For a huge number of investors, dividends really matter and with the RBA having slashed interest rates to just 2% this year, it has brought them into even sharper focus. That's because stocks are being asked by their investors to deliver even greater dividends right now, since cash balances offer a rather poor return at the present time. And, with the outlook for the commodity sector and for the Aussie economy looking challenging, the present situation may remain in place over the medium term.
As such, companies such as Wesfarmers Ltd (ASX: WES) and FlexiGroup Limited (ASX: FXL) could be worth buying. For starters, both companies should benefit considerably from a lower interest rate, with it having the potential to boost consumer spending and provide support for a diversified retailers. And, with the Aussie supermarket sector undergoing perhaps the most competitive period in many years, a boost in the form of higher-than-expected demand could help Wesfarmers to reverse the 0.7% fall in profitability that was recorded in its most recent financial year.
In fact, Wesfarmers is expected to deliver improved financial performance moving forward, with its bottom line forecast to rise at an annualised rate of 8.1% during the next two years. This should provide it with greater headroom when making its dividend payments and, with Wesfarmers currently yielding 4.6% (fully franked), it could continue to stay ahead of the ASX's yield of 4.5%.
Meanwhile, lending specialist, FlexiGroup, should also benefit from a lower interest rate via increased demand for loans. Evidence of the potential impact on the company's bottom line can be seen in the fact that FlexiGroup is expected to increase its net profit by 9.4% per annum during the next two years, which should allow it to increase dividends per share at an annualised rate of 7.8% during the same time period. This puts FlexiGroup on a forward yield of 6.6% (fully franked) and, with dividends being covered 1.7 times, there appears to be significant scope for their continued rise over the medium to long term.
Of course, neither Wesfarmers nor FlexiGroup are particularly popular among investors at the present time. Evidence of this can be seen in their share price performance during the course of the year, with Wesfarmers' shares being up 0.5% and FlexiGroup's being down 2.5%, versus a 5% gain for the ASX.
However, this provides potential investors with an opportunity to buy-in at a great price, with Wesfarmers having a price to sales (P/S) ratio of 0.8 (versus 1.5 for the ASX) and FlexiGroup's price to earnings (P/E) ratio being just 9.7 (versus 16 for the wider index). As such, both stocks appear to offer a very wide margin of safety so that, even if their respective financial performance disappoints, they should offer a generous total return in the long run.
