| Every February and August, most Australian listed companies report their profit results and guide how they expect their businesses to perform in the upcoming year. While we regularly meet with companies between reporting periods to gauge their business performance, the reporting season offers investors a detailed and externally audited look at the company’s financials. The dominant themes of the August reporting season have been concerns about consumer confidence and the dramatic slowdown in bank loan applications resulting from major tax changes announced in the May budget. These concerns led to weaker share prices for banks and consumer discretionary companies in August. Conversely, the beaten-up healthcare sector was stronger, along with gold and miners, which are now considered AI stocks thanks to expected demand for metals like copper from the hundreds of data centres planned over the next few years. This week’s piece looks at the key themes from the reporting season that finished this week, the best and worst results and how the Atlas Portfolio performed over the month. |
| Reporting Day Volatility This August reporting season continued the volatility we saw in February, with almost 50% of ASX 200 companies moving by more than 5% on results day, and 12 large-capitalisation companies recording share price moves greater than 10%. This is very unusual as the fortunes of the largest Australian companies rarely change significantly in the short term. Like many, we were confused by the share price moves post the Nine Entertainment result: it initially fell by 2% before finishing up 8% at 4 pm (a 10% intraday swing), then fell 7% the following day, leaving the share price where it started pre-results. Apparently, the AI bots, quant funds and pod shops had trouble interpreting the media conglomerate’s profit results. We see this as the result of the increasing influence of momentum trading driven by computerised programs immediately after company results are released. Some of the companies that saw the greatest volatility delivered strong headline FY26 profits, with the issue being the outlook for the coming twelve months. JB Hi-Fi, Seek and Sonic Healthcare all delivered solid profit growth in 2026, yet saw large falls on results day after reporting weaker trading conditions in July and an uncertain outlook. Consumer Feeling the Pinch Companies exposed to non-discretionary spending, from groceries to petrol, reported surprisingly strong results, with Woolworths and Coles seeing grocery growth of 6% and 4%, respectively, along with expanding profit margins. Woolworths explained that 1.5-2% of its sales growth came from the rollout of its in-store collectable ‘Disney Ooshies’, with parents getting extra value from their grocery shops. While consumers increased spending on food, this came at the expense of alcohol, with Endeavour (Dan Murphys/BWS) and Coles Liquor (Liquorland) reporting declining profits and negative sales growth as consumers bought cheaper brands or bought less alcohol. Similarly, private health insurer Medibank Private saw some customers trade down their coverage, removing coverage for pregnancy, joint replacement, and heart issues. Surprisingly, Domino’s Pizza saw sales decline by 8%, even as many expected the discount takeaway pizza company to benefit from cost-of-living pressures. Still, based on the Coles and Woolworths results, it looks like Domino’s customers have traded down to supermarket-brand frozen pizzas. Inflation Underlying inflation remains prevalent in the economy, with higher wage and input costs being passed on to customers. This was clear in the Amcor result, which showed a significant increase in resin input costs due to the war in the Middle East. Due to the pass-through mechanics in Amcor contracts, AMC was able to pass over $280 million in increased costs to customers. Productivity benefits are another way to keep cost inflation under control, with Wesfarmers‘ Bunnings Warehouse and Kmart, which saw wages increase for more than 92,000 employees but were able to increase earnings margins and market share. Cost-outs cannot always offset wage increases, as we saw in the Endeavour result, where Dan Murphy’s sales increased by less than 1% while earnings fell by close to 18%. This was driven by consumers moving to more value-for-money options at Dan Murphy’s, as well as by employees seeing increases in wages and working hours. Similarly, Sonic Healthcare saw higher pathology wages, up 12% over the year, with new wage agreements struck in both the UK and Europe due to tighter labour markets and the need for their services. What did we learn from the banks? Commonwealth Bank and Westpac have acknowledged the slowdown in mortgage applications, which are down 15% since May at CBA and 20% at WBC, not surprisingly, from investors due to the May Budget. Conversely, business lending growth has been stronger, with APRA reporting 10% growth in July; CBA and Westpac have been increasing their exposure to business lending, taking market share off NAB—a solid strategy, with the outlook for mortgages looking more challenged in the near future. Credit quality remains very good, though much of this is probably due to APRA (Australian Prudential Regulation Authority) imposing constraints on banks’ ability to lend to developers, thereby sending these spicier borrowers into the arms of private credit funds. A decade ago, the collapse this week of the Western Sydney homebuilder, the Bathla Group, with $3.4 billion in debt, would have been a major problem for major banks. Resources strong, Industrials weaker Underlying inflation remains prevalent in the economy, with higher wage and input costs being passed on to customers. This was clear in the Resource companies were the standout performers over the August reporting season, with cost initiatives and productivity gains offsetting inflation and wage increases. In addition to keeping costs low, resource companies have benefited from an uplift in commodity prices, with copper and gold the biggest beneficiaries of the global AI and data centre rollout. On the flip side, Australia’s industrial companies underperformed, driven by a fall in consumer discretionary spending, which impacted demand for their products. Economic Outlook Commonwealth Bank provides a good look through the economy during reporting season, with Australia’s largest bank holding over 17 million customer accounts. Consequently, the bank’s financial results and accompanying 174-page reporting suite give investors an insight into the health of the various sectors of the economy. CBA showed minimal bad debts and rising dividends but also that higher interest rates had differing impacts across its customer base. Discretionary spending decreased on average over the last year for customers over 35, while customers under 35 increased spending off a low base last year. The CBA result highlighted the underlying resilience of the Australian economy despite stronger economic activity, inflation and labour market conditions. The bank highlighted that stubbornly high inflation will likely lead to the cash rate being increased twice over the year to 4.1%. These increases in the cash rate are unlikely to cause bad debt to spike dramatically, with most mortgage holders having rebuilt their savings buffers over the last 18 months. Show me the Money During reporting season, we closely monitor company dividends, particularly their direction. While our investors appreciate income, we closely examine dividend increases because they are a sign of earnings quality. Our view is that management talk and guidance can often be cheap, and company CFOs can use accounting tricks to manipulate reported earnings. However, paying out higher dividends tends to signify that “insiders”, company directors, don’t see any imminent negative issues, assuming the payout isn’t all or more of earnings. Similarly, companies announcing share buybacks are a good indicator that the business has a solid near-term outlook, and the wolves (banks and bondholders) are not hammering at their doors. Buybacks both support the share price and promote earnings-per-share growth by reducing the divisor for future profits. Buybacks were a feature of the August season, with 21 companies announcing new buybacks for a combined total of $4.4 billion, led by CSL ($1.1 billion), Telstra ($1 billion) and Suncorp ($250 million). Best and Worst Over the month, gold and lithium miners, CSL, Ansell, and ResMed delivered the best-received results from the August reporting season. Despite current volatility in energy markets, these companies were able to increase their revenues (gold and lithium miners), pass costs on to their customers (Ansell), and provide positive outlooks suggesting a better time ahead (CSL and ResMed). On the negative side of the ledger, Life 360, Charter Hall, JB Hi-Fi, Downer and HUB24 reported poorly received results from the market. The common themes for the group included weaker revenue outlooks (Charter Hall and JB Hi-Fi), high PE missing expectations (HUB24) and weaker earnings growth (Life 360 and Downer) Result of the Season The season’s result was Ampol, which saw profits increase by + 376% to $857 million, benefiting from higher refining margins at its Lytton refinery in Brisbane. During the half, refining margins increased to $56 per barrel in March as the conflict in the Middle East began, up substantially from $9 per barrel before the conflict. Whilst the Lytton refinery earnings are the highlight of the result, the underlying retail business continues to operate well, with earnings increasing from $127 million in 2022 to $205 million in 2026, and shop margins increasing from 34% to 40% over the same period. Whilst retail margins are not as sexy as refining margins, increased retail earnings move Ampol away from the volatility of global refining margins and toward more consistent, predictable underlying earnings. On the capital management front, Ampol announced a 360% increase in the fully franked dividend to $1.85 per share, representing a payout ratio of 51%, at the bottom of its payout ratio (50-70%). The excess cash has been used to improve the underlying retail division of the business by acquiring EG Australia for all-cash consideration, rather than through a dilutive scrip issue. This acquisition will increase Ampol’s retail footprint by 450 service stations, with 125 of them scheduled to be converted into U-GO sites, which are staff-less service stations that can offer cheaper fuel due to lower overheads. Our Take: When a company reports results, one of the first things we look at is the dividend paid, as it is the best indication of a company’s actual health. A company’s board is unlikely to raise dividends if business conditions are worsening. Also, earnings per share can be restated later due to “accounting opinions” or financial shenanigans from the company’s finance team. However, once dividends are paid into bank accounts, they can never be taken back. Using a weighted average across the Atlas Portfolio, our investors’ dividends will be +32% greater than the previous period in 2025, and significantly ahead of inflation. Atlas sees that dividends are a better measure of a company’s financial health than earnings per share. In the short term, the market is a voting machine that rewards popular companies; in the long term, it is a weighing machine that rewards companies that consistently pay increasing dividends to shareholders. |