The Magnificent Seven – the banks, Telstra, Wesfarmers and Woolworths

Financial journalist
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Another reporting season has shown us the usual gamut of the Good, the Bad and the Ugly.

But if you want to cut to the chase, another Western is a more appropriate theme – the Magnificent Seven.

For retail investors – particularly income-oriented investors like SMSFs – interest in reporting season hones in on the big yield plays: the four major banks, Telstra, Wesfarmers and Woolworths, which have led the 2012-2013 bull market.

Key bank stocks hold strong

In bank land, only CBA of the big four reports at this time of year. National Australia Bank, Westpac and ANZ use 30 September as their end-of-year balance date, meaning that their interim reports – for the half-year ended March 31 – come out in May. But the trio do bring out trading updates in the February half-year reporting season for the companies with June-December periods.

CBA certainly did not disappoint, with cash earnings – which excludes one-off costs and gains – up 6% to $3.78 billion. The net margin fell two basis points over the year to 2.1%, but that disguised a much better performance in the December half, in which the margin rose by four basis points. Investors were also pleased by a 20% increase in the bank’s interim dividend, to $1.64 a share.

The shares hit a record high of $67.15 on the result, before trading downward into the ex-dividend date. Now nudging $67 again, it trades at a consensus expected FY14 yield of 5.5%, equivalent to 6.7% to an SMSF in accumulation mode and 7.8% if the fund is paying a pension.

Despite also showing a 6% increase in cash profit – albeit unaudited, and only for the first quarter of its financial year – ANZ’s shares fell after its trading update, before moving higher. There was no improvement in the net interest margin, but in fairness, it was only one quarter – and there was good growth from the bank’s operations in Asia – but the update did not impress investors as CBA’s result did, mainly because the shares had been pushed higher leading into the announcement.

However, the bank looks to be on track to achieve its forecast of $3.08 billion in cash profit for FY13, barring any unseen events. ANZ is priced at the same FY14 yield of 5.5%.

Big-four laggard NAB’s first-quarter trading update did not shoot the lights out – revenue was up 3%, cash earnings rose 4% and the bank’s bad and doubtful debts fell by 10% – but the market liked the update, pushing NAB shares over the following days through $30, a level they have not broached for more than three years.

NAB still faces big problems extricating itself from its troubled UK operations, but at $30.30, it is priced on an alluring 6.4% FY14 forecast yield, equating to 7.8% to an SMSF in accumulation mode and 9.1% if the fund is paying a pension.

Westpac is yet to give its first-quarter trading update, but at $30.83 it is priced by the market at an expected FY14 yield of 5.8%, equating to 7% to an SMSF in accumulation mode and 8.3% if the fund is paying a pension.

Telstra confirms guidance

Telstra’s result for the December 2012 half-year was in line with market consensus expectations, with operating earnings up 3.7% to $4.99 billion, and net profit up 8.8% to $1.6 billion, on the back of what the market took to be strong growth in its mobile business, in which revenue rose 4.6% to $4.56 billion. 607,000 new domestic mobile customers were added to the billing book, bringing the number to 14.4 million.

Telstra announced a 14 cent fully-franked interim dividend, representing a $1.7 billion return to shareholders, and the market liked chief executive David Thodey’s comment that Telstra’s full-year earnings would be at the top end of previous guidance for the full year – which implies profit growth in the low single digits.

After going ex-dividend, Telstra trades on a 6.3% FY 14 yield, which corresponds to 7.6% to an SMSF in accumulation mode and 9% if the fund is paying a pension.

Retailers performing well – mostly

At Wesfarmers, half-year net profit rose by 9.3% to $1.28 billion, largely on the back of an excellent performance from Coles – where pre-tax profit jumped by 15% to $755 million – and a 25% jump in earnings from Kmart, to $246 million. Bunnings lifted its contribution by 6.8%, while Target reported a 20.4% fall. Insurance lifted its earnings, but lower coal prices and the high $A dampened the resources division’s profits.

Wesfarmers spread the largesse, lifting its interim dividend by seven cents, or 10%, to 77 cents. At $40.74, Wesfarmers is yielding 4.7% for FY14, translating to 5.7% for an SMSF in accumulation mode and 6.7% for a fund paying a pension.

Finally, of the high-yielding defensive plays that have driven the market, supermarket giant Woolworths boosted net profit in the six months to December 31 by 19% to $1.15 billion, and raised its interim dividend by three cents to 62 cents. At $35, Woolworths is priced at a 4.1% yield for FY 14, equivalent to 5% to an SMSF in accumulation mode and 5.9% for a fund paying a pension.

BHP loses CEO, but key divisions humming

Lastly, of the popular stocks that drive the market, BHP is not a high-yield play, but many SMSFs hold the stock for resources exposure. BHP’s underlying earnings before interest and tax (EBIT) for the half-year came in at US$9.8 billion – well ahead of consensus of US$9.5 billion – while net profit met the consensus estimate, at $5.7 billion. The dividend was in line with expectations, at US57 cents a share.

The shares were sold off, however, seemingly because of a fall in net profit, on the back of lower commodities prices and global demand, but that should have been factored in by the market. (There was also the minor detail of CEO Marius Kloppers stepping down early as CEO, but again, that was not a huge surprise to the market. See our story about that here.)

BHP is expected to earn about US$13.9 billion for the full-year. With the iron ore and petroleum divisions – which account for 80% of the company’s earnings – performing strongly, there is no reason to doubt BHP’s ability to meet that expectation.

So while there was a lot of noise and colour coming out of the half-year reporting season, the bottom line is that there was nothing to dissuade an SMSF proprietor from continuing to hold the group of stocks that form the backbone of long-term portfolios.

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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