Caution starting to pay dividends

The bad news was better than expected in the recent reporting season - and the good news was better still.

The bad news was better than expected in the recent reporting season - and the good news was better still.

Welcome to the year of the dividend. And you can thank those companies that have built up a stash of cash by not investing, rather than any boom in profits.

Overall earnings per share have been falling, dragged down by the slump in mining profits.

But never mind the profit, feel the payout.

"Dividends are outstripping earnings," UBS chief strategist David Cassidy says.

Still, after a bad patch since the start of the year, it appears demand edged up in July and August.

Like the dog that didn't bark, what was missing from the reporting season proved the most telling.

"This is the most positive earnings season I've seen in three years. There were no downgrades for this financial year," Bell Direct equities analyst Julia Lee says.

"It looks like the earnings cycle is turning. The cyclicals are starting to run."

Cyclical stocks are those most closely tied to the economic cycle, such as retailing, media or building materials.

The market has already cottoned on to the turnaround. Some of the best-performing stocks, or perhaps it would be more accurate to say least disappointing - aside from gold miners buoyed by the weaker dollar, that is - have been cyclicals such as retailers.

The worst have been in the mining-services sector, which supplies drills, infrastructure and engineering services to the miners.

All the big miners are scaling down their capital spending and CommSec's Juliana Roadley says that since the mining services stocks have reported, the giant Glencore Xstrata has also cut back.

"This will affect the pipeline of projects [for mining services companies], so there's some bad news to come," she says.

Still, because the share prices of those companies have already been savaged by the market, some analysts expect a recovery purely on the basis it was overdone. What, the market overreact? Surely not.

Mining stocks were the reporting season's losers, though no surprise there.

But some, most notably Fortescue Metals and, to a lesser extent, Rio Tinto, did better than expected.

The funny thing is the miners are considered to have by far the best prospects this year, mostly because of the slump in the dollar. Already their share prices are on the rise, having arguably been written down too far in the first place.

Almost as good as the weak dollar is the pick-up in the global economy, with China bottoming out at still a high growth rate of 6 per cent to 7 per cent, the US recovery finally gathering momentum and even the eurozone coming out of recession - all good for commodity prices.

If mining profits were predictably bad, then those of the retailers were surprisingly good. Perhaps it's just that sales weren't quite as bad as they were saying.

"I've been analysing retailing stocks for 10 years and I can't remember when I've ever spoken to a retailer who said life was good," Lincoln Indicators chief executive Elio D'Amato says.

"There were great results from RCG Corporation, owner of The Athlete's Foot; ARB Corporation, which sells bull bars among other four-wheel-drive accessories; Super Retail Group which owns Rebel and Supercheap Auto; and JB Hi-Fi."

All lifted their dividends by double-digit amounts. About one in 10 companies managed to buck the trend and cut their dividend, but it's not bad going when an estimated 60 per cent have lifted theirs, according to AMP Capital's head of investment strategy and chief economist, Shane Oliver.

There have even been special dividends, including Woodside Petroleum's US63¢, Wesfarmers' 50¢, Suncorp's 20¢ and Coca-Cola Amatil's 2.5¢.

And a special mention to Flight Centre, which lifted its ordinary dividend 28 per cent to 91¢ a share.

Dividend increases from some smaller companies, such as Titan Energy Services, were in triple digits, but coming off a low base only amounted to a few cents.

So will this financial year be even better for dividends, or is the best behind us?

Don't bother looking at the profit outlook statements that came with the annual results. It's just as well somebody hasn't patented "challenging" because it's been the most overused word by chief executives in the past few weeks.

The federal election on Saturday has been a good excuse to be non-committal, though it hasn't washed with all analysts.

"Not giving profit guidance has been the trend over the last 12 months. And it's not just Australia," CMC Markets chief market strategist Michael McCarthy says. "The economic environment is very uncertain."

When annual general meetings begin next month, the election will be over and if boards aren't keen to volunteer an updated outlook, shareholders will demand it.

But there are some dead giveaways that dividends can only grow this year, at least within the top 200 companies.

For starters, those companies that have just lifted their dividends must be confident they will at least be able to maintain the payout this year.

Some, such as BHP Billiton, even promise a progressively increasing dividend.

More typical is the Commonwealth Bank, which has a targeted pay-out ratio. So if earnings rise this year, as analysts expect, so must the dividend. By how much depends on who you ask. But it's agreed a double-digit rise overall is a prospect compared with 2012-13's slight decline, mostly caused by the slump in mining profits.

Mining will also have a large bearing on the 2013-14 turnaround, as profits are expected to rebound.

That leaves about 5 per cent earnings per share growth for industrials.

Telstra, for example, reported a 3.9 per cent increase in operating profit last year and forecasts a "low single-digit" rise this year.

Even it is tipped to lift its 28¢ a year dividend - seemingly etched in stone since 2006 - this financial year, though it wouldn't be by much, and in any case, the official line is no more than "the company will return to its previous practice of considering dividends on a half-yearly basis".

You have to hand it to Telstra. Somehow it has turned its nemesis, the National Broadband Network, into a lucrative sideline with the prospect of a Coalition government speeding up payments to it for its copper-wire customers and keeping its fibre cable as a potential competitor.

Analysts tend to be over-optimistic about earnings growth early in the financial year and there could be a delayed pick-up in economic growth as housing takes up where the mining investment boom left off.

Yet not even zero profit growth would be likely to threaten dividends because balance sheets are relatively strong after hefty debt repayments and earlier capital raisings.

Companies also have the benefit of a lower cost base as a result of downsizing and cut-backs.

In any case, it's more likely the benefits from low interest rates, the weak dollar and the election being out of the way will kick in early in the new year as confidence returns.

Pay attention to pay, assets at AGMs

Executive pay and huge asset write-downs will be the targets of this year's meetings season.

With the election out of the way, the AGM will be the first opportunity for shareholders to get an idea of the company's outlook for the year.

So it could pay to show up this year or at least watch the webcast, if there is one.

"Shareholders will be keen to know how the new financial year has started," David Cassidy, chief strategist at UBS says. "The first quarter will be an acid test for a lot of companies."

More than 50 companies face the possibility of a second strike against their remuneration report, which would put the whole board up for election at a subsequent special general meeting.

This happens when at least 25 per cent of shareholders reject the remuneration report two years in a row.

Last year was noteworthy for the overhaul of executive pay and incentives, even among companies such as BHP Billiton, which weren't gonged.

But critics of the two-strike rule say it becomes a lightning rod for grievances against a company that might not even be about executive pay.

For example, shareholders can't vote on the accounts as such. These are tabled at the AGM but you can't vote against them.

"Often the remuneration report is the only way you can vote against something," Ian Curry, chairman of the Australian Shareholders Association (ASA) says.

Among those in the ASA firing line will be Billabong (for its huge write-downs), Fairfax Media, publisher of Business Day (having imposed an executive pay freeze and overhauled its incentive structure to include bonuses to be taken in shares and held at least two years, the issue has moved on to write-downs), Toll (write-downs) and Woolworths (because of the Masters write-down).

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