The Ausnet Services Ltd (ASX: AST) share price is backing away from its one-and-a-half year high this morning even after it lifted its final dividend for the fourth consecutive time and promised an even bigger payout in FY20.
The news wasn’t enough to push the stock higher with the Ausnet share price slipping 1.1% to $1.84 as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shed a more modest 0.4% at the time of writing.
But the underperformance of the gas and electricity infrastructure group shouldn’t worry many shareholders as the stock had rallied to $1.86 on Friday – its highest level since December 2017.
This makes Ausnet one of the top performing defensive dividend paying stocks on the ASX 200 as Ausnet has even outpaced the returns of another hot favourite among income investors, the Transurban Group (ASX: TCL) share price, with gains of over 18% since the start of 2019, or 0.5% ahead of Transurban.
Promising higher dividends through FY20
Ausnet released its full year profit result and declared a final dividend of 4.86 cents per share, which is a 5% increase and that will take its full year distribution to 9.72 cents (42.5% of this is franked).
Management is forecasting even more dividends in FY20 as it’s promising to pay total dividends of 10.2 cents per share (franked 40% to 50%) for the current financial year. This should put the stock on a forward yield of around 6.5% if frankig is included.
But the increase in the final dividend for FY19 comes even as the company reported a drop in earnings and cash flow!
Dividends up but earnings down
Ausnet’s full year revenue dipped 2.5% to $1.9 billion while earnings before interest and tax (EBIT) slipped 3.2% to $677.8 million and cash flow from operations shrunk 8.2% to $813.7 million for the year ended March 31, 2019.
The fall in earnings would be worse if not for some aggressive cost cutting but even that wasn’t enough to see EBIT margins fall due to higher depreciation and amortisation charges and a number of other headwinds.
These headwinds include falling gas prices (no doubt due to political pressure), an adverse finding by the Australian Energy Regulator (AER) which sets rates of return for the industry, increased funding costs and refunds it had to make on previously received revenue.
Nonetheless, the outlook for infrastructure stocks on the whole looks reasonably positive if you believe we are in for a sustained period of weakness. There is growing uncertainty with a possible global trade war brewing between the US and China, which will drag on economic growth unless the two can find a compromise.
This volatility improves the attractiveness of holding “boring” but relatively stable stocks that pay a reliable dividend. Extra points to those who can throw in dividend rises over the next year or more.
Having said that, I am underweight on defensive income stocks as I don’t have a gloomy medium-term outlook. I am fully expecting a market shakedown in the near-term but the rest of 2019 doesn’t look that bad to me – at least not enough to drive me into safe haven-like assets.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Transurban Group. 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 Scott Phillips.