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Income Stock Opportunity - Five Shares for Income Stock Investors

Interest rates in New Zealand continue to fall (we are currently at historic lows and set to stay here for the foreseeable future) and with this fall, the income generated by fixed interest assets such as term deposits and bonds has also fallen.

Many investors rely on their portfolio to generate a certain level of income, and for this reason, we are seeing more and more clients come to us looking for ways to increase income. One of the best ways to do this is to add some high-yield, blue chip, dividend shares to your portfolio, similar to the selection included below. These companies are all among the top 10 in the NZX50 ranked by dividend yield. In addition they all pass Hamilton Hindin Greene’s investment committee criteria for inclusion in portfolios.

N.B. While these companies are all favoured by HHG from a dividend-yield perspective, they are not without their own specific risks. We recommend checking with your adviser to see if they are right to include within your specific portfolio.

Air New Zealand is our largest airline, with around 80% domestic market share. They also operate international services to a range of destinations, including Australia, the USA, South America, Europe and Asia. They have recently downgraded their FY2019 profit before tax to “above $340m” (previously $340m - $400m), mainly due to the impact of an additional $25m jet fuel headwind, and are starting to see growth slow in the short and medium term. In saying this, growth remains positive, they have announced a multibillion-dollar investment in new and efficient Boeing 787-10 Dreamliners and continue to target aggressive cost-saving initiatives. While risks remain (currency, jet fuel price, competition etc.), we are comfortable with the company’s dividend profile and expect this to underpin share price in the near term.

NZX operates New Zealand’s equity, debt, funds, derivatives and energy markets. To support the growth of these markets, NZX provides trading, clearing, settlement, depository and data services for its customers. NZX also owns Smartshares, New Zealand’s only issuer of listed Exchange Traded Funds (ETFs), and KiwiSaver provider SuperLife. While the NZX struggles with some of it’s core business (there has been one new equity listing on the NZX this year compared to over seventy on the Australian exchange), we believe it’s Fund Management and Wealth Technologies represent meaningful medium-term growth opportunities.

Z Energy is engaged in importing, distributing and selling transport fuel to retail and commercial customers including airlines, trucking companies, mines, shipping companies and vehicle fleet operators. Z Energy has recently had a “year of two halves”, with a better 2H19 offsetting a weak 1H19. This improved second half was mainly due to increased fuel margins, which may yet come under pressure when the Commerce Commission releases its draft market study of the petrol industry in August/September. One thing that has been made clearer is Z Energy’s dividend policy, which has been set at 70%-85% of RC free cash flow.

Spark (formerly Telecom) is a supplier of telecommunications and information, communication and technology (ICT) services in New Zealand. Spark generates reliable cash flow, has a strong position in the NZ telecom market and has the infrastructure to offer a diverse range of products. Spark is a close second in market share to Vodafone NZ (39% market revenue) in mobile, and while it’s fixed-line broadband share is decreasing, this is somewhat offset by a growing wireless broadband segment. Spark is also showing good, organic growth in its Cloud, Security and Services businesses and plans to invest in these moving forward. While the recent resignation of CEO Simon Moutter took the market by surprise (hurting the share price), we have no reason to believe his replacement Jolie Hodson won’t continue his good work. The big risk for Spark is competition leading to loss of market share and/or lower margins.

Sky City is a highly cash-generative casino operator with a portfolio of long-dated monopoly licenses in New Zealand and Australia. It’s recently released 2H19 trading update missed analyst expectations slightly and we have seen the share price fall away from a recent high of $4.10 on April 23. The reasons for this weaker than expected half was a slowing macro environment, slowing tourism and increasing cost pressure. Taking these challenges into consideration, we feel the share price has reacted appropriately and are now fairly valued. Sky City have just announced a move into the online gaming business which, along with large capex at both it’s Auckland and Adelaide sites, gives some optimism for future upside, especially as the challenges appear mainly cyclical.

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