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August Results Thus Far: Quality, Costs And Dividends

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Aug 22 2018

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

In this week's Weekly Insights:

-August Results Thus Far: Quality, Costs And Dividends
-Rudi In The Australian
-Rudi On TV
-Rudi On Tour

August Results Thus Far: Quality, Costs And Dividends

By Rudi Filapek-Vandyck, Editor FNArena

One prediction made prior to the August corporate reporting season in Australia has proved to be 100% accurate: volatility has spiked in both directions on the back of corporate performance releases.

Making matters a little more complicated for investors is that share price responses on day one are not necessarily indicative of what follows next. Take JB Hi-Fi ((JBH)), for example. Its FY18 release was first met with share price weakness, but on the second day the shares rallied by 10%+ and they have been creeping higher since.

Shares in GUD Holdings ((GUD)) displayed a similar pattern, though not with the same magnitude. The same observation can be made for Zip Co ((Z1P)), as well as for Navigator Global ((NGI)), for Praemium ((PPS)), for ResMed ((RMD)), for Cochlear ((COH)), for Seek ((SEK)), and for Domino's Pizza ((DMP)).

Works the other way as well. News Corp ((NWS)) results seemed at first well-received, predominantly because of REA Group ((REA)), of course, but they've been falling since. Post result enthusiasm for Suncorp ((SUN)) did not last either. Ditto for Whitehaven Coal ((WHC)).

A second accurate pre-assessment was that cost inflation is starting to bite into companies' operational growth, and it's not just manufacturers and other industrial energy users that are feeling the squeeze; mining companies and energy producers themselves are equally battling to keep cost growth benign.

Heavy disappointments from the likes of Pact Group ((PGH)) and Ansell ((ANN) have thus been accompanied by cost growth disappointments from Rio Tinto ((RIO)), Origin Energy ((ORG)), and Beach Petroleum ((BPT)).

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And still, the earnings season remains relatively young. In terms of market capitalisation, circa 60% of the ASX200 has by now revealed their financial numbers for the six months ending June 30th, but in terms of actual releases we've not even crossed the one-third mark.

FNArena Corporate Results Monitor now contains 93 company results -we anticipate in excess of 300 by early September- and the good news is total "beats" are higher than total "misses" -30 against 26- but I have to add colleague Greg has been somewhat generous in his assessments by including the likes of QBE Insurance ((QBE)) and Hansen Technologies ((HSN)) as a "beat".

Stockbroking analysts are issuing more than twice as many downgrades as upgrades and earnings expectations essentially seem to be going nowhere, with increases on one hand being offset with reductions elsewhere. Maybe the most depressing observation is that, on Morgan Stanley's calculations thus far, only three local sectors have unequivocally enjoyed an increase to average profit growth forecasts; energy, consumer staples and telecom.

Sectors with the heaviest decline are industrials, utilities and discretionary retailers.

Market analysts at Deutsche Bank have tried to emphasise the positive in that forecasts for FY19 and FY20 are only declining by small percentages, as an average. In reality analysts' reductions are enormous, but they are huge in both directions, effectively offsetting each other, sort of.

Another important point made by Deutsche Bank is that commodity prices no longer imply free upside potential from here onwards, while, as we already established, costs are starting to bite for commodity producers as well. One of the key questions this month will thus be whether investor attitude towards miners and energy companies is about to change?

Interestingly, I note that on Deutsche Bank's assessment, the largest falls in profit growth forecasts to date have befallen the Resources sector (also the largest contributor to market growth estimates).

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One surprise thus far this month are companies further lifting their dividends and paying out specials. While this would be well-received by retirees and other shareholders, it can also be interpreted as a gesture from company boards who feel their operational performance is not up to scratch, and it might not get better in the year ahead.

Certainly, Woolworths ((WOW)) tried the good old fashioned higher than expected dividend trick on Monday, but it didn't stop the share price from falling on the weak trading update that accompanied a not too flash FY18 performance. Telstra ((TLS)) did it too. Even CommBank ((CBA)) made a point of increasing its dividend, despite all the operational headwinds, the regulatory scrutiny, and the embarrassment from the Royal Commission.

Both Deutsche Bank and Morgan Stanley make the observation local dividends have been the key surprise thus far this season. As such, Australian dividends are rising in line with the global trend, with research conducted by Janus Henderson suggesting dividend payouts globally have surged to a new all-time high this year.

The key difference is, alas, that dividends internationally are growing strongly as a result of noticeable increases in profitability and in cash flows, while locally dividends are increasing further, from already elevated levels of payout, as a defensive measure; to please shareholders in the absence of strong growth.

On Janus Henderson's numbers, global dividends jumped 12.9% year-on-year in the second quarter to $497.4bn, with new records set in twelve countries, including Japan and the USA. The Janus Henderson Global Dividend Index ended the quarter at a new record 182.0, meaning global dividends have risen by more than four-fifths since 2009.

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One prediction that has quickly turned into a misguided ghost story, is that richly valued companies were set up for a fall-off-the-cliff experience. It did not work out that way in February, and neither is it happening in August. From GUD Holdings ((GUD)), to REA Group, to CSL ((CSL)), ResMed ((RMD)) and Cochlear ((COH)), plus a whole bunch of others, if anything investors are incredibly quick to start buying in case some weakness does occur.

The reason, I believe, remains that these companies are in much better shape than most of the so-called "value" laggards, with better growth prospects, less operational and regulatory risks, and with much better adaptation to modern day disruption from the internet and other factors.

I have written about this before, but I also sense there remains a large wall of disbelief and of resistance against this observation. It's easy for me to add that those investors who are still refusing to accept this, have unlikely done themselves, and their portfolios, any favours over the past 5-7 years.

The latest example of this comes from Goodman Group ((GMG)), high quality achiever inside the global property development sector, with leverage to modern technology through the planning and construction of large warehouses and distribution centres. Prior to the release of FY18 financial performance numbers, analysts pointed out the shares did not look cheap.

This has not stopped the share price from rallying higher following the release of a result that met already elevated expectations, supplemented with enough evidence operational momentum remains strong, with risk to the upside. Analysts' forecasts have risen post the release, pushing up the consensus price target, but the share price remains at a sizable premium.

So what is an investor to do?

My suggestion is the same as with the High Quality Achievers I keep on pointing out, time and again: you wait for share price weakness, which you use to climb on board. This is a time and context that reward quality and investors will not be able to purchase these shares at a comfortable discount. The alternative is to buy cheaper looking stocks, that thus have a problem, or simply are of lesser quality, and carry more risk.

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One pleasing observation is the 3.17% average increase in consensus price targets for companies having reported to date. Certainly, were this number to remain unchanged over the coming eleven days, that would make August a "great" reporting season according to this specific measure. But with more than 200+ companies yet to report, it's probably better to refrain from any heavy handed forecasts.

The Australian share market has continued its positive performance in July and thus far in August it has added 1.3%. I would not ascribe most of this performance to the local reporting season. Instead, I continue to believe Australia remains a key beneficiary from global macro-developments, with Emerging Markets experiencing net outflows and some of those funds finding their way into Australian equities instead.

There is, however, no room for complacency and investors are better off watching their risk tolerance and their exposure to potential risk of disappointing market updates, as shown daily through heavy share price falls in case reported financials do not meet market expectations.

The local reporting season continues until early September, after which a number of out-of-cycle companies starts releasing their financial updates, but in a more measured manner.

Investors who are as yet not familiar with FNArena's Corporate Results Monitor can catch up with the latest updates here:

https://www.fnarena.com/index.php/reporting_season/

Rudi In The Australian

I have been granted the opportunity to share my early insights about corporate reporting season in Australia with readers of The Australian.

My story appeared in the recent Weekend Australian (August 18-19). Unfortunately, due to the newspaper's policy of hiding its content behind a pay wall, I cannot include a link to the story.

My twitter newsfeed contains an image of the story, which I can also pass on via email to those who have no access via Twitter and would still like to read it.

Send an email to info@fnarena.com

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 10.30am Skype-link to discuss broker calls
-Friday, 11am, Skype-link to discuss broker calls (unlikely, probably too busy, but possible)

Rudi On Tour

-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10
-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

(This story was written on Monday 20th August 2018. It was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website).

(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.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
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(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.) 

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CHARTS

BPT CBA COH CSL DMP GMG GUD HSN JBH NGI NWS ORG PGH PPS QBE REA RIO RMD SEK SUN TLS WHC WOW

For more info SHARE ANALYSIS: BPT - BEACH ENERGY LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: GUD - G.U.D. HOLDINGS LIMITED

For more info SHARE ANALYSIS: HSN - HANSEN TECHNOLOGIES LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: NGI - NAVIGATOR GLOBAL INVESTMENTS LIMITED

For more info SHARE ANALYSIS: NWS - NEWS CORPORATION

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: PGH - PACT GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: PPS - PRAEMIUM LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED

For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED