The just-concluded August earnings reporting season saw the majority of companies in Australia's benchmark S&P/ASX 200 index delivering profits, increasing their cash holdings and either lifting or maintaining their dividends.
While there were several corporate results that were far from outstanding, especially in the resources sector, these were not unexpected as companies had raised the red flag to the market earlier.
Against the backdrop of a decent Australian economy, the overall solid financial results suggested that share prices have scope to track higher, especially when interest rates in the country are at historic lows, according to CommSec.
Of the 139 companies in the ASX 200 that reported full-year results, 123, or 88% of them, were profitable, although their combined earnings dropped 17% over a year to $30.4bn, CommSec said in a research note on September 1.
However, the decline was largely distorted by the result of mining giant BHP Billiton, which plunged into a loss of US$6.4bn from a profit of US$1.9bn in the previous year.
“To include BHP Billiton in the aggregate results would present an incorrect picture of the earnings season,” said CommSec economists Craig James and Savanth Sebastian.
Taking BHP out of the picture, their collective profit improved by 7% from a year ago, while average earnings per share were up 4%, the economists pointed out.
Of these profitable companies, 63% of them increased their earnings, which was above the long-term average of near 60%. Gold miners, healthcare companies and real estate investment trusts were some of the strongest sectors, as well as those linked to home building.
Meanwhile, a record 92% of companies announced a dividend and collectively, their dividends were 6% higher than the prior year. Of those paying a dividend, 82% of them either lifted or maintained their payouts, while the remaining 18% cut dividends.
Notable dividend changes
Qantas Airways declared its first dividend since 2009 after posting the highest profit in its 95 years of history and almost doubling earnings per share to 49 cents.
A 322% jump in net profit allowed Bellamy’s Australia to boost its full-year dividend by 316%, while Fortescue Metals Group lifted its FY16 dividend by 200% after earnings more than tripled.
Blackmores’ total dividend for the year was 102% higher, while Domino’s Pizza Enterprises paid 42% more to shareholders.
Meanwhile, Origin Energy and Santos paused paying dividends for the six months to 30 June.
Among the large-cap companies that reported full-year results, significant reductions in FY16 dividend were seen at BHP (-76%) and Woolworths (-45%). Wesfarmers cut its payout by 7%.
As for those submitting half-year results, Oil Search’s interim dividend plunged 83%, followed by Rio Tinto (-58%) and Woodside Petroleum (-48%).
Taking long-term view
In view of the wide gap between the best- and worst-performing companies from the latest results reporting season, investors will have to consider being very selective of companies and sectors, according to David Bryant, chief executive at Australian Unity Investments.
The traditional, easy option of focusing on banks and resources companies – mining and energy stocks – for their dividends “is gone”, Bryant said.
“The resources sector results have been very poor, as expected, and the banking sector is struggling to deliver much growth given low rates, strong competition, and increasing bad debt levels,” he said. “Investors still need to embrace equities, but they need to be very selective in companies and sectors they invest in.”
Chris Bedingfield, principal and portfolio manager with Quay Global Investors, said investors need to be realistic in their search for yield, or they could become over-exposed to risk.
He said central banks around the world are likely to continue to keep interest rates low, which means investors may have to adjust their expectations and refrain from pursuing unsustainable high-yield investments.
Long-term investors should “look past yield and concentrate on good underlying businesses with a defendable market position and long-term secular tailwinds”, Bedingfield noted.
“A well managed diversified portfolio remains as good a defence against a low interest rate environment as it does against volatility,” he said. “Stock selection will be more important than simply allocating to yield.”
While Australian companies have had to work hard to improve revenues, they continue to succeed in restraining costs, CommSec said.
With the Australian economy in decent shape, and in view of record low interest rates, share prices have scope to track profits higher, it stated.
“Global factors – that is, the US election and US interest rate hikes – may act to constrain domestic share prices in the short term, but fundamentally Aussie companies are in good shape, making money and choosing to pay dividends,” they said.
As more companies make progress in exiting failed businesses and restructuring their operations, and in view of the overall reporting season results and guidance, investors can expect better corporate earnings in the 2017 financial year, Australian Unity Investments’ Bryant said.
“The big write downs we saw this year, largely in resource companies, shouldn’t be repeated in the 2017 financial year,” he said. “Overall it has been a fairly stable reporting season, without too much unexpected bad news.”