Tag: Motley Fool

Growth shares have pummelled value stocks in the past few years.

You just need to look at the successful technology stocks in Australia and overseas as evidence of this:

• Even after the pull-back this month, Afterpay Ltd (ASX: APT) has risen 740% since March
• Xero Limited (ASX: XRO) has surged more than 640% in the past 5 years
• Appen Ltd (ASX: APX)’s price has multiplied 32 times in the past 5 years
• Tesla Inc (NASDAQ: TSLA) has gone ten-fold in just over a year

In the US, the Russell 3000 Growth index has outperformed the Russell 3000 Value index by more than 7 percentage points per annum over the past 10 years.

This has had analysts wondering whether value investing is still relevant.

Bank of America sent out a provocative note last month declaring that value investing is “dead” after a decade of woe.

As opposed to growth shares, value investing involves picking out more established companies that are undervalued by the market.

It’s what Warren Buffett espouses, so the strategy has served many investors very well over the decades.

But their loyalty is being sorely tested.

Betashares senior investment specialist Cameron Gleeson told The Motley Fool that the low-interest environment in recent years had propelled growth stocks.

“Falling rates increase the present value of future cash flows, and this typically will have an especially positive impact for companies with strongly growing earnings,” he said.

“With the benefit of hindsight it’s perhaps not surprising that we have seen growth outperform value for over 10 years now.”

It’s not dead, it’s just resting its eyes

But Gleeson believes the value investing concept is not “dead”. 

“If the global economy shifts to a reflationary environment it is broadly expected that value will outperform and growth will lag.”

While everyone’s pretty used to low interest rates, it’s not that absurd to think inflation may return suddenly in the coming years.

“Expectations of increasing inflation and re-opening of economies may be triggered by the announcement of an effective COVID-19 vaccine, for example,” said Gleeson.

He added that value stocks are actually relatively cheap at the moment after many years of underperformance.

“For this reason, holding some exposure to value in your portfolio blended together with growth can improve the stability of your overall portfolio.”

Despite signing off on the funeral, Bank of America suggested four ways value investors can improve results:

• Target small caps
• Focus on quality, not “value traps” or fading industries
• Monitor macro-economic conditions (eg COVID-19 lockdowns, vaccines)
• Take “intangibles” into account when valuing a business (eg intellectual property)

“Equities markets such as the UK’s FTSE 100 Index (INDEXFTSE: UKX) offer exposure to large global value and cyclical stocks, like HSBC, Unilever and Royal Dutch Shell at compelling price levels and with an attractive yield,” said Gleeson.

More reading

• 5 things to watch on the ASX 200 on Wednesday
• 2 ASX shares looking much cheaper today
• BNPL shares like Afterpay (ASX:APT) and Zip (ASX:Z1P) are soaring today. Here’s why
• BrainChip (ASX:BRN) and Zip (ASX:Z1P) were among the most traded shares on the ASX last week
• Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA) among most traded US shares last week

Tony Yoo owns shares of AFTERPAY T FPO, Appen Ltd, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO and Appen 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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On Tuesday the S&P/ASX 200 Index (ASX: XJO) had a subdued day and edged ever so slightly lower. The benchmark index fell 4.7 points to 5,894.8 points.

Will the market be able to bounce back from this on Wednesday? Here are five things to watch:

ASX 200 expected to storm higher.

It looks set to be a positive day of trade for the ASX 200 on Wednesday. According to the latest SPI futures, the benchmark index is poised to open the day 48 points or 0.8% higher this morning. This follows a reasonably positive night of trade on Wall Street. The Dow Jones was flat, the S&P 500 climbed 0.5%, and the Nasdaq charged 1.2% higher.

Oil prices rebound.

Energy shares such as Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) could push higher today after a strong night for oil prices. According to Bloomberg, the WTI crude oil price is up 3.1% to US$38.41 a barrel and the Brent crude oil price is up 2.6% to US$40.64 a barrel. Traders were buying oil after storms on the U.S. Gulf Coast forced output cuts.

Tech shares expected to climb again.

The tech rebound should continue on Wednesday after another very positive night of trade on the tech-focused Nasdaq index. The famous index stormed higher for a second day in a row after investors returned to the sector following a tough couple of weeks. This is likely to be good news for local tech shares such as Afterpay Ltd (ASX: APT) and Nearmap Ltd (ASX: NEA).

Gold price softens.

Gold miners including Evolution Mining Ltd (ASX: EVN) and Northern Star Resources Ltd (ASX: NST) will be on watch today after the gold price softened. According to CNBC, the spot gold price edged lower to US$1,962.40 an ounce. The price of the precious metal eased after the U.S. dollar recovered.

Dividends.

The Costa Group Holdings Ltd (ASX: CGC) share price could edge lower today when it goes ex-dividend for its 4 cents per share dividend. This will be paid to eligible shareholders on 8 October. Elsewhere, shareholders of APA Group (ASX: APA) can look forward to being paid its 27 cents per share dividend later today.

More reading

• Why you should always invest in ASX shares when interest rates are low
• ASX 200 falls slightly, miners surge higher
• Rhinomed (ASX:RNO) share price tries following Starpharma’s path to COVID glory
• BNPL shares like Afterpay (ASX:APT) and Zip (ASX:Z1P) are soaring today. Here’s why
• The Mesoblast (ASX:MSB) share price surges on award win

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 Nearmap Ltd. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO and APA Group. The Motley Fool Australia has recommended Nearmap 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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I think Westpac Banking Corp (ASX: WBC) and the rest of the big four banks have fallen to attractive levels for income investors.

However, not everyone is keen to invest in the banking sector because of the pandemic.

For those investors, I have picked out two ASX dividend shares which I think could be top alternatives. Here’s why I would buy them:

Aventus Group (ASX: AVN)

The first ASX dividend share I would suggest investors buy instead of Westpac is Aventus. It has been one of the property industry’s positive performers during the pandemic. This is thanks to its focus on large format retail parks. It owns a total of 20 centres across Australia, which are home to many of the largest retailers the country has to offer. Pleasingly, these properties have a high weighting towards every day needs.

This has meant that the company has been relatively unaffected by the crisis. So much so, it recently released its full year results and revealed a solid 4.2% increase in funds from operations (FFO) to $100 million. It also reported rent collections of 87% through the COVID-19 period and a high occupancy rate of 98%. I expect this positive form to continue over the coming years and believe it is well-positioned to deliver another solid result in FY 2021. Based on the current Aventus share price, I estimate that it offers a 5% FY 2021 dividend yield.

Rural Funds Group (ASX: RFF)

Another ASX dividend share I would buy is Rural Funds. It is an agriculture-focused property group which owns 61 properties across five agricultural sectors – almonds, cattle, cropping, vineyards, and macadamias properties. At the end of FY 2020, the company’s weighted average lease expiry (WALE) stood at a lengthy 10.9 years. These leases have a high weighting to blue chip customers. Approximately 78% of its revenue is coming from corporate or listed tenants such as wine company Treasury Wine Estates Ltd (ASX: TWE).

This has allowed Rural Funds to continue its growth during the pandemic. It reported an 8% increase in property revenue to $72 million in FY 2020. Looking ahead, management reaffirmed its plan to grow its distribution by 4% in FY 2021 and intends to pay shareholders 11.28 cents per share. Based on the current Rural Funds share price, this works out to be a 4.8% yield.

More reading

• With dividends slashed, is there any reason to buy ASX bank shares?
• CBA (ASX:CBA) employees angry at ‘disrespect’
• ASX 200 flat: Afterpay (ASX:APT) rebounds, Cleanaway (ASX:CWY) sinks, big four banks lower
• Borrowers on loan holidays are ignoring ASX bank communications
• Is the Westpac share price still a buy for dividends?

Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Treasury Wine Estates Limited. The Motley Fool Australia has recommended AVENTUS RE UNIT. 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 CV Check Ltd (ASX: CV1) share price has fallen 4.7% to 10 cents after today’s closing bell. CV Check provided an operating update for the past few months prior to the market’s open this morning. During mid-afternoon trade, the CV Check share price hit as high as 12 cents before falling back to its day low of 10 cents.

CV Check overview

CV Check, founded in 2004, is an online tech company that offers background screening and verification services.

The company conducts over 300,000 verification checks every year for private and government organisations, employers and individuals.

These services include national police checks, employment reference checks, credit and financial checks, and predictive psychometric assessments, among other verifications.

Trading update

CV Check advised that its September order flow to date has been much stronger than its July and August averages. In addition, new customer wins in the recent months have offset the challenging conditions the company has faced during COVID-19.

CV Check has achieved over 50% revenue growth from information technology customers compared to the corresponding prior period. Notable client names include Ceridian HCM Holding Inc (NYSE: CDAY), Family Zone Cyber Safety Ltd (ASX: FZO), RXP Services Ltd (ASX: RXP), Reckon Limited (ASX: RKN), and Sage.

Sales post COVID-19 shutdown from 23 March to 13 September showed an upward trend of revenue increasing per week. From July, $250,00 of sales was achieved each week and has been increasing.

Check CV CEO, Rod Sherwood, commented that the effect of the widespread work from home adoption has accelerated sales of its digital, online, cloud-based services.

He added that new client wins across the information technology sector, particularly in its September revenues have continued the business recovery.

Mr Sherwood noted further that revenue from clients placing orders through integrations with other HR technology platforms also continues to rise strongly when compared to the same period of FY20.

CV Check share price summary

The CV Check share price has been gaining momentum since its March low of 4.6 cents, which has been underpinned by its sales recovery. However, the CV Check share price is down 33% from a trailing 12 months.

More reading

• CV Check share price storms 35% higher

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

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The minutes from the Reserve Bank of Australia’s (RBA) 1 September meeting provide some revealing insights into the outlook for ASX shares in the mining sector. Particularly those digging up iron ore.

Atop keeping the official cash rate at the historic current low 0.25% and indicating the RBA is prepared to purchase additional Australian Government Securities (AGS) to maintain the central bank’s 3-year yield target of 0.25%, the RBA dug into China’s rebound from the COVID-19 economic slowdown.

The RBA board concluded that unlike most nations’ recovery paths, China is seeing production rebound much faster than its consumption. The bank points to China’s government policies focusing more support on reviving business investment with less financial support for households.

While this means consumption in China is still below its pre-pandemic levels, Chinese industrial production is back to where it was before the virus shut down many of the nation’s factories.

What does this mean for Australia’s commodities?

According to the RBA, a big change in the demand and supply of commodities has been occurring. The bank noted that iron ore prices have been near multi-year highs. It said that atop the iron ore supply issues hindering output in Brazil, steel-intensive activities in China, like construction, have rebounded quickly, driving strong demand from China.

Despite some wider trade frictions and the viral slowdown in other sectors, the RBA board noted that “Australian exports of iron ore to China had remained resilient in recent months.”

Which ASX shares look to benefit?

With iron ore prices still near record levels (around US$130 per tonne), Australia’s big miners stand to make some outsized profits.

The BHP Group Ltd (ASX: BHP) share price, up 0.7% today, is still down 3.8% for the year. It has, however, come roaring back from its March lows, up 49% from 16 March.

The Rio Tinto Limited (ASX: RIO) share price, down 1.5% today, is up a slender 1.0% for the year. Rio’s share price has also gained strongly since 16 March, up 32%.

Finally, there’s this year’s star player in the big ASX miners’ club, Fortescue Metals Group Limited (ASX: FMG). The Fortescue share price closed almost flat today, but it’s up an impressive 65% so far in 2020.

Now a lot of other factors come into play which will determine these big miners’ future share prices. But Chinese demand driving high iron ore prices is certainly a welcome tailwind for their shareholders.

More reading

• Here’s why Goldman Sachs just upgraded BHP (ASX:BHP) shares to a buy rating
• KGL Resources (ASX:KGL) share price surges on big upgrade
• 3 ASX shares with high-flying dividend yields
• ASX 200 rises by 0.7%, Cleanaway (ASX:CWY) shares dumped
• Leading brokers name 3 ASX shares to buy today

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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There has been a lot of talk in the investing town of late as to the probability of another 2020 market crash. That’s what tends to happen when share markets go for a run. And that’s exactly what global markets have been doing for the past six months or so. Since 23 March, the S&P/ASX 200 Index (ASX: XJO) has risen close to 30%.

Over in the United States, things are even hotter. The flagship US index – the S&P 500 Index (SP: .INX) – is up more than 51% since 23 March. And the tech-heavy Nasdaq Composite (NASDAQ: .IXIC) is even higher, up 61% over the same period. With so many investors sitting on some solid gains from these run-ups, there are no doubt some investors growing nervous about their new gotten gains.

And on one level, this is fair enough. Uncertainty still abounds. The pandemic is still with us. Economies around the world are still struggling with some of the worst economic conditions in a century. And we have a highly-watched and consequential US presidential election in less than two months’ time, which is bound to move markets whichever way the chips fall.

But I’ll be staying mostly invested in both ASX and international shares regardless, apart from a small cash position. Why? Well, firstly I think ASX shares are one of the best ways we can build wealth under any circumstances. Over the past 120 years, the ASX has continually moved higher and paid dividends and in doing so, has rewarded long-term investors with inflation-smoking returns. And that’s through the Great Depression, a multitude of wars, the global financial crisis as well as periods of both high inflation and low inflation. Because of this, I will always have at least some of my wealth tied to shares.

But secondly, it’s also because interest rates are at virtually zero. And that makes investing in shares more important and potentially more lucrative than ever.

Implications of a zero interest rate world

Interest rates aren’t just about low rates on your savings account alongside a cheaper mortgage. To explain this, I’ll draw on the wisdom of Warren Buffett, here provided by a Magellan Financial Group Ltd (ASX: MFG) website. Buffett here describes interest rates as ‘gravity’ on all other financial assets:

The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are, the less that present value is going to be. So every business by its nature … its intrinsic valuation is 100% sensitive to interest rates.

So with interest rates virtually zero around the world (0.25% here in Australia), there is almost no theoretical limit on how much of a premium investors can place today for income in the future (when interest rates might be higher than today).

And that means that investors are likely to continue to pay high prices for shares until rates rise, regardless of the normal ebbs and flows, ups and downs, of the share market. It doesn’t hurt that there are few other real options for yield in a low-rate world either. That means I’ll be investing in shares at full-throttle until rates start going up again. Perhaps you should too!

More reading

• ASX 200 falls slightly, miners surge higher
• Rhinomed (ASX:RNO) share price tries following Starpharma’s path to COVID glory
• The Mesoblast (ASX:MSB) share price surges on award win
• Why the Ramelius (ASX:RMS) share price is at a new all-time high
• Magellan (ASX:MFG) reveals best share buys for September

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

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The S&P/ASX 200 Index (ASX: XJO) dropped slightly by 0.08% to 5,895 points.

ASX miners were the strongest performers today in the ASX 200.

ASX mining industry soars

It was a strong performance by the mining community today.

Gold miners were the top performers with the Silver Lake Resources Limited. (ASX: SLR) share price going up by 8.2%. The Northern Star Resources Ltd (ASX: NST) share price rose by 7.4% and the Perseus Mining Limited (ASX: PRU) share price went up 6.2%.

Other commodity businesses were also top performers. Coal miner New Hope Corporation Limited (ASX: NHC) saw its share price grow by 5.8%. The share price of Perenti Global Ltd (ASX: PRN) went up 5.5%.

However, at the other end of the ASX 200 was the SKYCITY Entertainment Group Limited (ASX: SKC) share price falling by 5%. Other large declines belonged to the Cleanaway Waste Management Ltd (ASX: CWY) share price which fell 4.3% and the Oil Search Limited (ASX: OSH) share price declined 3.4%.

Award win for Mesoblast Limited (ASX: MSB)

ASX 200 biotech business Mesoblast saw its share price rise 3.5% after winning an award.

Mesoblast announced today that its lead product candidate remestemcel-L has been selected as the winner of the Fierce Innovation Awards – Life Sciences Edition 2020.

This award is given to companies that demonstrate innovative solutions, technologies and services that have the potential to make the biggest impact for biotech and pharma companies. The applications were reviewed by a panel of executives from a variety of major biotech and pharma companies including Astellas, Accenture, AstraZeneca, Angiocrine Bioscience, Biotech Research Group, NIHR Clinicals Research Network, Medidata Solutions and PPD.

Mesoblast chief executive Dr Silviu Itescu said: “This important award is recognition of Mesoblast’s leadership as an innovator in the cell therapy industry, and of the potential for remestemcel-L to profoundly impact the lives of children suffering with steroid-refractory acute graft versus host disease.”

Electro Optic Systems Hldg Ltd (ASX: EOS)

The Electro Optic Systems share price went up almost 9% today after announcing a contract win.

It has secured two contracts totalling AU$4.25 million for the supply of R400 remote weapon systems to a European NATO country.

A number of these systems are optimised for integration onto remotely operated combat vehicles and include the remote control units to operate the systems. Both contracts will be delivered this calendar year.

Electro Optic Systems remote weapon systems products are well suited to the emerging market for remotely operated combat vehicles because of their market leading accuracy, reliability and light weight.

The company said it’s participating in a number of tender opportunities for remotely operated combat vehicles capabilities across multiple countries with a sales pipeline in excess of $1 billion. Management said that major awards are possible in the next 12 months.

Clinuvel Pharmaceuticals Limited (ASX: CUV)

The Clinuvel Pharmaceuticals share price went up 4% today after announcing that the first patient has been dosed with Scenesse DNA repair program. The company is running to clinical program focusing initially on xeroderma pigmentosum (XP).

Clinuvel clinical operations manager Dr Pilar Bilbao said: “We seek to provide meaningful benefit to XP patients, and these results will serve a wider population of fair-skinned individuals at risk of developing skin cancers. The next 12 months will be exciting for many patients, their families, the clinical experts and our own teams.”

More reading

• Why you should always invest in ASX shares when interest rates are low
• Rhinomed (ASX:RNO) share price tries following Starpharma’s path to COVID glory
• The Mesoblast (ASX:MSB) share price surges on award win
• Why the Ramelius (ASX:RMS) share price is at a new all-time high
• Brokers upgrade Macquarie (ASX:MQG) share price targets despite profit warning

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 Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited and Sky City Entertainment 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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The ASX banking sector has been one of the worst casualties of the coronavirus pandemic and associated economic damage. The share prices of the big four ASX banks have been a disaster zone in 2020. The best performer has been the Commonwealth Bank of Australia (ASX: CBA) share price, which is ‘only’ down 18.59% year to date. As for National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Limited (ASX: ANZ), the picture is far bleaker. Each of these three ASX bank shares is down roughly 30% year to date.

For any shareholders that bought in this time last year expecting a 6% to 7% fully franked dividend yield, the reality has no doubt been a sobering experience.

Not only have these four ASX giants had their market capitalisations slashed in 2020, the prospects of investors receiving dividend income is also far lower  – for both 2020 and beyond.

A dearth of banking dividends

Once again, shareholders of Commonwealth Bank have faired the best in 2020. CBA was lucky enough to have its interim dividend payment scheduled for February (right before the proverbial hit the fan in March). Shareholders received a $2.31 per share dividend back then and will be fortunate enough to be treated with a final dividend of 98 cents per share later this month on 30 September. That’s a 23.6% haircut form 2019’s dividends, but it doesn’t look too bad when we look at the other three bank shares.

Right off the bat, let’s get this out of the way. Westpac shareholders will not be receiving an interim dividend in 2020 at all. The bank cancelled its interim payout that was due in May. It’s unclear what sort of final dividend shareholders will receive in December.

NAB did pay an interim dividend of 30 cents per share back in July. But this was partly funded by a capital raising and is still a long way from the 83 cents per share the bank paid out in 2019’s interim dividend.

It’s a similar story with ANZ, which will pay a deferred interim dividend of 25 cents per share on 30 September (down from 2019’s 80 cents). Again, it’s unclear what kind of final dividend ANZ and NAB will pay in 2020, but it probably won’t be anything to write home about. It makes ‘dearth’ seem like a good collective noun for ASX bank shares right now.

No growth, no dividends… what do we buy ASX banks for?

Unfortunately, I don’t think there are any good reasons to buy the ASX bank shares right now. I don’t see any meaningful growth avenues over the next few years as our economy struggles with the virus-induced recession. People don’t tend to borrow too much money in a recession, after all. Therefore, I think credit growth will be almost nonexistent for at least a few years.

Interest rates also seem likely to remain at near-zero for a number of years too, if the Reserve Bank of Australia’s minutes are anything to go by. Yes, the bank shares are cheap right now, but they are cheap for a reason. A buy today might pay off handsomely in a decade’s time. But I think that’s a big bet to make, and not one I’m interested in placing.

More reading

• CBA (ASX:CBA) employees angry at ‘disrespect’
• ASX 200 flat: Afterpay (ASX:APT) rebounds, Cleanaway (ASX:CWY) sinks, big four banks lower
• Borrowers on loan holidays are ignoring ASX bank communications
• Have we reached “peak” Afterpay (ASX:APT) as its US website growth stalls?
• NAB (ASX:NAB) penalised $57.5 million for ripping off customers

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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The Senetas Corporation Limited (ASX: SEN) share price has risen 15.52% today after announcing winning its biggest order to date. By the market’s close, the Senetas share price was trading at 6.7 cents after closing yesterday’s session at 5.8 cents.

What does Senetas do?

Senetas is a developer of high-performance encryption security solutions. The company’s hardware network encryptors aim to protect business and government agencies from damaging security breaches and cyber attacks.

In addition, Senetas’ services segment offers its customers absolute control over file sharing and data sovereignty through its platform ‘SureDrop’.

What did Senetas announce?

Senetas advised it has secured its largest ever single order for its ultra-high speed, 100Gbps ethernet encryptors through its global distributor, Thales. The CN9000 series product will be deployed to secure a Middle Eastern Government agency’s data in transit. 

The gross value of the new order is approximately $2 million. However, after allowing cost of goods and margin to Thales, net revenue to Senetas will be a lesser amount which the company did not disclose.

Unsurprisingly, Senetas CEO, Andrew Wilson, was pleased with the size of the order. He pointed to the realisation of a considerable opportunity that has been building over the past 12 months, and is now delivering. He commented:

With our increased presence in this market, and the potential for new opportunities via the pending European certification and custom algorithm encryptors for Eastern Europe, we continue to see exciting opportunities to further expand the market for Senetas products and expect good growth from these regions over the medium term.

About the Senetas share price

The Senetas share price is down almost 10% from a trailing 12 months. Although the Senetas share price has recovered from its March low of 3.8 cents, it has been a bumpy ride of late for shareholders with fluid gains and falls greater than 15%. With today’s increase in the Senetas share price, the company has a market capitalisation of around $72 million.

More reading

• Why you should always invest in ASX shares when interest rates are low
• ASX 200 falls slightly, miners surge higher
• With dividends slashed, is there any reason to buy ASX bank shares?
• Just how much is a franked dividend worth?
• The best ASX blue chip shares to buy after the market selloff

Motley Fool contributor Aaron Teboneras 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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One of the first questions you will probably be asked right after telling a fellow investor about the yield of an ASX dividend share will be: ‘is it fully franked?’

Australia has an almost unique system of treating dividends for tax purposes known as ‘imputation’ or franking. Franking can be difficult to wrap your head around, but it is also enormously advantageous for a dividend investor.

Therefore, if you invest for dividend income or even just happen to own dividend-paying shares, an understanding of how franking works is essential.

An introduction to fully franked dividends

Unlike most other advanced economies, the Australian Taxation Office (ATO) recognises that dividends are post-tax income.

Let me explain. Most forms of income you can receive are treated as fully taxable by the ATO. That’s everything from wages and salaries to rent from property and interest from savings and loans. But dividends are a little different, and in Australia, they are treated as such.

See, when a company pays a dividend, the money that funds those dividends comes from the company’s profit. In Australia, when a company makes a profit, it must first pay tax (corporate tax) on that money before anything else (including paying a dividend).

As such, the dividends you receive have technically already been taxed once at the corporate level. In other countries (such as the United States), this isn’t recognised. Thus, the recipient of a dividend will have to treat the said dividend as ordinary income for tax purposes and the dividend will effectively be taxed twice.

A uniquely Australian system

But here in Australia, we have the franking system to counter this perceived injustice. Thus, if a company pays a dividend from a taxed profit pool, the dividends will come with a receipt of the tax paid. This receipt is known as an imputation or franking credit. This credit allows the receiver of the dividend to deduct the tax already paid from their own taxable income. This ensures the dividends are only ‘taxed once’.

Not all dividends come with franking though. If a company makes money from overseas (and pays tax overseas), it cannot attach franking credits to any dividends coming from these profits. Likewise if the company pays no tax in the first place. Companies can legally use tax credits from previous losses to avoid paying tax in a given year. If this situation arises, there is no tax paid and therefore no franking available. And some ASX shares don’t even have to pay corporate tax under special arrangements. These include ASX REITs (real estate investment trusts), for example. Thus, any dividend that these companies pay also don’t come franked.

How much is a franked dividend worth?

A franked dividend comes with 2 benefits for a recipient: the cash itself and the franking tax credit. Say an income investor owns a share priced at $100 and giving out an annual dividend of $5 per share. That would give said shares a yield of 5% if the dividends are unfranked. But if the share comes fully franked, the investor is given $5 per share along with a franking credit. If it’s fully franked (coming from a fully-taxed pool of profits), then the investor will receive a $5 per share dividend, along with a franking credit of $2.14. That gives the shares a total (or grossed-up) yield of 7.14%.

The $2.14 franking credit comes from the company paying the full 30% corporate tax rate on $5. This involves the company paying $2.14 in tax for every $5 dividend paid out. You can then take that $2.14 and reduce your own income for tax purposes by the same amount.

And if you’re a person who doesn’t pay tax (like a retiree with a superannuation fund in pension mode), then you get the franking credits back as a cash refund.

Foolish takeaway

In these ways, franking credits are very useful component of our taxation system for income investors and anyone who holds dividend-paying shares. Franking credits aren’t the be-all-and-end-all. But they are certainly something that you should aim to get your head around if you want to get the most out of your ASX dividend shares.

More reading

• Why you should always invest in ASX shares when interest rates are low
• ASX 200 falls slightly, miners surge higher
• With dividends slashed, is there any reason to buy ASX bank shares?
• Senetas (ASX:SEN) share price soars 16% on new order
• The best ASX blue chip shares to buy after the market selloff

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

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