Australian Equity Large Cap Insights - Finding value in 'through the cycle' balance sheets - UBS
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UBS Asset Management
For professional / qualified /
institutional investors only.
June 2020
Australian Equity
Large Cap Insights
Finding value in ‘through the cycle’ balance sheets
COVID-19 has caused a large and
unexpected shock (I am avoiding using
the buzzwords of ‘unprecedented’ and
‘black swan’) that, among other things, Dion Hershan
has called into question how many of Portfolio Manager & Head of
the ‘lessons learned’ from the GFC were Australian Equities
Yarra Capital Management
actually committed to long-term memory.
While on average most ASX-listed companies have managed 1) via discounted, dilutive transactions totalling more than
the crisis reasonably well, it’s remarkable just how many of $17bn:
them came into this pandemic with insufficient liquidity or
1. 14% had actually undertaken share-buy backs in the last
financial flexibility to see the business ‘through the cycle’.
three years; and
It’s quite revealing that out of the 28 companies in the ASX
2. The median dividend payout ratio of those that raised
200 which have raised equity from shareholders (refer Table
was 70%.
Table 1: Australian equity raises through COVID-19
Equity raising Total return since Div payout ratio
announced ($mn) market peak (%) last FY (%)
Invocare 274 -12 79
United Malt 165 0 N/A
Breville 104 1 71
Ingenia Communities 175 -20 53
Incitec Pivot 675 -32 51
Southern Cross Media 169 -62 81
National Storage REIT 330 -27 103
Qube Logistics 500 -16 77
Newcrest Mining 1,100 4 31
Credit Corp 150 -55 51
Lend Lease 1,150 -33 51
QBE Insurance 1,308 -42 76
Charter Hall Retail REIT 300 -33 93
National Australia Bank 3,500 -33 94
Ramsay Health Care 1,400 -12 53
Metcash 330 -6 58
Bapcor 210 -13 51
G8 Education 301 -38 64
SCA Property Group 300 -25 90
Oil Search 1,160 -43 50
Flight Centre 700 -61 117
NEXTDC 672 18 N/A
Webjet 275 -55 34
IDP Education 190 -30 72
oOH! Media 167 -52 69
Cochlear 850 -22 68
Blackmores 117 11 70
Atlas Arteria 495 -20 81
Total 17,067
Source: ASX Company Announcements (20 Feb 2020 – 27 Mar 2020), FactSet
2
In a world which is becoming increasingly volatile and The medium term outlook for dividends is clearly
unpredictable, a strong case can be made for more challenged. The ASX yields 4.2% based on trailing
conservative settings. Over the last decade, Australian 12-month dividends and 3.4% based on consensus
companies had the opportunity to binge on ‘cheap debt’ forecasts for the next year. With dividend payout ratios
and ‘abundant liquidity’ and many did, successfully avoiding likely to step down, we do not see a ‘V’ shaped recovery in
the ‘lazy balance sheet’ tag. dividends.
Post COVID-19, we can expect to see lower dividend payout
ratios and lower gearing, in particular for volatile businesses.
Through this period, we have been a
buyer of a number of cyclical businesses
Chart 1: Dividend payout ratios - FY19
with ‘through the cycle’ balance sheets,
including Ansell, GPT, QBE and Bluescope
Steel. We see these companies as being
well positioned to re-rate alongside the
90% recovering global economy and, more
74%
63%
73%
importantly, withstand any future
potential shocks.
ASX 200 Banks Resources Industrials
Source: FactSet, May 2020
Table 2: Four stocks for the current environment
Dividend payout Trailing dividend Forecast dividend Balance sheet strength
ratio (%) yield (%) yield (%)
Ansell 42 2.1 2.4 5% net debt/equity
GPT 82 6.2 5.5 22% net debt/total assets
QBE Insurance 76 6.1 3.3 Total capital >1.9x PCA
Bluescope Steel 8 1.2 0.9 1% net debt/equity
Source: FactSet, May 2020
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