Dividends the sub-plot to reporting season drama

Financial journalist
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The 2012-13 full-year reporting season gets into full swing this week, when the market hears from a swag of companies, including CBA, Leightons (half-year) Worley Parsons, AMP (half-year), Wesfarmers, UGL, Stockland, GPT (half-year), CSL, Primary Health Care, CSL, Oz Minerals (half-year), Bradken, Santos and Computershare.

The week in review

The highlight last week was Telstra, which beat expectations slightly, with a net profit after tax of $3.9 billion, up 12.9% on the previous year. Revenue rose by 1.9%, driven by the mobile business, which is Telstra’s growth engine at the moment. Telstra revealed a payout ratio of 91%, which – despite falling below 100% of profit for the first time in five years – still met shareholders’ expectations, because it enabled the expected 14-cent final dividend to be paid.

That, in turn, allowed the full-year dividend to stay at 28 cents a share, which puts Telstra on a yield of 5.50%. Or if you want to look forward, on the consensus estimate for the company’s dividend in FY14, of 29 cents, Telstra is trading on a prospective yield of 5.70%.

For many investors, that is the main event of reporting season – Telstra’s dividend.

It is certainly one of the major points for SMSF investors, who welcome the Big T’s hefty yield. An SMSF in accumulation mode would see that 5.70% yield augmented to 6.92%. It’s an even better yield to an SMSF in pension mode, where the full refund of the franking credits boosts the effective yield to 8.14%.

With inflation running at 2.5% and term deposits running at about 3.5% or less, yield-oriented investors have to look at the share market for income. That’s why the reporting-season noise of profits up, profits down, means very little for these investors, except in the context of what it means for the dividend.

The week ahead

It will be the same when Commonwealth Bank reports on Wednesday. While analysts and the financial media will be salivating over the record cash profit that is pencilled-in for CBA, many shareholders will be riveted to the dividend. CBA usually pays out 75% of its earnings, but analysts have flagged the prospect that the bank could lift this to 77%, and there is even at least one estimate in the market for an 80% payout.

(Only CBA of the major banks is truly involved in this reporting season, because its full-year balance date is June 30. The other majors, National Australia Bank, Westpac and ANZ use 30 September as their end-of-year balance date – although they will shortly release closely-watched June-quarter trading updates.)

On analysts’ consensus, CBA is expected to report a cash profit of about $7.7 billion. At say a 76% payout ratio, that would generate a dividend of about $3.65 a share, up from $3.34 in FY12. That places CBA on a nominal yield of around 5.0%, equal to an effective rate of 6.05% for an SMSF in accumulation mode and 7.15% for a fund paying pensions to its members. (Some analysts are speculating that to return cash to shareholders, CBA may throw in a special dividend of between 10 cents and 20 cents for FY13.)

Next year analysts are looking for about $3.73 a share in dividends from CBA, which places it on a prospective FY14 yield of 5.1%.

Quite simply, investors need these yields. And if we look at the companies reporting this week, dividends will be the standout point in SMSF-land.

Expectations

  • Worley Parsons (Wednesday) – consensus looking for about 91 cents a share, or 4.01% nominal (65% franking).
  • Wesfarmers (Thursday) – consensus looking for about $1.76 a share, or 4.30% nominal (100% franking).
  • Primary Health Care (Wednesday) – consensus looking for about 13.9 cents a share, for the full year or 2.80% nominal (100% franking).
  • Stockland (Tuesday) – consensus looking for about 24 cents a share, or 6.40% nominal (nil franking).
  • CSL (Wednesday) – consensus looking for about $1.10 USD a share for the full year, or 1.701% nominal (6.20% franking).
  • Oz Minerals (Wednesday) – consensus looking for about 3.5 cents a share for the full year, or 0.80% nominal (nil franking).
  • Bradken (Tuesday) – consensus looking for about 39 cents a share for the full year, or 7.70% nominal (100% franking).
  • Santos (Friday) – consensus looking for about 29.9 cents a share for the full year, or 2.20% nominal (100% franking).
  • Computershare (Wednesday) – consensus looking for about 28.5 cents a share for the full year, or 2.67% nominal (20% franking).

Naturally, not all of these dividends will convert to yields that will be attractive to SMSF proprietors; but some undoubtedly are, which is why the dividend will be the key number for these investors. For these investors, it is actually dividend reporting season – not profit reporting season.

The bottom line is that investors in retirement want greater levels of income from their portfolio, and equities are now considered a key contributor to that requirement. That’s why the ‘yield play’ shares are so popular – and why their dividends are so important.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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