Strategic decisions: A key theme to watch this earnings season

Welcome to the first episode of '4-minute Monday', a special series from Nikko AM built around ASX reporting season. Each Monday, I sit down with the team and summarise highlights of the prior week to give investors a pulse of company earnings as well as forward-looking views into upcoming results. I hope this material helps you make sense of the deluge of announcements typically associated with earnings months.

Read on or listen to my recap of week 1, where I call out big strategic decisions as a major theme investors should be watching, and what I'm looking for when CBA, Telstra and AGL report later this week. Don't forget to hit FOLLOW on the left if you'd like to be notified of these updates each Monday and more of my wires in future.

4-minute Monday - Week 1

What's the mood that you're seeing from company management?

The mood is definitely cautious—even more so given that Victoria has recently moved into stage four lockdowns, and we now have tighter border restrictions around Queensland and New South Wales. We expect there will be a number of companies where management is going to be very cautious in their expectations. The actual numbers, in many cases, will be poor compared to the prior corresponding period. There'll be some companies that have had hardly any change to earnings, and that will stand out.

Companies, such as mining companies, have hardly been impacted. Consumer staples businesses like Coles and Woolworths have seen revenue and sales extraordinarily higher than in previous years, and all the online retailers have done very well. So, there is going to be quite a dichotomy of results in this reporting season, and because of that, I don't think it's going to be particularly insightful compared to previous reporting seasons.

Were there any standouts for you in week one?

Week one is typically a quiet one and this is no exception. Only about 7% of the market reported. IAG (ASX:IAG) and ResMed (ASX:RMD) were two that reported in week one.

I think what's going to be interesting is, this reporting season is really around strategic decisions that companies may make given the crisis. The old adage of never let a good crisis go to waste may actually come to the fore in this reporting season. 

We've seen Qantas (ASX:QAN), the poster child of this, using the crisis to effectively reset their entire business, retiring the 747, effectively retiring most of the A380s, resizing their workforce and essentially restructuring their whole business. It's going to be interesting to see whether we see other companies make, maybe not as wholesale changes as that, but make some big strategic decisions that they may not have made under normal circumstances.

Dividends have been down across the board coming into reporting season. Has this been a consistent theme?

Undoubtedly so. Most companies that have been impacted by the coronavirus have actually either deferred or reduced their dividends. Particularly companies that have been raising money. There is no point in raising money only to then pay dividends. So, we're seeing dividends down or deferred across the board. Banks have obviously been in question given they are such a big payer of dividends. APRA has stepped in and suggested that banks can only pay out a maximum 50% payout ratio going forward for the rest of the year.

I expect dividends to be down across the board across most sectors. Probably the standouts are going to be mining companies, which have massive cash flows given commodity prices are up and volumes are not impacted. And so they actually have the capacity to pay very high dividends.

There are some big names reporting this week, CBA, Telstra, and AGL. Any thoughts on what these reports could look like?

On Commonwealth Bank, like all the banks, we want to get more insights into the deferred loan payments that are occurring across both mortgages and small businesses. Dividends will be front of mind as well as outlook statements. I'm not sure whether we're going to get many insights from the company given we're in very uncertain times, but even so, it will be interesting to see how their businesses travel.

Telstra (ASX:TLS) and AGL (ASX:AGL) are reasonably defensive at the moment. I'd expect their results should be okay, albeit it will be interesting to see whether the provisions of bad debts have increased given the economic conditions we're sitting in at the moment. So, I'm expecting reasonable results from all three within our expectations.

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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 to stay up to date.