JB Hi Fi has many of the attributes that income conscious investors look for in a sustainable high dividend payout ratio stock

About JB Hi-Fi Limited

JB Hi-Fi Limited (JB Hi-Fi, the Group, ASX: JBH) is a leading retailer of technology and consumer electronics and home appliances in Australia and New Zealand. The Group operates 327 stores at sites located in most Australian States and employs 15,000 people. Established in the Melbourne suburb of Keilor East in 1974, JB Hi-Fi listed on the ASX in October 2003 when the $1.55 Initial Public Offering (IPO) share price commenced trading at $2.20.

JB Hi Fi dividends

JB Hi Fi shareholders continue to benefit from a consistent and dependable fully franked dividend from the Group at an average payout ratio of 65 percent.

The December 2023 half-year dividend was $1.58 and represents a payout ratio of 65 percent.

Factors supporting JB Hi Fi’s consistent dividend history

JB Hi Fi’s consistent dividend history and relatively high sixty-five percent dividend pay-out ratio is supported by these factors:

Earnings reliability: JBH has achieved a compound earnings per share growth rate of 18 percent per year over the past 5 years. Consistent profit growth has long been a feature of JBH and has been rewarded by the market with an annual compound share price growth rate of 17 percent since listing. This compares to 3.7 percent per annum for the ASX200 over the same period.

Strong cashflow and low / zero net debt ratio: JBH’s strong cash flow from operations is reflected in its high operating cash conversion ratio that has averaged 119 percent over the past three years. The Group operates with no debt (apart from lease obligations) and has a 31 December 2023 cash balance of $488 million. If existing leases were recognised as debt, the interest cover is 30 times.

Re-investment to fund future earnings growth: Group capital expenditure for the December 2023 half-year was $37 million, up 8 percent year on year, with investment in the store portfolio, and online initiatives. Capital expenditure over the past five years has averaged $58 million per annum and these amounts have been readily funded from free cash flow and existing cash reserves.

Franking credit balance: At 30 June 2023 JBH had $517 million in surplus franking credits. To put this amount into perspective, the 2023 final dividend consumed $54 million in franking credits. Clearly, JBH has the capacity to fully frank its shareholder dividends for decades into the future.

Tax position of recipients: The majority of shareholders in JBH are resident individuals, Retail and Industry superannuation funds, and Institutional investors who, by and large, can apply franking credits to reduce their tax payable to the Australian government. Accordingly, the best use of accumulated franking credits sitting in JBH’s franking account is to distribute them to the maximum extent possible with regard to JBH’s capital management framework. This may include special dividends, or an off-market share buy-back as undertaken in April 2022 for $250 million. With a $488 million closing net cash balance at 31 December 2023, JBH appear to have the financial capacity and capital resources to undertake a future share buy-back.

The Future

The prospect of lower interest rates beyond 2025 brings shareholder dividend yield into focus and partly explains why JBH has the long-term, loyal support of many income conscious investors. The Group has scale, dominant market positions in its chosen product offerings and has a low cost, high cash flow operating model, with zero debt. Moreover, the Board’s high dividend payout ratio and share buyback history demonstrates the Group’s strong shareholder return bias which appears set to continue.