A Special Report

Revealed: The Motley Fool’s Top 3 Dividend Shares for 2020

The Motley Fool’s Top Dividend Stock for 2020 (and 2 bonus picks)

Thanks for taking the time to access my report. My name’s Edward Vesely and I’m the lead advisor of one of Australia’s most popular stock picking services, Motley Fool Dividend Investor.

Very soon you’ll receive your first issue of Take Stock. It’s full of vital information and investment ideas that I believe will help you grow, and when necessary, protect your wealth. I recommend you give it a good read. It’ll only take you a few minutes to read each issue, but it could prove to drastically change your future.

In fact, I think there’s never been a more critical time to be getting unbiased, professional insight into the stock market and economy. Because after a bumpy 2018, with the ASX dipping into the red, and a steady rise during 2019, you need to be on high alert for 2020. The days of easy profits may have disappeared. If you get caught owning the wrong shares at the wrong time, it could prove disastrous to your wealth.

The good news is, we’re confident there are still hidden gems out there that have the potential to hand you solid gains and income – even if the market continues to go south. But the question is, where do you find them?

That’s where I come in. Today, I’m going to reveal to you our top dividend play for 2020 (and beyond). Not only that, but as a thank you for being a loyal reader, we’ll also throw in two “bonus picks” (who we believe are also fantastic options for dividend investors) absolutely free. Each of these three companies boast fully franked yields and could be a great fit for your diversified portfolio.

Not only that, I’m also going to show you how you can access all of my other top dividend BUY recommendations inside my exclusive Motley Fool Dividend Investor service. If you’re looking for a wealth of NEW dividend investing ideas beyond the “usual suspects” like banks, Woolies and Wesfarmers, look no further.

But before I get to that, let’s review my top dividend share for the coming 12 months.

Our top dividend pick: Propel Funeral Partners (ASX: PFP)

Propel has grown to be one of the largest providers of death care services in Australia and New Zealand (ANZ) after being established in 2012 when it started with one facility in Queensland. The company now operates from 120 locations, including 28 cremation facilities and 9 cemeteries. 

Due to the highly fragmented nature of the industry Propel still has a significant opportunity before it to participate in the consolidation of the many existing small and family-owned funeral businesses located around Australian and New Zealand. It has a clearly defined investment strategy of acquiring assets and has, so far, been able to demonstrate success in not overpaying; evidence of financial discipline, which we like.

Why We Like Propel

Propel is operating in an industry with tailwinds that are anticipated to support long term growth. In Australia and New Zealand growth in death volumes are set to accelerate over the next 20+ years due to an ageing population and, so long as the company can remain diligent in its capital allocation and continue to provide a quality service for its customers — without any hint of controversy — then we see Propel’s long term prospects as attractive. 

Propel has had an impressive start to the current financial year, announcing revenue growth for the first quarter of 19% and growth in operating earnings of 38% compared to the prior corresponding period (pcp). The business has also made several acquisitions in the last financial year and expects to complete the purchase of Dils Group and Gregson & Weight this quarter. These acquisitions should have an immediate impact on earnings growth later in the year.

Risks and When We’d Sell

Much of the company’s future growth is expected to come from acquisitions and further consolidation of the industry, but this strategy has its risks. Propel needs to remain diligent on the price that it pays for its acquisitions, and ensure that each of its facilities have the right support to continue to generate growth. We also expect that an investment in Propel will come with an element of volatility due to the cyclical nature of death rates that impact on funeral volumes. For this reason, it’ll be important for investors to remain wary of this volatility and not panic when the cycle does turn against the business model.

The Foolish Bottom Line

Propel has, to date, executed very well on its strategy and is delivering both organic and acquisition based growth. The company provides dividend-focused investors a fully-franked yield of 3.6% at current prices and, with industry tailwinds behind it and significant inside ownership by management — aligning their interests with those of other shareholders –, these shares could be a useful addition to your portfolio.

Top dividend runner up #1: Bapcor (ASX: BAP)

Bapcor is primarily a trade-focussed auto aftermarket parts business with operations in Australia, New Zealand and Thailand.

The company owns 181 trade stores around Australia, and another 58 across the Tasman, with plans to add between 10 and 12 more per annum over the next 5 years. Unlike most retailers,  however, these stores aren’t located on busy street corners; they’re conveniently located around nearby workshops, allowing them to quickly deliver the parts required by mechanics.

When a person’s car runs into maintenance issues, they don’t really have a choice: they have to get it repaired right away, which makes for steady business for Bapcor. Better yet, a recession can actually be seen as good news for Bapcor: as customers put off buying new cars, they must spend more on keeping the ones they own running.

In the trade business, Bapcor’s customer is the mechanic, not the end user (the driver). That gives Bapcor a lot of pricing power, and is one of the reasons it has managed to grow its same store sales at an average of 4% per annum over the past five years.

The remainder of Bapcor’s income comes from its retail (predominantly Autobarn) and specialist wholesale operations, which together accounted for 51% of revenue and 44% of earnings from continuing operations in FY 2019.

Bapcor is led by CEO Darryl Abotomey, who has pioneered the company’s growth since 2011 (and led its IPO in 2014). He has recently signed a new contract extending his tenure in the top job until April 2022, and has approximately $10 million of his own shares in the company to ensure his interests are aligned with our own.

Risks and When We’d Sell

We think Bapcor’s trade business is relatively protected from Amazon.com (NASDAQ: AMZN), due to its strong relationships with mechanics. But its retail network is susceptible, as well as to other competitors. This does have the potential to have an impact on Bapcor’s overall performance, given its retail segment accounts for around 20% of its revenue and 16% of its operating earnings.

Bapcor has done a tremendous job integrating acquisitions to date, but there is always a risk that won’t continue. An ill-timed acquisition, or simply paying too much, could be disastrous for the group.

The Foolish Bottom Line

Bapcor provides investors with resilient earnings, growth potential and a healthy dividend yield (2.3% fully franked, at the time of writing). It’s time to drive Bapcor into your portfolio.

Top dividend runner up #2: Helloworld Travel (ASX: HLO)

Helloworld Travel is a leading travel agent with more than 2,400 independent franchised travel agents — a key differentiator to its listed big brother Flight Centre (ASX:FLT). But it’s much more than that: the company has diversified revenues across not only its retail division, but also wholesale and corporate.

You may recognise and have seen a number of these brands. As well as there being an increasing number of Helloworld stores, the company also operates Seven Oceans, Viva! Holidays and Qantas Holidays. Qantas (ASX:QAN) itself has a 15% ownership interest in the Helloworld business, aiming to benefit from the higher-margins that result from packaged holidays sold through Helloworld’s network and that of other holiday retailers.

The other element to its business model is that of its corporate and government division which is growing steadily after its winning of a number of corporate account tenders along with several key acquisitions in the last 12 months. A good example here is the acquisition in September of TravelEdge — one of Australia’s largest privately-owned corporate travel management companies — which is expected to be earnings accretive in FY20 and beyond..

Helloworld Travel is, therefore, a diversified exposure to the Australian and New Zealand tourism sector.

Why Buy Helloworld Travel

In the midst of a downturn in consumer spending, the company’s financial performance has  been impressive. In FY19, it increased its net profit by 24% to $382 million on the back of a 10% revenue increase to $358 million. The company also increased its total dividend for the year by 14% to 20.5 cents per share.. 

Pleasingly, Helloworld has also had a strong start to the current financial year and is forecasting for operating earnings to be between $83 million and $87 million. This represents growth between 7.3% and 12.5% on the pcp.

Risks and When We’d Sell

Investing in tourism businesses such as Helloworld Travel means business performance can prove to be quite cyclical. Despite its diversified source of earnings, if consumer sentiment continues to remain weak, lower levels of spending on tourism and travel-related products could impact the company.

Additionally, the industry the company operates in is highly competitive and there’s always the risk of lower margins due price matching. Its margins have actually increased in the last half year, so this isn’t necessarily a problem today, but it’s something you need to be mindful of if you’re going to invest in Helloworld Travel.

The Foolish Bottom Line

Helloworld Travel is a well-run company with senior management owning a large proportion of the shares. It’s proven itself to be able to make useful bolt-on acquisitions from time-to-time, has increasing scale, a broad array of products and services, and good brand awareness. With a 4.6% fully franked yield, Helloworld Travel could be a useful addition to a diversified portfolio.

Just to recap our top dividend stock for 2020 is Propel Funeral Partners (ASX:PFP) and our two runners up, which could be fantastic options within a diversified portfolio are Bapcor (ASX:BAP),  and Helloworld Travel (ASX: HLO).

We hope these three dividend shares help you on your way to becoming Smarter, Happier and Richer, with the first steps of well diversifield portfolio and a fantastic year ahead of investing.

To your dividend wealth,

Edward Vesely
Lead Advisor, Motley Fool Dividend Investor

As of 4 December 2019.

Ed Vesely owns shares of Bapcor. The Motley Fool Australia owns shares of Bapcor. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. For more information about The Motley Fool see our Financial Services Guide. All returns cited are hypothetical and based on the percentage change between the stock price at the time of recommendation and the current or sell price (if the position has been closed) at the time of publication. Brokerage, taxes and any other associated costs are not taken into account. Please remember that investments can go up and down. Past performance is not necessarily indicative of future returns. Performance figures are not intended to be a forecast and The Motley Fool does not guarantee the performance of, or returns on any investment. Any money back guarantee is strictly limited to the subscription price paid for the product.

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