As the interim reporting season winds to a close, the verdict appears to be that it was good, but not great. Overall, profits were up by about 12%, according to Deutsche Bank, and that helped the benchmark S&P/ASX 200 index gain 215 points, or 4.1%, over February – more than regaining January’s 3.3% loss.
The health of Australian companies certainly can’t be considered uniform. But fortunately for the overall market, the best exemplars of corporate wellness were in the sectors that drive the Australian market – resources and banks.
The star performers
Perpetual’s head of investment market research, Matthew Sherwood says four sectors – materials (the miners), banks, healthcare and consumer discretionary – delivered 96% of total profit growth of $4.9 billion, and 80% of the $3.4 billion increase in dividends.
Overall, on the “beat rates” we’ve been following through the season, Shane Oliver, head of investment strategy at AMP Capital, says 53% of companies exceeded expectations (compared to a norm of 43%); 66% of companies lifted profits from a year ago (compared to a norm of 66%); 64% of companies increased their dividends from a year ago (up slightly from around 62% in the last two years); and 56% of companies saw their share price out-perform the day they released results.
A slightly different take comes from Credit Suisse strategist Hasan Tevfik, who says only 22% of companies missed dividend expectations, while 35% failed to meet earnings per share (EPS) expectations, and 50% missed on free cash flow (FCF) predictions. (Free cash flow is the cash flow available to the company after all capital spending and maintenance requirements have been met, and the dividend paid.)
Importantly, the general strength of the results coming out in February allowed analysts to boost their estimates for full-year earnings to June 30. Macquarie Equities summarised this trend as follows:
And Macquarie says the interim results have enabled the top-line (revenue) growth forecasts for the full-year to be lifted to 6.5%. That’s important because the last few years have seen companies generating profit growth mostly through cutting costs out of their business – which can’t go on indefinitely.
Investor return
Dividends were a big story of the season. Oliver says dividends surged by 14% from a year ago, mainly driven by the market’s heavyweights, such as Rio, CBA and Telstra. He says the dividend payout ratio – the proportion of net profit paid out to shareholders as dividend – is “still not excessive” at 64%, adding that higher dividends are usually a sign that companies are confident about the outlook.
The dividend flow has resulted in a fascinating argument that would have been unthinkable just a few years ago, and which shows the massive clout now held by self-managed super funds (SMSFs). Credit Suisse’s Tevfik points out that companies have “tried hard to keep their dividend-hungry investor base happy. In many cases, these are the self-managed super funds, who now own more than 16% of the Aussie equity market.”
The best use of capital
What’s not to like about that? Well, some institutional investors have been increasingly vocal about the trade-off that companies make between lifting dividend payout and boosting investment in future growth through acquisitions or funding expansion projects. We’ve only seen the start of this dilemma over the best and most appropriate use of capital, with economists and fund managers on one side and investors – particularly SMSFs – on the other.
SMSF participation in the market is not only changing the way management teams think, it is changing the way stocks are viewed. This is particularly the case with bank stocks, where foreign investors scoff at over-valued Australian banks, while SMSF shareholders look to their after-tax dividend yields and ignore the price/earnings (P/E) and price-to-book valuation comparisons.
From the interim reporting season, it looks like the profit cycle has turned up, and companies are still getting quite a bit of help from the weaker Australian dollar and the prevailing low interest rates. Economic data continues to be mixed: for example, while the December NAB business survey showed business conditions at a two-and-a-half-year high, the December quarter capital expenditure report showed that business investment fell by 5.2% in the quarter.
But the companies’ outlook is positive, and that’s why earnings estimates have been lifted – although the industrials’ outlook is still a concern. (This sector contains some of the market’s real worry areas, for example Qantas and QBE.)
The top 20
With that in mind, here is a snapshot of the top 20 companies by market capitalisation, how the interim season treated them, and where full-year (FY14) earnings and dividend expectations have them trading. Bear in mind that for companies with a June 30 year-end, interim dividends have been declared. The augmenting power of franking credits on the two super-fund tax rates – 15% in accumulation phase, zero tax in full pension phase – is readily apparent.
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