Well, that’s that – almost. The June 30 profit-reporting season is almost complete, with the vast majority of companies having released results.
At the headline level, it was not a great season. According to Shane Oliver, head of investment strategy and chief economist at AMP Capital, with nearly 95% of results having been released, overall Australian listed company profits have fallen by about 8.5% in 2015-16, due mostly to the resources slump, which saw a 48% profit plunge in the miners and energy stocks.
With the profit outcome vis-à-vis market expectations the most crucial aspect of the season, on Oliver’s numbers 41% of companies beat analysts’ consensus forecasts, below the “norm” for full-year profit seasons, at about 45%.
However, 62% of companies lifted profits compared to a year ago, and the median company showed profit growth of about 4%.
Broker CommSec focused more tightly on the 129 companies from the S&P/ASX 200 Index that reported results for the year to June 30: in this sample, it says that all but 11 companies recorded a profit, or 85.9% of companies. CommSec says 64.8% of companies increased profit over the year, which was above the long-term average of about 60%: average earnings per share rose by 2.2%.
Profits are on track to return to growth in 2016-17 as the slump in resources profits reverses, and non-resource stocks see growth. Oliver says 2016-17 earnings growth is expected to be about 8%, with mining companies now seeing the fastest rate of earnings forecast upgrades. Resources companies are expected to boost their earnings in FY17 by about 17%.
Credit Suisse says on earnings per share (EPS) basis, profits fell 11% in FY16. It says consensus forecasts see earnings rising by 10% –15% in FY17.
For yield-conscious investors, dividends were the main story of the season. CommSec says 118 of the 129 June 30 year-end companies paid a dividend, with just over two-thirds (67.8%) lifting their full-year dividend; 16.9% maintaining it; and 15.2% of companies cutting the dividend.
In particular, mining and energy companies struggled on the dividend front. BHP Billiton cut its dividend by 75%, Rio Tinto followed suit by 58%, Woodside Petroleum almost halved its payout, Oil Search slashed its (interim) dividend by 83%, and Origin Energy suspended its dividend altogether. Iron ore miner Fortescue Metals bucked this trend with a six-fold increase in dividend, after tripling full-year profit. And Australia’s largest gold producer, Newcrest Mining, also impressed by announcing its first dividend payment since February 2013, but in general the resources sector’s profit downturn flowed through, as expected, to dividend payouts.
The former “progressive” dividend policies of Rio Tinto and BHP Billiton – under which the dividend for any period could not go backward – are now a memory. For many institutional investors, that is a good thing: they would rather the mining giants use their cash to fine new ore bodies (and in BHP’s case, new oil and gas fields.)
At the top end of the market – which is where dividend investors coalesce – the Top 20 listed companies cut their June-half dividend payouts by 17%. In dollar terms, reported the Weekend Australian, that means that $1.6 billion less will flow from these stocks to their shareholders in coming weeks – down from an $8.8 billion payout a year ago.
This figure excludes the payouts from yield giants Westpac, ANZ Banking Group and National Australia Bank, which report full-year results in November, for the year ending on September 30.
According to Credit Suisse, the S&P/ASX 20 Index’s dividend per share (DPS) figure declined by 9% in FY16, after growing by 3% in FY15. Credit Suisse expects the measure to grow by 2% –3% in FY17. In dollar terms, Credit Suisse expects $68.4 billion in total in dividends in 2016, rising to $69.7 billion in 2017.
Yield-oriented investors must pay attention to the payout ratio, the proportion of net profit that is paid out to shareholders in dividends. In the financial year just completed, Credit Suisse says the market’s payout ratio hit 76%. This is expected to fall to 72% in the current financial year.
The fact of life where dividends are concerned is that the payment is not set in stone – it is only a dividend when you receive it. In particular, investors need to be wary of bank payout ratios.
Over the past decade, bank payout ratios have increased from 60% to 75% –80%. It is difficult to credit that such levels are sustainable, and many analysts expect the big four slowly to bring their payout ratios back down to a more sustainable range of 60% –70% over the next three to five years.
While the banks will be reluctant to make large cuts to dividends – which would go down very poorly in terms of share price reaction – it’s likely that investors see static dividends for a few years, to allow earnings growth to flow into more sustainable payout ratios.
Investors already saw the ANZ Banking Group cut its interim dividend in May, which is expected to produce a retreat in the full-year dividend in November. The market’s largest dividend payer, Commonwealth Bank, was under pressure in the year just completed, with earnings falling, but held its full-year dividend steady at $4.20 a share. National Australia Bank is expected to follow ANZ Bank with a lower dividend for the year ended September 30, but Westpac is predicted to eke out an increased dividend – but not by much.
On FNArena’s earnings and dividend estimates collation, here’s a look at the ASX’s Top 20 stocks, and where they are on estimated yield grounds for the next full-year result – and where the all-important payout ratio is estimated to be. The market’s payout ratio is expected to come down, and so is that of the banks – this is the number with which investors must become familiar.
* at present foreign exchange rate
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