Motley Fool Australia

Capital returns galore from cashed-up ASX retail stocks

Young female investor holding cash ASX retail capital return
Image source: Getty Images

Just as you thought outperforming ASX retail stocks are running out of puff, the group could find a second wind through capital returns.

Many consumer discretionary stocks have outperformed the S&P/ASX 200 Index (Index:^AXJO) since the COVID-19 crash.

The fear is that all the good news is already reflected in their share prices. But I don’t think investors are expecting cash handouts or share buybacks.

Cash splash from cashed-up ASX retailers

The chances of some ASX retail stocks undertaking such programs is growing, according to Credit Suisse.

“Whilst the market debates the longevity of above-trend earnings for domestic retail, cash is in the bank as a result of strong trading in 2020 and gearing is almost non-existent for a number of the retailers under our coverage,” said the broker.

“It is likely that a combination of balance sheet capacity and diminishing downside risk to trading from COVID-19 will lead to capital management in 2021.”

Retail sales recovery running hot

Retail sales have been rebounding dramatically since the lockdowns. The latest data from the Australian Bureau of Statistics (ABS) showed a 7.1% surge in November from the previous month. The increase is a more impressive 13.3% from the same period last year.

The easing of harsh lockdown conditions in Victoria released a surge in pent-up buying, while Black Friday and Cyber Monday sales events helped too.

There are four ASX retail stocks that are likely to announce capital management initiatives this year, according to Credit Suisse.

Four ASX retail stocks most likely to return capital

These are the Metcash Limited (ASX: MTS) share price, Wesfarmers Ltd (ASX: WES) share price, JB Hi-Fi Limited (ASX: JBH) share price and Harvey Norman Holdings Limited (ASX: HVN) share price.

Capital management could come in various forms. It may be through a special dividend or a share buyback.

Share buybacks reduce the number of shares issued. This in turn leads to higher earnings per share (EPS) for the stock in question.

Extra franking credits can also be distributed to shareholders via a special dividend or off-market buyback.

Valuation increase for capital management candidates

“We estimate that capital management would result in 2% valuation increases (pre tax benefits) and 9% EPS accretion for HVN and JBH,” said Credit Suisse.

“For MTS, we estimate a 2% valuation increase and 5% EPS accretion. For WES we estimate a 1% valuation increase and 3% EPS accretion.”

Is the ASX retail sector on cum-upgrade cycle?

However, it’s worth noting that Credit Suisse’s bullish take is largely premised on its better than consensus forecasts for the sector.

The broker believes that market expectations for ASX retailers are too low in FY21 and FY22. Credit Suisse believes the tailwinds that lifted the sector in 2020 will persist for longer than what many are expecting.

Retail stock investors will be hoping the broker is right.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Related Articles…