Dividends can be an investor's best friend. Not only do they provide income, but dividend stocks tend to be more stable and can sometimes deliver capital gains as well.
Our top dividend stock pick for 2015-16 boasts an impressive yield as well as a stable business and an attractive valuation - putting this top ASX stock into 'holy grail' territory. G8 Education (ASX: GEM)
Company snapshot (data as of 9 November 2015) Recent price: $3.39 Market cap: $1.3 billion Cash/debt: $121 million / $352 million P/E ratio: 18.3 Dividend yield: 5.6% Fully Franked Why Buy?
Resilient earnings
Attractive growth potential
Impressive, fully franked yield
Early childhood education is experiencing something of a boom. A strong — and continuing — surge in female workforce participation has seen the demand for quality childcare skyrocket since the '90s. And, due to robust regulatory requirements and challenges in sourcing suitable and attractive locations, the industry has had trouble ensuring supply matches demand.
But, as far as problems go, that's a wonderful one to have! What G8 Education Care does
G8 Education is Australia's largest for-profit provider of early childhood education. It presently operates approximately 480 centres across the country, as well as a handful in Singapore. That's quite remarkable given it had only 34 centres 5 short years ago, and hints to the secret behind the company's soaring growth.
A highly fragmented industry has allowed G8 to gobble up a host of independent operators but — importantly — it has done so with a keen focus on quality, value and financial discipline. That, along with a commitment to operational excellence, has meant that G8's growth isn't just about the number of centres it operates, but also shareholder prosperity.
Since it turned its first profit back in 2010, the company has grown per share sales by 141% and profit by a whopping 340%. Importantly, it has done so without taking on excessive debt and has been able to continually support an attractive — and growing — dividend.
Little wonder shareholders have done so well. Over the past 5 years, the total average annual shareholder return has been over 35%. Yes, that's per year! Why Invest?
Growth via acquisition is great for a time, but sooner or later it tends to peter out. However there are three great reasons why investors can expect solid growth for the foreseeable future.
First, despite G8's expansion, it still represents less than 10% of the domestic market. In fact, the company estimates there remains over 4,000 childcare centres in the addressable market.
Second, even without acquisitions, the company is positioned well for organic growth. Increased Government support and strong demand give G8 great capacity to increase its pricing. Combined with increasing occupancy, and the largely fixed cost structure of the business, the business is well placed to extract added value from its existing network.
Finally, due to some market concern over a recent and unsuccessful takeover bid, shares in the company are available at an attractive price. G8's soaring growth has made it difficult to buy shares at a compelling valuation for quite some time, but the current (and likely short-lived) market price means that investors can today buy in at a price that doesn't demand exceptional growth. Critically, the depressed price presents income loving investors with an incredible yield — about 8% when franking credits are included. Strong management
Managing director and founder Chris Scott is the driving force behind the business. Although he has been accused of aggressive tactics in the past, he is a man with a clear vision of what success looks like and how to get there.
Unlike other failed operators in the childcare space, Chris has a resolute focus on maintaining a strong balance sheet, purchasing only quality centres at a reasonable price and ensuring a tight focus on frontline operations.
Risks and when to sell
Government regulation has the potential to dampen profitability, either through increased regulatory burden (eg heightened carer to child ratio) or through reduced financial support.
A loss of discipline with acquisitions would also be a real negative. If G8 were to relax its pricing standards, or if the degree of leverage became uncomfortable, investors would be wise to re-evaluate their position.
Finally, if occupancy rates were to materially decline, the economics of the business would face significant pressure.
The Foolish Bottom Line
Childcare is enjoying some wonderful tailwinds, and G8 has shown itself a capable and disciplined operator. Best of all, it doesn’t need to reinvent the wheel here — so long as it continues to prosecute its strategy well, it has the means and opportunity to continue to deliver outstanding long term returns to shareholders.
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