Investment Matters

Company profit reporting season wrap-up: overall good

Company profit reporting season: overview

Reporting season results were moderately above expectations, for both revenue and earnings.

Some points of note:

  • commodity prices, especially coal and iron ore, drove large (but mostly expected) increase in earnings for many miners - including the two large ones: BHP Billiton and Rio Tinto
  • the large index weight of BHP Billiton and Rio Tinto supported an increase in the aggregate earnings of the market
  • many domestically focused companies are working hard to achieve their results, with challenging economic conditions frequently noted
  • retail related companies are a case in point, including the retail (shopping centre) REITs - with some exceptions (e.g. niche, Nick Scali [benefits from positive residential property] and quality, JBHiFi)
  • companies that did not meet consensus expectations, especially high P/E ones, were punished severely with large share price falls (e.g. Brambles)
  • the market has reacted to the results in a somewhat positive manner - from the start to the end of February the All Ordinaries Index (XAO) increased 1.5% (although factors other than company reports may have influenced this; the US market S&P500 increased 3.7% over the same time frame)

First Samuel's investments

The following table summarises the performance of many of First Samuel's clients' equity investments for the H1FY-17 reporting season:

Company profits 2

Commentary on the individual results has been provided in the last few weeks of Investment Matters.

Dividends

As mentioned last week in Investment Matters, we were pleased with the dividends and distributions declared.  More specifically, seven of the investments our clients hold delivered higher than expected dividends.  This is the highest outperformance our companies have had, and was a positive surprise.  Because we tend to know our companies well, and have realistic (we hope!) opinions of their capabilities, we don’t tend to be surprised much (for instance, in FY-16 two companies did better than we expected).

The net result of this was that the portfolio delivered an increase in dividends and distributions of +17.1% for 1HFY-17 over 1HFY-16.  This goes a long way to explaining the strong absolute returns we have enjoyed in the past 12 months.  Further, we expect to deliver a dividend lift of around 15% for FY17, which would make it one of our stronger years (beaten only by FY12 +25.2%, and FY13 +15.4%).

The key dividend outperformers where: Paragon Care, QBE, Suncorp, South32, Southern Cross Media, Challenger and BHP Billiton.  The two disappointments where Primary Health Care and CML Group, and additionally Centuria rebaselined the distributions of the Urban REIT and Industrial REIT (which they have recently become the managers of).

CML delivered very strong EPS growth, but company's Board elected to hold dividends flat. We see this as a great company simply being cautious, and allowing for further scope to outperform in the future.  Primary's dividend reflects the results being delivered by the company, during a period of transition.  Also, on a post franking basis, Primary's dividend was actually up very slightly on the pcp, due to a move from 50% to 100% franking.

Payment of these dividends will be made into your cash account over the coming couple of months (as they are received from the companies).

Conclusion

So with the benefit of a recent update on our companies via reporting season, we can say we remain comfortable with clients' portfolio's positioning.  A number of the investments have meaningful opportunities to continue to grow over coming years, regardless of conditions.  We remain of the view that the earnings of clients' shares' portfolios will be at least 9% higher each year than the year before, for the next few years (this compares to about 4% p.a. expected for the market overall).  Ultimately, this is the best support of returns that we have over the medium term.

Currently clients' share portfolios have about 22% cash, along with a continuing defensive bias.  We are, however, still finding some places to invest and would expect that cash level to stabilise around here - and potentially even decline over coming months.  The portfolio remains inexpensive (at 10.6x P/E), with good growth (+9.5% earnings growth p.a. for the next three years) and reasonable dividends (at 4.2% p.a.).  Broadly speaking, with this construction, we would expect that we will deliver fairly similar growth in the next 3 years as we have in the last 17 - albeit it won’t be linear, as per usual!

 - Dennison Hambling & Fleur Graves