Rising shares, falling profit have Australian investors hunting yield
* 11 of Australia's top 20 companies seen shrinking profit
* Australian sharemarket trading at record highs
* Earnings downgrades outweigh upgrades 7 to 1 - Morgans
By Byron Kaye
SYDNEY, Aug 1 (Reuters) - Investors are hoping for generous
dividend payouts as some of Australia's biggest companies look
set to report profit declines this month, and will punish
underperformance in a market trading at record highs, fund
managers and analysts said.
The prospect of across-the-board earnings disappointment in
a frothy sharemarket puts the spotlight on capital return as
investors look to justify paying prices that are being pumped up
by the lowest interest rates in Australian history.
"Companies that disappoint on earnings where it hasn't
already been built into share prices will get hammered," said
Nathan Bell, head of Australian equities at InvestSmart.
"Given the lack of investment options many companies have
... it should be a good period for dividends."
The recent sharemarket peaks are a side-effect of
Australia's fragile economy, now growing at the slowest rate
since the global financial crisis due to a house price
correction and stagnant wages growth.
A federal election in May, U.S.-China trade tensions and
political turmoil in Britain have deepened the sense of
trepidation that has stalled business spending. This has
prompted the Reserve Bank of Australia to cut interest rates
twice, flattening bond yields and making it cheaper to borrow to
But the rate cuts are not seen translating to profits: 11 of
the country's 20 largest companies are forecast by analysts to
report a decline in annual profit in 2019, more than double the
five top-20 companies which reported lower profit the previous
year, according to Refinitiv data.
In the months leading up to reporting season, downward
adjustments to earnings guidance have outnumbered upward
adjustments seven to one, said Andrew Tang, equity strategist at
Brisbane-based stockbroker Morgans, in a note.
Market heavyweights like mining-to-retail conglomerate
Wesfarmers Ltd, telecoms giant Telstra Corp Ltd
and gas station operator Caltex Australia Ltd
have issued earnings downgrades in recent weeks (Caltex reports
The sharemarket has risen more than a fifth since the start
of 2019, blowing out the price-to-earnings ratio of the S&P/ASX
200 to about 18.5 by late July, from less than 15 in
December. The PE ratio is a measure of how expensive a company's
stock is in relation to its profit.
"High prices have to be met by reality, and if the reality
does not eventuate the high prices will correct," said Jason
Teh, chief investment officer at Vertium Asset Management.
Some analysts have said reports of a stabilising property
market suggested cheap interest rates were putting more cash
into the economy - which eventually would end up as company
"We could be at a bit of an inflection," Citi equities
analyst Tony Brennan told a media briefing in Sydney.
(Reporting by Byron Kaye; Additional reporting by Tom Westbrook
and Swati Pandey; Editing by Stephen Coates)
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