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ASX-listed companies must report their financial results to shareholders at least twice a year and we are currently in the middle of the main reporting season, when many companies release their full-year results. It provides an opportunity for everyone to review earnings reports (should you be that way inclined) and companies provide forecasts about how they expect the company to perform in the short term and long term.
At the close of trade on August 19, 78 companies had reported their earnings results. There has been no shortage of factors or themes affecting earnings results:
There is a lot of investor attention on the economic situation locally and globally with how strong inflation is around the world and how heavily central banks are responding with interest rate rises to bring it under control.
Sometimes, the biggest shocks to the portfolio don’t come from the above external forces, rather from results during reporting season.
Companies’ dump’ information at results time and the reactions to these results can be surprising. These conditions can mean even multibillion-dollar companies listed on the ASX can see their share price shift 20% on results day, sometimes within minutes.
For individual companies, the earnings result, market expectations, earnings guidance from the company and past performance of the company’s share price can all affect the share price reaction on earnings day. When analysts and media commentators assess earnings season, the common term used to describe results is “mixed” and while some influences are positive for a number of companies, like labour demand and rising interest rates, they are negative for other companies.
Often companies may over or underperform what market analysts have forecast, which can lead to unexpected share price movements. For instance if BHP was to announce profit of 10%, the share price could in fact fall due to it not meeting the market expectations. This year, more companies have seen their share prices fall on the day of earnings being released than those posting gains. According to a recent CommSec report – revenues are outpacing expenses and profits are rising, but cash levels have been trimmed as have dividends.
Quite remarkably all but two of the full-year reporting companies have issued a dividend – 97 per cent – well up on the long-term average of 85 per cent. So far, both full-year and half-year reporting S&P/ASX 200 companies have announced dividends totalling $27.5 billion.
Dividends are a way for businesses to reward shareholders. They can also be an insight into how management and boards are feeling about the outlook and whether they need to hold onto more cash for the next year. While Macquarie noted that some dividends may have been less than was hoped for, a number of the biggest companies have delivered higher payments to shareholders. BHP has increased its dividend by 8%, Telstra by 6.25% and Commonwealth Bank by 10%.
At Hewison Private Wealth, we stress the importance of a diverse investment strategy focusing on capital protection and reliable income. This enhances long-term returns with exposure to varying asset classes, you can smooth investment returns over time. Although history has shown that shares and property generally increase in value over 5-to-7-year timeframe, the price of these investments can reduce in the short term. Therefore, a minimum timeframe of 5 to 7 years should be considered for these investments.
We are long term investors and as you would have read, short term movements in the market should not be any reason to panic, as the investments recommended are done so with a long term lens. Having said that, it is important to understand what is driving the volatility and movements in the share market.
As we draw to the close of reporting season we have also drawn to the close of the AFL season and I’d like to wish all my fellow Melbourne Demons fans the best of luck this September.