Why you need to pay attention to reporting season
Many listed Australian companies are making a comeback. You only have to look at the results this interim reporting season. Companies have typically performed positively in the six months to the end of December, which is reassuring after such a scary first six months of last year.
For the 6.6 million Australians who hold share investments, the two half-year reporting seasons are worth looking at. Why? The parade of companies' financial results tell investors what happened over the past six months but most importantly the company's outlook for the coming six months.
The outlook is often more important than the result. But frustratingly not all companies will comment on the future.
Do you buy or sell shares on the results?
Investors are often bewildered by share price movements during reporting season. Unless you really understand what's going on it is easy to make the wrong trading decisions.
What do brokers' make of the results?
Research analysts make forecasts of what companies will earn and it may be higher or lower than the consensus forecast. Brokers say the result may be a 'beat' or a 'miss'. But the real significance for share price movements depends on what the 'beat' or 'miss' means for the future, together with the company's outlook statement.
Investors can easily misinterpret profit announcements unless they are really attuned to what the market expects. Look at your private broker's or online broker's view of the results.
The share price often doesn't go the way you expect. This is because increased earnings that come in below expectations may result in a soft share price after the announcement. Or a fall in earnings that has been well anticipated by the market because the company has guided expectations lower, may be followed by strong share price performance.
While some share prices rise and fall on the news - often fairly quickly after it is announced - most likely the market has anticipated the result and it is already factored it into the share price. In the lead up to the results' announcement is the pre-reporting 'confession season' when companies come clean about their earnings before they release them.
A strong rebound
Investors and superannuation fund members will see some big percentage changes in earnings over the past six months, which is reassuring.
The bounce back is from a huge 24% fall in earnings over the six months to the end of June 2020, to an earnings rebound of 23.3% in financial year 2021, explains Pieter Stoltz, equity strategy analyst at UBS. He says Australian companies are buoyed by a rebounding economy and near-record high commodity prices - particularly iron ore.
Which sectors will report strong results?
The recovery is uneven.
"Consensus expects resources to lead earnings growth by 42% followed by financials at 23%," says Stoltz. He says industrials ex financials lag behind with earnings up just 3%. The tech sector is expected to be a standout up 118% while media and health care will both rise by 10%.
Dividend drought to end
The dividend decline among Australian shares is coming to an end, according to market forecasters. Dividends are going to rebound with plenty of dividend surprises which is good news for investors who are searching for yield. Shane Oliver, chief economist and head of investment strategy at AMP, says dividends will return a 4.5% grossed-up dividend yield.
Certain sectors will offer much higher dividend increases. Stoltz predicts resources dividends will rise by 39.4% while financials will gain 29.3%, made up of a 57% rise in insurance company dividends, 43% increase by banks and 15% by REITs. Other financials will cut their dividends by around 15.9%.
Among the industrial shares, health care companies will pay out 20% more in dividends, technology shares 11% more and consumer staples 11% more. Sectors that Stolz predicts will pay lower dividends this reporting season include utilities, down 6.5%, general industries -6.9% and other materials -11%.
Optimism for 2021
The vaccine rollout will be a key driver for the year ahead. Oliver expects the ASX 200 to end 2021 at a record high of around 7200.