The reporting is upon us and the usual game of working how the mostly predictable results have been priced in begins. UBS is predicting a further slow down in aggregate earnings growth and a continuation of the dual speed economy. In FY12 they are predicting earnings growth of 13% in energy, 28% in general industrials and 11% in telcos.
They are making the following analyst net revisions:
Table 2: Analyst net estimate revisions ((up-down)/total)
Analyst net revisions (3 month)
Financial-x-Property Trusts -74%
Consumer Staples -57%
Materials -51%
Consumer Discretionary -50%
Health Care -30%
Information Technology -25%
Telecommunications Services -25%
Property Trusts -12%
Industrials -6%
Energy 5%
Utilities 13%
There are an awful lot of minus per centage figures in there, suggestive of the general gloom in the market. But once again, how much of the weakness has been factored in to prices? Earnings revisions according to UBS, creates potential trading strategies. But there is a real need for caution:
It is often tempting (particularly for value managers) as we approach reporting season to buy stocks that appear too cheap. However, given the correlation between earnings and multiples, retractions in earnings often lead to greater than expected retraction in prices. As a consequence, it is important when buying value prior to reporting season to ensure that the prices are underpinned by earnings.
UBS is arguing for a big shift towards dividend income, which is hardly a startling conclusion but welcome given the slowness with which the broking community has realised that the glory days are over:
In a world of slow growth income makes up a larger proportion of total returns. During the previous de-levering phase of 1929 to 1945 the Australian market delivered an average annual price appreciation of 3.2% per annum and a total return of 9.3%. In other words, 6.1% or around two thirds of the total return came from dividends.
Almost half the market pays a fully franked dividend (92 companies within the ASX200) and a further 22 pay a partially franked dividend. With a dividend yield of 4.9% and an average level of franking across the market of 71%, the market is currently paying 148 bps in franking alone. As a consequence focussing on companies with fully franked dividends provides investors with a free kick.