There's a little-known ASX All Ords share currently trading on a staggering 20% gross trailing dividend yield.
This company is a small-cap among ASX healthcare shares with a market capitalisation of $712 million.
It's pathology services provider Australian Clinical Labs Ltd (ASX: ACL).
What's a trailing dividend yield?
A trailing dividend yield represents the last two biannual payments a company has doled out. (Most companies pay dividends twice per year, although some ASX shares pay monthly or quarterly).
In the case of Australian Clinical Labs, the last two dividend payments were the interim dividend of 7 cents for 1H FY23 (payable next Wednesday, by the way) and the final dividend for 2H FY22 of 41 cents.
Together, that's 48 cents in dividends over the past 12 months to date.
Based on today's share price of $3.53, Australian Clinical Labs is trading on a dividend yield of 13.6%. Add the 100% franking on top, and the gross trailing dividend yield is a whopping 19.4%.
If we base our calculations on dividends paid in the last full financial year of FY22 — that's 1H FY22 (12 cents per share) and 2H FY22 (41 cents per share) — we get 53 cents per share and our trailing yield goes even higher.
The pitfalls of relying on the trailing dividend yield
Mega yields like this demand that we ask some questions before buying our ASX All Ords shares.
Without investigation, it's easy to fall into a dividend trap.
A dividend trap occurs when you buy a share expecting big, juicy dividends, based on the previous two dividend payments (or the trailing yield), only to discover those dividend levels weren't sustainable.
So, you get trapped in the investment when the company announces its next (significantly reduced) dividend and the share price drops as a result — and typically below what you paid for the stock.
Another way you can get trapped is if the share price has dropped a lot in recent months. A fallen share price will result in your trailing yield calculations being artificially higher. That's because the yield is calculated by dividing the previous two biannual payments by the share price as it is today.
Dividend traps are common with cyclical ASX All Ords shares.
These companies cycle between bumper years when their earnings are high, say due to economic conditions or commodity prices, and tougher years when the opposite is true.
Dividends are funded from profits or free cash flow, so they'll go up and down with earnings.
If you don't recognise the cyclicality of a business, or you fail to identify unique circumstances delivering the company a big earnings boost that is only temporary (like a pandemic), you can get caught.
Why is the yield on this ASX All Ords share so high?
Given Australian Clinical Labs is a pathology company, the first question that comes to mind is whether the extraordinarily high trailing yield is a result of temporary bumper earnings during the pandemic.
The last two dividends were paid for the periods 2H FY22 (January to June 2022 — 41 cents per share) and 1H FY23 (July to December 2022 — 7 cents per share).
There was still a lot of COVID testing going on back then, particularly in 2H FY22. Government data shows the rolling 7-day average for new cases was almost 31,000 as of 30 June 2022. Today, it's 3,600.
So, demand for tests was much higher.
Another factor that might be making the trailing dividend yield artificially high is the fall in the share price. A year ago, this ASX All Ords share was trading at $5.29. Today, it's trading at $3.53.
Can Australian Clinical Labs sustain its dividend?
In order to determine whether this 20% dividend yield is sustainable, we need to look at how the company's net profit after tax (NPAT) is changing as demand for COVID testing goes down.
Here's a snapshot:
- Net profit 1H FY22: $130.2 million (interim dividend 12 cents per share)
- Net profit 2H FY22: $48 million (final dividend 41 cents per share)
- Net profit 1H FY23: $25.5 million (interim dividend 7 cents per share)
As you can see from the numbers above, 1H FY23 NPAT is 80% lower than 1H FY22 NPAT.
The 1H FY23 interim dividend is 7 cents per share — 40% lower than the 1H FY22 interim dividend.
Falling demand for COVID tests is a key element in this decline. COVID-related revenue fell from $271.3 million in 1H FY22 to $148.8 million in 2H FY22 and $45.2 million in 1H FY23.
So, looking ahead, it's unlikely this ASX All Ords share will be paying a 20% yield.
While the company has not provided official guidance on full-year dividends for FY23, it pointed out in its 1H FY23 earnings statement that the interim dividend "implies an annualised dividend yield of 4.7%".
The Australian Clinical Labs share price at the time was $2.96.
It ain't 20%, but most investors would say that's a pretty healthy yield.
And there are full franking credits attached, too.
The pandemic effect
The spike in demand that COVID prompted for many companies is pretty well over now.
That means reported profits and dividend payments in FY23 will likely be much lower than FY22 and FY21 for these particular ASX All Ords shares.
That doesn't mean they're not good prospective investments.
For the purposes of this article, we're merely investigating whether Australian Clinical Labs can sustain that monster 20% trailing dividend yield.
And it appears not, given the 80% decline in NPAT in 1H FY23 compared to 1H FY22.
The company's dividend policy is to pay 50% to 70% of NPAT as dividends in FY23.
But by itself, that shouldn't sway your investing decision.
If you're interested in this share, the next step is conducting some fundamental analysis. This will give you a broader picture of the company's current financial and operational health and its future prospects.
What's next for this ASX All Ords share?
The company says it remains "focused on the ongoing out-performance of the core business".
As demand for COVID testing dies down, Australian Clinical Labs is focused on capturing more market share of non-COVID testing demand.
In its 1H FY23 statement, the company said:
While ACL expects non-COVID revenue to return to trend growth over time, the timing of this recovery is hard to forecast.
Prior to COVID, the Australian pathology market grew on average by 6% p.a. driven by population growth, ageing demographics and new tests.
ACL's non-COVID revenue continues to strengthen with January 2023 like-for-like revenue growth of 22% on [the] prior year
ACL's focus remains on capturing at or above its market share of the expected rebound in non-COVID
revenue [and] growing market share in New South Wales and Queensland following the acquisition of Sun Doctors and Medlab.
What do the experts think?
As we reported last month, Celeste Funds Management is positive on this ASX All Ords share.
Celeste notes the company's 1H FY23 result beat market expectations.
Celeste said:
Although COVID revenue was down (PCR testing volumes), the core business revenue grew 18.
ACL is an appealing exposure to a defensive industry and remains cheap versus listed peers.
