Dividends a focus as big names get ready to report results
Banks and retailers the focus as results season hits its straps.
Australia’s latest corporate earnings season is picking up pace, and this week we will see results from top-tier companies including our largest by market value, Commonwealth Bank, which reports on Wednesday.
Other big-name results coming this week include blood products group CSL, Telstra, gold miner Newcrest and energy sector giant AGL, which recently announced $2.7bn of writedowns on its power station assets.
This profit season is the first real glimpse for investors into how companies performed operationally during the second half of 2020 as the COVID-19 pandemic dragged the Australian economy into recession for the first time in 30 years.
But most importantly for shareholders will be what decisions company boards have made on their dividend payouts for the reporting period to the end of December.
And, in this respect, many investors will be paying close attention to Commonwealth Bank.
It is the first off the rank in terms of reporting results, because the other three of the “big four” — ANZ, NAB and Westpac — all have different fiscal-year balance dates. (CBA’s interim divided is widely expected to be double last time at about $1.47 for the half year compared to 98c six months ago)
Most people have an investment exposure to the big banks and their fully franked dividend streams, either directly as shareholders, through exchange traded funds and unlisted managed funds, or indirectly through their superannuation fund.
The investment yields from bank dividends have traditionally been high, but payouts have wavered in recent times due to COVID-19.
Last year, the Australian Prudential Regulation Authority mandated that, for capital management purposes, banks could continue paying out dividends, as long as any payments they made didn’t amount to more than 50 per cent of their profits. APRA has since relaxed its restrictions.
All the major banks announced lower dividend payouts in 2020, reflecting the serious effects of COVID on their business operations as they contended with a wave of loan repayment deferrals by businesses and individuals, a large spike in bad and doubtful debts and a slump in new loan applications.
The banks are still dealing with these problems, albeit to a lesser extent with many borrowers having resumed loan repayments over recent months. New loan applications are also on the rise, with record low interest rates spurring home mortgage activity.
This is expected to gain even more momentum following the Reserve Bank’s statement last week that interest rates are unlikely to rise until at least 2024.
A window into what our end-of-December earnings report card may ultimately look like is the fourth-quarter company results being announced to the US sharemarket.
Despite the escalation of COVID-19 transmission across the US, and global economic growth remaining hinged to how countries deal with the virus through vaccination programs, consumer spending has been growing rather than receding.
Surging online retail sales over the last quarter — particularly online sales — have led to record earnings results for Amazon, Apple and Google parent Alphabet.
For the most part, Australian retailers with robust online shopping channels have been riding the same big consumer spending wave during COVID.
Furniture retail Nick Scali announced a record interim profit and dividend in recent days: the retailer cited booming sales and earnings margins during the six months to December 31.
We won’t know specifically how other big retailers have fared recently until later in the month.
The earnings results from our biggest goods retailers, namely Wesfarmers (owner of Bunnings, Target and Kmart) and Woolworths South Africa (owner of David Jones and Country Road) are not due until later in February. Harvey Norman and online group Kogan will report nearer the end of the month, while Myer’s result is scheduled for early March.
Among market leaders, News Corp (owner of The Australian) announced it had more than doubled its December quarter net profit to $US261m ($343m) after a surge in digital subscriptions and advertising revenue.
For Australia’s other biggest companies, their latest earnings results will almost totally be tied to offshore demand during the last six months.
The results from BHP, Rio Tinto and Fortescue will reflect the almost 70 per cent surge in the iron ore price over the past year, from about $US92 a tonne to more than $US155.
Energy companies, on the other hand, have been experiencing tough operating conditions. Last week Anglo-Dutch oil company Royal Dutch Shell reported its lowest profit in two decades, with the impact of COVID-19 on energy demand worldwide leading to major cuts to its oil and gas production. Rival BP announced a $US5.7bn loss from the fourth quarter.
Australia’s Origin Energy has already flagged its earnings were under pressure as a result of the slump in wholesale power prices.
For investors, the latest earnings season will bring mixed returns under the shadow still being cast by COVID-19.
This underscores the benefits of a globally diversified exposure in managing risk, particularly given the expectation for higher risks in 2021 and the lower-returns environment over the medium term.
Maintaining a broadly diversified portfolio that’s appropriately aligned to your goals and risk tolerance is important, as is avoiding taking on too much risk by overreaching for income or growth.
Tony Kaye is senior personal finance writer with Vanguard Investments Australia.
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