Special Report
The Motley Fool's Top Dividend Stock for 2014-2015
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 2014-2015 boasts an impressive yield as well as a stable business and an attractive valuation - putting this top ASX stock into 'holy grail' territory.
Thorn Group (TGA)
Company snapshot (data as of August 11, 2014)
Thorn Group Limited (ASX: TGA)
Market cap: $351 million
Recent share price: $2.33
Cash/debt: $2.4 million/$40.5 million
Trailing P/E: 12
You've probably seen the 'Rent, Try, $1 Buy' ads from Radio Rentals, and Rentlo in South Australia. Our top dividend pick, Thorn Group (ASX: TGA), is the company behind them.
For many Australians, buying fridges, televisions and washing machines outright is often too expensive or inconvenient - and that's where Thorn comes in. Its business model sees the company rent out products to consumers from its familiar stores, and an in-house financing arm looks after the contracts and collections.
Breaking down a large purchase into small weekly payments makes the transactions easier for its customers - and vastly more profitable for Thorn. You see, the final price of a television or clothes drier can be considerably higher if the customer pays the weekly rental, providing Thorn with an impressive profit.
It's true some investors are uncomfortable with the thought that Thorn is profiting from the inability of its customers to pay upfront or their unawareness of the 'short-term gain, long-term pain' structure of the rental agreements, but there's no doubting that the model works.
Exciting growth initiatives
Thorn is working hard to capitalise on its market, and the company is diversifying its earnings base to become a broad financial services provider.
One recent initiative, Thorn Financial Services, comprises Thorn Money, which provides unsecured loans up to $15,000 and secured loans up to $25,000, and Cashfirst, which provides unsecured loans between $2,000 and $5,000. This division is growing strongly, with revenues rising a tidy 18% over the last year.
Another initiative, Thorn Equipment Finance, provides rental solutions for businesses and government. This division is also growing strongly, with sales climbing 35.7% this financial year.
Thorn Group's 2011 acquisition, debt manager National Credit Management Limited (NCML), has been slow to deliver the desired outcomes, but the good news is that this unit is slowly turning around. Revenues and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) are now growing, albeit slowly. Still, it's important to note that NCML is a relatively small part of Thorn's business, representing less than 10% of revenue, and around 15% of EBITDA.
A cheap valuation and favourable share price
This challenge in the NCML unit is likely why Mr. Market isn't so keen on Thorn Group just now - a happy situation that gives us the opportunity to snap up shares of this high-quality business on the cheap. At present, Thorn Group shares trade for just 11 times forecast 2015 earnings. That's a value price tag, considering the company's strong earnings momentum.
Risks & when we'd sell
Of course, investing in Thorn Group isn't without risk. Should the NCML business continue to prove difficult, there's the possibility that it could be a drain on management's time and the company's reported earnings. Yet so far, it appears that the unit is delivering results in the latest full year results, EBITDA was up 4% over the previous year. It may only be a small contribution, but it shows the NCML unit is heading in the right direction.
Another risk is regulation - there is always the possibility that governments will move to restrict the amount of profit Thorn can earn from its business, especially if those in power believe Thorn is taking unfair advantage of its customer base and/or charging what they see as punitive effective rates of interest.
Both of these risks are real - but then there are always risks in investing, and today's share price provides more than fair compensation.
Now about that fat, 7% dividend yield...
Given this is a dividend report, you'll be pleased to note that
Thorn Group's current dividend yield is 4.7%, fully franked, or when grossed up to include franking credits, over 7%.
While today's payout is substantial, making Thorn Group an excellent income play, the very best part is still to come.
We fully expect the payout to grow over time as the business delivers increasing profits.
