February is the half-yearly reporting season in Australia. Overall it was positive, but there are problems lurking behind the head numbers.
More than 2,200 companies are listed on the ASX, but the vast majority of them have never made a profit or paid a dividend, and will probably never do so. Almost half of the total profit and dividends from the market come from just six companies – the four major banks plus miners BHP (AX 🙂 and Rio (AX :). A dozen companies account for around two-thirds of total profits and dividends.
Hot stocks not relevant to the general market
Although most media attention is focused on the & # 39; hot stocks & # 39; du jour – such as Domino's (AX :), Wisetech (AX :), Afterpay (AX :), Lynas (AX 🙂 – they have virtually no impact on the total market. Even if they suddenly doubled or tripled their profits, or if they had a miraculous profit margin of 1,000% (most make losses – that is why they are & # 39; hot & # 39; shares). What happens outside the top of a dozen stocks in Australia has virtually no impact on the market as a whole, but that's where speculators hope to make it rich.
Here the focus is on the broad market, which has yielded good returns in the long term for those who study the underlying drivers and get the timing right. The graph shows the broad market index (blue line) since 1960, together with the aggregated earnings per share (maroon) and the total dividends per share (green). This points to the significant decline in profits and dividends in each of the major economic recessions and slowdowns in growth.
ASX stock prices, earnings and dividends
The February 2019 reporting season
Total profits and dividends increased in 2018, but the majority came from the big miners and their windfalls due to the accidental rebound in commodity prices since early 2016, and recoveries from the large losses in oil and gas, steel and mining sectors of the collapse of raw materials for 2015.
The major banks – the main engines of profits and dividends – all reported poor results for the full year (Commonwealth Bank Of Australia (AX 🙂 has one June year and the other three have September years). Profits in large banks were lower across the board, with weak revenue growth and rising costs of regulatory, customer remediation and compliance sanctions. As usual, profits were raised by fiddling with their provisions for doubtful debtors, which are still at paper-thin levels and which will certainly erupt if housing construction and the property finance loan weaken.
Dividends were also stimulated by two other factors. The first is the increasing pressure from shareholders to return the proceeds from the sale of mines to shareholders instead of letting management waste on more expensive acquisitions. The big miners have a long and sad history of wasting billions of dollars on overvalued acquisitions and projects at boom-time prices, only to write them off when prices inevitably fall as the cycle turns.
The second theme that dividends will win this season is the eagerness to pay extra dividends to reduce the franking balance prior to a possible victory in the upcoming federal election, which could make Labor its promised reduction in franking payments to carry out.
Looking ahead to the 2019 profit and dividend picture, the two main sectors look rather weak. Banks are likely to suffer from lower credit growth and higher costs for reorganization and compliance, as well as doubtful debtors for the property slowdown. Miners (including oil and gas) will not repeat their windfalls because the commodity price reform of 2016-18 has stalled in the global slowdown. In other sectors, cyclical weakness is likely to have an impact on construction, building materials, transportation, and retailers (including real estate funds dominated by retail). Telstra (AX 🙂 is, well, Telstra. Apart from Macquarie (AX :), CSL (AX 🙂 and the major insurers, the other 2,000+ listed companies make little difference for the overall market return.
Miners versus banks: who wins in the long run?
Australian stock markets have always been dominated by miners and banks, but which sector was better for the return for shareholders?
In February 2019, BHP (including the end of London) reclaimed the top location of Commonwealth Bank as Australia's most valuable company. Banks had had a fantastic run since the early 1990s thanks to their relentless margins and fees, swallowing up competitors, aggressive cross-selling of internal products, fraudulent sales and many other unfriendly practices under their cozy cartel structure and sleepy regulators. But the miners beat the banks in 2016, 2017, 2018 and so far in 2019. Why, and will it last?
Rising commodity prices since the beginning of 2016 have stimulated the recent recovery in the prices of mine shares, while the major banks have been hit by a fall in regulation and a slowdown in the local housing and construction industry. The lead of the miners will decrease as commodity prices fall in the global slowdown
Miners have always been the speculators' favorites. Probably 90% of all companies that have ever been listed on Australia's numerous stock exchanges since the 1850s are speculative mining projects. The vast majority almost disappeared a trail almost as fast as they appeared. The equity was parried by sharp promoters or disappeared into empty holes in the ground. Despite the miserable history of most mining stocks, many thousands of speculative profits have been made by ordinary shareholders who have become rich in the mining trees that live on every 30 years.
Banks, on the other hand, were relatively stable, high-dividend paying & # 39; safe havens & # 39; (apart from the depressions in the 1890s and 1930s and a close call in the early 1990s). Compared to miners, banks were usually relatively boring.
The graph below shows the total return (including dividend) of the past 40 years – from the banks (green line), miners (brown) and the rest of the market (red), compared to the overall market index (black) . The banks have easily won with a total return of on average more than 15% per year, compared to only 9% per year from the miners and the rest of the market. The bars in the lower part show the winner every year.
ASX total return: banks versus miners versus the rest
Over the past 40 years, banks have won in 16 years, miners have won in 15 and the rest of the market has won in just 9 years. The brown dotted line in the middle is the broad commodity price index, which is the key to mining cycles. Miners bounced back with commodity prices from early 2016 with the Chinese stimulus, recovery in the US and signs of life in Europe and Japan. The only other miners won in 1989 and 1980 were, but that was because banks were hit by rising debts that led to the recession in the early 1990s, not rising commodity prices.
Miners will suffer again when commodity prices fall in the coming global slowdown. As for the banks, the Hayne report anchored their market dominance and they should have the freedom to continue most of their oligopolistic paths with a few small tweaks to appease regulators.
Ashley Owen is Chief Investment Officer at consulting firm Stanford Brown and The Lunar Group. He is also a director of Third Link Investment Managers, a fund that supports Australian charities. This article is intended for general informational purposes only and does not take into account the circumstances of a person.
Original post by Cuffelinks
