Summary of Sydney Wealth Management Autumn Update
The company earnings season was mixed. Although more companies reported increased profits than reported falls, this was at the lowest rate since the depths of the GFC. Commsec noted that revenues were 4.7% higher (to $312.0b), expenses declined 3.0% (to $258.5b) and profits increased 3.3% (to $35.6b). Aggregate dividends fell by 2.4%; and cash holdings rose by 1.7%. Statutory earnings increased by around 3.3% compared to one year ago, however once BHP and CBA were excluded, earnings (on a statutory level) decreased by 5.6%.
In the face of this declining landscape, the Australian share market hit a new record high when the ASX200 reached a record close of 7,162 points on 20 February 2020 before the global sell-off that was fanned by fears over the effect of COVID-19 on the world economy.
Whilst dividends remained solid, only half the companies raised their dividends, below the long-term average. The dividend payout ratio (defined as the Dividend Per Share (DPS) divided by Earnings Per Share (EPS)) decreased. This was due to boards conserving cash for growth and/or as a precaution against the uncertain impact of COVID-19 over the coming year. This led to very few companies proposing capital management initiatives. The companies with the strongest balance sheets within the ASX100, BHP and RIO, whilst paying solid dividends, have resisted calls to pay special dividends, notwithstanding the high iron ore prices recorded over 2019 and the surprisingly robust prices in 2020 to date. This is a prudent move as cashflows are likely to be heavily impacted by a slowdown in China as a result of COVID-19.
One of the most concerning aspects of reporting season was the number of companies warning of negative impacts due to COVID-19, with more expected to come down the track. This has raised the prospect of a deeper, more drawn out hit to the global economy and the uncertainty has affected asset prices. Around 30% of large cap companies upgraded profit guidance for 2020. These may need to be pared back in the months ahead if the COVID-19 epidemic continues to worsen, though the effects will be mitigated to some extent by the weakening AUD.
Winners and Losers
The winners and losers (and in-betweens) of the reporting season can be summarised as follows:
- AGL Energy (FY20 profit now expected to be at the upper end of the guided range)
- Carsales (profit increased 7% and a solid outlook was provided)
- Coles and Woolworths (both reported sales growth of around 3%)
- CSL (increased earnings by 11% and upgraded FY20 profit growth)
- JB Hi-Fi (sales rose 4% with a solid outlook)
- Telstra (re-affirmed upgraded guidance announced in September)
- Wesfarmers (underlying NPAT increased 6%, underpinned by strong returns across all businesses)
- Sydney Airport (EBITDA rose a sound 4% but provided no distribution guidance due to the uncertainty around COVID-19)
- Cochlear (downgraded profit guidance for FY20)
- NIB (Australian Resident’s Health Insurance (ARHI) net margin contracted, underlying profit lower).
- Treasury Wine Estates (downgrade to FY20 profit growth, additional downside possible due to the effects of COVID-19)
- Woodside (profit down 75% and dividend cut)