After the spectacular share price gains witnessed in 2012 and 2013, many analysts have questioned whether Telstra Corporation Ltd (ASX: TLS), Australia and New Zealand Banking Group (ASX: ANZ) and Macquarie Group Ltd (ASX: MQG) can continue their current upwards trend throughout the remainder of 2014 and into 2015. After all, they are up 45%, 56% and 107% not including dividends, respectively.
Holding onto blue chip dividend stocks like these however can work wonders for your portfolio because there are many obvious benefits to receiving full or partly franked dividends in addition to ongoing capital gains. Here’s what you need to know about these three promising companies.
In the past few years, our biggest telco has made a number of significant changes to its business model. For example, it will no longer be able to maintain a monopoly over its competitors who’ve been forced to use its extensive copper cable network for many years. The network is now being transferred to the NBN Co. for use in its fibre optic network (for a price, of course). More recently, it has also floated its Autohome (NYSE: ATHM) business on the New York Stock Exchange. This small but growing company is China’s top online automotive sales website, similar to Carsales.com (ASX: CRZ). It has also divested away from its Hong Kong mobiles business CSL and Australia’s Sensis.
As a result of Telstra’s move to become a more agile technology and telecommunications company, cash flows have grown and it’ll now be looking to advance its push into Asia where, so far, it has been quite successful. Investors could expect its full-year dividend payout to rise to 29 cents per share. Whilst I think shares in Telstra hold long-term value, investors would have to pay up for it. Currently it trades on a price to earnings ratio (PE) of 17, price to book ratio (PB) of 5.23 and dividend yield of 5.4%.
ANZ Banking Group
Australia’s third largest bank is in a similar position to Telstra. Since 2007, when CEO Mike Smith launched the ‘Super Regional Strategy’, ANZ has been preparing for the Asian Century. Whereby the rising affluence and changes to the geopolitical environment throughout the region will enable it to become the global hub for finance and trade. ANZ has been the only big four bank to position itself to significantly benefit from this ongoing trend.
By 2017, management have set the goal of drawing 25% to 30% of revenues from the Asia, Pacific, Europe and Americas (APEA) markets. In the most recent half year, ANZ was able to draw 19% of FX-adjusted cash profit from the region through a focus on increasing customer numbers, foreign trade and exchange, improving credit quality and cash management deposits. The International and Institutional Banking division will be fastest growing business unit in the coming decade.
As far as valuation goes, ANZ’s share price reflects its promising future. It currently trades on a trailing PE of 15, PB of 2.04 and forecast dividend yield of 5.1%.
While ANZ is vying for the crown of Australia’s super regional bank, Macquarie Group, our fifth largest financial institution and number one investment bank, has already won the race. Of particular importance is the group’s exposure to South Korea. However Macquarie’s reach extends beyond Asian markets. Of Macquarie’s $8.1 billion in FY14 operating income, 68% was derived outside of Australia and New Zealand.
After such a stellar 2014 year, which included net profit up 49% and earnings per share up 53%, management have provided a rather conservative outlook for FY15. They believe, depending on global market conditions, earnings will grow steadily and contribute to the gains related to the distribution of its stake in Sydney Airport Holdings Ltd (ASX: SYD). In the long-term Macquarie will be able to leverage growth from its expertise in niche market areas such as resources research, M&A and growth in its total funds under management.
The best buy
I’d love to hold each of these companies in my portfolio and, if I had my time again, they certainly would be. I believe ANZ is the best big bank but I can’t bring myself to pay the current price, perhaps when interest rates and bad debts rise I might get an opportunity to buy in at a price I’d prefer. Telstra is a great dividend stock but, once again, investors are paying a premium for the right to hold it. Macquarie is currently trading on the highest earnings multiples but lowest PB.
I would consider Macquarie the best buy at current prices however, given its cyclical nature, the best time to buy it was probably two years ago. I think if investors are looking to make significant capital gains in the next two years, they should instead focus their attention on smaller ASX shares, ones which have less analyst coverage and a bigger chance of being mispriced.