This article appeared in the March 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
The major highlight, and a very important one, for the interim reporting season was the 4.9 per cent rise in dividends declared. As well, a number of small and mid-cap companies stood out strongly. Morningstar's ROSS BIRD says that dividends continue to be an ever-increasing component of total returns for shares.
By Ross Bird, Morningstar
The 2011 December half-year interim profit-reporting season was expected to show weak results in many sectors. Earnings were under pressure from the strength of the Australian dollar, rising business input costs, cautious consumers, below-trend bank lending, and the fragile global macro environment affecting overseas business divisions.
Subdued profit results reported to date have caused overall Morningstar median earnings-per-share (EPS) growth forecasts for companies we cover to fall from 7.5 per cent to 6.3 per cent for the current forecast full year. For the second forecast-year, median EPS growth rises slightly from 8.7 per cent to 9.3 per cent, but this is largely because of a rise from a lower base than from any material upgrades to medium-term profit expectations.
Results to date highlight the challenging conditions faced by many industries. While operating revenue is up 6.3 per cent on the previous corresponding period, earnings before interest and tax margins are down 4.4 per cent, leading to net profit after tax (NPAT) growth of minus 2.6 per cent for companies we research.
The major bright spot, and a very important one, for the interim reporting season was the 4.9 per cent rise in dividends declared. As well, a number of small and mid-cap performances stood out strongly.
Dividends to the rescue
A snapshot of the top 20 largest-cap companies reveals the important contribution dividends are making to investor returns. While the average rise in dividends is a modest 3.4 per cent in the half year for this group, the weighted average rise is a robust 6.2 per cent thanks to the large dividend increases for the top two companies, BHP Billion and Rio Tinto.
Growth in bank dividends was a little more subdued with the exception of the National Australia Bank, which was up 12.8 per cent on the previous corresponding period.
For Australian investors, the interim 2012 reporting season has generated dividend payments of $16.4 billion among the top 20 companies (excluding QBE Insurance, which at the time of writing was yet to report), compared to $15.8 billion in the previous corresponding period.
This is a rise of $626 million in dividends over the first half of 2010-11, or 4 per cent. Allowing for overseas issued capital of BHP, Rio and News Corporation, total dividends grew to $18.9 billion from $17.8 billion in the first half of 2010-11, up $1.1 billion or 6.2 per cent.
Table 1: Top 20 companies dividends for 2011 December half-year compared to previous corresponding period (pcp) in A$ cents.
|Company||Div||pcp||% chg||Franking %|
Source: Morningstar. Note. QBE was yet to report as this research was completed.
Overall, the strongest profit results have come from a range of mid-caps, such as:
Domino's Pizza Enterprises (DMP)
- Net profit after tax up 23 per cent on the previous corresponding period. We expected an impressive result and were not disappointed. Double-digit profit growth is becoming the norm. Revenue increased 9.6 per cent, but relatively fixed overheads helped Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) margins firm 170 basis points and lift EBITDA by 21.7 per cent. The interim dividend rose from 10.4 cents in the first half of 2010-11 to 13.0 cents fully franked.
- Net profit after tax up 20 per cent on the previous corresponding period. The uptake of CRZ's iPhone application increased 169 per cent from a low comparable base. The consumer audience wants access to the latest price information and inventory details at their convenience to locate the most suitable vehicle for their needs. This first-half result further demonstrates how the media industry is rapidly evolving, and marketing directors are reallocating budgets to ensure more money is spent on online/mobile formats to capture what is a niche and highly engaged audience. The interim dividend rose from 9.4 cents in first-half 2010-11 to 11.3 cents fully franked.
Mermaid Marine (MRM)
- Net profit after tax up 35 per cent on the previous corresponding period. After reporting robust growth in 2010-11, buoyant earnings growth continues for Mermaid, primarily thanks to strong demand for the vessel fleet as a result of significant oil and gas project activity in the North West Shelf, Browse Basin and Timor Sea.
Among the large-cap stocks, while generally not as strong in absolute growth terms, pleasing results were reported by Telstra, ANZ Bank, Commonwealth Bank, Westfield Group, Iluka, Seek, Monadelphous, and Wesfarmers.
On the flipside, disappointing results were more prominent among the larger-cap brigade. These included:
- BHP Billiton and Rio Tinto were slightly below expectations because of rising costs
- GWA Group continues to suffer from a housing-led slowdown
- Westpac suffered from a contraction in net interest margin
- Brambles reported a very weak European division
- Goodman Fielder experienced ongoing tough trading conditions
- Sims Metal Management announced a large writedown of US assets and reported tough trading conditions in the US and UK
- Pacific Brands reflected the tough times in the retail sector and higher input costs
- Ten Network and Fairfax Media results were indicative of tough times in the traditional media segments.
Dividends to the fore
With corporate balance sheets generally in good health, companies are aware of the need to reward shareholders through dividend growth to partly supplement the modest levels of capital growth since the GFC. In some instances, increased payout ratios drive dividend growth, such as Stockland, which saw an 8 per cent decline in underlying profitability while its dividend rose 2 per cent.
Our current Morningstar universe forecast 2012 financial year dividend yield is 5.1 per cent, growing strongly to 5.6 per cent in 2013. Dividends continue to be an ever-increasing component of total investment returns for equities, highlighted by the strong performance of high-yield infrastructure and telecommunication shares last year.
Significant interim dividend rises over the previous corresponding period were:
- BHP Billiton - up 11 per cent to 51.03 cents fully franked
- BWP Trust - up 7.3 per cent to 6.63 cents unfranked
- Cochlear - up 14.3 per cent to $1.20, 60 per cent franked
- Charter Hall Retail REIT - up 8.3 per cent to 13.0 cents unfranked
- Carsales.com - up 20.2 per cent to 11.3 cents fully franked
- Domino's Pizza - up 25.0 per cent to 13.0 cents fully franked
- Iluka - up 587 per cent to 55.0 cents fully franked
- Mermaid Marine - up 25.0 per cent to 5.0 cents fully franked
- Monadelphous - up 25.0 per cent to 50 cents fully franked
- Oakton Limited - up 57.1 per cent to 5.5 cents fully franked
- Primary Health Care - up 66.7 per cent to 5 cents fully franked
- Ramsay Health Care - up 13.3 per cent to 25.5 cents fully franked
- Rio Tinto - up 35.9 per cent to 84.2 cents fully franked
- Seek - up 22.1 per cent to 8.3 cents fully franked
- Transurban - up 11.5 per cent to 14.5 cents, 24 per cent franked
- Wesfarmers - up 7.7 per cent to 70 cents fully franked.
Significant falls in interim dividends over the previous corresponding period were:
- Aquarius Platinum - to zero, from 3.95 cents, unfranked
- Goodman Fielder - to zero, from 5.25 cents, 30 per cent franked
- Billabong - to 3.0 cents unfranked from 16.0 cents, 50 per cent franked
- Pacific Brands - to 2.0 cents fully franked from 3.1 cents, fully franked
- Western Areas- to 5.0 cents unfranked from 10.0 cents, unfranked.
Outlook statements continue a cautious tone
Not surprisingly, outlook statements from companies continue to paint a cautious future, with some companies unwilling to provide an accurate picture given the degree of macro and micro, domestic and global uncertainties. This creates an ongoing cautious attitude among investors leading to price-earnings ratios lower than otherwise.
The outlook comment from companies accompanying their interim results closely followed comments at annual general meetings late last year. Little changed in the intervening period, given the ongoing high Australian dollar, weakening east coast employment trends, and continued uncertainties over Europe.
About the author
Ross Bird is head of equities strategy, Morningstar. For more reporting season news and analysis, visit Morningstar.com.au
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