Australian FY17 Reporting Season: When Reality Bites

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

Australia Utilities / Thematic (Sector/Industry)

In our post-reporting season note, we highlighted how payout ratios were cut in FY17 but guided to rebound in FY18. The additional capital from some of the cut to payout ratios was used to protect market share and margins, while some was retained because of industry-wide structural pressures.  We classified most of the capex, at least partially funded by the payout cut, as being “defensive” – spending necessary to protect margins; rather than “offensive” – used to grow future earnings.Australia provides more investor return on capital via dividends than most advanced markets and the downward pressure on payout ratios revealed during reporting season is a concern. Indeed, after the reporting season reset, analysts expect payout ratios to be lowered further in Consumer Discretionary, Energy, Industrials, Materials, Telecommunications and Utilities in FY18.  However, a rebound higher in that year is expected in Consumer Staples, Financials, Healthcare and Information Technology.Stocks with more stable payout ratios generally trade on lower dividend yields than those that don’t, meaning stocks with better longer-term payout stability are rewarded. Payout stability in the sectors where the dividend is an important part of investor return is key.  These sectors include Real Estate, Financials Telecommunications, and Infrastructure.  In a market with little top-line revenue growth and a mature cost-cutting cycle, buy dividend stability. AVN, AUB, CBA, SCG, and PTM all have good longer-term payout ratio stability.Stocks that have a poor track record in payout stability in the key dividend-paying sectors include SKI, BOQ, SYD, EPW, ABA, IAG, LEP, APA and CHC.

In our post-reporting season note, we highlighted how payout ratios were cut in FY17 but guided to rebound in FY18. The additional capital from some of the cut to payout ratios was used to protect market share and margins, while some was retained because of industry-wide structural pressures.  We classified most of the capex, at least partially funded by the payout cut, as being “defensive” – spending necessary to protect margins; rather than “offensive” – used to grow future earnings.Australia provides more investor return on capital via dividends than most advanced markets and the downward pressure on payout ratios revealed during reporting season is a concern. Indeed, after the reporting season reset, analysts expect payout ratios to be lowered further in Consumer Discretionary, Energy, Industrials, Materials, Telecommunications and Utilities in FY18.  However, a rebound higher in that year is expected in Consumer Staples, Financials, Healthcare and Information Technology.Stocks with more stable payout ratios generally trade on lower dividend yields than those that don’t, meaning stocks with better longer-term payout stability are rewarded. Payout stability in the sectors where the dividend is an important part of investor return is key.  These sectors include Real Estate, Financials Telecommunications, and Infrastructure.  In a market with little top-line revenue growth and a mature cost-cutting cycle, buy dividend stability. AVN, AUB, CBA, SCG, and PTM all have good longer-term payout ratio stability.Stocks that have a poor track record in payout stability in the key dividend-paying sectors include SKI, BOQ, SYD, EPW, ABA, IAG, LEP, APA and CHC.

A Closer Look at the Cut to Payout