ASX Companies Worth Watching Closely Australia has led the world in capital raisings following the global outbreak of COVID-19. Effectively ASX listed companies worth watching closely have been giving with one hand, paying dividends, and then taking with the other, requesting injections of equity. Why are we Watching These ASX Companies? If you’re wondering what ASX companies I’m talking about, look no further than NAB: at the same time as paying a 30 cent interim dividend costing it almost $900m, the Australian big bank asked shareholders for money to raise $3.5bn! In data compiled by Bloomberg, ASX listed companies raised close to A$14bn in April alone, which compares with the US$11.1bn (A$17.2bn) in the US, a market almost 30 times the size. Dividends are Key with ASX Listed Companies Why has this happen and as investors what can we learn from it? In one word, dividends. Because tax policy encourages paying out the majority of earnings in dividends, balance sheets can be left dangerously exposed when something goes wrong. In March/April, that something was government shutdowns imposed in response to COVID-19. You might like to laugh at the unenviable financial position the NRL has been left in, but the reality is that many ASX listed companies have been left in a similarly parlous state. Many of you will know, because you’ve been putting your hand in your pocket for just that reason. Small Cap Stocks Performance One reason I fell in love with small caps is the fast earnings growth they can generate, but this is only the case if they’re reinvesting the vast bulk, say 90 per cent, of their profits. In contrast an income producing company, say a telco, should pay out at most 50 per cent of its net profit after tax. In Australia, because of the tax benefits accruing to dividends, the average pay-out ratio is 70 per cent. Three ASX Companies We are Watching When a company has a high return on equity and reinvests its profits, it achieves a compounding effect, which is essential. It means the ASX listed company is focussed on growth. These are three ASX listed companies that are worth watching. It’s no accident that two of them are family controlled. As one of my colleagues said: a good owner is not interested in the financial chicanery paying out excessive dividends and weakening the company’s foundations. Bear in mind also that NAB’s dividend payout ratio last year was 94 per cent i.e. it paid out that proportion of its profit after tax. HANSEN TECHNOLOGIES (HSN) The family controlled company has been around for almost 50 years and might be a technology company, but it’s not a “sexy” technology company. It flies under the radar because it provides boring billing software for infrastructure companies and telcos. The thing is, its customers are blue chip and they stick. On top of that, the company only pays out of its earnings in dividends. MACQUARIE TELECOM (MAQ) The company is also not at the “sexy” end of the IT space because it owns and operates buildings that house reems and reems of servers (aka data centres). The business was founded by the Tudehope brothers, who maintain control and has always had a longer-term return horizon than most fund managers wanted, until they did. Then they rushed in. The company is not paying dividends this year as it concentrates on a major data centre related expansion. Luckily, before COVID-19 hit it had all its ducks lined up, having secured the debt finance required. INFOMEDIA (IFM) When I first spoke to the founder of this company Richard Graham he tried comparing the car parts publisher’s exploits to Johannes Gutenberg’s invention of the printing press. I didn’t buy that, but I bought the stock and haven’t looked back. Now run by other people following some board infighting a few years back, the company has continued to go from strength to strength, capitalising on the benefits its product delivers for car dealers, who need the extra income from parts when sales aren’t up to scratch. Unfortunately I’ve been using this stock to generate cash, nervous as I am about the future of its customer base of giant auto manufacturers. To find out whether we are recommending to buy these three ASX companies, sign up. It's the best investment you'll ever make.