The owner & operator of gas transmission and distribution assets in Australia offers two key things we like in this uncertain environment. Predictable earnings that rise with inflation (90% of earnings linked to CPI) and a dependable dividend that is now back up above 5% given the share price weakness. We sold APA Group from this portfolio last month above $12, and now have interest again around $10. APA guided to a FY23 dividend of 55c which at $10.44 puts it on an expected yield of 5.26%. That dividend will be up 4% on FY22, a lower than expected increase, however, the payout ratio (of free cash flow) is only 58% versus APA’s stated target of a 60-70% payout. The lower payout is due to their growth focus in the short term i.e. they are in the running to buy two assets and that would have prompted some conservatism from the board. In terms of valuation, we price APA on its yield relative to bonds. APA generally trades at a 2.8% premium to the 10-year bond yield and while it is currently only 1.63% above 10-year yields, below $10 and applying a more typical payout, we’re getting closer to this number.
MM is bullish APA below $10
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