Earnings season insights part 1

-- | 14/09/2018 Text size Decrease

Glenn Freeman: Now that earnings season for the full year 2018 has wrapped up. I am speaking with Peter Warnes from Morningstar about a season that he saw as largely in line with expectations, but there are a few standouts including the resources and health care sectors and also within the dividend space where the payout ratios continue to be quite high. Peter, thank you very much for your time today. Peter Warnes: Happy to be here, Glenn. Freeman: Now, we've seen that another earnings season that's been crossed off the list, another full year season. Overall, you've said that it was pretty pleasing results across the board and it was well anticipated by the market and by our analysts here inside of Morningstar. So, can we talk through a bit about what your thoughts are in general terms. Warnes: Glenn, I mean, overall, the reporting season was – as I said pretty good. Average increase in earnings for the ASX 200 was about 9%, resources doing much better than the rest of the market up about 20% or a bit more. And the ex-resources only up about 5% or 6%. Weighted average being affected by banks and telcos. So overall a good reporting season. But I think the highlight really was the dividends – dividend growth exceeded earnings growth which is always a nice way to finish for shareholders. Freeman: Well, just on that – I mean, how did the total payout figures this year compared to last year. And is it something that you think is sustainable that they can stay off at these levels going forward or is it have we seen a peak in dividends. Warnes: Glenn, that's a very good question, because all shareholders like to bank the dividends couple of times a year. Look this year I suspect what was happening was that management decided early on maybe they weren't going to pull the trigger too much on investment and their balance sheets were in pretty good shape. So, they didn't have to pay down a lot of debt and they didn't really push the paddle on investments so that that allowed management to reward shareholders more. Free cash flow was only got three buckets. And so, we didn't have paydown too much debt, we didn't push our foot to the floor on investment and so that gave them more allocation for shareholders. And payout ratios generally rose because of that. Ratios are higher and as well few more share buybacks. So capital management initiatives were front and center. Now, my gut feel is that's not going to be sustainable and so I think what you are going to see is a flattening in the payout ratios and lesser dividend growth going forward. But this year in the numbers I have seen total dividends for the reporting season just passed was about 40 billion up from about 35 billion last year which is a bit more than 10% and I said that the overall earnings were up about 9%. So that's – that lines up there. As I say I think the payout ratios will start flattening from here on in as maybe hopefully and certainly the reserve banks hoping that non-resources or non-mining investment starts to kick up. Freeman: Are there any red flags in that result, in the dividends specifically again that – their CapEx is too low, that businesses are there bit skittish and not wanting to necessarily grow their businesses around uncertainty or is it just something that it is happening in a more balanced fashion way they are not investing all their free cash into growing businesses and they are not paying it all out either they are kind of balancing it. Warnes: Yeah, well, look, all businesses are trying to run lean – I mean, as I said, the results were pretty reasonable. What was a little bit disappointing and where you saw initial market reaction was negative was if the forward guidance now there was guidance 2019 was a bit soft. Generally speaking it was soft or softer than anticipated by consensus – the consensus view out there and you show quite a number of analyst downgrades because going forward the guidance just didn't match up. So, as I said the companies are running lean. They really are saying margin pressure is quite intense and going forward I think it's quite at peak out there it's – the horizon has got some clouds on it. I don't think, and I think that's one of the reasons why you are not getting wages growth to the extent that the reserve bank would like or the results probably should – would suggest. Because management don't want to increase one of their major expense items is wages and salaries. If they tweak the wage rates, their locking them in. What's happening is that there is more over time and there are more numbers employed and that's what's supporting household income at the moment. Not higher wage rates. And so, you've got raw material cost – imported raw material costs going north. You've got energy costs still being very significant part of the whole equation. And so managements are little bit gun shy, and they are saying okay look we just – let's just wait a second before we guarantee, we are going to push the button on major growth expansion.