What should we expect from reporting season 2021?

Roger Montgomery

Montgomery Investment Management

Profit season unofficially kicked off this week with half-year results from diversified resources behemoth Rio Tinto yesterday. Perhaps the most insightful observation is the lack of downgrades during confession season.

In that regard, this reporting season is a bit of an unusual one – we’ve never really had so much information going in. We can generally expect a very buoyant reporting season and a bit of a dividend bonanza – especially where founders have large equity stakes!

We estimate earnings and dividends for CY21 will come in at least 15% higher than the peak CY2018. But without putting a precise number on earnings growth we believe the raft of strong earnings growth revisions, now means that FY21 earnings will beat pre-COVID-19 earnings.

For those interested in precise numbers, expectations after the half-year reporting season were for 15% earnings growth for FY21 -- that number has now almost doubled. And keep in mind the February 2021 reporting season was marked by the biggest upgrade of consensus EPS in 20 years.

It also follows that upside surprises are expected to outpace downside surprises.

Much of the strength can be attributed to mining, healthcare and banks.

We expect big dividends to be declared by the major miners, BHP(ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue Metals Group (ASX:FMG) thanks to elevated iron prices and the lack of stupid acquisitions at the top of the market!

Investors also appear to have priced in considerable returns of capital this year by the banks (through share buy-backs) although there’s a good chance the capital returns won’t be as substantial as the market predicts and they’re not reporting right now.

Bank pay-out ratios won’t reach past highs but the dividend growth on last year will be material.

Resource sector earnings are expected to rise 59% (thanks to buoyant Iron Ore prices) and the banks should, when they do report, announce collective growth of 52%. Together resources and banks are expected to contribute 65% of total earnings.

Much of the high earnings growth rates for the rest of the market is a function of the low base effect from 2020. Consequently, most in the investment community are comparing results to 2019. So, we aren’t expecting 2021 growth rates to be sustained.

The outlook statements by companies will obviously hold the key to the outlook.

On that front, we believe labour scarcity could start to push pressure on company cost bases. We are aware for example of miners and retailers who are facing significant wage increases to attract and retain staff. For miners 10% higher wages is not uncommon amplified of course by lockdowns. For retailers, we note some have reported up to 15% wage increases for ‘digital’ staff – those that look after websites and online and digital marketing.

For retailers, we think the bigger issue will be a reappraisal of the likely forward currency rate. The fall in the AUD from nearly 80 cents in February to circa 74 cents currently amid a sell-side consensus rate of 77 cents means downgrades are likely to add to the slow-down in sales growth as the recent opening saw a switch of spending from goods to services.

The building and renovation boom continues apace and expectations for continued infrastructure spending will provide support for building companies.

Indeed, a lack of clarity due to the current lockdown in Sydney will extend the period of uncertainty for companies making it difficult for them to offer solid guidance.

And the government’s current round of financial support is materially lower than its first response. While this reflects the government's expectations lockdowns won’t persist, it nevertheless puts a lid on consumer spending intentions.

While outlook statements for 2022 are more important than the backward-looking results, we remain wary of those companies for whom lockdowns will temper enthusiasm. We expect some selling of stocks where the outlook is especially less clear, which they are at this early stage of the financial year anyway.

Until the vaccine rate picks up and we can be more confident about the path of reopening, uncertainty and market inefficiencies will remain, making the environment terrific for smart stock selection.

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Chief Investment Officer
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger brings more than two decades of investment, financial market experience and knowledge. Roger also authored the best-selling investment book, Value.able.

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