Earnings Season: Companies still keen on dividends
Corporate Profit Reporting Season (Early figures: 75% of companies reported)
Each ‘earnings season’ or ‘profit-reporting season’ CommSec tracks all the earnings results of ASX 200 companies to obtain a comprehensive picture of the aggregate health of Corporate Australia.
The earnings season has another week to go. But so far, 109 of the ASX200 index group have reported full-year results while 20 companies with a December 31 reporting date issued half-year (interim) results.
Overall, companies have struggled. Companies are still reporting profits – 93.6 per cent of companies that have reported full year results did report a profit, near the high of 94.4 per cent recorded in February 2017. But only 53.2 of companies were able to lift profits. Aggregate statutory profits are also up only modestly – just 4.7 per cent. But if BHP is excluded, profits are actually lower by 5.1 per cent.
Despite the tough conditions, more companies are issuing dividends. The 90.8 per cent of full-year reporting companies that elected to pay a dividend was the highest in three years and above the average of 86 per cent over the 19 reporting seasons covered.
And in further good news, seven companies elected to pay special dividends to shareholders. Aggregate dividends of full-year reporting companies lifted by 6.1 per cent.
The Profit Reporting Season
• Every six months CommSec tracks the earnings of Australia’s largest listed companies. Some analysts track whether companies have met broker expectations. That tells you little about the financial performance of companies. And unfortunately for many companies only a few brokers ‘cover’ all the stocks.
• Other analysts just track the earnings of those companies they ‘cover’ – the companies that they have detailed information on. CommSec includes all ASX 200 companies in its macro (big picture) assessment of the reporting season.
• Overall, investors have reason to be pleased with the performance of Corporate Australia. Arguably business conditions in the past year – especially the first half of 2019 – have been the toughest faced by companies in a decade. The China-US trade war has continued with the lack of agreement serving to cap investment and employment by companies across the globe. The UK exit from the European Union (Brexit) has been delayed, creating more business uncertainty. Fears of US recession have added to negative global environment.
• Closer to home, uncertainty about the outcome of the Federal Election crimped economic momentum, especially in the first half of 2019 (Bapcor). Sluggish wage growth constrained consumer spending together with lower home prices in Sydney and Melbourne.
• But quite remarkably, companies are still making money. In fact 93.6 per cent of the companies that have reported annual results, reported a statutory profit (net profit after tax). That is near the record highs recorded in ‘interim’ results seasons of February 2017 and February 2018. But only 53.2 per cent of companies lifted profits compared with a year ago. That is still better than the 49 per cent result in the ‘interim’ reporting season in February.
• Aggregate statutory earnings lifted by 4.7 per cent on a year ago, but once BHP is excluded, profits are down 5.1 per cent on the year. The percentage of companies that have issued a dividend is at 3-year highs despite a fall in cash levels and despite growth of expenses outpacing sales.
• Some of the themes of the season:
Share prices of companies were volatile on the day of their earnings announcement. But the spread of companies recording a lift in its share price has almost completely matched those recording a share price fall. That is, ‘ups’ matched ‘downs’.
Costs or expenses continue to lift, as has been the case for over a year (Qantas, Coles, Whitehaven Coal). Growth of cost of sales/expenses exceeds that of sales/revenues. Higher wage bills and energy costs were specifically noted.
Housing construction and development companies have reported challenging conditions with supply adjusting to weaker demand. (Sunland, Finbar, Stockland). Noticeably the office and industrial market has remained strong (Dexus, GPT, Mirvac, Charter Hall).
The experience of consumer-dependent companies has proved more mixed than conventional wisdom. Those companies that have adjusted strategy and listened to consumers have done well. This includes retailers like JB Hi-Fi and shopping centre owners like Scentre. Big box retailer, Aventus, has also weathered the fluky retail conditions.
The statistics: Full-year reporting companies
• CommSec has analysed the results from the ASX 200 companies that reported earnings for the year to June or half-year to December. Traditionally brokers or analysts focus on smaller subsets of results. And some merely focus on just whether companies have met or fallen short of “market expectations”.
• In the ASX200 index group, 109 companies with a June 30 reporting date have so far issued full-year results while 20 companies with a December 31 reporting date issued half-year results.
• Some of the key results for full-year (FY) reporting companies:
In aggregate, revenues have risen by 4.7 per cent on a year ago to $463 billion; expenses have risen by 6.2 per cent to $378.5 billion; profits have lifted by 4.7 per cent to $49.1 billion; dividends lifted by 6.1 per cent but cash fell by 2.4 per cent in recognition of the tough business conditions and desire to pay dividends.
The lift in dividends was influenced by special dividends by a number of companies including ASX, Coles Group and Medibank Private. Excluding these companies, aggregate dividend payments rose by 0.5 per cent.
Excluding BHP, profits fell by 5.1 per cent. While ‘underlying’ results may show a different picture, BHP reported a 90.4 per cent rise in statutory profit.
Profits of BHP, Telstra and CBA accounted for 41 per cent of all full-year profits.
The following points relate to those companies that reported full-year results (FY reporting companies).
On revenues, 79 per cent reported increases and 21 per cent reported declines.
On expenses, 81 per cent reported increases and 19 per cent reported declines.
On profits, 93.6 per cent reported a profit.
Only 53 per cent reported a lift in profit (long-term average 61.5 per cent).
Of those reporting a profit, 55.9 per cent have lifted profits and 44.1 per cent have reported a decline.
Of all FY reporting companies, 90.8 per cent issued a dividend and 9.2 per cent didn’t.
Of those reporting a dividend, 53.5 per cent lifted the dividend, 17.2 per cent cut dividends and 26.2 per cent left dividends unchanged.
On cash holdings, 56.9 per cent lifted cash holdings over the year and 43.1 per cent cut cash levels.
Cash holdings of both full-year and half-year reporting companies stood at $80.9 billion as at June 30, (full-year companies, down 2.4 per cent on a year ago to $74.1 billion).
• Surveys conducted over 2018/19 have generally indicated tougher business conditions. The NAB business conditions index hit record (21-year) highs in April 2018 but conditions have significantly softened in the period since. This hasn’t been confined to Australia – business surveys across the globe have softened since the second quarter of 2018.
• Companies are still making money. The near 94 per cent of companies that reported a statutory profit for the year to June was just off the record high of 94.4 per cent (19 profit seasons) recorded in February 2017.
• But the fact is that fewer companies were able to lift profits. In fact only 53.2 per cent of all companies managed to lift profits compared with a year ago. Certainly the ‘comp’ was harder – the comparison with a year ago. That was a time when business surveys were recording the best operating conditions for over 20 years.
• The even split between those lifting and cutting profits also lines up with the mixed results of company share price performances on the day of reporting earnings. The first day change in share price is useful for picking up various elements – whether results have met expectations; outlook statements; capital management initiatives; and judgements by investors on whether recent share price performances have been justified in light of the new information.
• Revenues rose in aggregate by 4.7 per cent – faster that the nominal growth of the economy (real growth near 2.5 per cent and inflation of 1.5 per cent). But the cost of sales and expenses rose even more on a year ago – closer to 6 per cent. A number of companies reported increases in the cost of doing business. Firms have been employing more staff and wage growth over the year was higher than a year ago (albeit only modestly). The cost of materials and transport costs also lifted over 2018/19, especially fuel prices (Qantas). A weaker Aussie dollar also added to the cost of imported materials.
• Companies are still keen to pay dividends. In fact the 90.8 per cent of companies electing to pay a dividend is above the longer-term average (86.3 per cent).
• Aggregate dividends are up 6.1 per cent over the year, but they were up almost 14 per cent on a year in the 2017/18 financial year. Some companies reported ‘special’ dividends, but the prevalence was not markedly greater than in the previous reporting season.
• Of companies paying a dividend, the 53.5 per cent that elected to lift dividends was the smallest proportion in around six years. The trend was actually in favour of companies keeping dividends stable – the 26.3 per cent of companies was the highest proportion in 7½ years.
• The tougher business environment meant it was harder to lift dividends and also to lift cash levels. In aggregate, cash holdings actually fell by 2.4 per cent, but there were more companies electing to lift cash levels (56.9 per cent) than those trimming cash levels (43.1 per cent).
What are the implications for interest rates and investors?
• Challenges remain for Aussie companies, although most of the challenges reflect global factors. The US-China trade war rages on. Brexit hasn’t been solved. BHP, Brambles, Iluka, Amcor and Worley have noted global risks. But Amcor believes it’s in a strong position to weather the uncertainties.
• Investors are fretting that an inverse yield curve in the US (shorter-term rates above longer-term yields) could lead to recession. Having said that, the US economy remains in good shape with 2 per cent plus economic growth, sub 2 per cent core inflation and sub 4 per cent jobless rates.
• At home, the election is out of the road. Home prices are now rising in Sydney and Melbourne. The Reserve Bank has cut interest rates twice and is prepared to cut rates further. And the federal budget is balanced, opening the door for fiscal stimulus if required. While housing demand is expected to lift, Stockland, Sunland, Fletcher Building and even Bingo are cautious about the outlook.
• Super Retail Group, Dominos, Bapcor are amongst those noting a pickup in the economy in the past six weeks.
• Certainly there is a bevy of infrastructure projects either underway or poised to get underway in the next few years. These projects will support engineering and construction firms and mining service companies.
• The lower Australian dollar has supported miners and other companies reporting results in US dollars. And the Aussie dollar is expected to hover in a US65-70 cent range over most of the current financial year.
• Despite all the challenges, Australian company balance sheets remain solidly in the black. And the Australian sharemarket managed to hit record highs at the end of July.
• Using traditional valuation tools, such as the price-earnings ratio (share prices to company earnings), the Australian sharemarket may seem ‘dear’ at 17 times earnings. But with interest rates at generational lows, and home prices up only modestly (with more supply to come), investors are asking what is a ‘fair’ or ‘normal’ PE ratio?
• The major uncertainty is how or when the US-China trade war will be resolved. Still, high quality and lower-priced Australian goods are attractive for US and Chinese buyers as well as buyers in other parts of the world. The lower Aussie dollar is certain helpful at a time of relatively high commodity prices. Notably the gold price continues to hover near record highs in Australian dollar terms.
• We expect the All Ordinaries to be in a range of 6,700-7,000 by the end of 2019, with the range for the ASX 200 between 6,600-6,900 points.
Craig James, Chief Economist, CommSec