The Australian stock market, as measured by the S&P ASX200 Index, had a shocking June quarter, falling by 12.4%. For the full 2021/22 financial year the market declined by 10.2%, all the drop coming in the final quarter. Dividends averaged 3.7% for large companies, somewhat improved over the COVID affected previous year. There were some notable large dividend increases due to robust commodity prices and volumes, and lots of buybacks, both on and off market. Dividends from industrial, consumer and financial stocks are expected to be modestly higher this coming financial year, but perhaps a bit lower from certain energy and mining stocks, reversing some of the windfalls of last year.
There was an unusually wide dispersion of performance between stocks in different economic subsectors last financial year. Woodside, for example, was up a full 50%, benefitting from rampant energy prices and demand, whilst Ansell shares fell 40% as the pandemic-induced mass demand for its health and safety products started to dissipate, and higher raw material prices increased production costs. There was also a flurry of takeover activity, with cheap money and cashed up superannuation and private equity vehicles looking to spend. In our model portfolio, Sydney Airport, CIMIC and Spark Infrastructure were all acquired at inflated prices, whilst offers have been made for AGL, Link and Ramsay Healthcare. The mega-deal sale of BHP’s petroleum division to Woodside, in which BHP shareholders were distributed Woodside shares as a fully franked dividend, proved beneficial for both companies’ shareholders.
The recent retreat in the ASX200 index makes large company shares in Australia good value. Share investors require appropriate compensation for the risk taken, known in the industry as the equity risk premium. At current share prices, long-term investors are being offered more than adequate compensation for risk, such that shares can be held or acquired prospectively. Markets will undoubtedly suffer further periods of volatility this year, but when buying opportunities present investors should be prepared to buy.
The release of company financial reports and outlook statements in August will be closely watched and represent a useful gauge for the year ahead. We expect plenty of commentary about inflationary pressures and the tight labour market, but moderate optimism based on the extraordinary build up of household wealth and the generational low in unemployment.
A modest market recovery is likely this coming financial year but will need to compete with higher interest rates and inflation, a moderating of economic growth and hopefully a peaceful resolution of the Ukraine crisis.