Earnings season insights: Why record dividends unsustainable
The record $85bn in shareholder returns for the first half of 2019 isn't likely to be replicated any time soon, says Morningstar’s Peter Warnes, who also singles out a few winners and losers.
Peter Warnes: Briefly, we have a very, very wide spread and quite brutal confession period before the results started and there was a lot of downgrading of expectations. And so, what happened was that, generally speaking, results met those downgraded expectations. The feature of the season was certainly capital management and total shareholder returns dominated by high payouts and share buybacks. So, we are looking now for the financial year 2019 for total shareholder returns to be near $85 billion, which is a record. And that level is, in my opinion, unsustainable. We are looking at a lower total shareholder return in 2020 and that will be led by resources not being so generous as they have been in the last six months.
The resources have been driven by record cash flows, high commodity prices, some asset sales and there's also been – in a wider market there's been this fear of a change of government and what's going to happen to surplus franking credits and the rebate on them. And so, conservative companies kicked on putting special dividends; they are not going to be repeated. The payout ratios were edged up across the board. But again, as I said, the total shareholder returns – growth in total shareholder returns exceeded the growth in earnings. That is not sustainable. And of course, all those payouts have to be paid for, whether they be dividends or share buybacks and that pushed gearing levels up across the board. But still, in all, their balance sheets were in pretty reasonable shape.
On the positive side, Goodman was a feature, up about 10% and Charter Hall also up about 10%. Goodman, for obvious reasons, they are in the right space. They are in the industrial real estate market pandering to extremely strong demand from the online retailers and ecommerce, if you like. But in addition to that, a very, very strong growth in their asset management area and they now aren't funding any of it. There's not – very little of their capital going into these funds. Third-party are putting in a lot of money and Goodman are just clipping the ticket, one, in the development and then two, in the management of those assets. So, it's a beautiful set of – or business model, if you like, and we've upgraded there.
We've downgraded Blackmores quite meaningfully and they just ran into a little bit of trouble with their channel mix in China and the way that China is buying their product. So, a little bit gun-shy there at the moment. a2 Milk, on the other hand, did well in China. But it just goes to show you that maybe vitamins aren't the flavor of the month that infant formula is.
Healthcare is usually pretty reliable for obvious reasons. But the thing is the big three global companies there, CSL, Cochlear and ResMed, all of them, the initial market reaction – in other words, what happens when the market price in the first 24 hours, they all went down, about 4% for CSL, about 8% for Cochlear and about 15% for ResMed. That's unusual. The results were still okay. But they have missed the expectations of growth. We are still quite comfortable obviously with the three of them. But it just goes to show you that they missed expectations. Ramsay was good and was probably a bit of relief actually after pretty brutal six months and they also went – they were strongly positive in terms of a reaction in the market. But overall, we are still quite comfortable with the healthcare space.