The 2022-23 companies reporting season was quite positive overall with performance of some companies ahead of expectations. Djerriwarrh Portfolio Manager Brett McNeill shares his key takeaways and thoughts on how some of the key holdings in the Djerriwarrh portfolio fared.
Investors had concerns heading into reporting season about the impact of inflation, rising interest rates, cost of living increases would mean for consumers. There were fears that a drop in consumer spending would hurt retailers and the economy in general. There were also concerns over how bad and doubtful debts and house prices would affect the banks.
For the most part however, based on the company reports that we saw and our subsequent meetings with company management teams, the economic environment for companies appears to be fairly sound. The most important contributing factor is record low unemployment. While household budgets are being squeezed by the higher cost of living, many have a good buffer of savings, and house prices have held up at a better-than-expected level.
Australia has also benefited from strong lending standards; few loans have gone to people who cannot afford them, and mortgages over the last two to three years have been written on good terms, with a focus on mortgage serviceability. Regulation of our financial system has also been strong.
As far as market expectations go, reporting season was neutral. The number of earnings beats versus earnings misses was about the same as in recent periods and outlook statements were cautious and probably a little bit below expectations, but not that far off.
Dividends were in line with expectations
The level of dividends overall was weighed upon by lower dividends from the big mining, oil and gas stocks, however outside of the resources sector, dividends were pleasing.
Of the top 15 ASX companies by market cap that reported for the year ended 30 June, 11 increased their full-year dividend and only four reduced them, those being BHP, Rio Tinto, Santos, and Woodside. Dividends from resources companies were reduced from very high levels a year ago, and the market had expected a cut although BHP’s dividend was below those expectations.
Outside of the resources sector, the Commonwealth Bank increased its dividend by 17 per cent, and supermarket operator Woolworths lifted its dividend by 13 per cent - significant double-digit increases by some very large, well-held companies.
Overall dividend income for the Djerriwarrh portfolio was in line with our expectations. We had reductions factored in for some stocks, but good increases for blue-chip stocks such as Commonwealth Bank, Woolworths, Wesfarmers, and CSL, and a strong rebound for Transurban.
The dividends announced during reporting season reflect one of the tenets of Djerriwarrh’s investment philosophy: the ability of quality companies to pay attractive, sustainable dividends over the long term. Over the last financial year, well-run companies with good boards and management teams avoided extravagance in terms of pursuing costly acquisitions or paying stretched dividends.
Good results for Djerriwarrh’s portfolio
Even beyond their dividend increases, Commonwealth Bank and Woolworths both delivered strong results overall as two of the largest holdings in the Djerri portfolio. These results also illustrated the benefit of diversity in Djerriwarrh’s quality portfolio given the softer performance from major resources stocks.
Commonwealth Bank has good management and a strong balance sheet, and capital ratios are well above the minimums required by the regulator so they can return some of that capital to shareholders. Revenue, profit and net interest margins have expanded, costs have been reasonably controlled, and the dividend payout ratio is conservative and sensible.
Bad and doubtful debts have increased however haven’t reached levels of significant concern and aren’t at the levels that the market was anticipating six to nine months ago. The bank is well provisioned and about as well placed as it could be in the current environment.
Woolworths generated good revenue growth, delivered some margin expansion, managed price increases pretty well and controlled costs. Sales have continued to grow in a sustainable manner as the business focuses on delivering what shoppers want.
One of the surprises of the reporting season was Telstra, another significant holding in the Djerriwarrh portfolio. We believe Telstra’s results were better than the market treated them in terms of share price reaction. The stock has been sold off heavily after the result. Some investors may have been expecting Telstra to announce the sale of some of its infrastructure assets.
We responded to the Telstra sell-off by increasing our holding. We’ve been wanting to do so for some time, but the share price held us back. We expect Telstra will provide a dividend yield of around five per cent fully franked and believe that its dividend is set to grow.
The outlook is cautious but encouraging
Generally, companies are cautious. They understand that there are still risks associated with the higher cost of living, high interest rates, consumer uncertainty, and stubborn inflation. However, our observation of economic indicators and the results that were delivered during reporting season suggest that many companies are in a reasonably good position. They have strong balance sheets, sustainable dividend payout ratios, and high-quality businesses.
Australia is also in an encouraging economic position, with extremely low unemployment, sensible lending standards, an increasing population, and rebounding immigration. These factors should help generate reasonable economic growth, providing great benefit to a broad range of companies, many of which are in the Djerriwarrh portfolio.
In our view the Djerriwarrh portfolio is in good shape. In line with our investment philosophy, we have a mix of quality companies across diverse sectors, including industrial and resources stocks. Some are more income-focused, so overall we think the portfolio is well set up to deliver good income yield and attractive dividends for the current period.