Profits Guide, But Dividends Still Rule

This story features BRAMBLES LIMITED, and other companies. For more info SHARE ANALYSIS: BXB

In this week’s Weekly Insights:

– Profits Guide, But Dividends Still Rule
– Index Changes: Winners & Losers
– Oil & Gas Stocks: Dividends And Impairments
– Miners: From Growth With Dividends To Growth Of Dividends
– De-Equitisation Theme Continues In 2015
– FNArena Sponsors ASX Investor Series
– Rudi On TV
– Rudi On Tour

Profits Guide, But Dividends Still Rule

By Rudi Filapek-Vandyck, Editor FNArena

Reporting season is among us. This is usually the time when investors and commentators get all fired up about profits and guidance. Certainly Domino’s Pizza and Sims Group, to name but two, have had us all in awe with their share price performances on the day.

Market strategists at Macquarie point out that when profit results smash expectations (see Domino’s and Sims) this usually means dividend payments are much better than expected too. In other words: don’t stare yourself blind on the occasional profit surprise that happens to move the share price. In the background of all that is happening this month, dividends very much remain in focus.

Witness, for example, what happened to the share price when Bradken announced it wasn’t paying any dividends for the first half, or when OZ Minerals’ profits surprised, but the board thought it more prudent to keep the money in the company’s bank account instead of in shareholders’ pocket.

On Macquarie’s analysis, which only covers the first week of February, net profit results are on course for a general “beat”, which is good, with exception of resources stocks. Dividends, on the other hand, are being carried by continued increases in payout ratios. Clearly company boards are still out to appease the market’s thirst for yield and income.

And… stocks appear to be moving more to surprises on dividends than on profit results. Macquarie points out virtually all the big negative share price movements occurred on the back of negative dividend surprises.

Macquarie tips the following candidates to potentially deliver a positive dividend surprise this month: Brambles ((BXB)), Westfield ((WFD)), Adelaide Brighton ((ABC)), TPG Telecom ((TPM)), IOOF ((IFL)), Fletcher Building ((FBU)), nib Holdings ((NHF)) and Invocare ((IVC)).

For a low growth company, trading on a high multiple, well above market average and only offering circa 3% (fully franked) yield prospect, Invocare’s share price has performed remarkably well in the run-up to the February reporting season.

Yet another member of the All-Weather family^(*), of course.

Maybe Macquarie’s analysis has uncovered part of the reason why the shares have gained more than 10% since the start of the calendar year?

^(*) For more on All-Weather Performers, see below

Index Changes: Winners & Losers

Standard & Poor’s and ASX will announce the results of the Quarterly Index Review on Friday 6 March 2015 and if predictions by JP Morgan are anything to go by, it’s going to be one major reshuffle. It’s been a long time since this many changes have been on the cards for Australia’s major market benchmarks.

On the positive side, it appears some recent IPOs and strong non-index performers are ready to make their entrance in either the ASX200 or ASX300 and this -all else being equal- means these stocks may start attracting additional interest from funds managers.

Among the candidates, JP Morgan lists Medibank Private ((MPL)), Corporate Travel ((CTD)), Australian Agricultural Company ((AAC)), Dick Smith ((DSH)), Growthpoint Properties ((GOZ)), Credit Corp ((CCP)), Folkestone Education Trust ((FET)), nib Holdings ((NHF)), Select Harvests ((SHV)), Syrah Resources ((SYR)) and GDI Property Group ((GDI)) for possible inclusion in the ASX200.

Candidates for inclusion in the ASX300 are Fisher and Paykel Healthcare ((FPH)), APN Outdoor ((APO)), FAR Ltd ((FAR)), Regis Healthcare ((REG)), Villa World ((VLW)), Nanosonics ((NAN)), Hansen Technologies ((HSN)), Impedimed ((IPD)), GPT Metro Office Fund ((GMF)), Affinity Education Group ((AFJ)) and Admedus ((AHZ)).

Those predicted to lose their spot in the ASX200 include BC Iron ((BCI)), Beadell Resources ((BDR)), Atlas Iron ((AGO)), Lynas Corp ((LYC)), Mt Gibson Iron ((MGX)), Horizon Oil ((HZN)), Ainsworth Gaming ((AGI)), Singapore Telecom ((SGT)), Evolution Mining ((EVN)) and potentially even STW Communications ((SGN)) and Ten Network ((TEN)), though these last two names carry a low probability in JP Morgan’s universum.

Stocks likely to be dropped from the ASX300 include Intrepid Mines ((IAU)), Silex Systems ((SLX)), Maxitrans Industries ((MXI)), Prana Biotechnology ((PBT)), Mineral Deposits ((MDL)), CSG Ltd ((CSV)), Newsat ((NWT)) and Cooper Energy ((COE)).

Assuming the majority of these predictions prove accurate, this implies the upcoming reshuffle of Australia’s indices is going to mark the end of the era for second and third tier iron ore producers as well as more choice in healthcare and child care centres.

Oil & Gas Stocks: Dividends And Impairments

Last week I wrote about a potential dividend shock for yield-seeking Woodside Petroleum ((WPL)) shareholders; all shall be known this Wednesday (see also the FNArena calendar on the website).

Woodside is far from the only one in the energy space who needs to adapt to the lower pricing environment. Stockbroking analysts are bracing themselves for more news on impairments and at the same time they are keen to find out what exactly management teams have in mind to survive and to grow in the new environment.

Interesting times indeed.

One stock that has everybody’s attention is Santos ((STO)), saddled up with too much debt and management is likely going to pull every lever at its disposal to avoid what Credit Suisse believes it cannot: the dreadful, heavily dilutive capital raising. Santos is not a genuine yield stock as yet, but will the board go as far as to scrap or lower the dividend?

Probably not. Analysts suggest a Dividend Reinvestment Program (DRP) with extra incentives for shareholders to take up scrip instead of cash might be the rabbit that comes out of the Santos hat on February 20th. The board is eyeing asset sales. Critics say there will be more impairments in the future (Queensland LNG assets) so why not take them now and get it over with?

Miners: From Growth With Dividends To Growth Of Dividends

It has taken investors quite a long time to adjust their views on the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)) from being pure-play, cyclical growth stocks who also happen to pay a dividend, to the large mining companies being healthy cash flow generators who have the ability to manage their assets and costs better, and promise a fully franked, solid, steadily growing dividend in an overall challenged growth environment.

The irony is, of course, total investment returns haven’t been that great post 2008 and if it wasn’t for those dividends, share prices would have dipped much lower than they have to date. My favourite observation about BHP and Rio is that commentators and stockbrokers alike continue to exclaim those stocks are not to be bought for their dividends, yet since 2009 that’s pretty much everything shareholders have been able to cheer about.

Remember, in the long run, half of total returns from owning BHP shares stems from dividends. At least, such has been the case since the 1990s. Since 2009, dividends have been the ONLY source of joy for BHP shareholders, unless they managed to pick the bottoms and sold at the top of the trading range.

In a wicked manner, both historical data combined suggest share prices for BHP and Rio have some catching up to do so that dividends make up half of total returns again, not 100% of all returns.

London-based commodity analysts at Citi have been on the dividend-rather-than-growth vision for the world’s larger mining companies for a while but only recently have they decided to actually re-calculate valuations and projections on the basis of cash flows generated and dividends paid out to shareholders.

Long story short: the analysts believe both BHP and Rio can reliably payout steadily growing dividends for many years to come, even in an environment of lower prices. (Maybe it’s because of the lower prices – nobody wants these boards to get excited again and start investing for the future).

When trying to determine a valuation on the basis of future dividends, Cti analysts believe both BHP and Rio, in the UK, are some 20% undervalued. This does not translate one-on-one to their ASX-listed shares, but it does give an idea about the level of upside that might be on offer once investors have gone through the same calculations and projections, and feel comfortable about it.

Maybe an apt observation to add here is that BHP has beaten the banks over the past decade in its reliability as a steady dividend improver. Certainly, last week’s financial report by Rio Tinto has lifted analysts’ confidence Rio might be able to emulate the BHP dividend experience in the decade ahead.

Yes, that would be funny, and ironic at the same time; BHP and Rio generating higher returns for investors while the focus lies on dividends rather than on growth.

De-Equitisation Theme Continues In 2015

Tired of SMSF-operators dominating the local share market? Too bad, reports Credit Suisse. It’s not going to change in 2015.

Market analysts Hasan Tevfik and Damien Boey estimate this year ASX-listed companies will add some $8bn in new equities, net, which will mark the lowest net issuance number in ten years. But “Selfies”, as CS calls them (here at FNArena we call them Smurfs), are expected to allocate some $12bn in fresh funds to the local share market.

In other words: 2015 will be the second year in a row that SMSF funds outpace net growth in equities. Concludes CS: “The combination of little net equity issuance and solid equity demand will continue to support Australian stock indices”.

CS analysts remind investors shares in companies that buy in their own stock often outperform companies that don’t. For 2015, they nominate WorleyParsons ((WOR)), Boral ((BLD)) and News Corp ((NWS)) as potential buy-back candidates.

FNArena Sponsors ASX Investor Series, Sydney February 17, 12:30pm-2pm

Don’t miss the next opportunity to hear from CEOs over lunch with an informal meet and greet session at the conclusion of presentations. Speaking at this event are Starpharma Holdings, Whitehaven Coal, Charter Hall Holdings and TTG Fintech.

These events are free to attend however registration is required as seating is limited. Register here

(Or use the following link: http://www.asx.com.au/education/investor-series.htm )

Rudi On TV

– no appearances this week.

Rudi On Tour

I have accepted invitations to present:

– Wednesday, 18 February to members of CPA Australia’s SMSF Discussion Group in Sydney (evening)
– Wednesday, 11 March to members of Chatswood section of AIA, in Chatswood (evening)
– August 2-5, AIA National Conference, Surfers Paradise Marriott Resort and Spa, Queensland

(This story was written on Monday, 16 February 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s – see disclaimer on the website)

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THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena’s bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

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MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Odd as it may seem, but today’s share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena’s free bonus package for a paid subscription (excluding one month subscription).

If you haven’t received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of January available. Just send an email to the address above if you are interested.

Click to view our Glossary of Financial Terms