Share price: $39.53
Industry: banking and investment services
Forecast 2015-16 dividend: $1.93 a share
In light of recent sharp market falls, Dividend Detective this week focuses on ASX itself (the company listed on the exchange that runs the market) as one of the high-quality stocks to watch in the event of a downturn.
With a local monopoly over securities issuance and clearing functions — and as the dominant trading house — ASX is leveraged to ongoing market activity, which drives high-certainty revenues and extremely high operating earnings margins above 75 per cent.
Pricing power protects profitability against inflation. Like other exchanges around the world, ASX is likely to retain a local monopoly due to the winner-take-all nature of digital marketplaces and per-unit cost advantages derived from scale.
For this reason, shares are perennially out of reach on valuation grounds as the market treats the company like a utility and adopts low required returns.
On our estimation, the required return implied by the current share price of $40 is about 9 per cent, which is modest.
ASX pays out about 90 per cent of income and has delivered consistent dividends over the past decade. Shares are trading on a forward yield of 4.9 per cent or 6.5 per cent fully franked, which should grow over time.
The level of financial market activity and the value of trades are primary influences on ASX’s earnings, due to the company’s relatively fixed cost base. ¬Although revenues are recurrent, they are pro-cyclical in the sense that activity is generally stronger in elevated markets.
Last week, ASX delivered a strong half-year result. Operating revenues were up 8 per cent to $376 million and earnings were up 7 per cent to $213m on the first half of fiscal year 2015, driven by higher listings (IPOs and secondary raisings) and corporate actions and growth in trading activity. The company declared a fully franked interim dividend of 99.1c a share, up 7.4 per cent on the previous corresponding period.
Management forecast $50m capex for the current ¬financial year, focusing on its technology transformation program. ASX is upgrading its primary trading platforms as well as its clearing and settlement platforms across equities and derivatives.
Next month, T+2 settlement for cash market trades will start, reducing settlement time from three to two days, which will bring the exchange in line with global best practice and lead to a more efficient market.
Much of the forward commentary at the result centred on plans to develop distributed ledger technology for post trade (settlement and clearing) processes, which could replace the current CHESS system.
Distributed ledgers or blockchain is best known as the technology underlying crypto-currency Bitcoin. The technology allows a public and tamperproof record of transactions, reducing the involvement of intermediaries in handling transactions and records. ASX envisions blockchain enabling real-time settlement and clearing, dividend payments, voting and a simplified data trail.
The potential costs and benefits haven’t been quantified at this stage. To develop the technology ASX has partnered with US tech company Digital Asset Holdings and is aiming for a decision on future market design by mid-2017.
Written by Jonathan Wilson, Australian Equities Analyst