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Rudi’s View: BHP, Dividends, And Breville Group

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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 26 2021

This story features AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ

BHP, Dividends, And Breville Group

By Rudi Filapek-Vandyck, Editor FNArena

So far, so good. Eight days from the end of the domestic corporate results season (six trading sessions plus one weekend) and genuine 'beats' are outnumbering disappointing 'misses' by almost a factor of two-to-one.

More companies feel comfortable enough to provide some kind of guidance, though that is to be read as 'more than feared' beforehand, not a reference to the majority. Many companies are swimming in cash, and they have not hesitated to reward shareholders through increased payouts, special dividends, share buybacks, and M&A.

The share market as a whole is up for the month and local indices would have performed a lot better if not for the global growth scare that is unfolding in the background, which is partially why specific price charts for the likes of Fortescue Metals look like a fall-off-the-cliff experience -suddenly, quickly and savagely- but this also explains why AUDUSD has been below 72c instead of nearer to 80c.

Also, typically for Australia, the FNArena Corporate Results Monitor still only comprises of 140 reports, or an estimated 40% of the total number of individual companies. This goes a long way in explaining why most stockbrokerages are no longer publishing intermediate running updates on the season.

We still await more than 50% of financial results from the companies scheduled to report in August. Apparently, it's the bottleneck in accountants domestically we should blame for this out-of-kilter, heavy skew.

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Some of the early indications have solidified and gained more traction as the numbers to date have accumulated to 140 corporate updates. Many a company in Australia can report its sales, if not profits and dividend, have recovered to pre-pandemic level, or it anticipates to achieve full recovery over the year ahead.

This observation is incredibly important for a share market that has continued to trend upwards, setting new all-time record highs along the way. Most surprises, however, have come through cash dividends for shareholders with company boards lifting payout ratios much sooner than anticipated, despite ongoing challenges posed by the global pandemic.

In hindsight, it can be concluded both ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) gave local investors the earliest indications that corporate Australia was gripped by quite an optimistic mindset in June.

August is not solely providing bliss and happiness, of course. While June-half financial numbers have been better-than-forecast on balance, the outlook for the December-half for many companies is a lot more circumspect as lockdowns across Australia remain in place.

Estimates are thus falling for retailers, travel agents, leisure companies, et cetera. The market is drawing confidence from the past in that once lockdowns end, a strong recovery should follow. This is why, so far, reduced forecasts because of renewed impact from lockdowns has not been met with savage punishment this month.

The market looks forward. One observation is that share prices remain supported by confidence that temporary lockdowns, even when extended, shall be followed up by a swift recovery in sales. This confidence is fueled by numerous companies reporting they were performing better-than-expected up until new lockdowns were announced in NSW, then Victoria and elsewhere.

Unsurprisingly, companies announcing a share buyback usually are rewarded through additional outperformance, though not in every case. Note, for example, the differences in share price performances for Janus Henderson ((JHG)), Suncorp ((SUN)) and Telstra ((TLS)) -all very strong- with the negative outcomes for Fletcher Building ((FBU)) and Emeco Holdings ((EHL)).


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The Big Surprise this season has come from dividends and here, Janus Henderson reports, we are witnessing a global phenomenon. Global dividends experienced a sharp fall in 2020, but Janus Henderson forecasts total payout will rise above the pre-pandemic high in the year ahead.

Global dividends rose by 26% in the second quarter ending June 30th, so this month's sharp increases announced in Australia are not even included yet. On the fund manager's calculations, global dividends have now recovered to $628.3bn (US$471.7bn) for the quarter, which is only -6.8% below the level paid out in Q2 last year.

A few key observations to consider:

-Companies restarting cancelled payouts contributed three quarters of the underlying surge;
-84% of companies increased their dividends or held them steady compared to Q2 2020;
-In Asia Pacific ex Japan, three quarters of companies increased or held their dividends with Australia boosted by banking dividends (pre-August);
-In a seasonally quiet quarter for Australia, payouts more than doubled (+103.6%) on an underlying basis;
-Janus Henderson has upgraded its 2021 forecast to $1.85trn (US$1.39trn) from $1.81trn (US$1.36trn); this new forecast is just -3% below the pre-pandemic peak, implying next year global dividends are set to rise to a new all-time record.

The dividend numbers are receiving an extra-boost from companies paying out a special dividend, as also witnessed in Australia this month, while an offset comes from companies cutting dividends in emerging markets. Underlying, estimates Janus Henderson, dividends globally are set for 8.5% growth in 2021.

One interesting observation was made by analysts at JPMorgan who observed that 33% of Australian companies reporting thus far have subsequently seen forecasts being downgraded with all sectors, except Staples, experiencing negative revisions this month.

A sign of growing wariness or a realisation company boards have pulled forward their reward for shareholders in order to sugarcoat for the headwinds and uncertainties that lay ahead? Worst hit sectors have been Utilities and Materials and the reasons for both seem pretty straightforward: energy markets and the price of iron ore.

All of AGL Energy ((AGL)), BHP Group ((BHP)), BlueScope Steel ((BSL)) and Mineral Resources ((MIN)) have suffered a decline in dividend forecasts this month, as have several of the more troubled names including AMP ((AMP)), Lendlease ((LLC)), and Vicinity Centres ((VCX)).

Macquarie, quite casually, observes prospects for growth in profits remain superior in the USA compared to Australia.

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In terms of individual companies, irrespective of what happens between now and early September, August 2021 will be marked down as the season when the Big Australian made that Big Dividend announcement; US$15bn, the largest in its corporate history, but BHP Group also made a seminal deal with Woodside Petroleum ((WPL)) and pulled its share market listing back home to the Big Southerly homeland.

In terms of truly historic announcements, it'll be plain impossible to beat BHP this season. There has been plenty of coverage by FNArena and media elsewhere, so I'll simply point out what I haven't seen mentioned elsewhere as yet.

Confronted with several opposing challenges and options, the current C-suite team at BHP has found solution in a narrative that should be on every long-term thinking investor's mind. Instead of milking its world-class assets in oil and gas during a time when the price of iron ore is likely heading down quite sharply from lofty US$200-plus per tonne levels, BHP has chosen for a hundred-year long journey into a sector it believes is primed for natural growth in the century ahead, fertiliser, with the ambition of becoming a powerful, low-cost disruptor.

On the other side of the deal we find a super-enthusiastic Woodside Petroleum, and for obvious reasons. Today's share price is a long way off from the highs seen in Q2 2008 and while Woodside stands to lose the mantle of Australia's largest oil and gas company because of the merger between Santos ((STO)) and Oil Search ((OSH)), the company has spent post-GFC in vain to find growth and to develop new projects at a satisfactory return.

Time to reel out my most favourite market observation: the energy sector, in Australia and elsewhere, has been by far the worst performer post-GFC. Santos once was seemingly destined for that elusive $20. Origin Energy ((ORG)) shares equally used to trade in the mid-teens. Woodside used to be revered for its stable and attractive dividend.

Remove the movements in the price of oil and gas from the picture and what is left at Woodside Petroleum? A company ex-growth, struggling to find the capital without a large, shareholder-dilutive capital raising; a position it has been in for years. The deal with BHP will inject new momentum into the business that can possibly reverberate for many years.

But it won't last forever, of course, and most certainly not as long as BHP's entrance into Canadian potash. Deep down, below the surface, there is a real message in there for every investor. Short-term versus long-term. Instant reward against investing for longevity.

We all make those choices, or at least: we should.

Incidentally, the energy sector stands out so far this month with the weakest updates and the largest disappointments, as also illustrated through share price falls for Beach Energy ((BPT)) and Cooper Energy ((COE)). Woodside's half-yearly update was labelled as "weak" by all and sundry too.

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One company that caught my attention is Breville Group ((BRG)), proud manufacturer of iconic Australian household brands Breville, Kambrook and Sage. Less known, probably, is that Breville considers itself an innovator; it is Australia's first and foremost bridge into the Internet of Things (IoT), a future era when household goods start communicating with each other through the ether.

Management at the company decided to cut the dividend for shareholders, traditionally seen as 'blasphemy' among Australian investors, in order to ramp up investments into the company's future. On the day of the FY21 report release the share market responded with a good old shellacking, to which the All-Weather Model Portfolio responded with: I'll have some, thank you.

Breville Group has been on my radar for a long while. Those who are familiar with my research know it ranks as a 'Prime Growth Story' alongside the likes of Macquarie Group ((MQG)), Aristocrat Leisure ((ALL)) and Pro Medicus ((PME)). One cannot own them all at the same time and while the Breville share price has been cheaper, the All-Weather Portfolio was previously happily filled with plenty of durable, quality performers.

One of the names currently no longer held by the Portfolio is Pro Medicus, whose shares put on another big rally following the release of FY21 financials. This remains one of the highest quality growth stocks on the ASX, but it's also valued to the max.

Which simply means Pro Medicus remains on the radar for when a similar opportunity at the right time presents itself.

Next week we shall look into more companies that stood out or caught my attention this reporting season. Plus we will finally be able to draw conclusions by then that stand the test of time.

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More on the August results season:

-August: It's A Joke

https://www.fnarena.com/index.php/2021/08/19/rudis-view-august-its-a-joke/

-Early Days, But Plenty Of Signs

https://www.fnarena.com/index.php/2021/08/12/rudis-view-early-days-but-plenty-of-signs/

-August Bonanza, But What's Next?

https://www.fnarena.com/index.php/2021/08/05/rudis-view-august-bonanza-but-whats-next/

-August Results: Anticipation & Trepidation:

https://www.fnarena.com/index.php/2021/07/29/rudis-view-august-results-anticipation-trepidation/

Here is the link to the FNArena Corporate Results Monitor (from now on updated daily):

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

(This story was written on Monday 23rd August, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday 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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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– 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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CHARTS

AGL ALL AMP ANZ BHP BPT BRG BSL COE EHL FBU JHG LLC MIN MQG NAB ORG OSH PME STO SUN TLS VCX WPL

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: BPT - BEACH ENERGY LIMITED

For more info SHARE ANALYSIS: BRG - BREVILLE GROUP LIMITED

For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED

For more info SHARE ANALYSIS: COE - COOPER ENERGY LIMITED

For more info SHARE ANALYSIS: EHL - EMECO HOLDINGS LIMITED

For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED

For more info SHARE ANALYSIS: JHG - JANUS HENDERSON GROUP PLC

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: MIN - MINERAL RESOURCES LIMITED

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: OSH - OIL SEARCH LIMITED

For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED

For more info SHARE ANALYSIS: VCX - VICINITY CENTRES

For more info SHARE ANALYSIS: WPL - WOODSIDE PETROLEUM LIMITED