What we’ve learned so far, this reporting season – Proposed franking changes front of mind

Reece Birtles

Reece Birtles

Australia’s semi-annual reporting season is almost coming to an end. Profit results are being clouded by negative sentiment on politics, financial conditions and house prices.

“But politics is also creating an interesting dynamic for dividends and capital management,” notes Reece Birtles, Chief Investment Officer, Martin Currie Australia, a Legg Mason equities investment affiliate manager.

He says: “There have been more misses than hits between actual company results, and what broker analysts had forecast for earnings per shares (EPS). Sales or revenue results are mostly in-line with consensus expectations, implying that consumer spending may not have necessarily fallen as far as feared. 

“But it is dividends per share (DPS), which is most interesting, as the only line item surprising the market with a positive skew. Driving this seems to be the expected result of the imminent Federal election, influencing companies such as Woolworths, Wesfarmers, Fortescue Metals Group and Woodside Petroleum to declare higher dividends and signalling their consideration of off-market buy backs.”

He presents the following analysis:

Proposed franking changes front of mind

Ahead of any changes to rules about cash refunds for franking credits by a potential new Labour Government, we wrote to a number of large-cap companies with surplus franking credits in December 2018, including those listed above.

We asked boards to consider capital-management strategies that could release surplus franking credits to investors, in case the rules are changed in June.

With the announced special dividends and companies bumping up their payout ratios across the market, company boards are evidently taking the possibility of government change very seriously and heeding our request to ensure franking credit economic value doesn’t get lost to shareholders.Apart from the loss of value of franking credits to retirees, our biggest concern with proposed changes is that the choice of investment vehicle (pooled versus segregated) will result in different value attributable to taxpayers of the same status.

Consensus revisions down further overall 

Despite already lowered EPS forecasts in the run-up to the reporting season, reflecting the global economic uncertainty, we have continued to see further mild negative revisions to earnings and cashflow metrics.

Premium pricing but slowing growth

Unlike last reporting season in August 2018, where the market rewarded high price/earnings ratios (P/E) growth stocks with an expanding multiple on lacklustre earnings. This time around high P/E stocks are seeing no multiple expansion – probably because their EPS growth rate has reduced in absolute terms and relative to low P/E stocks.

It appears that the market reaction has been relatively measured towards disappointing EPS results, but what price reaction is showing, is the that EPS upgrades are being rewarded, while sales downgrades are being punished.


We see these short-term disconnects as opportunities for our fundamentally driven strategies.


Key themes being confirmed through engagement

In terms of themes across the sectors, our statistical framework is telling us that better results are evident in resource and offshore-exposed stocks, while there is more weakness in the financial and defensive names, such as the consumer staples.

We believe the lacklustre profit results are due to the economic and political uncertainty since August 2018. Politics, financial conditions and house prices are clouding sentiment versus Australia’s strong employment market and fiscal position that is likely to be used to boost the economy leading into an election.


“By the end of the reporting season in March, our team of analysts will have met and grilled over 150 management teams. This will allow us to supplement our fundamental understanding of the issues and strategies of each business, and help refine our views on each investment opportunity going forward,” says Birtl

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