The coming of the 2011-12 reporting season may be compared to the “silly” season of Christmas.
Some commentators are suggesting that the market is in waiting for a storm of negative earnings reports. Time will tell, but shortly we will be dealing with facts rather than speculation. It will certainly give us the opportunity to critically analyse the companies that reside in our portfolios.
One adjective that will be flogged to death in the coming weeks will be the word “challenging”. “The past year was challenging, the present is challenging and the outlook appears challenging.” Those business environment conditions may be used by executives to justify an increase in remuneration. The shareholders, who actually own the business, may well conclude that these conditions actually justify a reduction in salaries!
The other things to look for in coming weeks from the reports of our major companies are as follows:
1. Will the decline in BHP Billiton’s (BHP) profit be offset by a more sensible approach to capital management and dividends? During the three years to 2011, BHP lifted earnings by 400%, whilst the dividends to shareholders hardly moved. The share buyback of 2011 was a massive positive for the shareholders who sold (mainly pension funds) and a disaster for the Australian government’s tax collections. Hopefully, we will see some sense by the BHP board, dividends lifted and shareholders treated like owners. Maybe BHP will give us some clarity over its mooted non-payment of the Mineral Resources Rent Tax.
2. The Commonwealth Bank (CBA) result should confirm low earnings growth and a slight increase in dividend. There will be the usual analysis of margins and cost bases but the key focus will be on return on equity. We suspect that the ROE may lift slightly and confirm that Australia’s banks are amongst the best in the world. Unfortunately, the peer group residing in Europe makes anyone look good in comparison.
3. Telstra’s (TLS) result has been flagged and low-digit growth is expected. The dividend is known and so the real consideration will be the operating cash flow report. Does the TLS depreciation charge exceed the capital investment and thus, is free cash flow growing faster than profits? Further, some clarity over the receipt of National Broadbank Network payments would be helpful. How much is likely to be received in 2013 and 2014? Maybe it is challenging for TLS to shed light on this question, but it is vitally important information.
4. Woolworths (WOW) should also disclose low single-digit earnings growth before its provision for Dick Smith. Its dividend should rise slightly. Of more interest will be the analysis of its Masters hardware joint venture to determine its investment so far, and the dilutionary effect on WOW’s ROE.
We do not doubt that the current economic and business conditions are most challenging. However, it is at times like these that we should look for companies to be clear in their communication, in their strategy and in their capital management.
