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Is The Lottery Corp (ASX: TLC) the best ASX dividend share?
It’s every Australian’s dream to win a division one jackpot. While your odds of that are pretty slim, you can now benefit from lotteries in another way. Last week The Lottery Corporation Ltd (ASX: TLC) – which owns brands including Tattslotto, Powerball and Ozlotto in addition to Keno outlets – was listed as a standalone ASX company after being demerged from Tabcorp Holdings (ASX: TAH).
Most people will know TLC from tuning into the evening news to scribble down the latest draw numbers. But the company itself is largely misunderstood. Lotteries are government-regulated monopolies. States tender the right to operate lotteries for a fixed concession duration. In return, they receive a clip of lottery sales, which in FY21 averaged 57%. TLC owns the right to operate and profit from lotteries in all states and territories except Western Australia. The business is more akin to an airport or toll road, with an average concession expiry of 2043. Earnings have increased every year since 2010 and are relatively immune to downturns. In the three months after the pandemic hit in March 2020, sales increased15-30% across each game type.
Despite its inherent quality, TLC is perceived as a low growth business. While ticket sales should average single-digit annual growth, the business will be a big beneficiary of the shift to digital. Over the past five years, digital turnover has increased from 12.7% to 36.7%. The impact is twofold. One TLC reduces its cost base, as it no longer needs to pay commissions to intermediaries like newsagents and post offices. Second, digital turnover expands its potential customer base. Physical intermediaries are limited to store opening hours, whereas an app or website can be accessed anywhere at any time. Furthermore, management has a track record of implementing game changes that draw in bigger jackpots and customers. As a result, earnings should grow at high single-digits for the foreseeable future.
For all of the aforementioned points, it has been rumoured TLC is a potential takeover target. Its reliable infrastructure-like income is attractive to pension funds, particularly overseas, which have defined benefit plans to service. Trading as a public company also reveals to state governments the company’s increasing profits, which could force TLC to give up more margin when concessions renewals occur.
All of this sounds very rosy. But there are two major risks. Concessions need to be renewed and the take-rate is largely at the discretion of states. TLC also faces competition from other types of betting, including online casinos and sports betting apps.
Analysts expect the company to achieve earnings per share of 16.2 cents in FY22. At the current share price of $4.61, this infers an earnings multiple of 28 or an earnings yield of 3.5%. The board has already advised a payout ratio in the range of 70-90%. TLC has minimal opportunities to reinvest earnings, therefore the ratio should be at the upper end implying a dividend yield upwards of 3% at current prices.
However, dividend investors will need to be patient. TLC will begin paying dividends after its first-half result for FY23, given five months of earnings in the second half of FY22 are attributable to the existing Tabcorp business.
The dividend yield won’t knock your socks off but remains attractive in a low interest rate world. The business isn’t optically cheap either. However, earnings convert more than 100% into cash given depreciation is greater than annual capex. The company will always trade at a premium due to its reliability and long-duration concessions. Adding together dividends and earnings growth, there is a strong argument TLC is the best ASX dividend share on the market.
The author owns shares in TLC and Tabcorp.
