The February 2015 interim reporting season actually got under way in January, but it moves into full swing this week, when market heavyweights CBA, Telstra and Rio Tinto step into the witness box.

Going into the season, the general consensus was for a largely subdued set of results, with the weaker Australian dollar and lower fuel costs not as apparent in the first half results as in the second half. Shane Oliver, chief economist at AMP Capital, says consensus earnings growth expectations for this financial year have already been wound back to near zero, driven by an expected 28% drop in resource profits, on the back of the slump in commodity prices.

However, says Oliver, the rest of the market is a bit stronger, with industrials expected to see growth (for the fourth year in a row) of around 10% and banks to see about 8% growth.

If you exclude the resources stocks, says Citi Research, market earnings forecasts have been quite stable, on the back of a moderately growing economy, cost-cutting and a falling Australian dollar.

Coming up this week, investors will hear from two of the market’s big yield plays, Telstra and the Commonwealth Bank, and one of the mining giants, Rio Tinto. Let’s take a look at what the market is expecting.

Rio Tinto

The mining heavyweight reports on Thursday, after the local market closes. Rio Tinto is one of the minority of companies reporting its full-year result, for calendar 2014.

The market is expecting underlying profit somewhere in the range of US$8.2 billion–US$9.8 billion, down from US$10.2 billion in 2013. Underlying profit surged 21% in the first half of 2014, to $US5.1 billion, well ahead of the $US4.6 billion analysts had expected. The interim dividend, at 96 US cents, was a lift of 12.5 cents, or 15%.

Market consensus cut Rio’s expected earnings per share (EPS) by 10% in December, and by a further 3% last month. Analysts now expect Rio Tinto’s 2014 EPS to fall by 13.2%, to US 480.2 cents a share – not unexpected in a weaker commodity price environment, especially iron ore. Conversely, the consensus expects the dividend to be lifted by 11.2%, to US 213.6 cents a share, implying a final dividend of US117.6 cents a share.

Rio boosted its first-half profit by slashing costs and cutting capital spending faster (and by more) than expected, and boosting shipments of iron ore – albeit at ever-decreasing prices. It has already told the market that it boosted iron ore sales in 2014 by 17% to a record 302.6 million tonnes, and that it is the lowest-cost producer in the world.

Analysts also expect capital management to be a big feature of Rio Tinto’s profit announcement: brokers expect a share buy-back, but possibly up to US$4 billion worth of shares. There could also be a special dividend, depending on which route gives Rio’s treasury the maximum flexibility. Analysts also expect a strategy to increase dividends to be unveiled.

According to analysts’ consensus collated by FN Arena, Rio Tinto is great buying. At just over $60, it sits 15% below the consensus target price of $69.85, and broker opinion is universally positive. (Deutsche Bank reckons the stock can achieve $80.90.)

Rio Tinto (RIO)

Source: Yahoo!7 Finance, 9 February 2015

Commonwealth Bank

CommBank reports its interim profit on Wednesday, with the market expecting about $4.5 billion in net profit, up from $4.2 billion last year. The interim dividend is expected to come in at $1.95, up from $1.83 last year.

At a share price of $92.98, CBA is pushing toward $100, but unlike Rio Tinto, the analysts’ consensus sees it as well over-valued: the analysts have a consensus target price of $81.95 on the stock, implying 12% downside. The reason for the price strength, however, is the search for yield, particularly from self-managed super funds (SMSFs): CBA’s consensus forecast fully franked dividend yield of 4.7% in FY16 becomes, in the hands of a SMSF in accumulation phase the equivalent of 5.7%, while to a fund in pension phase, the equivalent yield is 6.7%.

Commonwealth Bank (CBA)

Source: Yahoo!7 Finance, 9 February 2015

Telstra

Telstra reports on Thursday, also its half-year result. The market is expecting interim net profit of $1.93 billion, up from $1.70 billion in December 2013, which was itself a 9.7% lift on the December 2012 interim profit.

Last year, Telstra lifted its interim dividend by half a cent to 14.5 cents a share, the first payout rise in eight years. Market consensus expects a FY15 full-year dividend of 30.7 cents a share from Telstra, up 1.2 cents – this implies a probable lift in the interim dividend to 15 cents. Further out, the telco giant is expected to pay a 32.2 cent dividend in FY16.

Yield investors have recently pushed Telstra to a 14-year-high share price of $6.59: it has risen 150% from its historical low, four years ago. According to analysts’ consensus, Telstra is also over-valued: they have a consensus target price on the stock of $5.38, or 18% to the downside. But Telstra is an even more alluring yield play than CBA: if it does pay 32.2 cents in FY16, that prices it on a prospective fully franked dividend yield of 4.9%, which to a SMSF in accumulation phase is the equivalent of 5.9%, and to a pension-paying fund, stacks up as 7%. In a low-interest-rate environment, that is a massive attraction.

Telstra (TLS)

Source: Yahoo!7 Finance, 9 February 2015

Telstra and Commonwealth Bank are actually two of the companies that Macquarie believes most likely to provide positive result surprises this interim season, along with wealth managers Platinum Asset Management and Magellan Financial Group.

UBS says the following companies could surprise on the upside this season:

• Qantas
• Harvey Norman
• Orora
• Bluescope Steel
• Spotless Group
• Burson Group

Although it expects the opposite from this group:

• Woolworths
• Coca-Cola Amatil
• Treasury Wine Estates
• Suncorp Group
• Brambles
• UGL
• Ardent Leisure
• Transpacific Industries

Goldman Sachs is looking for good news from the following stocks this season:

• Dick Smith
• Harvey Norman
• Genworth
• Medibank Private
• Sydney Airport
• Leighton
• SAI Global
• Dexus Property Group
• Caltex Australia
• Fortescue
• Seek
• Crown Resorts

In contrast, Goldmans has its red pen poised over its expectations for:

• Sonic Healthcare
• Macquarie Atlas Roads
• Beach Energy
• UGL
• GWA
• BWP Trust

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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