3 things I’m looking for in this years’ reporting season

3 things I’m looking for in this years’ reporting season

One of the factors contributing to Australia’s recent market gains has been the hunt for yield, and I have never seen company boards focus so much on rewarding their shareholders with cash. This has not been a selfless endeavour as the low interest rate environment has meant that yield has been bought up very aggressively, and nothing makes shareholders happier than higher share prices. Predicting the turn in interest rates may signal the end of the bull market in yield, but if corporate Australia is proactive then it should not be end of the bull market in general.

My personal view is that while we are closer to the end of the low interest rate cycle than to the beginning, there are still some legs left in the trend. I expect with the RBA’s desire to keep a lid on the Australian dollar may mean our interest rates remain where they are beyond the turn of the US cycle.

So what do we need to see for the market to continue to buy Australian companies?

  • The market will not tolerate lazy balance sheets, given our relatively low earnings, growth rates and interest rates.
  • Special dividends and commitments to higher payout ratios will attract more investors.
  • In the absence of higher payout ratios, I want to see companies using excess capital to grow earnings. It is for this reason I have been predicting increased merger and acquisition activity.

Over the past few years we’ve seen companies’ earnings grow primarily from cost cutting. However, a higher interest rate environment on the horizon means the market will look for revenue growth, especially from companies not rewarding shareholders with dividend streams. 

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