Monthly economic e-news – March 2019

15 March 2019

By Craig Turnbull
Chief Investment Officer


Big dividends dominate the latest corporate reporting season

Dividends were the highlight of the latest reporting season with a number of companies keen to put some of their excess cash back into the hands of their shareholders.

So despite some mixed profit results, investors generally lapped up the good news with the Australian share market extending its new year rally, passing 6,200 points by the end of February.

 

Source: Yahoo Finance 

So who were the big spenders?

In the run up to the federal election, some Australian companies are looking to reduce their accumulated franking credits and shift a portion of excess cash off their balance sheets by paying special dividends.

Rio Tinto reported full-year underlying earnings of US$8.8 billion and final dividend of US$1.80 on the back of stronger sales of iron ore, gold and copper. But the recent sale of some major assets allowed the mining giant to also declare a special dividend of US$2.43 for shareholders.

Sales of key assets including Coles and Kmart Tyre and Auto helped Wesfarmers to slash net debt by over 90%, and boost half-year underlying profit by 59% to $1.08 billion. Shareholders were rewarded with an interim dividend of $1.00, matched by a special dividend of $1.00.

Despite the slowdown in consumer spending contributing to a fall in half-year underlying net profit to $85 million, Flight Centre dipped into its cash reserves by announcing a special dividend of $1.49 on top of an interim dividend of $0.60.

Some of the other companies to reward shareholders with strong dividends this season included CSL, QBE, Fortescue Metals, Cochlear, Goodman Group and Woodside.

But it wasn’t all good news

A closer look at the results revealed that it was a very mixed season with profits affected by a variety of factors including natural disasters, the fallout from the Hayne Royal Commission, and consumer spending in Australia and China.

On the retail front, solid supermarket sales helped Woolworths post a 1% rise in half-year net profit to $979 million while the newly demerged Coles Group reported that half-year net profit had fallen by almost 30% to $381 million due to rising costs and some loss of market share in NSW.

Strong sales in China drove a 50% increase in the A2’s Milk Company’s half-year net profit to NZ$152.7 million, but in contrast, increasing competition and distribution problems in China saw vitamin producer Blackmores’ half-year net profit stall at $34.3 million.

The Hayne Royal Commission continues to have an impact on the financial sector as AMP’s full-year net profit fell 96% to just $28 million after customers withdrew around $4 billion in funds from their wealth management division in 2018.

But it was the December hailstorms in NSW and south-east Queensland that eroded Suncorp’s earnings with half-year net profit falling over 40% to $250 million, and the interim dividend being cut to $0.26.

What do these results tell us about the outlook for the economy?

While the special dividends hogged the spotlight in a mixed season, many companies reported only modest earnings growth in the half year to December, reflecting a softening local economy.

The downturn in the property market and low wage growth means Australians are tightening their belts and this is likely to continue to have an impact on company earnings over the short to medium term.

The outlook for companies with a greater exposure to international markets may be more positive but they are still vulnerable to a slowdown in global growth, and to a range of ongoing geopolitical tensions.

 

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Markets at a glance

for the month ending 28 February 2019

Australian shares 1 up by 5.98%
Australian Government Bonds yield2 down to 2.100%
Australian dollar down to US$0.7146 
noArrow Cash ratesteady at 1.50%
upArrow International shares4 up by 2.84%

 

1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)

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