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The unlikely dividend hero on the ASX 200

Brendon Lau

One of best large cap dividend paying stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index could be hiding in plain sight as investors continue to be distracted by so-called traditional income stocks like the banks and telecommunications companies.

I am referring to global packing company AMCOR PLC/IDR UNRESTR (ASX: AMC) even though it isn’t one that comes to mind for many income investors.

Unlike the big banks, such as Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB), and our largest telco Telstra Corporation Ltd (ASX: TLS), Amcor’s current yield is sitting under 5%.

What’s more, the company makes most of its revenue overseas and that means it can’t pay franking credits to bolster its yield.

It’s not yield you should be watching closely

But just looking at the grossed-up yield of any ASX stock is one of the biggest mistakes any investor can make. You’ll be prone to walking into dividend-traps! These are stocks with seemingly high yields that cannot be sustained.

Brokers are forecasting the group to pay a US46 cents dividend for FY20, which puts the yield at around 4.7%. That may not look particularly exciting but Amcor’s dividend looks more enticing to me than other high yielders fetching over 8%.

This is because these so-called high dividend flyers are flying too close to the sun. Their earnings are under pressure due to structural or cyclical factors and that puts their distributions at risk.

The unlikely dividend hero on the ASX 200

On the other hand, Amcor’s earnings and business outlook appears solid, particularly after it posted its first quarter results last Friday.

The earnings performance was impressive enough for Credit Suisse to upgrade the stock to “outperform” from “neutral”.

“Amcor delivered a solid 1Q FY20 with volume growth in segments outside ‘public view’,” said the broker.

“For example, Amcor’s combined flexibles business in North America achieved volume growth despite Nielsen scan data suggesting that the US supermarket food volumes were weak—particularly in key Amcor/Bemis customers.”

Dividend growth ahead

Amcor acquired Bemis earlier this year and most brokers continue to rate the stock a “buy” and are tipping dividend increases for the next few years.

For instance, Macquarie Group Ltd (ASX: MQG) is forecasting dividends to increase to US47.8 cents in FY21 from US46 cents this financial year. The payment is expected to increase again to US52.1 cents in FY22.

What makes a good dividend stock is not only one that can sustain its payout, but one have good potential to increase its dividend payment over the medium to longer term.

On that note, Amcor looks like an income stock worth putting on the buy list for dividend-seeking investors.

Macquarie has an “outperform” recommendation on Amcor with a 12-month target price of $16.87. Credit Suisse’s price target on the stock is $15.50 a share.

The post The unlikely dividend hero on the ASX 200 appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019