Telstra finally cuts its sacred dividend – & was taken to the cleaners! (TLS, QBE, SUN)
Another session on the mkt that promised so much - looked strong early on for a break out of the trading range but once again failed to go on with it. Obviously Telstra was the big news today down more than 10% after they reported earnings but more importantly, guided to a 22cps dividend for FY18, down from the 31cps they’ve been carrying unsustainably for too long. More on this below however we stepped up and bought Telstra this morning.
Elsewhere, more big moves from stocks that delivered numbers today with Wesfarmers trading in a big range – very strong early before closing marginally higher, the ASX outlined a solid result however it too had a big intra-day range, finally closing up +1.42% while QBE was clearly a disappointment, missing earnings expectations and dropping -7.07%. We own it unfortunately and have seen a very good profit turn into a slight one – our entry level of $10.98 versus todays close of $11.17.
Other reports of note came from Whitehaven Coal (WHC) which reported earnings below expectations (about a 4% miss) however they announced a nice 20cps cash return to shareholders which the mkt liked early on - however sellers looked through the sugar hit and the stock closed down -2.08% at $3.29.
Overall – the Material stocks were best bid today recovering from some recent weakness, however we continued to see this disparity between the main sectors. Banks rally / resources lag and vice versa leaving the index continuing to trade in this v’tight trading range…an overall range today of +/- 41 points, a high of 5806, a low of 5765 and a close of 5779, off -6pts or -0.10%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
Telstra (TLS) - saw massive volume through the stock today (234m shares) trading within a range of $3.99 and $3.81 as investors dumped the stock following the BIG cut to the dividend. In terms of the earnings themselves, all was okay and they delivered an operating result that was a slight miss in terms of earnings, but not enough to see the stock drop 10%+.
The issue was around the dividend being cut by such a magnitude – from 31cps this year to guidance of 22cps next year while the market was factoring in a dividend of 28cps – a cut, but a lot smaller one. MM bought Telstra this morning at $3.85 in the Growth Portfolio and on the new dividend numbers, this will yield 5.71% plus franking. To us, this looks like a ‘capitulation’ style low in the stock which we view as an opportunity.
In terms of what analysts think, only a few have updated numbers – and clearly there is a big divide between views.
Telstra Daily Chart
QBE Insurance – another weak result with the company missing cash earnings by around 4% for the half. This is a company that promises so much yet struggles to deliver. There is lots to like about QBE, hence why we own it, however they have an uncanny knack of missing expectations. This time it was largely due to previously flagged issues within their emerging markets business so not new news, however the underbelly of the result was soft overall today. Looking at the selling pressure, it was sustained, and it seemed there were some big lines simply exiting the stock throughout the session.
QBE Insurance Daily Chart
I was stuck on the desk today however we had Suncorp Management in to Shaw to discuss their results, and the mkts reaction to them. Harry, one of the very good guys in my team went down to the meeting…. Let’s call it – Harry’s Hard Hitting Hindsight!
Since the Suncorp report, the stock has fallen 5.6% if we strip the value of the dividend inclusive of franking – which is not ideal. We met with Suncorp today to get some insight into what is going on and left feeling much more confident about the stock. In the report, the market focussed on a $122mil additional forecasted after tax cost in FY18 to accelerate their ‘One Suncorp’ model and refreshed strategy the group is executing. Suncorp is a business made up of many moving parts, not just limited to the Suncorp branded bank and insurer, such as AAMI, GIO, Shannon’s just to name a few. The new strategy looks to reduce customer churn and have ‘engaged’ customers holding multiple Suncorp products. Re-insurance is also being employed in the new strategy, reducing the impact of big events on the annual P&L These strategies look to grow the group and reduce volatility in the P&L. Along with this, the groups payout ratio for FY18 dividends will be increased from current levels of 60-80% up to a potential 87% so value for shareholders isn’t lost. They also continue to talk about excess capital on their balance sheet, and they should pay a special dividend in FY18 – all up, I like the stock and remain comfortable here!
Suncorp (SUN) Daily Chart
Have a great night
The Market Matters Team
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