From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
And another one bites the dust.
Telstra (TLS) this week became the latest Australian blue-chip to dramatically cut its dividend payout, warning investors that dividends would fall to 22c a share in 2018, and well down on the 31c paid in 2017.
When coupled with last year’s dividend cuts at BHP (BHP), Rio Tinto (RIO), ANZ (ANZ), Woodside (WPL) and Woolworths (WOW), the material reduction in TLS’ dividend plans further compounds the impact on retirement incomes, and again demonstrates the dearth of earnings growth amongst Australia’s leading corporates.
In truth, reporting season to date has actually been quite forgettable.
It seems that the vast majority of companies have seen analysts take down expectations for future earnings.
Credit Suisse today remarked that only 17% of companies reporting thus far have beaten expectations, where 31% have missed.
Offhand I could nominate Navitas (NVT), Magellan (MFG), Aurizon (AZJ), AMP (AMP), RESMED (RMD), Sonic Healthcare (SHL), Domino’s Pizza (DMP), Computershare (CPU), Pact Group (PGH), Wesfarmers (WES), Adelaide Brighton (ABC), Crown Resorts (CWN), SEEK (SEK), QBE Insurance (QBE), Challenger (CGF), CSL (CSL) and Cochlear (COH) as companies where analysts ended up taking down 2018 and beyond forecasts.
Pretty tawdry stuff.
This week has been manic for markets with all the corporate reporting’s, another horrible terrorist attack and the mass resignation and ultimate dissolution of two of Trump’s business advisory boards.
The sell-off on Thursday night in the U.S. was largely attributed to concerns Gary Cohn, Trump’s National Economic Advisor and the hot favourite to succeed Janet Yellen as Fed Chairman, would stand down.
It does seem like the Charlottesville outrage has got politics in the U.S to a tipping point, and strictly from a market sense, it now appears that Trump’s policy agenda on which much of the recent economic optimism has been based, looks to be derailed.
I guess we’ll see.
Telstra (TLS) – scorched earth.
TLS chose to cut its dividend to 22c for 2018, and announced plans to securitize $5-5.5bn of its NBN receipts (40% of the total, implying a value of ~$13bn for the entire NBN compensation), using $4bn+ to buy back shares (9% of issued capital).
The 22c dividend does look to be sustainable in the medium term, even though core TLS earnings will likely bottom out at around 18-19c in 2020, as the company have promised to augment dividends with NBN cashflows.
Interestingly TLS profit figures were actually better than forecast in 2017, however the company commented that they saw the impact of migration to the NBN as being more costly than expected, and likely to impact TLS operational cash-flows by as much as $3bn over time.
Though TLS have increased their cost saving targets and brought forward their time frame for cost outs, these are unlikely to fully mitigate for the NBN impact, and as a result analysts have lowered their future core earnings by around 3-4%.
In hindsight, I have maintained a patience for TLS longer than I otherwise should, underestimating the impact of the NBN on TLS core cash-flows to some degree, but perhaps more so underestimating the willingness of the TLS board to bring things to a head so quickly (ie slashing the dividend so dramatically).
At $3.90 TLS is now on a 5.6% fully-franked yield, equal to the major banks.
I would argue that this dividend is now set in stone for at least the next 6 or 7 years, which makes TLS increasingly akin to a bond.
Stripping out the value of the NBN payment stream to the tune of $13bn makes TLS look like it is on 13-14x underlying earnings, depending on the year you choose to look at.
With mobile still doing quite well, and the prospect of future growth from 5G to come, all is not lost for TLS, particularly with the market on 16x.
I expect TLS will now trade within a tight $3.70 to $4.30 range, dependent on the intensity of mobile competition and Australian interest rates.
For now we hold on, but I would expect back above $4.20 we do indeed lighten the load.
SEEK (SEK) – the cost of growth
SEK this week posted reasonable 2017 profit figures, but surprised the market with its continued heavy cost investment and disappointing 2018 profit guidance.
SEK guided for 20-25% revenue growth in 2018, and though profits are only expected to rise by 10% due to heavy cost investment, it seems entirely likely SEK shareholders will bear the fruits of this investment in the 2019 and 2020 years.
SEK’s Australian employment business continues to grow profits by over 10% each year despite being branded a ‘mature’ business, which should give investors enormous confidence that with the right investment in building out its Chinese footprint (Zhaopin is China’s top job site), SEK will profit for many years to come.
We would definitely look to be buying more SEK at or around $16.
Wesfarmers (WES) – a bit disappointing
WES earnings were largely in line at the headline level, but Coles were disappointing and the miss there was made up for by the less well known industrial divisions.
The competitive impact of Woolworths (WOW) renewed efforts has seen many analysts take down their future earnings for Coles by -10% or more.
We are hopeful that the WOW numbers next Thursday bear out their recent sales dominance over Coles.
WES doesn’t look expensive anymore in the low $40’s, but it’s hardly shooting the lights out.
Would think it does very little again in the coming 6-12 months.
CSL (CSL) – superb growth, but still failed to match forecasts
CSL again demonstrated just what an awesome company they are by delivering 24% profit growth and guiding ahead for a further 16% growth in 2018.
Trouble was, despite the excellent profit growth, the guidance for 2018 profit ($1.48-1.55bn) was some 5-7% below the already optimistic forecasts of analysts.
The stock got rolled for a few hours on the day of the results, but as the day wore on, buyers continued to come in for the stock.
The main reason seemingly being that even though the growth outlook failed to reach analyst expectations, it still is rather impressive, and likely repeatable for several years to come.
It’s this growth outlook that has the stock trading on such a fierce multiple (28x and a 60% premium to the market).
We would love to own CSL, but frankly need to find a better absolute level to be putting it into portfolios.
The rest …
Beyond those results I referred to above, there were figures from a list of others.
Apart from Woodside (WPL), who smashed most analyst forecasts with a terrific performance on production costs, most of the numbers we saw this week failed to excite.
Market favourites like Challenger (CGF) and Computershare (CPU) failed to deliver. CGF posted some of its worst quarterly annuity sales figures in 2 years, and CPU guided to a weaker 2018 than markets expected.
Adelaide Brighton (ABC) and Cochlear (COH) both had pretty decent profitability, but again, guided to a 2018 that didn’t quite match analyst forecasts.
It has been a recurrent theme this.
Next Week …
It’s busy again.
Oil Search (OSH), Healthscope (HSO), QUBE (QUB), Woolworths (WOW) and Regis Healthcare (REG) all report next week, alongside a list of other well-known names,
Blackmores (BKL), who incidentally had a good week as the appointed a new CEO, and Mantra (MTR) report the week after next too.
The Economy … more of the same (mixed)
Weekly consumer confidence remains in a hole, as do wages.
The June quarter wage index remained at a 20-year low with annual growth at only +1.9%.
Interestingly, the sum of those Enterprise Bargaining Agreements struck within the last quarter point to annual wage rises of +2.7% in the 12 months ahead.
This is the lowest growth in 25 years and indicative of a continuation in subdued wage growth.
Employment this month reversed, with part-time jobs surging and our recent run of strength in full-time work easing. Nothing in it.
Fingers crossed for a better week on the earnings front next week.
Have a great weekend.
Friday 11am Values
|S&P / ASX 200||5730||+34||+0.6%|
|Property Trust Index||1332||+27||+2.1%|
Thursday Closing Values
|U.S. S&P 500||2430||-8||-0.3%|
Key Dates: Australian Companies
|Mon 21st August||Earnings – Bluescope (BSL), Brambles (BXB), Fortescue (FMG), Westpac (WBC)
Div Ex Date – Dominos Pizza (DMP)
|Tue 22nd August||Earnings – BHP (BHP), Oil Search (OSH), Sydney Airport (SYD)
Div Ex-Date – Computershare (CPU), REA Group (REA), Wesfarmers (WES)
|Wed 23rd August||Earnings – Healthscope (HSO), Insurance Australia (IAG), QUBE (QUB), Woolworths (WOW)
Div Ex-Date – AGL (AGL), AMP (AMP), Pact Group (PGH), ANZPD
|Thu 24th August||Earnings – Boral (BLD), Estia (EHE), Scentre (SCG), SANTOS (STO)
Div Ex-Date – Woodside (WPL)
|Fri 25th August||Earnings – Flight Centre (FLT), Medibank (MPL), QANTAS (QAN), Regis Healthcare (REG)
18th August 2017, 330pm
For more information on the above please contact Robert Flynn, Bentleys Wealth Advisors directly or on 02 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.