After a 2020-21 company reporting season that produced generally positive results, including companies in AFIC’s portfolio, Portfolio Managers David Grace and Kieran Kennedy are cautiously optimistic about the current financial year and expect the dividends to keep flowing.
The 2020-21 profit reporting season was positive, but the year ahead is challenging as the impact of COVID lockdowns continues and the economic environment remains uncertain.
Nonetheless, interest rates are still near enough to the bottom, so it’s still a supportive environment for equities.
Our view is that investments are best made in companies that have “self-help” drivers ‒ the capacity to invest in themselves and capture more market share – and the ability to grow their earnings outside of the economic cycle that is in front of them.
We believe that, generally, domestic companies will find it a bit tougher over the next 12 months compared to the last 12 months. Offshore earners are in for a better position because the reopening of economies overseas is further advanced than in Australia.
That said, we’re favourable towards healthcare companies, particularly ResMed, CSL, and even Ramsay domestically because more surgeries will return as local economies reopen. We also like Macquarie Group, which has a large pool of capital to invest at a time when conditions overseas are improving.
We expect dividends in the current financial year will be generally higher than they were in 2021 but still not yet back to pre-COVID.
This applies particularly to the banks. The banks were very conservative in their provisioning for bad and doubtful debts when COVID first began. As a result, they have over-provisioned for loan impairments and releasing these provisions should increase the potential for greater dividends to shareholders.
Among industrial companies, earnings growth looks positive for many, so we would expect them also to provide higher dividends moving into next year.
A potential headwind on future dividends from the big miners, such as BHP and Rio Tinto, is what happens with the iron ore price, which has fallen considerably over the last couple of months. Trying to predict the iron ore price is no easy task, but we remain confident in the quality of these businesses.