At Seneca, as part of our investment process selecting companies to invest in via the Seneca Australian Shares SMA, we screen for companies that can sustainably grow dividends, among other characteristics.
Some of our biggest winners in 2023 were able to sustainably grow dividends over time, such as insurance broker AUB Group Ltd (ASX: AUB), quick service restaurant provider Collins Foods Ltd (ASX: CKF), and industrial property owner Goodman Group (ASX: GMG).
One area of the market where we see opportunities is the financial sector, as market sentiment improves from a challenging 2022-23 and monetary policy potentially eases. Below we share two ASX-listed shares to add to your watchlist that are paying dividends in March.
1. Pinnacle Investment Management Group Ltd (ASX: PNI)
Pinnacle (ASX: PNI) is a funds management business that takes minority (typically ~40%) equity stakes in emerging fund managers in return for providing distribution services and helping their boutique partners grow funds under management (FUM).
In funds management, the hardest thing to do is grow FUM. Pinnacle has strong relationships with most of the key ‘gatekeepers’ in the industry – wealth management firms, asset consultants, and independent private client advisers (like Seneca Financial Solutions).
Pinnacle’s history of selecting high-performing managers to partner with, who run scalable strategies, has helped create an efficient flywheel of a business with huge operating leverage. Pinnacle shares the management and performance fees with their partners, so PNI earnings can be volatile from period to period, but affiliate FUM has grown from $16.1 billion in 2015 to $100.1 billion today, resulting in earnings per share CAGR of 25.6% per annum over the same period. Shareholders have reaped the rewards, enjoying an 11x return since 2015.
Founder Ian Macoun owns 7% of the company and key senior staff also have large equity holdings in PNI shares. As such, the company pays out ~90% of after-tax profits as fully franked dividends.
Pinnacle is set to pay a 15.6 cents per share fully franked dividend on 23 March 2024, going ex-dividend on 7 March. Over the past 12 months, PNI has paid out 36.0 cents per share, for a dividend yield of 3.33%, or 4.76% grossed up.
On its current valuation of 23x forward P/E, PNI shares look reasonably fully valued, but as the latest earnings upgrade in February 2024 shows, PNI is a beneficiary of buoyant equity market sentiment.
2. Credit Corp Group Limited (ASX: CCP)
The best way to think of Credit Corp (ASX: CCP) is as a modern-day debt collector. Typically, this involves CCP buying bad debts off a lender (eg. Bank) in the form of a purchased debt ledger (PDL).
In normal conditions this creates a win-win situation:
- The seller of the PDL (bank) benefits because they have written down the loans to zero on their balance sheet via an impairment and any amount they recover from the sale is booked as a profit.
- The buyer of the PDL (Credit Corp) benefits by buying a loan book for cents on the dollar and recovering significantly more than their purchase price. Recoveries can be enhanced by restructuring the loans, and offering payment plans and extensions.
Credit Corp is replicating its successful Australian business model, where it is the market leader, in the much larger US market.
In October 2023, Credit Corp announced a $55 million impairment, representing a -14% reduction in the carrying value of its PDL assets in the US. The company recorded YoY collections growth of +10% in July and August and then flat growth in September but this was below management and market expectations. According to management, extrapolation of current collection conditions would have a $10m impact on FY24E NPAT, hence the reduction in ex-impairment NPAT guidance.
The share price subsequently shed 30%, dropping to a low of $11.97. At ~$12.00, our analyst Ben and I put out a desk note to clients outlining that “healthy economic data suggests that this is unlikely to be a ‘canary in the coal mine’ moment for CCP” and that CCP was a buy after the share price fall when shares were trading at ~$13.00.
Credit Corp is no stranger to large share price moves. After all, Credit Corp’s business model of collecting bad debts is inherently leveraged to the financial strength of the consumer. During peak covid fears in March 2020, the CCP share price fell from a peak of $37.43 to a low of $9.83. Within 12 months, shares had recovered to a $33.56, a 241% gain. The other significant impairment was made in the GFC, a similarly tumultuous period for the CCP share price. In both instances, the market eventually looked through to normalised earnings and the share price recovered in time.
Credit Corp is set to pay a 15.0 cents per share fully franked dividend on 29 March 2024, going ex-dividend on 19 March. Over the past 12 months, CCP has paid out 70.0 cents per share, for a dividend yield of 4.01%, or 5.73% grossed up.
On its current valuation of 12.7x forward P/E, CCP shares trade at a discount to its long-term average of ~15x. Despite shares having recovered strongly from $12 to ~$17 today, we continue to see upside on a 12-18 month view as collections normalise, investments bear fruit and earnings resume growth.
