Dividends surprise in tough profit season

One of the standout stories so far is Telstra. Picture: NCA NewsWire/Bianca De Marchi

At first glance, this year’s August reporting season is providing support to the strong market recovery witnessed since April, delivering more “beats” than “misses” in corporate results as analysts increase their price targets on leading stocks by around 5 per cent.

Of course, we need more time to put the reporting season in a proper framework. We have about 80 per cent of the market by value reporting to date.

Here’s what investors saw so far:

* Mild growth forecasts for FY21 (meaning growth won’t return until FY22 for many).

* Ongoing uncertainty with most companies refraining from providing guidance.

* About 67 per cent of companies reported falling earnings.

The biggest positive has come through numerous upside surprises for dividends from a list that includes AGL, AMP, Aurizon, CBA (the 98c H2 payout was higher than expectations), Evolution Mining, GPT, Newcrest and QBE.

Of course, as the above summary indicates, many more companies will not be paying any dividends this year, or next year, but many others won’t be holding back, effectively creating yet another demarcation between “winners” and “losers”.

As many of the dividend payers are receiving support from government programs such as JobKeeper, a discussion has broken out about the appropriateness of such payouts.

Ironically, the big miners are swimming in cash but showing restraint in paying out dividends, partly because costs are rising and more capex is needed.

To date, 59 per cent of companies have outperformed expectations, which is better than 51 per cent last season.

If these numbers hold up until early September, then 2020 would easily be the best August reporting season in Australia since 2013, but, again, it’s too early to make such projections.

Among the winners, industrial property leader Goodman Group yet again showcased to investors just how strong the shift to online spending has become.

It wasn’t that long ago Goodman shares offered no more than 3.5 per cent prospective yield, which elicited quite a number of calls dubbing the stock “grossly overvalued”, yet today the yield stretches no farther than 1.6 per cent, after the stock has more than doubled in price since 2016.

Another positive standout is REA Group where the FY20 release yet again showcased the true value of operating the No 1 real estate portal in the property-mad country that is Australia. (REA is controlled by News Corp, publisher of The Australian).

As with Goodman, REA shares have continued to climb and remain close to record highs. The key difference with the industrial property giant is that analyst price targets at REA are all below the present share price.

Rio Tinto also delivered a strong performance, overshadowed by controversial destruction of the Juukan Gorge along with the board restraining itself with the half-year dividend.

Some results were strong, but the market had other ideas. Hence the likes of ResMed and Breville received capital punishment post-market update.

But one of the standout stories so far is Telstra, which dropped yet another booby trap among investors, creating more doubt about dividend sustainability and the way forward for Australia’s largest telco.

It wasn’t that long ago that I reminded investors that with so many unhappy customers, a conglomerate under such pressure is highly unlikely to elevate itself to a position from which it can deliver long-lasting, sustainable benefits for loyal shareholders.

After Telstra’s FY20 report, the share price is back hovering above the $3 mark, not far off the March low, while analysts’ updated forecasts are implying lower dividends this year, and yet again in FY22.

I am increasingly leaning towards the idea that Telstra is looking to create value through cutting itself up in smaller pieces, which shall be spun-off in order to make the sum of the parts count for more than the conglomerate.

Rudi Filapek-Vanydyck is the editor of stock research service www.fnarena.com