Lessons learnt from the current results reporting season

Guidance is better than expected, buybacks are rewarded and BHP leads again.

The sharemarket as a whole is up for the month of August. Picture: NCA Newswire/Gaye Gerard

So far, so good. We are deep into the corporate reporting season and genuine ‘‘beats’’ are outnumbering disappointing “misses’’ by almost a factor of two to one.

More companies feel comfortable enough to provide some kind of guidance, though that is to be read as “more than feared” beforehand. Moreover, a lot of companies are swimming in cash, and they have not hesitated to reward shareholders through increased payouts, special dividends and share buybacks. Some others are using the cash to launch takeovers.

The sharemarket as a whole is up for the month of August. We still await more than 50 per cent of financial results from the companies scheduled to report for the season. Apparently, it’s the bottleneck among the accountants.

Typical updates show a company that can report its sales, if not profits and dividend, has recovered to pre-pandemic level, or it expects to achieve full recovery over the year ahead.

This observation is incredibly important for a sharemarket that has continued to trend upwards, setting new record highs along the way.

Most surprises, however, have come through cash dividends for shareholders, with company boards lifting payout ratios much sooner than expected, despite ongoing challenges posed by the pandemic.

In hindsight, it can be concluded both ANZ and National Australia Bank gave local investors the earliest indications that corporate Australia was gripped by quite an optimistic mindset in June.

While June-half financial numbers have been better than forecast, on balance, the outlook for the December half for many companies is a lot more modest as lockdowns across Australia remain in place.

We see estimates falling for retailers, travel agents, leisure companies and so on.

Yet, the market is drawing confidence from the past in that once lockdowns end, a strong recovery should follow.

This is why, so far, reduced forecasts because of the renewed impact from lockdowns have not been met with savage punishment this month.

Remember the market is always looking forward.

That’s why share prices remain supported by confidence that temporary lockdowns, even when extended, shall be followed up by a swift recovery in sales.

This confidence is fuelled by numerous companies reporting they were performing better-than-expected results up until new lockdowns were announced in NSW, then Victoria and elsewhere.

Unsurprisingly, companies announcing a share buyback usually are rewarded through additional outperformance, though not in every case.

Note, for example, the differences in share price performances for Janus Henderson (JHG), Suncorp (SUN) and Telstra (TLS) – all very strong – with the negative outcomes for Fletcher Building (FBU) and Emeco Holdings (EHL).

In terms of individual companies, irrespective of what happens between now and early September, August 2021 will be marked down as the season when the Big Australian – BHP – made that big dividend announcement: $US15bn, the largest in its corporate history.

But BHP also made a seminal deal with Woodside Petroleum (WPL) and pulled its sharemarket listing back home from many decades as a dual listed entity in both Australia and Britain.

Confronted with several opposing challenges and options, the current C-suite team at BHP has found a solution in a narrative that should be on every long-term thinking investor‘s mind.

Instead of milking its world-class assets in oil and gas at a time when the price of iron ore is probably heading down quite sharply from lofty $US200-plus per tonne levels, BHP has chosen a 100-year journey into a sector it believes is primed for natural growth in the century ahead – fertiliser – with hopes of becoming a powerful, low-cost disrupter in potash.

On the other side of the deal we find a super-enthusiastic Woodside Petroleum, and for obvious reasons. Today’s share price is a long way off from the highs seen in Q2 2008, and while Woodside stands to lose the mantle of Australia’s largest oil and gas company because of the merger between Santos (STO) and Oil Search (OSH), the company has spent the post-GFC period vainly trying to find growth and to develop new projects at a satisfactory return.

Actually, it’s worth pointing out the energy sector, in Australia and elsewhere, has been by far the worst performer post-GFC. Santos once was seemingly destined for that elusive $20. Origin Energy (ORG) shares equally used to trade in the mid-teens. Woodside used to be revered for its stable and attractive dividend.

Let’s take Woodside Petroleum, for example: a company ex-growth, struggling to find the capital without a large, shareholder-dilutive capital raising – a position it has been in for years. The deal with BHP will inject new momentum into the business that could possibly reverberate for many years.

But it won’t last forever and most certainly not as long as BHP’s engagement with Canadian potash. Deep down, below the surface, there is a real message in there for every investor: short-term versus long-term, instant reward against investing for longevity.

We all make those choices, or at least we should.

Rudi Filapek-Vandyck is editor at stock research service fnarena.