Real reporting season surprise isn’t about profits but dividends

The market’s attention is on the earnings recovery during this profit reporting season, but the real surprise may be dividends.

It’s the expected rebound in earnings from the impact of COVID-19 that’s dominating the spotlight and fuelling much of the recent rally in the S&P/ASX 200 Index (Index:^AXJO).

There’s nothing like a “V-shape” profit recovery to get the blood racing. We have already seen some ASX shares issue profit upgrades.

Profit upgrades are only half the story

Some recent examples are the Amcor CDI (ASX: AMC) share price, BlueScope Steel Limited (ASX: BSL) share price and ARB Corporation Limited (ASX: ARB) share price.

We can expect more positive earnings surprises and upgrades during this month’s reporting season. But the real action may be on the dividends front.

That’s the view from Morgan Stanley who is predicting dividend upgrades will surpass profit upgrades.

Dividend upgrades could dominate profits

“During 2020 the primary focus shifted from solvency and liquidity to leverage to a recovery,” said the broker.

“The debate around earnings also evolved with a focus on how quickly pre-COVID levels of earnings could be regained.

“Left in the back of the analyst spreadsheet is the dividend, anchored to a savage COVID adjustment and well below FY19 levels in many cases.”

Higher upside from lower expectations for dividends

As the market isn’t pricing in much of a dividend recovery, at least not as much as earnings, ASX shares that boost their payouts could be the bigger winners.

The fact is, the tailwinds that are lifting earnings expectations apply equally to dividends!

The pandemic recession isn’t as bad as initially feared, cheap money is lubricating the wheels in the corporate machinery, jobs are rebounding and consumers are cashed up.

Dividend upgraders have an extra edge

These factors are as conducive for dividend growth as it is for profits. But dividends may have one extra advantage – capital raises.

ASX companies have gone to investors for emergency capital injections during the height of the COVID scare. As it turned out, many didn’t need quite as much as feared and have excess cash on their balance sheets to restore some, if not all, of their dividend cuts.

Some companies that went cap in hand to shareholders in 2020 but are expected to cut dividends in FY21 include the Shopping Cntrs Austrls Prprty Gp Re Ltd (ASX: SCP) share price, Perpetual Limited (ASX: PPT) share price and Lendlease Group (ASX: LLC) share price.

Others like the Metcash Limited (ASX: MTS) share price, Tabcorp Holdings Limited (ASX: TAH) share price and Newcrest Mining Ltd (ASX: NCM) are also on the list.

More reading

• Here’s a bargain ASX share in a sea of expensive stocks
• 5 things to watch on the ASX 200 on Tuesday
• ASX 200 rises 0.6%, Vocus jumps on takeover offer, Afterpay hits new record
• Why the Afterpay (ASX:APT) share price is exploding even higher today
• ASX 200 up 0.6%: Vocus rockets, Zip surges, & Treasury Wine rebuffs speculation

Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited and Newcrest Mining Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Amcor Limited. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. The Motley Fool Australia has recommended ARB Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Real reporting season surprise isn’t about profits but dividends appeared first on The Motley Fool Australia.

from The Motley Fool Australia https://ift.tt/2YUPuiB