One trick boards of ASX-listed entities have learnt well is that the way to win over investors if you can't deliver earnings growth is to increase dividends.
That's what electricity and gas company AusNet Services (ASX: AST) is attempting to do as it reports an 87.3% collapse in net profit to $22.6 million for the year ended March 31, 2015.
The big drop isn't something investors should be too worried about as it is caused by a number of one-off factors.
In fact excluding these, the company's adjusted net profit only dips 2.5% to $312.8 million and that's comfortably ahead of the average broker estimates reported on Bloomberg of $288.9 million.
But the result will be overshadowed by management's restructure plan, which is aimed at unlocking more franking credits to shareholders and to simplify its business structure to drive greater operating efficiencies in the face of a challenging growth environment.
AusNet's 2013-14 distribution was franked at 33% and if the restructuring proposal is approved by shareholders, the franked component will rise to 75%.
Based on management's latest guidance, the stock will have a yield of 7.8% in the current financial year if franking is included.
AusNet is forecasting an 8.53 cents per security dividend for 2015-16, which is up from last year's 8.36 cents.
That's more than what most analysts are expecting and it will be easy for investors to be seduced by the generous distribution given record low interest rates.
I think the strategy will work but I am not keen on buying the stock because yield is not enough to ensure outperformance over the next six months.
I prefer stocks that can pay a decent dividend but that are also well placed to deliver earnings growth that's at least 3% ahead of inflation.
Perhaps AusNet can do that following its restructure and if it undertakes an earnings accretive acquisition, but the costs involved in modernising its infrastructure and the ongoing problems it has with its smart meters have taken much of the appeal out of the stock for me.
The problems with its smart meters knocked off $60.6 million from its bottom line in 2014-15. Another $325.1 million had to be written off its bottom line to settle disputes with the Australian Tax Office and for fees relating to the termination of its master services agreement.
The stock gained 1 cent to $1.45 in early trade.
There's certainly no rush for current shareholders to sell the stock, but new investors will find better value elsewhere such as the dividend stock that Motley Fool experts have uncovered.
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