Investors are betting on hefty dividend hikes from mining giants and likely share buybacks at the upcoming round of earnings results, despite COVID-19 lockdowns in Sydney and Melbourne threatening to derail the economic recovery.
Profit season unofficially kicks off in Australia this week with half-year results from diversified resources behemoth Rio Tinto and investors say a key theme will be bumper dividends from miners that have benefited from surging iron ore prices.
Banks, another key sector in the ASX 200, also have billions in excess capital that investors expect will ultimately be handed back to shareholders via share buybacks or special dividends.
The expectation of capital returns comes despite boards facing an uncertain economic outlook due to the worsening COVID-19 crisis in NSW, which threatens to derail the national economic recovery.
Citi’s head of research Paul McTaggart said the investment bank was forecasting total 2021 earnings across the Australian market would rise 35 per cent compared to last year to surpass pre-COVID levels, and mining would play a critical role.
A research note on Friday said Citi expected resources earnings would surge by about 60 per cent to $42.9 billion for the 2021 financial year, and make up about 41 per cent of the entire market’s earnings.
“In addition to a dividends bonanza, buybacks are also expected to feature prominently, particularly in the large cap banks and resources stocks,” Mr McTaggart said.
Mr McTaggart said despite the rising capital returns, guidance for the 2022 financial year could be a bigger focus for investors, and it was possible some companies would not provide guidance at all.
Fund managers were also relatively upbeat on the earnings season, with managing director of White Funds Management Angus Gluskie saying he expected a further recovery in dividends. Boards could be more confident about the future today than six months ago, even if there was still a lot of uncertainty due to lockdowns, he said.
“If you wind back six months, we were in a much more precarious situation,” Mr Gluskie said.
Portfolio manager at Tribeca Investment Partners Jun Bei Liu said despite the uncertainty caused by lockdowns, much of corporate Australia had healthy balance sheets, as she also singled out big miners and banks. “The overall theme of this reporting season will be dividends, buybacks, and capital management,” Ms Liu said.
As well as the strength in miners and banks, Citi’s Mr McTaggart said some retailers could also pay special dividends after some strong results.
Regal Funds Management portfolio manager Mark Nathan said retail stocks could benefit from “captive” spending, as international travel bans had stimulated domestic spending, such as at online retailers. “Stock shortages should see margins hold up quite strongly as well,” he said.
Rio’s half-year result, scheduled for Wednesday, will be the highest-profile earnings result this week, while BHP’s results are in mid August and Fortescue’s are at the end of next month. Among the banks, Commonwealth Bank’s results are on August 11, with some analysts tipping a $5 billion share buyback after ANZ announced a buyback of up to $1.5 billion last week. ANZ, National Australia Bank and Westpac do not report their full-year earnings until later this year.
Chief investment officer at Atlas Funds Management, Hugh Dive, said results season would provide a key gauge of the economy’s strength, as he also predicted miners would provide “solid” dividends and potential capital returns.
“This is the first mining boom I’ve seen where they have not wasted their largesse buying things at the top of the market,” Mr Dive said.
The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.