The best time to buy consumer discretionary stocks is during a recession when earnings are at the low point in the cycle and share prices are low. The trouble is that it could be years until the next recession and so the opportunity cost of waiting may be significant. Here are three quality dividend-paying consumer cyclical stocks which are reasonably priced today.
Vita Group Limited (ASX: VTG)
Shares in this mobile phone retailer have risen 1,254% over the past five years. Its success is due to three factors.
- The rise of smart phones
- A partnership with Telstra Corporation Ltd (ASX: TLS) which has enabled Vita to leverage the ubiquitous Telstra brand
- Focused investment in employees fostering a sales culture characterised by exceptional customer service
Despite the company's success, the market periodically gets spooked when Vita renegotiates terms with Telstra. Now is one such time and so it is currently possible to buy Vita shares with a trailing fully-franked dividend yield of 5.4%.
Tamawood Limited (ASX: TWD)
Many commentators suggest that Australia is experiencing a housing bubble which might explain why shares in this Queensland based house-builder are trading so cheaply. The stock currently pays a full-franked dividend yield of 6.6%.
Whilst I tend to agree that house prices are unsustainably high, I am also confident that Tamawood will continue to prosper because of its low-cost business model and unleveraged balance sheet. The company is also making progress in expanding operations outside of Queensland and so the stock has plenty of growth potential.
Lovisa Holdings Ltd (ASX: LOV)
This seller of jewellery and accessories delivered superb results for the first half of 2017 thanks to impressive like-for-like sales growth of 12.6% and continued store rollout in Australia and overseas.
Revenue increased 20.7% to $99.7 million and net profit after tax (NPAT) surged 49.7% to $20.3 million. During the period, the company managed to put through price rises offsetting currency headwinds. The exit of a competitor also boosted sales and so it is unlikely that the company will deliver quite as strong growth next time.
Lovisa is a quality business which generates very high returns on capital and one of the company's key strengths appears to be the price point of its products. It sells affordable yet fashionable jewellery, an easily justifiable low cost purchase which still delivers instant gratification to consumers. The company is basically following the highly successful "fast-fashion" concept used by Spanish retail heavyweight Inditex with its Zara chain but applying to a niche.
The stock pays a fully-franked dividend of 3.4% and is trading on a modest forward looking enterprise value-to-earnings (EV/E) ratio of 14.
