Top-flight earnings season sets $102 billion dividend windfall

The August annual reporting season reveals that corporate Australia is in good shape as it grapples with the lingering effects of the pandemic, a change in government and the impact of the war in Ukraine, which has pushed inflation to a two-decade high. In May, the Reserve Bank began its most aggressive tightening cycle in almost 30 years.

However, a sense of caution characterized the company outlook statements as businesses braced for a decline in demand and the global economy appeared to be on the verge of recession.

“Overall, the reporting season has demonstrated the resilience and health of Australia’s corporate balance sheets, even with the myriad of pressures they face,” Ausbil chief investment officer Paul Xiradis said. AFR weekend.

“We are seeing the resilience of the economy reflected in FY22 earnings, but there is likely to be some uncertainty in FY23.”

Europe’s energy supply crisis created windfall gains for the energy sector, but headaches for other corners of the market, as prices for coal, oil and gas soared, stoking inflationary pressures and the cost of doing business.

Coal miners Whitehaven, Coronado, Yancoal and Stanmore broke earnings records and showered shareholders with windfall dividends, asserting themselves as the market’s next superprofit. On Friday, coal junior TerraCom joined the club with a 10¢ dividend and pledged to distribute up to 90 percent of profits quarterly.

The season started on a rocky note when Rio Tinto more than halved its interim dividend despite posting better-than-expected underlying profit. But its rival BHP exceeded expectations.

Australia’s largest miner reported its biggest ever profit in Australian dollar terms and a huge final dividend worth $1.75 per share thanks to the gleam of its coal and iron ore assets.

Fortescue Metals will publish its full year results on Monday.

The convention that both BHP and Rio declare their dividends in US dollars, the currency in which their earnings are denominated, means increased demand for the Australian currency as those dividends are converted for payment.

ANZ estimated that US$12.7 billion worth of dividends would be declared in the third quarter, slightly below the record set in the first quarter of this year, when iron ore prices were significantly higher.

“How much Australian dollar is required depends on the location of the shareholder base,” said John Bromhead, strategist at ANZ FX.

He added that this would provide a reasonable tailwind over the next month for cross-currency exposures such as the Australian dollar against its New Zealand counterpart.

The net income position of the Australian economy has been enriched by the trend of a growing allocation to overseas equity through retirement, which accounts for earnings from foreign income distributed to Australian resident owners. Although Wall Street has an ingrained preference for managing capital through share buybacks rather than dividends, Apple, for example, declared a dividend of 23 US cents on its third-quarter earnings in July.

Margin concerns

With investors equally anxious about how rising input costs will hit profit margins, many companies proved their mettle by showing they could offset price increases, according to Jason Steed, head of Australian equity research at JPMorgan.

This is conducive to healthy future returns for shareholders.

“There is no question that inflationary pressures are building within corporate Australia, with labor and materials being the most challenging areas,” he said. “In most cases, management teams are finding ways to offset higher expenses, both through operational efficiency and pricing.”

Brambles was able to absorb $470 million of lumber inflation by shifting costs through price increases and surcharges, enabling it to generate 14% annual earnings growth and increase its final dividend by the same amount.

Ingham’s was also forced to push through price increases to combat rising food, fuel and labor costs, and warned of a second round of price increases ahead. The poultry supplier cut its final dividend by 94 percent.

Inflation may be moderating in certain sectors, with Domino’s Pizza signaling that price pressures on key ingredients, including wheat and cheese, are beginning to flatten.

Coles hinted that food inflation, which rose to 4.3 percent in the June quarter at his supermarkets, would moderate in the second half of this year. Rival Woolworths said average prices rose 3.6 percent in the same period, prompting shoppers to switch to more affordable food.

While it doesn’t pay a dividend, Qantas surprised shareholders with a larger-than-expected $400 million share buyback. It faces a $5 billion fuel bill this year.

While job restrictions were pervasive, Steed said high job vacancies were not translating into runaway wage growth, with most boards pointing to increases in labor costs of around 3% to 4%.

That is well below levels seen in the US and UK, he said.

very little guidance

Strategists agreed that companies remain cautious about the year ahead and paused longer than usual in framing the outlook for 2023.

“Companies appear to have been deliberately vague on outlook statements given the macro conditions they face,” said Karen Jorritsma, head of Australian equities at RBC Capital Markets.

“Overall they left the outlook commentary open as to where they land and many did not issue quantitative guidance this time.”

While Origin Energy more than doubled its final dividend compared to a year earlier, it opted to retain earnings guidance for next year and postponed a decision to extend an initial $250 million share buyback until later in the year.

AGL Energy also declined to provide guidance as it cut its final dividend by 70 percent.

JB Hi-Fi chief executive Terry Smart warned Australia was entering an “increasingly uncertain retail environment” after reporting record revenue and profit for the year and increasing its final dividend by 43 per cent.

The retailer chose not to provide guidance for the full year of 2023.

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