It is a little over a month since Melbourne-based biotech company CSL Ltd [ASX:CSL] officially became the largest firm on the ASX.
Now, the biotech behemoth could be poised to become a standard fixture for income investors.
Yesterday, the Australian Prudential Regulation Authority (APRA) ordered the banks to slash dividends until the full effect of the COVID-19 pandemic could be quantified.
Read here for more in-depth analysis of why bank dividends are under serious threat.
And there is no telling just how long the banks’ dividends will be missing.
So, is it time to begin looking for the new generation of dividend income stocks?
At least for the moment, I think so.
Source: Trading View
CSL profits unfazed by coronavirus
The banks have been busy reassuring shareholders and customers they can weather the current storm.
All the while CSL has charged on ahead.
In an announcement made this morning, the biotech company reaffirmed its FY2020 profit guidance of $2.11–2.17 billion.
This despite difficulties in their blood plasma business and expected delays in capital project and clinical trials.
So, what does this have to do with the banks and dividends?
In the lower two windows of the graph above I’ve compared CSL’s dividends with the two smaller banks of the Big Four, National Australia Bank Ltd [ASX:NAB] and Australia and New Zealand Banking Group Ltd [ASX:ANZ].
As you can clearly see both the banks have a far higher dividend payout ratio (they payout more of their profits to their shareholders) than CSL.
What does this mean?
Well, it means CSL has more money to invest back into the business in order to drive higher profits.
Something they have been doing successfully, boasting a steady 52% increase in operating revenue over the past five years.
The company’s R&D budget has almost doubled over the same period.
Since 2015, CSL’s dividend also doubled from a total of $1.64 to a total of $2.66 per share in 2019.
In the meanwhile, the banks have steadily cut their own dividends (with the exception of Commonwealth Bank of Australia [ASX:CBA]).
The downside, however, is CSL’s low dividend yield compared to NAB and ANZ.
CSL trades at a whopping $318 per share, for a dividend of approximately $2.66.
You could buy around 21 NAB shares for the same price, giving you at net dividend of around $59.
But with banks’ future dividends in doubt, companies like CSL could begin to become more attractive to income investors over the medium term.
If they remain on a similar trajectory that is.
A big chunk of us rely on the banks’ dividends, either through direct ownership or our superfunds.
With their future looking uncertain, we have created a two-pronged strategy to help protect your wealth during the COVID-19 pandemic.
Click here to get a copy of our free report.
Regards,
Lachlann Tierney,
For Money Morning
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