ASX 200 earnings reflect solid financial health
The latest earnings season showed dividend yield at its highest level since the global financial crisis, with growing hope for capital returns from Australian equities this year.
For companies reporting throughout February, a record percentage in the S&P/ASX200 index declared a dividend, according to CommSec.
Collectively, they lifted their dividend yield – calculated by dividing a company’s dividend per share over the past 12 months by its current share price – to the highest level since the global financial crisis.
A total of 163 companies in the ASX 200 released earnings results – 136 for the first half and 27 for the full year. Those that did not submit their results have different reporting periods.
The results from these financial statements largely reflected an improving economy in Australia, CommSec economists Craig James and Savanth Sebastian wrote in a report dated February 29.
They said companies focusing on the domestic market benefitted from an improved operating environment in the final six months of calendar year 2015, as lower interest rates, a weaker Australian dollar and falling oil prices helped cut costs for both businesses and consumers.
“The good news is that the economy continued to improve in the second half of 2015. In turn, Corporate Australia has delivered, with solid results in the latest earnings season,” they said.
“[T]hat doesn’t mean that management of companies has been exultant. Far from the case. Revenues are still hard to come by, although the cost environment has been benign, leading to satisfying bottom-line results.”
Of those that released first-half results (1HFY16), almost 90% reported a profit – near record levels, the economists pointed out.
Further, 69% of the 136 companies posted better results when compared with the prior year’s corresponding period, according to CommSec. That was the best performance in the 12 reporting seasons the economists have covered.
Meanwhile, 82% of those releasing full-year earnings made a profit, although their combined profit was down 67.2% to $6.2bn because of substantial declines at Rio Tinto (ASX: RIO), Woodside Petroleum (ASX: WPL) and Scentre Group (ASX: SCG). Excluding these three, combined profit fell 3.6%.
While cash holdings of all the 163 companies dropped 4% over the year to $96bn, the levels “remain healthy”, James and Sebastian said.
Dividend yield boost
CommSec data showed a record 91.2% of the companies declared a dividend, with most increasing or at least maintaining the payouts. Dividends rose by 7.5% collectively.
Their dividend yield of 4.89% was the highest since the global financial crisis (June 2009), according to the data. Excluding that period, dividends were the highest in more than 24 years since June 1991.
High-yielding stocks paying regular dividends remain a focus for many investors, as low interest rates in Australia mean income from assets such as term deposits is difficult to come by.
“Some have criticised companies for a seemingly blinkered view of issuing dividends at all costs. And indeed some companies have re-assessed their policies or strategies,” said James and Sebastian.
“But there is competition for shareholder affections and it is a global competition.”
Judging from where the ASX 200 companies generally stood, their dividend payout ratios were sustainable, said Prasad Patkar, portfolio manager at Platypus Asset Management.
“The big question is about the sustainability of the dividends of the banks. This is the first time in many, many years that the market has expressed caution and concern about the ability of the banks to maintain their dividends.
“If the economy holds its own, the banks will be able to hold their dividends,” Patkar said in a webinar held on March 3.
The payment of a dividend can be of interest to an investor, however, there are many other indicators of a company’s financial health or sustainability.
Adrian Warner, chief investment officer at Avenir Capital, said negative sentiment in the market might have distracted investors from seeing “high-quality, growing and well capitalised businesses trading at prices that we think are actually pretty silly”.
“We are seeing a lot of interesting opportunities in the market at the moment, but our focus is not so much dividend-oriented. We are looking for mispriced securities.
“The opportunities are a lot more widespread than six months ago,” he said in a phone interview on March 1, referring to the underlying strength in many companies.
Focusing on fundamentals instead of market volatility, Warner said companies with strong cash flow-generating ability were “across a range of industries”.
“At all times, you focus on the fundamentals, but there’s no more important time to focus on the fundamentals than in periods of volatility when people let their emotions get the better of them, leading to misguided investment decisions,” he said.
As widely expected, companies in the resources sector – energy and mining stocks – suffered either losses or a substantial decline in profits.
As a result, aggregate revenue from companies reporting half-year results grew by just 0.2% to $281.4bn, while expenses increased 6.1% to $242.4bn, leading to a 46.6% decline in net profit to $13.5bn, CommSec data showed.
However, stripping out BHP Billiton (ASX: BHP) and South32 (ASX: S32), aggregate profit would be up by 2.1%, said James and Sebastian. Further, if Woolworths’ (ASX: WOW) first loss in 23 years was excluded, the aggregate profit would actually increase by 13.4%, they said.
Platypus Asset Management said healthcare and consumer discretionary companies delivered results that were better than their expectation.
In particular, Patkar said Ramsay Health Care (ASX: RHC), Healthscope (ASX: HSO) and Cochlear (ASX: COH) were standouts in the healthcare sector for the reporting season just concluded.
In the consumer discretionary space, the better earnings came from JB Hi-Fi (ASX: JBH) and Domino’s Pizza (ASX: DMP), he pointed out.
Meanwhile, large-capitalised companies that reported lower-than-expected results were Crown Resorts (ASX: CWN), Telstra (ASX: TLS) and Wesfarmers (ASX: WES), Patkar said.
As for the big four banks, Platypus chief investment officer, Donald Williams, said their share prices have “stabilised”.
“We still think that there’s a place for banks in the portfolio. Even though their earnings growth was within 2% to 4%, you have a very high dividend yield of 5% to 6%.
“So the total return that you can get out of your bank shares is still quite competitive compared to the Australian market,” he said.
Williams said the February reporting season had not changed his position on the Australian stock market for the rest of calendar year 2016.
He said companies – not just the miners – were reducing costs to improve profitability.
“Historically, Corporate Australia has been a little bit lazy on costs and we are keen to see this [cost reduction] trend continue. As a generalisation, we think this is a transition period.
“We are expecting the market to perform a little bit better than last year. I’m not particularly bearish at all on the Australian market. I think in the second half, investors have reason to believe that we will get an absolute return – capital return that is – out of Australian equities,” he said.
CommSec’s James and Sebastian said: “Current earnings results are supportive for the sharemarket and with the economy in good shape, share prices have scope to track profits higher.”
Australia’s economy expanded 0.6% in the quarter to December, taking 2015 growth to 3%, which was above both the decade-average of 2.7% and 15-year average of 2.9%, Sebastian said in a separate report on March 2.