AMWAY (M) Holdings Bhd (RM7.50) raised its net dividend payout for 1Q10 to nine sen per share, from seven sen per share in the previous quarters. This is an encouraging sign that the company may lift total dividends for the current year, which will further boost its already higher-than-market average yields.

The company generates a relatively stable stream of operational cashflow from its multilevel marketing business, selling a wide range of quality consumer products. Coupled with a strong balance sheet — net cash totalled some RM180.5 million at end-March 2010 — and comparatively low requirements for capital expenditure, Amway can well afford to be generous with its dividends.

Net yield estimated at 6.7%-7.5%
Dividend payments totalled 48 sen per share last year, consisting of four quarterly single-tier dividends of seven sen per share plus special dividends of 20 sen per share. If a quarterly dividend of nine sen per share is maintained throughout the current year, shareholders could receive up to 56 sen per share this year, assuming the same special dividend payout. That would translate into a net yield of 7.5% at the current share price, well above prevailing bank deposit rates and average yield for the broader market. Even assuming dividends remain unchanged at last year's level for the rest of 2010, investors will still earn an attractive net yield of 6.7%.

Defensive business for risk-averse investors
The stock is relatively defensive, which should appeal to risk-averse investors. Its shares fluctuated within a narrow range of between RM7 and RM7.68 over the past 12 months. The low volatility can be attributed, in part, to its high yields.

We also perceive the company's business risks to be quite low. Amway's distributor base of 208,000 caters to a broad cross section of consumers. It also carries a wide range of consumer goods, including personal care, nutrition and wellness, skin care, home tech and home care products, totalling over 250. Six new products were introduced in 2009 and another seven are planned for the current year.

Hence, demand has been fairly resilient even through downturns. The company registered positive sales growth in each of the past 10 years. Sales grew 10.5% and 2.9% through the global recession in 2008-2009, respectively.

Expect sales and earnings to trend higher
Amway forecasts turnover growth in the single digit this year. Sales in the first three months grew 7.1% year-on-year (y-o-y) to RM175.5 million. The company should also do well with the strengthening of the ringgit. Given that the bulk of its products is imported in US dollars, a stronger ringgit will translate into lower cost of goods. Plus, the increase in selling prices, effective March 2010, should help recover part of the higher cost of purchase from last year's price hike.

Thus, we estimate sales and net profit to improve in the next few quarters. Net profit is expected to total RM78.3 million in 2010, up 8% y-o-y. That implies its shares are trading at roughly 15.7 times forward earnings, which is pretty much in line with the broader market and other high-yielding stocks. Therefore, we foresee limited downside risks.

Focus on enhancing consumer access and brand awareness
One of Amway's main focuses this year is to further enhance consumer access. The company's move to establish an online sales portal has been successful, with some 63% of sales conducted over the Internet last year.

At the same time, it is also boosting its physical presence in select locations. The greater visibility acts as a platform to attract more people to join its ranks — in addition to greater convenience for existing distributors.

There are currently eight Amway shops nationwide, which accounted for about 10% of sales in 2009. Three more shops are planned this year, to be located in Mentakab, Taiping and Segamat.

To raise awareness in the brand name, Amway is expanding its advertising activities to include television and online, on top of the traditional print outlet. It will also continue with aggressive promotion programmes to incentivise its distributors including overseas seminars.

To support the anticipated growth in sales, Amway recently completed a RM100 million new headquarters. The premises include a larger processing centre, warehouse and advanced system that can process up to three times the number of orders daily as well as training and brand centres (to be ready in 2H10).

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.