Another, at times frantic, Australian reporting season has passed us by. And with the ASX200 up over 5% in February, it gives you some idea of how the market saw the season! It was also an impressive performance given the strength of the Index over prior months as well.

There were a number of features about this reporting season that the market liked.

A highlight of the season was the number of companies, including Suncorp Insurance and Commonwealth Bank, that announced higher dividends and higher dividend payout ratios. Higher dividends are important for two reasons. First, it rewards shareholders with higher income for their holding. Additionally, a higher payout ratio is an important signal to highlight management’s confidence in the outlook for a company’s earnings and cash flow.

A second feature of the result season was the improving outlook for retail and industrial cyclical companies. Companies, ranging from retailer Harvey Norman, to industrial company Bluescope, generally reported an improving outlook into the second half of the financial year. This feedback, together with the series of rate cuts we have seen from the Reserve Bank over the last 12 months, has prompted optimism that the non-mining sector could finally emerge from the near recessionary conditions they have been experiencing over the last 3 years.

Finally, many companies, such as Transpacific and Skilled Group, were able to report a significantly improved operating performance on the back of cost reductions, and by configuring their business to suit the current environment. Lower interest rates also meant that many companies saw significant savings on their cost of debt, which also assisted profitability.

While markets have been strong, this performance has been underpinned by rising dividend yields and improving outlooks. A continuation of these themes would offer significant support for the market over the medium term.

Marc Whittaker

Portfolio Manager

Disclosure of interest: Milford Funds Limited holds shares in Commonwealth Bank, Suncorp Inusrance and Skilled Group on behalf of clients.