As the full-year 2020-21 reporting season gathers momentum this week, the trend from some of the early results is expected to solidify – and that is, big rises, as earnings return to pre-pandemic levels, from the ravaged results of a year ago.
Rio Tinto (RIO), the country’s biggest iron ore miner, set the tone with a record first-half profit of $US12.2 billion ($16.2 billion) – more than double the $US 4.75 billion at the same time last year – and a US$9.1 billion ($12.1 billion) dividend bonanza, as booming Chinese demand drove the iron ore price to a record high. Rio paid shareholders an ordinary interim dividend of 376 US cents ($5.01) a share, which was more than twice the 155 US-cent interim dividend paid a year ago, and boosted that with a special dividend of 185 US cents ($2.47) a share, as 75% of underlying earnings found their way into shareholders’ pockets.
Given the extent of the surge in Rio Tinto’s profit – and dividend largesse – the market is expecting similar things from BHP and Fortescue Metals Group (FMG). Analysts’ consensus (collated by FNArena) envisages BHP reporting earnings per share (EPS) of 347.8 US cents ($4.64) – more than double the 157.3 US cents paid last year – flowing-through to a full-year dividend of 305.3 US cents ($4.07) a share, more than 2.5 times the FY20 dividend of 120 US cents.
At Fortescue, analysts’ consensus is looking for FY21 EPS of 333 US cents ($4.44) – again, more than double the 153.9 US cents earned in FY20 – enabling a dividend of 309.3 US cents ($4.12) a share, at a whopping payout ratio of 93%. If that dividend expectation is borne-out it would represent a 76% rise from last year.
In the general market (S&P/ASX 200 stocks), the market is looking for across-the-board 50% rise in EPS (earnings per share) and 56% rise in dividends, according to Shane Oliver, head of investment strategy and chief economist at AMP Capital. That outcome will be powered by an expected doubling in profits in the resources sector, and 58% growth in bank earnings.
Of course, comparisons with FY20 reporting season – which were scarified by COVID-19 in the second half – are bound to improve. One year ago, the average EPS figure in the Australian market fell by 19.3%. Given the stop-start economic activity we saw over the period July-to-end-December 2020, analysts were pessimistic at the start of the year: the consensus forecast for full-year FY21 was for EPS growth across the market at 8%. But a strong half-year reporting season in February lifted that to 15%, and it has climbed ever since – in particular, as the outlook for resources and financials continued to improve, and the market anticipates broader re-opening. (In fact, upgrades to market forecasts have now risen for eleven consecutive months.) Against this, however, there is always the potential for COVID to continue to throw up potential bad news, for example, on fresh outbreaks and new variants. The market is trying its best to be optimistic on this front.
On Wednesday, we hear from Commonwealth Bank, which is expected to continue the barrage of share buybacks from the banks, with a buyback to the tune of up to $5 billion forecast. Analysts say the banks are sitting on at least $30 billion in surplus capital available for capital returns; which will augment the hefty profits and ordinary dividends already expected. On FNArena’s collation, analysts’ consensus projects CBA (the only one of the big four to report full-year results to June 30; the other three have a financial year ending September) as showing an EPS fall (from 544.9 cents to 471.3 cents) but lifting its full year dividend by 15%, from 298 cents to 343.3 cents. That is a stark contrast to last year, when the Australian Prudential regulation Authority (APRA) intervened to cap bank dividends at 50% of profits, it was so concerned at the potential economic effects of the pandemic – the regulator ordered the banks to conserve capital. They did; and now they’re preparing to put some of it back in shareholders’ hands.
Not all companies will benefit from the improved outlook, of course, because some cannot operate fully; and stop-start economic activity is still the norm for many sectors. Apart from the banks and the miners, among the cyclicals that have ridden the COVID recovery, things are looking quite good – although the market won’t be happy with any outlook statements that are not relatively upbeat.
Furniture retailer Nick Scali (NCK), for example, one of the first to report this season, doubled its full-year profit, and lifted its dividend by 11%, as it cashed-in on a shopping bonanza as consumers updated their home furnishings during lockdowns and working from home. However, chief executive officer Anthony Scali sounded a clear warning on the big-picture global effects of COVID-19, saying the company’s shipping costs were up to five times more expensive than pre-COVID, and these higher costs, if sustained, would eventually have to be passed to consumers.
Online homewares retailer Temple & Webster (TPW) also came out with booming full-year numbers, with sales up 85% to $326.3 million, earnings more than doubling to $20.5 million, and active customer numbers surging 62% to 778,000. Fourth-quarter revenue rose by 26% and the company said FY22 was off to a flying start, with sales rising 39% for the first 24 days of July, a period during which Victoria, Sydney and Adelaide all experienced lengthy lockdowns.
Temple & Webster flew through the worry that the market held that the end of JobKeeper would have flowed-through to a sales slowdown for the online retailers over the last few months.
However, there are still pockets of the market that simply can’t operate at normal levels. Qantas (QAN), for example, will report another loss for FY21, for obvious reasons, and won’t pay a dividend for the second straight year; analysts are looking for a rebound to profit in the current financial year (FY22). That does not stop plenty of them recommending QAN as a buy: FNArena posts an analysts’ consensus price target of $5.75, which is 24.8% above the current share price; while Thomson Reuters’ analysts’ consensus valuation is similar, at $5.71.
Reflecting Qantas’ troubles, Sydney Airport (SYD) is also expected to slip into the red on an EPS basis, although it is foreshadowed to at least pay a dividend (unfranked): after no payout last year, SYD is expected to pay 1.4 cents a share, a far cry from the 38-cent dividend it paid before COVID, in FY19.
Broking firm Citi expects the most positive surprises to come from banks, miners, healthcare, retail and property fund managers and residential developers, while the technology sector and retail landlords have “more potential for downside” relative to expectations.
Citi is looking for positive earnings surprises from the likes of BlueScope Steel, (BSL) Charter Hall (CHG), Goodman Group (GMG), Harvey Norman (HVN), Liberty Financial (LFG). Mount Gibson Iron (MGX) and Qube Holdings (QUB), all of which it rates as ‘buy,’ but it warns that negative surprises could come from InvoCare (IVC) and Scentre Group (SCG).
Broking firm Morgans has posted its “key tactical calls,” on the positive side, for reporting season as: Amcor (AMC), Ansell (ANN), TPG Telecom (TPG), Sonic Healthcare (SHL), Dalrymple Bay Infrastructure (DBI), Afterpay (APT), Computershare (CPU), Carsales (CAR), BHP (BHP), Santos (STO), OZ Minerals (OZL), Zip Co (Z1P), Alliance Aviation (AQZ), Maas Group (MGH), Eagers Automotive (APE), Lovisa (LOV) and Booktopia (BKG).
But the broker is negative on what we’ll see from Ramsay Health Care (RHC), Cochlear (COH) and HUB24 (HUB).
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