FINANCIAL YEAR 2017: REPORTING SEASON INSIGHTS AND IMPLICATIONS

This extract has been drawn from the article produced on 20th September 2017, by Roy Maslen, Chief Investment Officer—Australian Equities, AllianceBernstein

Q: Commonwealth Bank of Australia (CBA) and Telstra (TLS) captured a lot of attention this reporting season. What are your thoughts on them, and do they still offer opportunities?

A: CBA and TLS were probably the two most controversial stocks of the season.

CBA: The Commonwealth Bank’s underlying results were quite good but the market’s focus, of course, was on the AUSTRAC investigation into the bank’s alleged failure to comply with anti-money laundering legislation, and on APRA’s inquiry into the bank’s governance and culture.

Both developments could have a negative impact on the stock and—given that the stock had been priced at a premium—they have made us more cautious.

Depending on their findings, AUSTRAC could levy a fine and APRA could direct the bank to hold more capital. Either of these would weigh on Commonwealth Bank’s earnings, particularly when combined with continuing pressure for a Royal Commission into the banking sector.

TLS: Telstra is a very different story. The underlying performance was slightly weak but the big news was a cut in the dividend from 31 to 22 cents. We had expected a cut, with 25 cents at the bottom of our expectations.

The market was very disappointed and the poor communication of the results led the market to reflect on its outlook for the business.

Our view, however, is that Telstra has been very conservative: such a large cut gives the company enough scope to grow the dividend over time, and to do so in an environment of falling revenue as its own network winds down and the National Broadband Network (NBN) goes live.

That 22-cent dividend, including franking credits, gives a yield of more than 8% with potential for growth. We also see attractive valuation in the stock and, even considering some of the headwinds with the launch of the NBN, we think there are likely to be fewer negative events in the short term.

Source: AB Volatility Insights: Reporting Season Insights and Implications for the AB Managed Volatility Equities Fund.

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