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Economics & Markets

Reporting season in review

By Thomas Young
Sydney, Australia

After a record 12 months of dividends and off-market buybacks from Australian companies the most recent reporting season has really given us more of the same.

We saw two more off-market buybacks announced – one from Qantas and one from McMillan Shakespeare – which takes the number of off-market buybacks announced over the last year or so to seven, which is quite remarkable given that over the past six years we’ve just had six off-market buybacks.

We’re also seeing more special dividends paid from the likes of Rio Tinto, Coca-Cola Amatil and Coles, who have all announced special dividends over this reporting season in line with this trend to of returning capital to investors.

Australian equities continue to deliver

Australian equities continue to be one of the last reliable sources of income in what is increasingly a low rate environment. The dividend yield on the ASX200, including the value of franking credits is around 5.8 per cent at the moment.

In fact, you have to go back to the 1950s to see the last time that dividend yields on Australian equities were this far above term deposits, while since 1900, dividend equity yields have never been this far above what you can get on 10-year Government bonds.

Tough conditions set to challenge

But while income is great, reporting season has really shown that the operating environment for Australian companies is quite tough. Starting valuations for Australian equities are relatively high, and are looking increasingly at odds with the bond markets which, thanks to the inverted yield curve, are signalling that potentially trouble is ahead for the market.

It was a relatively challenging reporting season; more companies missed on earnings than surprised on earnings and when you look at dividends, roughly about one-third of the market cut their dividends relative to 12 months ago. On that measure, this made it the worst reporting season since 2012 so we are facing a relatively challenging environment.

Trade war and retail upside

What is clear is that the US-China trade war is beginning to have an impact on Australian companies across a relatively broad range of industries. Even companies that aren’t directly manufacturing in China are calling out the disruption to global supply chains, and the impact tariffs are having.

One of the bright spots for reporting season has been domestic consumer retail. Stabilising house prices and a boost to confident post-Federal election, as well as the tax cuts that came through on July 1, have meant that most retailers noted improved volumes and improved conditions. It’s been a relatively challenged sector for quite a number of years but it’s clear that the outlook for this sector is now stronger than it has been for some time.

Dividends forecast to stall

However, it’s worth investors remembering that consumer retail is a relatively small part of the ASX200 index, and if you’re invested in Australian equities for income reasons 40-45 per cent – or nearly half of the ASX200’s dividends – come from just six stocks, which are the big four banks and the two miners.

If you look at what brokers are forecasting for those stocks, dividends are actually forecast to decline over the next couple of years as a function of some of the well-known challenges facing the banking sector and a normalisation of commodity prices in the resources sector.

Given the amount of dividend that comes from these stocks there is not forecast to be much in the way of dividend growth in the next few years.

  • Economics & Markets
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  • Income
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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