ASX dividend share Chorus Ltd (ASX: CNU) could be a rewarding pick for passive income according to fund manager L1 Capital.
The Chorus share price has fallen by more than 10% since mid-August, as we can see on the chart below.
The company describes itself as New Zealand's largest telecommunications infrastructure company. It maintains and builds a network predominantly made up of local telephone exchanges, cabinets, and copper and fibre cables. Expanding the fibre cable network and getting more New Zealanders to sign up to fast internet is a key focus.
Why does L1 like Chorus shares?
The fund manager says that the ASX dividend share is protected from higher inflation and higher interest rates. The weighted average cost of capital (WACC) and regulatory asset base (RAB) will "step up" at the 2025 regulatory reset.
RAB essentially refers to the amount of money that it has invested in its network, which then generates revenue for the business.
L1 points out that Chorus is well placed with strong take-up of higher speed plans. Of plan speeds between 100 Mbps to 500 Mbps, Chorus has a 68% take-up compared to the NBN take-up of just 21%. For speeds of at least 1 Gbps, take-up for Chorus is 24% and for the NBN is just 1%. Only 8% of plans with Chorus are on speed plans of less than 100 Mbps, which compares to 78% of NBN plans on less than 100 Mbps.
Finally, as I've already mentioned, the Chorus share price is down 13.5% from mid-August.
Passive income from the ASX dividend share
Chorus says that its dividend payout ratio policy is to pay an ordinary dividend of 60% to 80% of free cash flow, meaning net cash flow from operating activities less sustaining capital expenditure.
In FY17 it paid NZ 21 cents per share as a dividend to shareholders. It then paid the following amounts per share: NZ 22 cents in FY18, NZ 23 cents in FY19, NZ 24 cents in FY20 and NZ 25 cents in FY21. It jumped to NZ 35 cents in FY22 and NZ 42.5 cents in FY23.
The Chorus board has provided guidance of NZ 47.5 cents per share for FY24, which is a forward dividend yield of around 6.5% once converted into Australian currency.
L1 believes that continued strong dividend growth is likely because of earnings growth and network build completion.
Outlook for Chorus shares
The Chorus CEO JB Rousselot said in the annual report about the outlook:
We're focused on continuing to grow uptake of our network so its socio-economic benefits can help power Aotearoa's digital future. Our copper withdrawal programme will keep driving fibre uptake in our urban areas and we're continuing to be an active wholesaler. Our latest New Zealand runs on fibre advertising campaign showcases some of the ways fibre is now used by about three million Kiwis. Market data shows that consumers value fibre's reliability and speeds.
We're cognisant that there are shadows over the wider economy. We see inflationary pressures across our business through direct labour costs and our service companies. There are signs too that our housing development pipeline is slowing from its recent peak. We know consumers face economic pressures and, although we're increasing prices on some fibre plans by inflation from 1 October, we'll again hold the wholesale price of our entry level 50Mbps Home Fibre Starter plan at its current level.
