The Profit Reporting Season
- Regular readers would be aware that each six months we undertake a detailed review of the profit reporting season – the time when companies report half-year or annual results for the period to June or December. (A far smaller proportion of companies have a different reporting period, such as March or September).
- To recap, investors have reason to be pleased with the performance of Corporate Australia. Arguably business conditions in the past year – especially the first half of 2019 – have been the toughest faced by companies in a decade. The China-US trade war has continued with the lack of agreement serving to cap investment and employment by companies across the globe. The UK exit from the European Union (Brexit) has been delayed, creating more business uncertainty. Fears of US recession have added to negative global environment.
- Closer to home, uncertainty about the outcome of the Federal Election crimped economic momentum, especially in the first half of 2019 (Bapcor). Sluggish wage growth constrained consumer spending together with lower home prices in Sydney and Melbourne.
- But quite remarkably, companies are still making money. In fact 92 per cent of the companies that reported annual results, reported a statutory profit (net profit after tax). That is below the record high of 94 per cent recorded in ‘interim’ results seasons of February 2017 and February 2018 but above the 88.4 per cent average. Still, only 52.2 per cent of companies lifted profits compared with a year ago. That is still better than the 48.6 per cent result in the ‘interim’ reporting season in February.
- Aggregate statutory earnings lifted by 17 per cent on a year ago, but once BHP and Wesfarmers are excluded, profits are up just 1.2 per cent on the year. The 88.4 per cent of companies that issued a dividend is above longer-term averages despite flat cash levels and despite growth of expenses outpacing sales.
- Some of the themes of the season:
- Share prices of companies were volatile on the day of their earnings announcement. But the spread of companies recording a lift in its share price has almost completely matched those recording a share price fall. That is, ‘ups’ matched ‘downs’.
- Costs or expenses continue to lift, as has been the case for over a year (Qantas, Coles, Woolworths, Whitehaven Coal). Growth of cost of sales/expenses exceeded that of sales/revenues. Higher wage bills and energy costs were specifically noted.
- Housing construction and development companies have reported challenging conditions with supply adjusting to weaker demand. (Sunland, Finbar, Stockland). Noticeably the office and industrial market has remained strong (Dexus, GPT, Mirvac, Charter Hall).
- The experience of consumer-dependent companies has proved more mixed than conventional wisdom. Those companies that have adjusted strategy and listened to consumers have done well. This includes retailers like JB Hi-Fi and shopping centre owners like Scentre. Big box retailer, Aventus, has also weathered the fluky retail conditions. Vicinity Centres believe that not enough of the good news is being priced in.
For full-year reporting companies:
- On profits, 92.0 per cent reported a profit.
- Only 52.2 per cent reported a lift in profit (long-term average 61.5 per cent).
- Of those reporting a profit, 55.9 per cent have lifted profits and 44.1 per cent have reported a decline.
- In terms of dividends, 88.4 per cent issued a dividend and 11.6 per cent didn’t.
- Of those reporting a dividend, 54.9 per cent lifted the dividend, 21.3 per cent cut dividends and 23.8 per cent left dividends unchanged.
- On cash holdings, 58 per cent lifted cash holdings over the year and 42 per cent cut cash levels.
- Cash holdings of both full-year and half-year reporting companies stood at $110.7 billion as at June 30, (full-year companies, down 0.1 per cent on a year ago to $83.4 billion).
The Dividend Timeline
- IRESS provides data on the dividends declared by companies, the number of shares on issue and the pay date of the dividends. So it is possible to derive a dividend timeline. The ASX 200 companies were assessed.
- As always there are complications to the analysis such as where the shareholders are based, whether dividend reinvestment plans operate, special dividend payments and currency translation effects for foreign investors. But the aim is to get a broad idea of the timing and magnitude of dividend payouts.
- Experts estimate that around $29.2 billion will be paid to shareholders by ASX 200 companies from July- December, but largely from late August to late October. The key period for dividend payments is the four-week period beginning September 16. Over that four-week period, $22.6 billion will be paid out as dividends by listed companies:
- in the week ending September 20, dividends totalling $3.3 billion will be paid;
- in the week ending September 27, $12.3 billion will be paid out as dividends;
- in the week ending October 4 dividend payments totalling $4.3 billion will be made; and
- in the week ending October 11 distributions total $2.7 billion.
The importance of dividends
- If you indexed the All Ordinaries index and the All Ordinaries Accumulation index at January 2004 it would show share prices (All Ords) have broadly doubled while total returns have quadrupled. The differential (dividend growth) has especially widened from the low point for shares after the global financial crisis in February 2009. So dividends have taken on greater importance.
- There are a few reasons for this. Investors have been more cautious about buying shares, despite the fact that Australian companies have been making money and strengthening balance sheets. So share prices have not fully captured the stronger fundamentals.
- The economy has also continued to mature and the “potential” growth rate has eased from around 3.5 per cent to 2.6 per cent. Many of Australia’s biggest companies operate in mature industries. So while companies continue to generate good returns, growth options are more limited. Add in the fact that inflation has also slowed from around 2.5 per cent to around 1.5-2.0 per cent.
- Over time Australian companies have to compete with property markets and overseas equities to secure the affection of investors. With share prices seemingly constrained by a range of influences, that puts more onus on companies to offer attractive dividends or to support share prices with buybacks.
- Until recently there has been some reluctance by companies to plough back cash into the business. And expansion, renewal, replacement or efficiency measures have boosted the funds that can be made available as dividends.
What are the implications for investors?
- Investors have the usual choice over the next few weeks. Those investors who still elect to receive dividend payments direct to their bank accounts can choose to spend the extra proceeds, save the proceeds (leave it in the bank) or use the funds in combination with other savings and reinvest into shares or other investments.
- For companies, retailers and financial firms, the dividends flowing through to shareholders clearly represent opportunities. The Reserve Bank will also monitor the trends in the next few weeks: if confidence lifts, an inflow of funds represents a potential spending boost.
- Of the major bourses across the globe, Australia is amongst the largest payer of dividends. In part this reflects the maturity of Australia’s industry sectors. It also reflects the stability of the companies that dominate the ASX20 and ASX50 indexes. And it also reflects the on-going growth of the Australian economy and corporate profitability.
- Over the past couple of years many companies took the “safe option” of paying out dividends and buying back shares – in other words, keeping shareholders happy. But many companies are now opting for greater balance.
- Adequate cash must be maintained to pay out dividends together with confidence on future profitability. But cash levels as well as modest borrowings are important for reinvestment in the business and applied to new opportunities – entering new markets or engaging in mergers and acquisitions.
- Over the past year, costs or expenses have lifted. Aussie companies have done well to lift revenues, record profits and pay dividends in the current environment. And with competition increasingly becoming global, Aussie companies need to get the balance right in focusing on lifting revenues and restraining costs.
- Shareholders increasingly realize that it is important to select companies with good potential for solid, sustainable growth in total returns – share price plus dividends. And that means paying attention to all aspects of the business.
- There has been a renewed focus on dividends with some observers calling for greater investment spending rather than companies focusing on buybacks and dividends. But the environment is not currently conducive to a major focus on investment given the global slowdown caused by the US-China trade war. Good companies will keep an open mind on opportunities.
- The average dividend yield is around 4 per cent but returns for some ASX200 companies are well in excess of the average. Investors need to be mindful that past performance is not always a good guide on the future.
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