Dividends surprise so far in reporting season

Dividends have been a key upside surprise of the August reporting season

The market has been will to look trhough short-term weakness in earnings due to COVID-19. Picture: AAP

Dividends have been a key upside surprise of the August reporting season, albeit Bendigo Bank’s decision to defer its final dividend injected a note of caution before trading updates from Westpac and ANZ this week.

Bendigo Bank — which is heavily exposed to the lockdowns in Melbourne — also undershot earnings estimates, exceeded cost estimates, disappointed on capital generation and couldn’t give earnings guidance, pushing its shares down 6.6 per cent, while Westpac, ANZ and NAB fell between 2.3 and 2.6 per cent.

The S&P/ASX 200 share index fell 0.8 per cent to 6076.4 points, dragged down by the financial sector.

However, there were plenty of positive share price reactions to results, with Beach Energy up 6.1 per cent, JB Hi-Fi up 4.8 per cent to a record high close of $49.60 and BlueScope up 2.3 per cent.

For the ASX 200, the August reporting period is 25 per cent complete by number and 39 per cent by market capitalisation as of Monday. By Friday, the picture will be clear as 65 per cent of the top 200 companies or 80 per cent by market cap will have reported.

So far, corporate outlooks and earnings per share revisions have been on the whole disappointing.

As of last week the median stock had seen a downgrade of its consensus 2020-21 earnings per share estimate by 2.7 per cent, according to UBS, the worst since the bank started tracking EPS revisions. The consensus now expects a massive 22 per cent fall in earnings per share and a 38 per cent fall in dividends for 2019-20, followed by a 9.6 per cent bounce in 2020-21.

But at the same time, share price reactions have been surprisingly strong, with the median stock seeing a 0.3 per cent outperformance on the day of its result, the best reaction since 2016.

“In our view, the gap between share price reactions and EPS revisions likely reflects that the market is willing to look through near-term weakness in earnings due to COVID-19,” says UBS Australia equity strategist Pieter Stoltz.

He finds that EPS “beats” are being rewarded with positive share reactions, but EPS “misses” are not being punished, albeit the market is far more interested in guidance, with downgrades among the industrials ex-financials being punished more than upgrades are being rewarded.

The “beat-to-miss” ratio of 1.3 is above the long-term average and a rise from 0.9 recorded in the February 2020 reporting season, suggesting that “analysts may have overshot 2020-21 EPS downgrades, albeit as reporting season progresses, the beat-to-miss ratio may fall,” Stoltz says.

Still, 13 per cent of large companies have upgraded guidance, while 39 per cent have downgraded. The “upgrade-to-downgrade” ratio of 0.3 was the worst since at least August 2014.

But perhaps counterintuitively, dividends and capital management have continued to surprise on the upside for large companies despite the COVID-19 hit to cash flows and the market has rewarded companies that have beaten dividend estimates as much as it has punished dividend misses.

“Surprisingly, the main upside surprise this reporting season has again been to dividends,” Stoltz says. “We find that 30 per cent of large cap companies have beat expectations on dividends, while only 22 per cent have missed.”

JP Morgan’s head of Australian research Jason Steed makes the point that in keeping with the trend of recent reporting seasons, revisions to dividend forecasts have been less negative than those to earnings.

“This trend reflects a persistent willingness of boards to raise payout ratios to maintain or grow dividends,” Steed says.

“So far in August, over half of those that have reported have seen dividend forecasts raised, while 30 per cent have encountered downward revisions.”

Stoltz also finds trends on costs have generally been positive, albeit some companies like Bendigo Bank have said COVID-related costs may remain elevated.

Meanwhile, the rise in the market’s one-year forward price-to-earnings valuation to about 20 times has been driven by the high PE or “growth” companies, which have rerated to record highs.

That has meant the dispersion of valuation between the cheapest and most expensive stocks is also near record highs, along with the overall valuation of the market.

Looking ahead, Stoltz sees upside risk to dividends for BHP and Fortescue, upside risk to EPS and the outlook for Amcor, upside risk to Charter Hall’s outlook and upside risk also for NextDC.