While GDP figures were higher than expected and show that the economy continues to post relatively high rates of growth, interest rates are likely to remain low over the medium term. That’s because, with continued weakness in the commodity sector, there may be a knock-on effect in other parts of the economy and, as such, the RBA may choose to be dovish regarding its monetary policy.
As a result of this, dividend stocks are likely to remain popular. One stock which offers upbeat income prospects is National Australia Bank Ltd. (ASX: NAB), which yields 6.8% versus 4.6% for the ASX. A key reason for this is, of course, NAB’s poor share price performance since the turn of the year, with its shares falling by 12% mainly as a result of fears surrounding a challenging economic outlook, with the potential for high unemployment, slow wage growth and slowing house price growth hurting NAB’s profit potential.
Despite this, NAB’s dividends are covered 1.3 times by profit and, while the sale of non-core assets could cause it to book losses, it should also mean improved financial performance as the bank can focus on generating efficiencies from its core operations. In addition, NAB raised funds totalling $5bn this year and this has improved its common equity tier 1 ratio to just under 10%.
Looking ahead, NAB is expected to increase its earnings by 8.6% per annum during the next two years. This should allow it to match the current rate of inflation when it comes to dividend increases next year and, with NAB trading on a price to earnings (P/E) ratio of 12.8 versus 15.5 for the ASX, it could be viewed as offering good value versus the wider index.
Also offering upbeat income prospects is packaging company Amcor Limited (ASX: AMC). Unlike NAB, Amcor has highly appealing foreign operations which the company is keen to expand, rather than dispose of. For example, Amcor is pursuing an acquisition strategy as it seeks to further position itself towards faster growing markets across the emerging world, with the recent purchase of the Souza Cruz tobacco packaging company being an example.
Although Amcor’s yield is currently 60 basis points lower than that of the ASX at 4%, the company is forecast to increase dividends per share at an annualised rate of 6% during the next two years. With dividends being covered 1.4 times by profit and Amcor having bright future growth potential, further rises in shareholder payouts in the longer term seem likely while the company’s exposure to non-domestic markets is likely to provide it with a boost from a weakening Aussie dollar.
With Amcor delivering annualised gains in its bottom line of 6.5% during the last decade, it appears to offer a degree of consistency which many of its index peers have failed to replicate. With investors still uncertain about the future prospects for the ASX, such consistency could help to bid up Amcor’s share price and this makes its P/E ratio of 17.4 appear to be fair at the present time.