Downer - An appealing proposition for shareholders looking for dividend yield
ETF Stock Story
Russell Investments High Dividend Australian Shares ETF (RDV)’s methodology seeks to identify companies with above-market dividend yields, building a portfolio that provides investors with an income premium over the broad market through time. A key focus of RDV’s methodology is future dividends; although historical dividend yield is informative (and is one of the metrics in the methodology), you cannot buy last year’s dividend. As such, looking to the future is important when assessing companies for their dividend-paying characteristics; this is especially true for more cyclical businesses. Downer is a cyclical business in the engineering and construction industry that is held in RDV based on its forward dividend yield expectation, as well as its expected dividend growth over the next three years. Based on these characteristics, it is expected to benefit yield-focussed investors as part of the overall portfolio.
Downer reported full year earnings in early August, and this result was well received by the market; the stock rallied 4% on the day of the announcement, and 5% the next day. The company reported a 21% increase in net profit, alongside an increased dividend payout ratio. Further, the company expects to continue to increase its payout ratio going forward, providing investors with the opportunity to earn additional dividend income. The stock is up almost 19% since reporting and has added 17 bps of excess returns relative to the ASX200 for RDV investors for the month of August. The stock is held at a 1% overweight position in both RDV and Russell Investments Australian Responsible Investment ETF (RARI).**
Downer is held in RARI due to its dividend characteristics outlined above, as well as its better-than-market ESG score. Downer has historically had relatively high ESG risk assets in the mining sector, however these assets are in the process of being exited alongside the exit of higher-risk construction assets. The exit of more cyclical businesses and assets with higher ESG risk, coupled with the expectation of higher dividend payouts in future make the stock an attractive proposition for shareholders looking for dividend yield via RDV, as well as those doing so with a responsible overlay via RARI.
* Source: Bloomberg at 30/8/21