Key points
- Natural health company Blackmores was a stand-out, lifting revenue by 36%, net profit by 83% and its dividend by 83%. Qantas turned in an impressive return to profitability, as did gold miner Newcrest.
- The curse of the season was companies where the market discounted the near-term outlook, ignoring good results – those hit included Ansell, Carsales.com, Boral, Cochlear, Domino’s Pizza and CSL.
- Commitment to increasing dividends was a critical factor in the buying support that emerged in the market’s big stocks later last week.
As always, the recently concluded company profit reporting season saw plenty of big moves as stocks surprised on the upside or disappointed the market. But the August 2015 reporting season was even more volatile than usual, given that it took place in the middle of a full-blown market correction.
Between August 17 and August 25, the US market fell by 11.2% (S&P 500) and 10.7% (Dow Jones Industrial Average). The Australian market (S&P/ASX 200) followed suit, with a fall of 12.3%.
Before August 17, the profit season had just been disappointing – and double-digit share price falls were common for the stocks disappointing the market. But after that date, the savage correction in the Chinese stock market and uncertainty over the global economy, commodity prices and the timetable of the US Federal Reserve’s move to lift interest rates hit the stock market like a steam train.
Markets have rebounded somewhat, such that the US market’s loss has been pruned to 5.4% (S&P 500), but the Australian market remains 7.7% lower than it was on August 17.
The (few) winners
The upshot was that few stocks came out of August with both reputation and share price enhanced. In that, natural health company Blackmores was a stand-out, lifting revenue by 36%, net profit by 83% and its dividend by 83%, on the back of burgeoning sales to China: the market responded by pushing Blackmores shares 20% higher, to $109.21. When the market watched CSL and Commonwealth Bank “race” to a share price of $100, very few would have tipped Blackmores as the stock to punch through the triple-digit barrier.
Apart from Blackmores’ heroics, Qantas turned in an impressive return to profitability, as did gold miner Newcrest. There were also standout results from the likes of rail freight company Aurizon (helped by heavy cost-cutting), healthcare group Ramsay Health Care, M2 Telecommunications, travel firm Corporate Travel Management, financial services group Perpetual, gambling heavyweight Tatts Group, agribusiness standout Select Harvests, Medibank Private and takeaway food and coffee specialist Retail Food Group.
But the curse of the season was companies where the market discounted the near-term outlook, ignoring good results. This was a very prevalent theme: prime examples were safety equipment maker Ansell, car sales website operator Carsales.com, building materials group Boral, hearing implants maker Cochlear, fast-food specialist Domino’s Pizza and Australia’s biotech star, CSL.
Cost-cutting focus
Companies continue to struggle to generate meaningful revenue growth, meaning that profit increases have to come from cost-cutting – and most companies have done about as much as they can on that front. According to Citi equity strategist Tony Brennan – whose firm covers about 150 ASX companies – the average revenue growth among his sample slipped to about 2.2% in the year ended June 30, from 3% in FY2013.
As expected, commodity producers were hammered by falling commodity prices, with the likes of Fortescue Metals, Woodside and Santos all showing big profit falls, as did BHP – its worst profit in 11 years and Rio Tinto, although the latter’s half-year profit did manage to beat expectations.
Shane Oliver, head of investment strategy and chief economist at AMP Capital, says that although results were “a little disappointing,” they were not “disastrous.” Oliver says 59% of companies lifted profits from a year ago, but that is the lowest such proportion since August 2009, in the depths of the GFC.
Likewise, while 43% of companies beat market consensus profit expectations, that proportion had run at above 50% since 2013.
Of the companies in Oliver’s sample, 57% lifted dividends, the first fall below 60% since the 2013 half-year profit-reporting season. Reflecting the slightly disappointing results and soft guidance, he says only 48% of companies saw their share price outperform the share market the day their results were released, the lowest proportion since February 2012.
The outlook
Slipping expectations for FY16 was perhaps the biggest theme of the season. Earnings growth expectations for the Australian market in the current (FY16) financial year started off a year ago at 8%. Heading into the FY15 reporting season, that expectation had been downgraded to about 3.3% growth, or 6% excluding resources. As the FY15 season progressed, further downgrading came for FY16 expectations: optimists now look for a profit boost for the 2015-16 financial year of about 2%, while pessimists hardly expect profits to bother the scorers in terms of positive growth, at all.
FY16 growth is expected to be heavily compromised by a slump of about 20% in profits for the resources stocks, but analysts are looking for about 4% earnings growth for the banks – and what strength there is should come from the non-resources companies, as they continue to benefit from low interest rates and a lower $A.
As share prices tumbled, the prospective dividend yield on the S&P/ASX 200 Index surged as high as 5.6% last week. That is almost a full percentage-point gain on the 4.7% FY16 expected yield at the outset of the season.
Dividend commitment
Commitment to increasing dividends was on show in the season, and it was a critical factor in the buying support that emerged in the market’s big stocks last week.
While the process of factoring in FY16 outlook statements and re-assessing earnings forecasts in the wash-up of the FY15 season is not complete, it is worth looking at where the market heavyweights stand at present in terms of consensus expectations for FY16 dividend yields. Courtesy of FN Arena, the top 10 stocks by market capitalisation stand at:
Commonwealth Bank: 5.6%
Westpac: 6.1%
National Australia Bank: 6.3%
ANZ Bank 6.5%
BHP Billiton: 6.9%*
Telstra: 5.5%
Wesfarmers: 5.1%
CSL: 2%*
Woolworths: 4.9%
Woodside Petroleum: 5.4%*
* Reports in US$: forecast at current A$/US$ exchange rate
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