When Federal Treasurer Jim Chalmers hands down the budget on 14 May, the pressing need for fiscal responsibility is likely to trump spending programs.
In an era of fake news, it’s getting more difficult to separate fact from fiction. Yet it’s imperative we do so because the consequences for being deceived can be enormous.
Good news tipped on dividends and buybacks
Investors can expect good news for stocks in the most popular ASX companies in the reporting season this month. Consensus forecasts on corporate earnings are the highest for more than ten years.
With about 170 of the S&P/ASX 200 companies reporting between now (early August) and early September, this season’s results, in the middle of gloomy Covid news, are being eagerly anticipated.
According to Reece Birtles, the CIO Australia at global equities manager Martin Currie, the lead-up conditions for companies have been “extremely strong”, continuing the path prompted by the vaccine announcements last November.
He said last week (August 5) that despite the setbacks of lockdowns, companies generally were in strong positions to report earnings and dividends which were above expectations for the year to June 30.
Birtles also expected more companies to announce returns of capital to shareholders, although he said the company comments and forecasts on the outlook were likely to be tempered.
He said: “The period since the February reporting season has had the strongest earnings per share (EPS) upgrades that we have seen in the 10 years since the GFC, with upgrades to EPS forecasts of 4.6 per cent in July alone.
“We have also seen strong expectations for profit margins, up significantly from the subdued position in 2020. This is really being driven by the acceleration of digital transformation, cost outs and a shift away from physical delivery. We do however see some risk to the longevity of profit margin expansion given lockdowns and that they are now already above pre-COVID-19 levels.”
As a guide, the World Purchasing Manager Index (PMI), considered a reliable indicator of conditions, has reached a peak. Birtles expects those conditions to remain at high levels, perhaps with slower growth, despite the resurgence of Covid cases.
Australian consumer confidence and business conditions have also showed good indications of the earnings environment for companies through the six-month period since last reporting season.
Other indicators – such as wages growth, house price growth, building approvals, iron ore and copper prices – are supportive for earnings in consumer, construction and resources industries.
In the energy space, the oil price has recovered strongly from Covid lows as the demand returns with activity, however, earnings conditions have been more subdued due to increased pessimism around energy transition and a reluctance to drill new wells, Birtles says.
Martin Currie believes that the season’s news about dividends will be even better for investors than the news about earnings. The indicators have made the firm more optimistic on dividends per share (DPS) and dividend payout rations.
“We actually think that better DPS results will be better than EPS upgrades,” Birtles said. “Companies had been continuing to reduce their payout ratios to conserve cash during the Covid-19 uncertainty, with ratios falling from an average of 65 per cent to 58 per cent over last 12 months. We are now beginning to see companies talking about and raising their ratios again.”
As Martin Currie commented in June, many companies have high franking balances and are holding high levels of cash on their balance sheets. Like consumers, companies were very conservative in 2020, hoarding cash against the economic uncertainty and paying down debt.
Will Baylis, Martin Currie portfolio manager, said in a June blog: “They now have more free cash flow available to pay dividends than a year ago.”
He also said that many companies had been under-geared. For instance, the firm’s ‘Equity Income’ portfolio had an average debt-to-market value of only 25 per cent.
In a record low interest rate environment, it was not unreasonable to expect companies in an economic recovery to take advantage of the low cost of debt and return excess capital to shareholders, Bayliss said.
The capital management actions expected to be announced this season should contribute to income growth available to investors, particularly those on low or zero tax rates, such as retirees and super fund members.
Martin Currie is expecting to see a spike in announcements across the capital management range, including on-market and off-market buybacks and special dividend payments to accompany the rebound in dividend payout ratios.
– Greg Bright
Note: Martin Currie is a sponsor of Inside Investor’s sister title, Investor Strategy News. Any views expressed are those of the author and not necessarily those of Martin Currie.
