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. Right now, as we all know, the Covid-19 crisis has seen share markets fall 30% or so in the space of a few weeks after a steady rise throughout 2019 and early 2020. Despite these across-the-board falls, investors can still be caught out owning the wrong shares at the wrong time, shares that fail to come back at all once the crisis passes.
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). 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: Dicker Data (ASX: DDR)
Dicker Data is a wholesale distributor of hardware, software and other related products that serves more than 5,000 ICT resellers each year. The IT/software manufacturers and vendors that are eager to access this portfolio of customers include many big names that you’re likely to recognise — companies such as HP, Fujitsu, Sony and Western Digital, for example. Given the breadth and growth of Dicker Data’s distribution network, it’s not surprising that the company has been able to continue attracting ICT vendors to its fold.
In 2019, 15 new vendors were added, accounting for incremental revenue of just under $30 million, and sales from existing vendors grew almost 17%. With these sorts of growth figures, it’s not a surprise to see that Dicker Data’s market share has grown markedly in the last decade or so.
Between 2010 and 2013, Dicker Data grew its share of the industry pie from 5% to 8%. But with its savvy acquisition of Express Data in 2014, a relentless focus on improving its value proposition, an ability to shift quickly when market preferences change and, importantly, maintaining strong relationships with all of its clients, we were pleased to see that it delivered another exceptional year of revenue and profit growth in 2019.
Why We Like Dicker Data
As mentioned above, its performance has been extremely solid. But it’s not just the extent of improvements in 2020 that has caught our eye. It’s been a marvellous long-term generator of increasing profits over a number of years, which has led to an ever-rising fully franked dividend — paid quarterly. The 28 cents it paid in dividends for the trailing twelve months provides for a dividend yield of 6.5%.
Additionally, it’s not hard to notice the regular buying of shares on-market by insiders. Throughout 2019, and into 2020, key senior staff and directors have continued to top up their holdings. Whilst this doesn’t guarantee performance, we’re pleased that senior management are not just tagging along for the salary but, instead, are continuing to add to their ownership stakes in the company. It’s this sort of shareholder alignment that we like.
Risks and When We’d Sell
A key risk is the level of debt currently on the balance sheet. The Debt to Equity ratio currently sits around 1.36 times, with total debt up slightly from the balance in 2018. But, importantly, its ability to service that debt has increased substantially in the last year, with its ability to meet its interest bill increasing now much higher courtesy of its improving cash flows. Whilst we believe that the balance sheet is manageable, there’s a risk that its debt burden could negatively affect it if sales don’t meet expectations or cash flow is managed poorly.
Another key risk to keep your eye on is its customer concentration. Its top 5 vendors account for 57% of its sales, but it’s been pleasing to see that this figure is well down on 90% from 2012. Therefore, losing any of these key vendors would have a significant impact on company revenue. However, Dicker Data continues to treat vendor diversification as a key objective for future years, but we’d be concerned if its efforts in diversification came to a sudden halt or, worse, reversed. So far, its record has been good, but we’ll continue to keep an eye on this going forward.
The Foolish Bottom Line
Dicker Data has proven itself to be a very well run company, having demonstrated its ability to perform in a range of economic conditions. With increasing scale, a very good record of paying increasing dividends and high inside ownership, we’re confident that Dicker Data has a place for most income-focused portfolios.
Top dividend runner up: #2: Bapcor (ASX: BAP)
Bapcor is primarily a trade-focused auto aftermarket parts business with operations in Australia, New Zealand and Thailand.
The company owns 184 trade stores around Australia, and another 72 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 45% of earnings from continuing operations in the first half of FY 2020.
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 $7 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 19% of its revenue and 17% 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 (3.6% fully franked, at the time of writing). It’s time to drive Bapcor into your portfolio.
Top dividend runner up #3: Sonic Healthcare (ASX:SHL)
Sonic Healthcare is a global medical diagnostics company that operates in a number of countries. including Australia, the USA, Germany, Switzerland, the United Kingdom, Belgium, Ireland and New Zealand.
It’s been able to demonstrate reliability in its growth profile and, as such, is now one of the largest operators in its field.
Sonic has been able to consistently grow its revenue, net profit and dividend over the last 25 years, allowing it, today, to present itself as a company with one of the best financial track records of any company on the ASX.
It started out locally in Australia and quickly scaled its pathology business here before the natural confines of a smaller market encouraged it to expand its operations globally.
These efforts were so successful that the proportion of Australian revenue now accounts for only 23% or so of the total.
But we believe there’s more to come. Management continues to see a strong pipeline of further acquisition opportunities within the US and, given its track record for high quality capital allocation, we remain enthusiastic that this will support further growth in the years ahead. As scale increases, the company places itself in a potentially better position relative to other competitors in the marketplace, further strengthening its competitive advantage.
Tailwinds supporting the company include ageing population in the countries it operates in, as well as the impetus for testing from the growing prevalence of Covid-19.
For instance, its US laboratories are now expanding testing capacity throughout its lab network in that country, ensuring availability to help mitigate high demand in certain regions. The current situation should see a real boost more generally for greater numbers of pathology tests and other viral-type infections across its whole network.
Risks and When We’d Sell
In the short term, there’s a chance that diagnostic testing volumes will be impacted as populations quarantine themselves due to the Covid-19 situation. If, however, this has a longer-term impact on testing capacity volume growth, or the impact of Covid-19 extends for a period much longer than expected, we may reconsider the recommendation in light of other potential ideas elsewhere in the market.
Another risk arises from potential changes to the regulatory environment in the countries it operates in. For example, any changes to the funding by governments could mean higher costs for the business and reduced margins. If such a situation was to be sustained, we’d be likely sellers of the company’s shares given pathology accounts for the vast bulk of Sonic’s revenues.
The Foolish Bottom Line
In an uncertain and highly volatile market it can sometimes pay to include quality global companies in your portfolio that operate in industries with minimal disruption from recession and/or other macroeconomic shocks. The company is well positioned to capitalise on an ageing population in the markets it operates in, supported by a greater awareness of the need for pathology brought about by the current crisis.
Just to recap our top dividend stock for 2020 is Dicker Data (ASX:DDR) and our runners up, which could be fantastic options within a diversified portfolio are Bapcor (ASX:BAP) and Sonic Healthcare (ASX:SHL).
We hope these 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,
Lead Advisor, Motley Fool Dividend Investor
As of 30 March 2020.
Ed Vesely owns shares of Dicker Data and Bapcor. The Motley Fool Australia owns shares of Dicker Data and 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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