Dividends in focus for NZ earnings season as low interest rates underpin equity demand

 The reporting season that kicks off this week may show moderating sales and earnings growth for New Zealand's listed companies, leaving dividend payments to underpin a stock market trading at high multiples.

Brokerage Forsyth Barr forecasts aggregated revenue growth across 50 listed companies reporting over the next few weeks at 0.5 percent and normalised earning-per-share growth of 9.7 percent, while dividends per share are seen rising 14 percent.

The dividend forecast includes reinstatement of payments by NZ Refining but is still 10.5 percent up excluding the refinery operator. A strong uplift in dividends is also expected from Air New Zealand, Fonterra Shareholders' Fund, Meridian Energy, Metlifecare, Mighty River Power, Port of Tauranga, Spark New Zealand and Summerset Group.

"Dividend will be an important feature," said Rickey Ward, New Zealand equities manager at JBWere. "It is the backbone for the New Zealand market's appeal. I expect no negative surprises." The bond yield versus equity yield argument is based on companies delivering to analyst expectations.

Ward uses the NZ Portfolio Index as a benchmark, which shows average sales growth of 4.5 percent, ebitda (earnings before interest, tax, depreciation and amortisation) growth of 3 percent and dividends per share of 4.5 percent. Earnings growth would include companies coming from a low base, such as Kathmandu, whose year-earlier first half was weakened by poor seasonal sales.

The S&P/NZX 50 Index reached a record high at the end of 2015 but like the Standard & Poor's 500 Index has declined so far in 2016 amid concerns about slowing growth in China and the US, falling commodity prices and more recently the health of European banks.

As stock prices have declined, bonds have rallied. The yield on US 10-year Treasuries has fallen to a 12-month low of about 1.7 percent, while New Zealand's 10-year government bond is yielding about 3.02 percent, barely 50 basis points above the official cash rate. New Zealand funds on term deposit for two years are earning 3.55 percent, according to interest.co.nz, down more than 1 percentage point in the past 12 months.

"The yield demand for New Zealand shares is still going to be there," said Keith Poore, head of investment strategy at AMP Capital New Zealand. "To the extent that these global uncertainties are going to persist in the near term, that is going to be good for New Zealand shares, with high yields and not many commodity companies or financials."

Poore says he doesn't expect "a blow-out earnings season on the downside or the upside."

"If you can look through the current market uncertainties, the fundamentals of equities have improved - equities have got cheaper and bonds have become more expensive," he said. AMP Capital's portfolios are overweight global equities "on attractive valuations, reasonable economic growth and relatively easy monetary policy compared to previous cycles" and underweight bonds. It sees China as the biggest downside risk.

SkyCity Entertainment will be the first to post its results when it reports interim earnings tomorrow. New Zealand's only listed casino company has already said first-half profit rose as much as 30 percent as it benefited from improved trading in New Zealand, higher turnover from 'high roller' gamblers, reduced costs at its struggling Adelaide property, and lower funding costs. The first-half dividend is expected to be up 10 percent at 11 cents a share.

Jeweller Michael Hill International is due to report on Friday and is forecast to deliver a "modest" 2.4 percent gain in ebit (earnings before interest and tax) as it cycles off a strong year-earlier result. No change is expected in its interim dividend.

Feb. 17 is the first of the heavy days for earnings releases, including A2 Milk, Fletcher Building, Precinct Properties and Trade Me Group.

"Outlook statements will yet again be vital," JBWere's Ward said. "Flat earnings on healthy payout ratios imply limited scope for dividend increases. That should restrict market upside given earnings growth is slowing with a market trading on a historically high earnings multiple."

Harbour Asset Management portfolio manager Shane Solly concurs there are risks around the outlook for dividends.

"The backdrop for listed NZ company earnings is still relatively sound, with lower interest costs, the New Zealand dollar weaker and the parts of the NZ economy the listed market faces still relatively solid," Solly said. The New Zealand equity market "remains relatively expensive compared with most other markets. This reflects the higher certainty of earnings and relatively high dividends."

Given the current mood of markets, though, stocks are likely to be punished "where expectations are missed or guidance is soft," he said. "Investors need to be cautious about assuming dividends will keep growing – depending on the company there is some risk that earnings don’t grow, constraining the ability to pay higher dividends. Careful stock picking will be the key to performance."

(BusinessDesk)