It’s hard to feel bullish towards high-yielding stocks with a low-growth profile in this climate, but there’s one that could catch the eye of investors after Citigroup said the market is underestimating the dividends it could pay in 2019.
Utility infrastructure company Spark Infrastructure Group (ASX: SKI) is expected to raise dividends by around 3% a year but that would mean next year’s dividend payout ratio would only stand at around 92% of its expected standalone operating cashflow (OpCF), which is defined as all cash flows into Spark from stabled securities with corporate costs deducted.
This means consensus is probably underestimating Spark’s 2019 dividends (its financial year is the same as the calendar year) by as much as 1.5 cents a share. The works out to be around an additional 0.6% yield.
What’s more, management’s guidance and consensus OpCF may also prove to be too conservative. Citigroup worked out a range of scenarios to work out how appropriate management’s guidance for at least consumer price index (CPI) increases to the dividend is.
“We think this shows that guidance is achievable, and may prove conservative. Even under our more pessimistic scenario, the Standalone OpCF yield (a direct proxy for divend yield) is still a healthy 7%,” said Citigroup, which has a “buy” recommendation on the stock.
The broker also describes Spark as the best cash generative company in the sector and given its upgraded dividend forecast for the company that is driven by robust cash flow growth, Citigroup has lowered its risk premium on the stock.
This has led to an increase in Citigroup’s price target on Spark to $2.69 from $2.55 a share.
But “bond proxies” (stocks that tend to follow bond yields) are out of favour in a rising interest rate environment, and utility stocks fit the description of a bond proxy in just about every way.
This explains why Spark is lagging the broader market with a modest gain of around 3% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has gained close to 6%.
Spark is performing better than most of its peers like APA Group (ASX: APA) and Ausnet Services Ltd (ASX: AST), but I would be surprised if it can materially outrun the top 200 index over the next 12 months, if not longer, even with an upgraded dividend yield.
There’s nothing wrong with the stock. It’s just that this is the wrong part of the market cycle to buy high-yield low-growth stocks.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.