The 2024-25 half-year company results season can be described as volatile in terms of its impact on share prices. It delivered some surprises while also revealing good financial health for many companies and Australian consumers. It also confirmed the need for investors to be increasingly patient and selective when looking for dividend yield. However, despite share price volatility being the highest on record during the reporting season, the Djerriwarrh portfolio demonstrated resilience. It reinforced confidence in the portfolio’s strategic positioning. Brett McNeill, Djerriwarrh’s portfolio manager, shares his insights below.
We saw some significant contrast between company results and share price movements throughout the half-year reporting season. Despite strong earnings and positive outlooks from several companies, many share prices fell throughout February. Examples of this include JB Hi-Fi, Pinnacle Investment Management Group, and Wesfarmers. This price movement reinforces the fact that valuations were already too high for a lot of companies following a very strong run in our markets over the last two years.
In contrast, some companies that delivered results in line with expectations saw their share prices react positively, such as ASX, Mirvac Group, and BWP Trust. Telstra, which delivered solid results, also experienced price gains, likely benefiting from investor preference for stability. Telstra remains operationally strong but has had a stagnating share price. The company’s announcement of up to $750 million share buyback was a surprise this season.
Dividend strategies shifting
We also observed a more cautious approach to dividends, particularly in the resources sector. Companies like Rio Tinto and BHP reduced their dividend payouts, indicating a move in strategy away from delivering growing dividends to investing in future growth. While this might disappoint some income-focused investors, the overall dividend yield remains attractive. However, a significant jump in payouts is unlikely in the near term.
More broadly, financial health remains sound across most sectors, although many companies have now used up much of their debt capacity compared to two years ago. While debt levels remain manageable and not excessive, balance sheets are generally less conservative than before. Companies such as Wesfarmers, BHP, Rio Tinto, and Woodside have used up considerable debt capacity, positioning themselves for future growth opportunities.
Retail resilience
Australian consumer financial health remains strong despite ongoing economic uncertainty and cost-of-living pressures, with retail sales continuing to show strength.
Companies such as JB Hi-Fi and Wesfarmers—particularly through Bunnings and Kmart—have benefited from consistent demand, reinforcing the sector’s stability. JB Hi-Fi’s performance has been phenomenal, driven by sustained consumer demand for technology products.
However, while sales remain strong, inflationary pressures and higher interest rates could weigh on consumer spending in the months ahead.
An appetite to price for perfection: What it means for the banking sector
The Commonwealth Bank of Australia (CBA) is the only major bank to report half-year results during this reporting season, while the other majors release quarterly updates. However, the banking sector faced selling pressure in February, with most major banks seeing their share prices fall. The market reassessed valuations across the sector, leading to share price declines for NAB and Westpac, among others.
The banking sector has enjoyed a very strong run over the past few years, but with margins coming under pressure and some concerns around capital positions, we are seeing a correction in valuations.
Portfolio adjustments
We took advantage of temporary stock price weaknesses to rebuild positions in select high-quality names such as Reece Group and Cochlear. Additionally, we selectively added positions in Rio Tinto, Woolworths, and Region Group to enhance income generation. Djerriwarrh had no active selling during February, reinforcing our long-term investment strategy.
Reece and Cochlear delivered results that were below expectations, but these setbacks appear to be driven by temporary operational challenges rather than fundamental weaknesses. We continue to view these as strong businesses with long-term potential.
Outlook for FY2025: cautious but opportunistic
We believe the market appeared overvalued on multiple metrics in February, reflecting the immediate impact of the half-year results season. While half-year results offer useful insights, it remains important to focus on long-term trends rather than short-term fluctuations. Companies that have experienced strong runs may continue to see corrections as valuations normalise.
We’re in an environment where valuations have been running ahead of fundamentals in some areas. We remain focused on quality businesses with sustainable earnings and strong balance sheets rather than chasing momentum.
Looking ahead, Djerriwarrh will continue to look to take advantage of opportunities to add high-quality companies when market conditions allow. While the market may face some fluctuations, we’ll continue to invest in companies with strong fundamentals that are well-positioned for long-term growth.
Djerriwarrh remains patient in our approach. Sectors like retail, infrastructure, and healthcare may provide opportunities, and Djerriwarrh will continue to monitor these areas closely, ensuring a diversified portfolio as market conditions evolve.
Our strategy remains taking a long-term view and ensuring investments align with our objectives for steady and sustainable returns.