK partners such as ASOS and Zalando.

The ASX growth share has a goal of becoming one of the world’s leading businesses in the plus-size fashion category. It’s furthering that goal with the recently-completed acquisition of Evans from the Arcadia group. Evans is a UK-based retailer of women’s plus-size clothing with a longstanding customer base and strong market position.

Evans has been operating for 90 years as a high street retailer. City Chic is buying the e-commerce and wholesale businesses, not the physical store network, for $41 million. For the financial year to August 2020, the Evans website made £23 million of sales with 19 million visits. The wholesale business also made £3 million of sales. The overall group, including the stores and franchise, made £60 million of annual sales before COVID-19 came along.

The rest of the City Chic business has been growing strongly. Despite the difficult COVID-19 conditions, its online sales jumped 113.5% in FY20 and this represented 65% of total sales. Fund manager Chris Prunty from QVG Capital thinks that the e-commerce theme will continue to grow after COVID-19 has passed.

Redbubble Ltd (ASX: RBL)

Redbubble is a online marketplace business that sells a wide variety of artist-produced products such as wall art, phone cases, masks, clothing, stationery and so on. These products are sold through two websites, Redbubble.com and TeePublic.com.

The ASX growth share had a very strong year in FY20 with the shift to online shopping. FY20 marketplace revenue went up by 36% to $349 million, gross profit grew by 42% to $134 million, operating earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 141% to $15.3 million and EBITDA went up 358% to $5.1 million. It also generated $38 million of free cashflow in FY20.

Fourth quarter growth was particularly strong as marketplace revenue jumped 73%, gross profit rose 88% and it made $8.4 million of operating EBITDA.

Growth has continued into the first quarter. Excluding positive delivery date adjustments, FY21 first quarter revenue grew 98% to $139.3 million, gross profit rose 118% and it generated $17.2 million.

At the time of the FY20 result, Redbubble Martin Hosking said: “RB Group’s on-demand fulfilment model and differentiated consumer offerings provide us with distinctive advantages. The strong financial performance follows from these fundamentals. It has been pleasing to see the acceleration of existing trends in the last few months. 2021 represents a year of opportunity for the business. We are positioned to build on a decade of momentum and aggressively pursue the global opportunity presented by the shift to online activity and increasing adoption of e-commerce platforms.”

Joseph Kim from Montgomery Investment Management said that the ASX growth share has been one of the clear winners from the shift to online. However, whilst the ASX share has clearly been a “stay-at-home” trade, the fundie believes the business has the opportunity to emerge a longer-term structural winner from COVID-19 if it can capitalise in the recent spike in user and customer interest as a result of recent lockdown measures.

More reading

• Which 2 ASX shares have rocketed up more than 200% in 6 months?
• Why the Redbubble (ASX:RBL) share price is rocketing higher today
• Can the Redbubble (ASX:RBL) share price continue its run in 2021?
• Why Galaxy (ASX:GXY) and these ASX shares just hit 52-week highs or better
• Here are the best All Ordinaries performers of 2020

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

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The S&P/ASX 200 Index (ASX: XJO) went up by around 0.7% to 6,758 points.

Here are some of the highlights from the ASX today:

Accent Group Ltd (ASX: AX1)

Shoe store business Accent Group released an update for the first half of FY21. The Accent share price went up around 3% today in response.

The company said that its FY21 first half earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be in the range of $95 million and $98 million, before AASB 16. This will represent growth of 40% to 45% compared to the prior corresponding period. Earnings before interest and tax (EBIT) growth is expected to be similar.

Management said that the first half result was driven by a number of different factors.

Sales were stronger than expected in November and December with total sales up 12.3% and like for like sales were up 7.4% in those months. New store sales contributed to the overall growth.

Accent said it achieved positive like for like (LFL) sales growth of 2.7% in the first half. Excluding Auckland, Victorian and Adelaide stores during periods when they were shut, like for like sales increased by 12.3%.

Turning to e-commerce sales, Accent said that online sales grew 110% to $108.1 million compared to last year. Online sales represented 22.3% of total sales.

Accent said that it achieved a strong profit margin, ahead of the prior year. The company also said that the disciplined cost controls which started in the second half of FY20 has continued, along with rental abatements and wage subsidies (for July to September).

Since June through the Victorian, Auckland and Adelaide shutdowns, and recently in Sydney’s Northern Beaches, all permanent employees have received full pay despite store traffic levels in those areas being significantly impacted. Accent estimated that the net benefit of wage subsidies in the first half of FY21 was $9.4 million.

Daniel Agostinelli, the CEO of Accent, said: “I am delighted with the way our team has executed through the all-important November cyber events and the lead up to Christmas. Our strong focus and capability in digital, combined with operational excellence in merchandise and store execution has delivered a strong, trading led result. The company’s store network and best in class digital fulfilment capability, allowed us to fulfil significant volumes of online Christmas customer orders placed up until 22 December in time for Christmas Day.”

Big movers in the ASX 200

There were some big movers today in the ASX 200.

The best performer in the ASX 200 was the Bingo Industries Ltd (ASX: BIN) share price which went up 8.7%. Buy now, pay later (BNPL) business Afterpay Ltd (ASX: APT) saw its share price rise 6.6%. The share price of BNPL peer Zip Co Ltd (ASX: Z1P) climbed 6.3%. Bingo’s competitor, Cleanaway Waste Management Ltd (ASX: CWY), benefited from a share price rise of 5.5%. Finally, the JB Hi-Fi Limited (ASX: JBH) share price went up 5%.

At the bottom of the ASX 200 were resource businesses. The IGO Ltd (ASX: IGO) share price fell 4.2%, the Deterra Royalties Ltd (ASX: DRR) share price fell 3.9%, the Perenti Global Ltd (ASX: PRN) share price fell 3.8%, the Silver Lake Resources Limited. (ASX: SLR) share price declined 3.7% and the Ramelius Resources Limited (ASX: RMS) share price fell 3.1%.

More reading

• Mesoblast (ASX:MSB) share price could be facing more pressure in 2021
• Brokers name 3 ASX shares to buy right now
• The Bingo (ASX:BIN) share price is up 8% today, 38% in 6 months
• Citi picks the best international share markets that can beat the ASX in 2021
• Why the IGO (ASX:IGO) share price is dropping lower

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 ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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If you’re on the lookout for blue chip ASX shares that you can buy and hold, then I would suggest you check out the ones listed below.

These quality companies could have the potential to grow strongly over the next decade, which could lead to their shares generating market-beating returns for investors during the 2020s. Here’s why they have been rated as buys:

REA Group Limited (ASX: REA)

The first ASX blue chip share that could be a great buy and hold option is property listings company REA Group.

The last few years have not been easy for the company. It has had to deal with a mini housing market crash and then of course the pandemic. But despite this, REA Group has managed to come out on top and deliver solid financial results. This appears to demonstrate the resilience of its business model.

The good news is that the housing market is improving and house prices have been tipped to rise strongly once the pandemic passes. This is likely to lead to higher listing volumes and could result in an acceleration in its profit growth in the near future. Especially given its new revenue streams, costing cutting, and potential price increases.

Morgan Stanley is a fan of the company and has an overweight rating and $150.00 price target on its shares.

SEEK Limited (ASX: SEK)

The second blue chip to look at is SEEK. It is the dominant job listings company in the ANZ region and has a number of growing businesses around the world.

This includes the increasingly important Zhaopin business in China. It has been growing at a very strong rate in recent years and is quickly becoming a key part of the SEEK business.

So much so, Zhaopin is expected to play a key role in the company achieving its aspirational revenue target of $5 billion later this decade. This will be a material increase on the revenue of $1,577.4 million it reported in FY 2020.

Analysts at Credit Suisse are positive on the company’s future. They have an outperform rating and $28.50 price target on its shares.

More reading

• Why these leading ASX gold and tech shares could rally on through 2021
• Are heads in the clouds with these sky high P/E ratios?
• Why the REA Group (ASX:REA) share price thumped the market in 2020
• 4 of the best-performing ASX media shares in 2020
• 2 important investment lessons from 2020

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited and SEEK Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Megaport Ltd (ASX: MP1) shares have lost more than 8% of their value over the last five days of trading, with no major news announced by the company. In fact, the Megaport share price had been dumped in the last four consecutive days of trading up until yesterday. 

Like other technology companies, Megaport shares seems to have been negatively impacted by recent fears the incoming Democrats in the United States Government will make sweeping changes to curb ‘Big Tech’, and tighten regulations in the industry in general.

By the market’s close today, the Megaport share price was trading 0.08% higher at $13.04.

What is Megaport and how did it perform in 2020?

Megaport is a global provider of elastic interconnection services. This means it provides corporate clients the flexibility to manage their bandwidth usage. Customers can scale up their bandwidth when demands are high, and then reduce consumption during off-peak periods.

The platform also leverages cloud-based technology to expand company networks beyond the reaches of traditional infrastructure.

The company has been an ASX success story in 2020, with the Megaport share price gaining by over 40% last year.

Megaport’s revenues jumped 66% year on year to $58 million in FY20. This came as companies shifted their employees to work-from-home arrangements, increasing the uptake of the kind of services Megaport offers.

The company’s good form has been carried into FY21, with it reporting a record first-quarter increase in customer numbers. Most of this growth came from the US.

Outlook

In Megaport’s annual general meeting in October, the company reported that it was positioned on a path to profitability.

Management said a key driver of this in FY21 would involve pushing the business to achieve breakeven on its earnings before interest, tax, depreciation, and ammortisation (EBITDA).

The core of the strategy will revolve around Megaport’s ‘Connected Edge’ platform. This allows customers to extend their networks closer to their branches and maintain them on-demand, instead of relying on traditional data centre models.

Megaport has still not achieved profitability since its initial listing on the ASX in 2015, however the company maintains it is well-funded for the next few years.

Based on the current Megaport share price, the company has a market capitalisation of around $2.1 billion.

More reading

• ASX 200 drops 1.1%
• How to invest in ASX shares in a post-COVID world 
• Here’s how the S&P/ASX All Technology Index fared in 2020
• Can these ASX IT shares carry their momentum into 2021?
• ASX 200 Weekly Wrap: ASX hits new post-March high

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

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The S&P/ASX 200 Index (ASX: XJO) bumped higher today moving up 0.68% at the time of writing. Although the Materials sector has slightly dipped by just over 1%, these three ASX mining shares have all posted big gains.

European Metals Holdings Ltd (ASX: EMH)

The European Metals Holdings share price soared over 10% today, reaching $1.30. While it’s been a bumpy road, the company’s share price has roared over 300% in the past six-month period.

In recent news, the company appointed Ambassador Lincoln Palmer Bloomfield, Jr as a non-executive director. Ambassador Bloomfield will be based in Washington DC and has held several roles in the private sector promoting sustainability. European Metals said that he is a ‘valuable addition’ as part of the company’s commitment to support the European Commission’s new Batteries Regulation.

Copper Mountain Mining Corporation (ASX: C6C)

Copper Mountain Mining shares shot up an impressive 9.59% today, landing at $2.40. The share price posted booming gains after announcing record quarterly production with a positive 2021 outlook.

The announcement also advised that the company had exceeded its 2020 expectation to mine and develop between 70 to 75 million pounds of copper by 1.6 million pounds. The company’s 2021 guidance expects copper production to range from 85 to 95 million pounds.

Gold production is expected to be between 25,000 to 35,000 ounces and silver production is expected to be in the range of 500,000 to 550,000 ounces this year.

Talga Group Ltd (ASX: TLG)

The Talga Group share price jumped by 5% today to reach $1.89. The company posted an impressive 2020 share price gain of nearly 250% with big plans to make its mark in the electric vehicles market. Talga Group has been operating since 2011 with operations in Sweden, Germany and the UK.

Morningstar analysts believe Talga Group is undervalued, while Thomson Reuters has posted a neutral rating for the company.

In December, the company announced completion of a successful institutional placement to raise $25 million. The announcement also cites a Share Purchase Plan put in place to raise an additional $10 million. 

Investors and analysts alike will be keeping an eye out on what’s ahead after a $35 million capital bump. Talga has advised that all of the funds raised will be spent developing the company’s Vittangi Anode Project in Sweden.

More reading

• Why the Copper Mountain (ASX:C6C) share price is hitting a record high today
• Talga (ASX:TLG) share price rose 250% in 2020 as battery demand booms

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

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The Mesoblast limited (ASX: MSB) share price could come under further pressure this year on rumours that it needs a capital injection.

The MSB share price fell 1.3% ahead of the close to $2.23 when the S&P/ASX 200 Index (Index:^AXJO) rallied 0.5%.

Shares in the biotech have been on the nose over the past few months and this won’t be a good time to go cap in hand to shareholders.

$100m cap raise cloud hanging over Mesoblast

But that’s exactly what broking firm CLSA is warning is likely to happen as Mesoblast needs to cover a close to $100 million cash shortfall, reported the Australian Financial Review.

CLSA’s analyst Hashan De Silva believes that Mesoblast will need to start repaying a US$75 million loan with Hercules Capital in two months.

Mesoblast has reportedly drawn down US$50 million of the debt facility, which attracts an interest rate of 9.45% a year.

Bad time to raise cash

The stock tumbled from peak of $5.50 at the end of September last year when its Ryoncil drug for a-GVHD was rejected for use by US health regulators.

Its clinical trials to treat heart failure and COVID-19 related acute respiratory distress syndrome (ARDS) also flopped last month.

“Without access to significant capital, whether it’s from capital raising, or from a third-party partner, or non-dilutive capital, it’s very difficult for Mesoblast to continue to fund their clinical trials in the not-too-distant future, in the next 18 months to 24 months,” De Silva told the AFR.

Why $100m may not be enough

While Mesoblast latest quarterly reported a cash holding of US$108 million, the company doesn’t generate a profit.

De Silva believes that management needs US$75 million ($97 million). But even that may not be enough after Mesoblast’s ARDS trial failed to meet its primary endpoint.

This is because the failure puts its partnership with Swiss drug-maker Novartis in question. The deal would see Novartis make a US$50 million upfront payment to Mesoblast. The payment is split 50:50 in cash and cash for equity.

De Silva doesn’t know if Mesoblast still qualifies for the payment. If Novartis walks, Mesoblast will need a second capital injection in FY22, according to De Silva’s calculation.

Should you buy the MSB share price now?

The broker has a “sell” recommendation on the Mesoblast share price with a 12-month price target of $1.22 a share.

Mesoblast isn’t the only ASX biotech to underperform. The CSL Limited (ASX: CSL) share price is also scrapping the bottom of its 12-month trading band.

More reading

• Citi picks the best international share markets that can beat the ASX in 2021
• The Energy Resources (ASX:ERA) share price is falling. Here’s why.
• Why is the CSL (ASX:CSL) share price trading around its COVID lows?
• Brokers just upgraded the Sonic (ASX:SHL) share price and this other ASX stock to “buy”
• ASX 200 up 0.4%: Afterpay & Zip charge higher, NAB rises, Harvey Norman hits new high

Brendon Lau owns shares of CSL Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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