Over the past year or more, shrewd investors have been looking outside the previous dividend darlings like Commonwealth Bank of Australia (ASX: CBA) and BHP Billiton Limited (ASX: BHP), accurately perceiving the structural risks around these companies.
However, simply looking to a non-banking or non-mining stock doesn't mean that you're guaranteed a risk-free income stream. Here are two companies outside these sectors that I believe face a significant risk to earnings and/or share prices:
Scentre Group Ltd (ASX: SCG) is the property developer behind a number of successful shopping centres in Australia. Shares have risen nearly 50% from their nominal launch after the restructure of Westfield Group on the back of strong performance, rising sales and a very high occupancy rate – and therein lies the rub.
With full occupancy (99.5%), Scentre has very little scope to improve its ongoing operations and management is targeting 2%-2.5% increases in Net Operating Income per annum. Although we still seem to be looking at interest rate reductions, rate rises would begin to nibble into already anaemic company growth.
Furthermore, if the domestic economy is slowing and investors might assume that it is if interest rates keep falling then there is a question mark under ongoing sales growth. Lower rates can lead to higher discretionary spending, true, but rising unemployment and falling property values would likely impact sales at Scentre Group's retailers. This would place downward pressure on rents, and potentially increase vacancy if retailers need to close stores.
Scentre Group is a great business, but to me it looks fully valued and with more risk of downside than upside for investors expecting the Australian economy to worsen.
Lifehealthcare Group Ltd (ASX: LHC) is a middleman supplying medical devices both complex and simple to hospitals and surgeons. Recent growth has been driven by acquisitions in the fragmented sector, as well as growth in the sales of higher margin, more complex equipment. However, the company's recent operational performance was sub-par, as expenses grew faster than revenue. Shares fell heavily on the news, and Lifehealthcare now offers an annual yield of more than 6%, if the interim dividend is doubled to represent full-year earnings.
That's an attractive yield, and in combination with the defensive nature of the healthcare sector, might ordinarily be enough to make investors look through Lifehealthcare's recent woes. However, I believe there is an even bigger threat looming in the form of potential regulatory changes to the health insurance system, particularly the fitting of prosthetics.
The cost of fitting these devices has been described as 'Alice in Wonderland stuff' by a prominent health insurance fund, and Medibank Private Ltd (ASX: MPL) along with other insurers is agitating for changes in the system. Any regulatory change is highly uncertain – which is why I continue to hold my shares – but investors should be wary of the potential for today's earnings to be impacted further.
