Guidance is this reporting season's big surprise

It's been a stellar start to reporting season, with several companies reporting strong profit numbers. Suncorp announced a $250 million share buyback after increasing its full-year profits by 13%. The company also paid a special dividend to investors on top of a fully franked dividend of 40 cents. CBA also announced an increase in profits, a share buyback and a big dividend payout.

This August reporting season is still in its infancy, however that isn't tempering the incredible numbers coming through. In the following wire, I share further insights as the second week of reporting wraps up, including my outlook on the banking sector and the key points to be aware of in each of these results.

Suncorp and QBE both announced exceptional results. Were these expected and what drove the boom in profits?

Suncorp (ASX:SUN) reported a trilogy of beats across sales, earnings and outlook, and they also added to this by providing a special dividend and a buyback. The resultant performance of the stock on the day reflected this strong result, rising over 10%. Strong gross written premium (GWP) growth driven by a combination of price rises and unit growth surprised the market, and the whole insurance sector rallied on the day given the positive trends we're seeing. 

A few days later, QBE (ASX:QBE) had a belter of a result. It was some 40% above the street and the strong insurance trends that we've seen in global peers during their reporting seasons were reflected in QBE numbers. Compositionally, the result was very clean which is not something that is often said about a QBE profit result. The stock was up 8% on the day, which was after a few days of price rises driven by the previous Suncorp result. The whole insurance sector has rallied quite strongly on the positive sector trends.

In light of CBA's exceptional report, do you see the ongoing economic impacts and earnings pressure from the interest rates impacting the banking sector?

The CBA (ASX:CBA) result was really all about the return of $6 billion (to shareholders) in the form of an off-market buyback. The dividend payout ratio also returned to a more normal 75%, which is consistent across the banking sector from those 2020 levels which were much lower. We're also seeing that the 2020 COVID provisions continue to be written back. Although the result itself was a 2% earnings beat, most of that was driven by their COVID provision write-backs.

The actual underlying core earnings were not particularly strong and the cost growth looks quite problematic with negative jaws* currently. However, we do see further similar-sized buybacks occurring in the next profit result given the huge excess capital that’s still on CBA’s balance sheet. The stock itself rallied really strongly into the result, however given the lofty multiples it's trading on at the moment, the result really wasn't sufficient and it's subsequently weakened. 

A few days later NAB (ASX:NAB) reported a third-quarter trading update, and the underlying result was better than CBA when you remove the weaker markets and trading income. Bad debts also helped drive the result, with the write-backs of COVID provisions. However costs were kept in check and asset quality remains quite positive. NAB also suggested that they're only holding $1 billion in deferred loans at the moment as a result of the current lockdowns. Overall, the banking sector looks quite good with very strong capital as well as increasing dividends and payout ratios. The sector should continue to perform well.

Telstra maintained its dividend of 8 cents per share but did see earnings fall. What's your outlook for Telstra?

The result itself was around consensus and the buyback and dividend were pretty well flagged. However, Telstra (ASX:TLS) did report very strong cash conversion, so free cash flow was strong and the stock rerated on the day given the improving market structure of its largest division, mobile. Average revenue per user (ARPU) growth was very strong and competitors also experienced this benefit. The return to mobile revenue growth and a solid second half with 40% margins was really a highlight of the result and should pave the way for ongoing growth in the mobile division over the next few years. Given the improvements in its largest division, Telstra now is starting to look attractively positioned.

Having completed week 2, are there any early themes you see playing out through reporting season?

It's still very early into reporting season. Week three is always the big week carrying the majority of the companies reporting. However, early signs are that we have around 40% beats and 20% misses, which is down on the February result but pretty reasonable given the current environment. Outlook statements are probably the big surprise so far. They've been pretty positive and many stocks are actually giving guidance, where I was expecting a more tempered outlook and perhaps no guidance given. However, week three will really test the early signs we are seeing.

Get the latest reporting season insights

Throughout August, I will publish my thoughts on all the biggest news from reporting season, including a look back on the week that was, and the things to look out for in the week ahead. Hit the “follow” button below to stay up to date.

* A larger Jaws ratio (or percentage) would be good news for a trading entity, showing signs that more income is being generated and that the entity's profitability and profitability growth rate is increasing. However, the Jaws ratio may sometimes be expressed as a negative percentage. In this case, it would be a sign of eroding profitability and would therefore be cause for concern for the owners/management of a trading entity. The jaws ratio is calculated by subtracting the expense growth rate from the income growth rate.