The week saw reporting season come to an end. Some impressive results were dominated by concerns the US would take military action against Syria and, yet again, taper talk.
Syria tensions dominate
Our local market lost 1 per cent on Wednesday as concerns escalated that the US would take military action against Syria, though it has closed the week basically flat. The thought of war has never been something equity markets have liked, but investors weren’t too concerned with volumes on the day falling within the average range.
Aside from the human toll of any military response, the major concern is a long-term disruption to the supply of oil, which would ultimately push prices up. With Saudi Arabia trying to entice Russia into an agreement to control the global oil supply, it shocked the oil prices $2.88 higher to $108.80 on Tuesday night.
Global growth will be suppressed if oil prices remain at elevated levels for a prolonged period. Growth this year has been underwhelming and any further disruptions will reduce expectations for the year ahead. Despite this, there are some positives for domestic investors.
Woolworths’ cheery outlook
Reporting a 7 per cent increase in operating earnings growth sent Woolworths up 2 per cent on Wednesday in what was otherwise a miserable day on the market.
The outlook for Woolworths is looking fine – the retailer has flagged profit to grow somewhere between 4 and 7 per cent for the year ahead. The forecast has dampened concern that Woolworths is relying on cost cutting for margin expansion and ongoing profitability. In comparison to the weaker outlooks other companies have provided, management obviously has confidence in the core businesses to chase this profit guidance.
Considering Woolworth’s impressive results came in at a time of continuing food deflation and poor consumer sentiment, it should put the company at the forefront of investors' minds. If we gloss over the losses of hardware arm Masters, it really is as good as it gets.
Woolworths will be one to watch for a one-off return to shareholders. They have added to their bank of franking credits making the possibility of another off-market buyback or special dividend even more likely.
Dividends on the rise
Reporting season has seen dividends increase by 10 per cent, helping to keep the Australian market buoyant in what is otherwise becoming an increasingly trying time once you factor in Syria, taper talk and emerging market dramas.
Although this looks good on the surface, especially in a low-interest rate environment as investors are yield-hungry, earnings haven’t grown at the same rate as dividend increases. Either management have nothing to spend their earnings on that will generate a decent return or they are trying to keep investors happy.
In addition to this, companies have forecast slower growth in the year ahead to coincide with weaker domestic conditions. Reporting in February will provide us with a better indication as to how companies are tracking and if continued dividend increases are in fact sustainable.