Hey there, dividend seekers! Welcome back to ‘The Dividend Uncle’. In today’s post, we’re exploring three solid dividend stocks I’m buying, and two stocks that I will be avoiding in June 2024. With the ever-changing market conditions and inflationary pressures, it’s crucial to make informed decisions based on how the business fundamentals have changed for each of our investments.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Now, let’s get into today’s post and uncover which dividend stocks are getting the thumbs down or thumbs up from ‘The Dividend Uncle’, and the reasons behind these recommendations.

3 Dividend Stocks to Buy

1. NetLink NBN Trust – Dependable Trust at Low Gearing

First up, let’s dive into NetLink NBN Trust. This stock is like a steady ship in stormy waters. For FY2024, they reported a Distribution Per Unit or DPU of 2.65 cents for the second half, bringing the full year DPU to 5.3 cents, up 1.1% year-on-year. This represents a mouth-watering dividend yield of 6.3%.

There is a good reason many investors view NetLink NBN Trust as a bond-equivalent investment. More than 80% of its business is recurring, bringing predictable revenue streams and robust cash flow. Underlying the stability in DPU is NetLink’s low gearing at 23.1%, which is much lower than most REITs. In addition, 78.4% of its debt have fixed rates, reflecting much lower financial risk.

Plus, with the risk-free rates that investors use to value a dividend stock projected to decline by the end of the year, the dividend yield required for NetLink NBN Trust could drop, implying potential capital gains in the near future, making it a compelling choice for dividend investors.

Not too shabby, right? But a few things to note for savvy investors. Their profit after tax did take a bit of a hit, dropping 8% year-on-year for the second half and down 5.5% for the full year. Its EBITDA margin fell from 73.1% to 71.1% due to a one-off $8.8 million write-off for decommissioned network assets.

Despite these bumps, I continue to be confident in NetLink as a solid investment to provide me with predictable passive income, and will continue to put my hard-earned cash into it.

2. Singtel – Higher Dividend Yield Supported by Brighter Outlook

Let’s talk about Singtel. In my previous video, I talked about how its share price has gone nowhere for the past 20 years. Singtel has gone through a rough few years, with high capital expenditure and declining profitability. From 2021, Singtel reduced its dividend payout, leaving the hearts of dividend investors broken.

Now, these look like it’s going to change. Singtel is bumping up its total dividend payout for FY2024 to 15 cents per share, which is a solid 52% increase from last year. This payout includes a final dividend of 6 cents per share and a value realization dividend (or V.R.D.) of 3.8 cents. Plus, they’ve rolled out the Singtel28 growth plan to boost customer experiences and keep delivering value to shareholders. With about $6 billion ready for capital recycling, there’s a good chance we’ll see more of these special dividends in the future.

However, their latest financial announcements were not as smooth-sailing than what their dividend increases show. For FY2024, Singtel’s earnings took a hit, dropping 64% year-on-year. This big drop is mainly because of hefty impairments on its Australia subsidiary Optus and the NCS unit. The upside is that, if you look past these one-off items, their underlying net profit actually went up by 10% year-on-year. It seemed that the core business is still holding up well.

Looking forward, we find particular optimism with Optus, their Australian arm. It is expected to bounce back with more revenue and subscriber growth in the first quarter of FY2025. Optus Enterprise even snagged a huge A$578 million contract from Services Australia, which should really boost their profits over the next few years. With a strong dividend yield and solid core business, I’m buying Singtel as a good, early investment for my dividend portfolio before the rest of the market recognises its impending recovery.

Before we move on to the next stock that I will be buying, if you have enjoyed the video so far, please help me in our challenge to get 500 likes for The Dividend Uncle channel! Now, let’s get back to the video.

3. Keppel Corporation: Benefitting from Strategic Asset Sales

Keppel Corp has been making significant strides in improving its financial health and future prospects through strategic asset sales. It might seem counterintuitive for a company to enhance its outlook by selling assets, but in the case of a conglomerate like Keppel, this strategy makes perfect sense. Conglomerates often face what is known as a “conglomerate discount,” where the market undervalues their diversified assets. By divesting non-core assets, Keppel can unlock value and focus on more profitable and synergistic areas of its business.

In 1QFY2024, Keppel raised approximately $170 million in the first quarter alone from asset monetization, including the sale of a residential project in Wuxi, China. These sales are part of a broader asset monetization strategy that has seen the company raise $436 million in equity and execute $1.1 billion in acquisitions and divestments year-to-date. Since October 2020, Keppel has cumulatively monetized over $5.5 billion in assets, with a target of reaching $10 billion to $12 billion by 2026.

The specific benefits of these sales are evident, unlocking shareholder value. For example, the sale of its 23.91% stake in Dyna-Mac Holdings for $100 million, representing an 11% premium over the last market price, significantly boosted Keppel’s cash flow. Moreover, the divestment of legacy offshore and marine (or O&M) assets, listed separately as Seatrium, which have been a drag on profitability, allows Keppel to focus on more stable and profitable sectors.

But here’s the kicker, Keppel’s recurring income grew by 51% year-on-year, driven by stronger contributions from asset management and operating income. Looking forward, potential synergies with its subsidiary, M1, and the collaboration with StarHub could unlock new revenue streams and cost efficiencies.

In summary, Keppel Corporation’s strategy of selling non-core assets is unlocking significant value and positioning the company for future growth. By focusing on its strengths and leveraging strategic partnerships, Keppel is well on its way to becoming a leaner, more profitable enterprise.

2 Dividend Stocks to Avoid

1. Frasers Property – Are the Huge Discounts to N.A.V. Sufficient to Overcome the High Financial Risks?

Their first half of FY2024 financial results were underwhelming, to say the least. Revenue took a hit, dropping by 20.4% year-on-year to S$1.55 billion. Earnings were even worse, plunging by a staggering 81.8% to $36 million. The main reasons for this poor performance were fair value losses on their UK properties and higher financing costs. Despite actively recycling assets and divesting $1.1 billion worth in the first half of FY2024, these efforts haven’t been enough to counterbalance the financial downturn they’ve experienced.

Now, let’s delve into what my main concern is: their high gearing in the current high interest rate environment. Frasers Property’s net gearing is about 80%, which is alarmingly high. This heavy reliance on debt makes them particularly vulnerable to rising interest rates and tighter credit conditions. Additionally, their interest coverage ratio stands at a mere 2.3 times, indicating potential difficulties in managing their debt obligations. For a company, this low ratio signals a significant risk in maintaining their financial health.

Some analysts have tried to find some silver lining by focusing on the huge discount of the share price to their net asset value or N.A.V., which is up to a 70% discount. As a value investor, I’m naturally tempted by such a massive discount. However, history shows that these large discounts, if not actively countered by management aggressively, can persist for a very long time, as we’ve seen with other property-related companies like O.U.E. and U.O.L. The deep discount suggests that the market sees little value in Frasers Property’s strong development track record and portfolio. Therefore, I’ll avoid this stock for now and monitor it for clearer signs of a turnaround.

2. Kimly – Good for Customers, But Bad for Investors

Our second stock to avoid is Kimly, the popular coffeeshop chain. While their revenue for 1HFY2024 rose slightly by 1.9% year-on-year to $158.5 million, their earnings dipped by 0.9% to $16 million. This modest revenue growth was driven by new outlets and food stalls, but rising costs and several outlet closures offset these gains.

Kimly is facing significant challenges as a victim of inflation. The majority of Kimly’s customers are highly cost-conscious, making it difficult for the company to pass on the rising costs of raw materials, labor, and utilities. Despite the threat of declining margins, Kimly has opted to increase its dividend payout to 1 cent per share, up 78.6% from 0.56 cent in the previous year. While this might seem appealing to dividend-focused investors, it raises concerns about the company’s financial prudence.

In my view, Kimly should have conserved its financial resources to better face these cost and profitability pressures. This decision to boost dividends despite looming cost challenges seems misaligned with the need to strengthen its financial resilience. You may ask me, hey Uncle, isn’t this increase in dividends in the face of poorer results a similar situation as Singtel, which I have said earlier that I will be buying? Well there is a difference in growth outlook, with Singtel showing some promising signs, while Kimly’s outlook is the direct opposite.

Given the inflationary pressures on profit margin, and management’s questionable financial strategy, I am avoiding Kimly for now until there are clearer signs of overcoming these operational challenges.

Alright, savvy investors, that wraps up our deep dive into the dividend stocks to buy and avoid in June 2024. I know this post was a bit longer than usual, but I wanted to ensure we covered all the important details so you can make well-informed decisions. Remember, investing wisely is all about understanding the full picture, and I hope this breakdown helps you navigate the market better.

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Stay smart, stay invested, and I’ll see you in the next one.