Companies reporting this week
With a huge week of reporting season upon us, the overall result at the halfway point is considered a touch disappointing, at least in terms of how reported results have matched up against expectations – which is the most critical aspect of reporting season for the companies’ actual share prices.
According to Shane Oliver, head of investment strategy and chief economist at AMP Capital, so far, about 41% of results have exceeded expectations, which is the weakest performance since 2013.
Oliver says earnings are up – with 73% of companies reporting higher profits than a year ago – and 71% have increased dividends from a year ago.
Take out Telstra’s much-publicised cut to dividend expectations, and dividend growth is a major theme emerging from the reporting season. But Telstra was a shock to many investors.
Telstra maintained its FY17 dividend at 31 cents, but took a knife to FY18 expectations. Prior to reporting season, the analysts’ consensus expectation was for 29.6 cents in FY18: the company told them to expect 22 cents, fully franked, including both ordinary and special dividends, a 29% cut on 2017.
Telstra said that its days of paying out almost 100% of profits in dividends were over, and that from FY18 it would adopt a dividend payout ratio of 70%–90%, which would be more in line with its global peers and fellow large ASX companies. Telstra also said it would return about 75% of net one-off NBN receipts to shareholders over time through fully franked special dividends, but the market reaction to the dividend cut from yield-oriented investors and self-managed super funds (SMSFs) was savage: Telstra fell almost 10%, to $3.91.
Prior to reporting season, the Telstra share price implied an expected FY18 yield of 6.8%. To an SMSF holding the shares in accumulation phase, that nominal yield is effectively 8.3%, and to an SMSF that has moved fully to pension phase, it equates to 9.8%.
Of course, every Telstra shareholder has their own individual yield calculation, based on the price at which they bought the stock: before reporting season, someone who participated in the “T1” float in 1997, who paid $3.30 a share, was looking at an expected FY18 yield of 9% (10.9% in an SMSF in accumulation phase, and 12.8% for an SMSF paying pensions). But someone who paid $8.62 for Telstra in July 1999 was expecting, on the FY18 prospective dividend, a yield of just 3.4% (effectively 4.2% in an SMSF in accumulation phase, and 4.9% for an SMSF paying pensions).
The point is that every Telstra shareholder has had their expected yield cut: on the current share price, the projected FY18 yield (on a 22-cent dividend) is 5.6% (effectively 6.8% in a SMSF in accumulation phase, and 8% for an SMSF paying pensions). Our T1 participant does a bit better than that (effective yield of 9.5% in SMSF pension phase); the person who paid $8.62 does a bit worse (effective yield of 3.6% in SMSF pension phase).
But what investors have to remember, points out George Boubouras, chief investment officer at Contango Asset Management, is that those projected yields, on a lower payout ratio, are “more sustainable, and thus arguably more compelling.”
The Telstra yield cut is a classic example of the risk being run by share market investors using shares for yield: the dividend that generates the yield is not guaranteed.
Away from the Telstra example, dividends have arguably been the strength of the season – particularly from the resources stocks, whose profits have been very strong.
Rio Tinto, for example, showered its shareholders with the biggest interim dividend in the company’s history, at US$1.15 a share fully franked, up from the US45 cents it paid out a year ago, after its net profit almost doubled (albeit falling slightly short of analysts’ expectations.) Woodside Petroleum lifted its fully franked interim dividend by 44% to 49 US cents a share, after stronger oil and gas prices and a steady reduction in costs contributed to a 49% rise in its half-year profit. Mineral sands miner Iluka Resources doubled its fully franked interim dividend, to 6 cents a share.
Newcrest Mining, Australia’s largest listed gold producer, moved to put a floor under its dividend – it will now pay a minimum of 10%–30% of free cash flow as dividends, with a minimum of 15 cents a year. The new policy comes just a year after Newcrest resumed dividends after a two-year hiatus, during which it struggled with balance sheet pressures.
Evolution Mining, Australia’s second-largest listed gold producer, declared a higher-than-expected 3 cent a share final dividend, as part of a new policy to return 50% of after-tax earnings as dividends. “We consider paying dividends an absolutely critical and mandatory part of our business,” the company said. “As far as we can see now, we are going to be a very profitable company and so moving to a profit-linked dividend is an appropriate recognition of this.”
Coal exporter Whitehaven Coal paid a 14-cent special distribution and a six-cent dividend – the first dividend since 2012. Chief executive Paul Flynn said shareholders “could expect further dividends in coming years,” given the company’s strong balance sheet.
Boubouras says the resources sector is “not traditionally seen as a great source of dividends through the cycle,” but the companies are rewarding shareholders out of “extraordinary profits,” and that has generated a pick-up in dividend momentum across the market.
However, it is not only the resources stocks that have delivered greater than expected dividend largesse – often, as part of a result that disappointed for other reasons.
Furniture retailer Nick Scali, for example, paid a full-year dividend of 34 cents, 31% higher than the 26 cents paid in FY16 (which was 23 cents if one strips out the 3-cent special dividend paid for FY16. But despite a 42% profit rise, Nick Scali shares were hammered after the company declined to give guidance for FY18, saying a looming housing slowdown made predictions too difficult.
Packaging group Pact lifted its full-year dividend by 9.5% to 23 cents, but because all of its revenue growth came from acquisitions, the market punished the shares with a 5% fall. Jobs website operator SEEK lifted full-year dividend by 10% to 44 cents, but the shares were marked down 8%, because the company’s forward-looking estimates saw costs rising faster than revenue.
Naturally, there have been unambiguously strong stories. Electronics retailer JB Hi-Fi boosted its full-year dividend by 18% to $1.18 fully franked, on the back of a 36% rise in underlying net profit to $208 million in 2017, the strongest growth for eight years. Global hearing implant leader Cochlear lifted its full-year dividend by 17%, to $2.70 fully franked, on the back of an 18% rise in net profit. Construction and contract mining giant CIMIC Group augmented its interim dividend by 25% cent to 60 cents, after posting a half-year profit rise of 22% to $323 million.
But the major perceived problem with the full-year reporting season – underwhelming company guidance – is playing into the dividend outlook. “Because the guidance outlook is not strong, corporate Australia is not greatly willing to invest,” says Boubouras. “Companies are content to recycle cash into stronger dividends. We expect this situation to prevail between now and FY20.”
On Thomson Reuters’ reckoning, the forecast dividend yield for the market in FY18 is 3.6%, equating to a grossed-up yield of 5.2% if fully franked. For FY19, that is seen improving to 3.8%, or 5.5% grossed-up. Those are the comparative yields against which yield-oriented investors will look to measure their expected stock yields.
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