Why income investors have a lot to be excited about this reporting season

With inflation and rising rates raining on the equities market's parade, many brokers and fund managers have forewarned investors of an "earnings recession" this reporting season.

Let's face it. That sounds pretty, pretty terrible. But according to Tyndall Asset Management's Michael Maughan, it's not all bad news for income investors. 

In fact, the big payers of dividends - like the banks, miners and supermarkets - are all on the right side of inflation, he said. In addition, the next half continues to look promising for iron ore, despite what the naysayers might trumpet. 

That said, it's not the banks, miners or supermarkets' results that have Maughan excited. Instead, his number one dividend darling pick for this reporting season is in the energy sector - a stock that he believes still has plenty of room for further growth in its tank. 

Plus, Maughan also shares why he believes that discretionary retailers, industrials and REITs could disappoint income investors this reporting season, as well as the stock that could come under significant pressure moving forward.

Note: This interview was shot on Wednesday 27th July 2022. You can watch the video or read an edited transcript below. 

Edited Transcript 

Ally Selby: Hello and welcome to another Expert Insights video with Livewire Markets, I'm Ally Selby. Today, I'm sitting down with Tyndall Australia Share Income Strategy's Michael Maughan. We're talking about reporting season and what you can expect over the next four or five weeks. Thank you so much for joining me today, Michael. It's such a pleasure.

First off, reporting season kicks off this week. It's been a really turbulent time for markets over the last six months - probably over the last 12 months if I'm being honest - so what do you think investors can expect?

Michael Maughan: I think we're going to get a bit of history and a bit of "now-casting" - trying to put inflation and other factors into what people are seeing today in their trading. We're not going to get a lot of forecasting by companies. 

I think guidance statements are going to be a very rare thing because the market is worried about recession risk and the impact those rate increases are going to have on the consumer.

We're probably not going to get any evidence of that, especially in the Australian market, this reporting season, but we're already seeing some signs in the US. For example, looking at companies like Walmart, which is a classic bellwether for the consumer, are showing some weakness already.

Ally Selby: I want to talk about rising rates and inflation. It seems to be all that investors can talk about at the moment. How has that impacted companies' ability to pay out dividends?

Michael Maughan: I think rates have been more of a factor for the market in terms of PEs and multiples that people are willing to pay for companies. We've seen that change in leadership in the market. But inflation is obviously a massive issue. 

What we're seeing going into reporting season is that - in terms of dividends - the big payers are probably on the right side of inflation. If you think about the miners, commodity prices have been benefiting. Food inflation helps the supermarkets, for example. And even in the case of the banks, they've got positive tailwinds in terms of their margins. 

So we see positive tailwinds for the majority of the dividend payers in the market, while smaller parts of the market are going to be more affected by inflation.

Ally Selby: What are those parts of the market?

Michael Maughan: Well, I think if you're looking at something like a discretionary retailer or an industrial, they're going to have a lot more trouble passing on the cost inflation that they're experiencing. So something like a Brambles (ASX: BXB) or a Qantas (ASX: QAN) is going to have a lot more trouble passing that inflation on.

Ally Selby: You talked about the miners a little bit earlier. They've obviously paid out the lion's share of dividends over the past few years. What do you think we can expect from these companies this reporting season? And do you think we'll see a change in dividend leadership over the coming months?

Michael Maughan: The miners have paid the lion's share of the dividends because they've been generating enormous cash flows. So the question is, is that going to change? If we think about where the iron ore price is, it's still above a hundred dollars. We've been on a bit of a wild ride, but when we look at the half that we're in, the average iron ore price for that period is actually the same as it was in the half before. 

Ally Selby: Okay, I'm going to put you on the spot here. Is there one stock that you're really excited to see report this reporting season?

Michael Maughan: We see risks to some of the miners. Obviously, they have exposure to China and there's a lot of uncertainty there. When it comes to cyclical companies, we're much more interested in what's going to happen in the energy space and a stock like Woodside (ASX: WDS) would be top of that list. And we're talking about a company that's really changed in its nature post the acquisition of the BHP assets. So it's now self-funded, in terms of its growth. 

I think what people are starting to realise is that Woodside and Santos (ASX: STO) and gas, more generally, are an important part of the energy transition. And so I think these types of companies won't need to hide their light under a bushel going forward.

Ally Selby: We've talked about a company that you think investors can get excited about this reporting season. How about one that you think could disappoint them going forward?

Michael Maughan: We worry about sectors that are on the wrong side of some of these macro tailwinds. 

A sector that leaps out is the REITs. They're on the wrong side of increasing rate rises. And they're a bond proxy, which by definition, is not good when rates are rising. 

In particular, we would say something like a Scentre Group (ASX: SCG), where you've got the impact of rising rates as they're the most geared of the big REITs. And then at the same time, when you look at the impact of inflation on their business, their costs are rising and their ability to pass that on in terms of rent is going to be questioned because we don't think that the outlook for, in particular, those specialty retail customers is great looking forward.

Ally Selby: Well, thank you so much for your time today, Michael. I really enjoyed that interview. If you enjoyed that video, give it a like. And remember to subscribe to our YouTube channel. We're adding so much great content every week.

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Michael and the team at Tyndall AM invest in income generating stocks to put money in your pocket. To learn more, visit their website here.

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