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Stocks with the potential to surprise this reporting season

Macquarie’s Equities Research team recently released a note summarising which stocks it believes have the potential to deliver a dividend surprise during this reporting season. The reporting season, which officially kicks off this week, is expected to favour industrial and consumer stocks, while those exposed to the mining and IT industries are most likely to surprise to the downside.

Macquarie’s research noted that since 2010, in the two months following a dividend surprise to the upside or downside, stocks averaged returns of +2.5% and -1.5% respectively. After four months, on average those providing an upside dividend surprise rose around 6%, compared to a fall of the same magnitude for underperforming stocks.

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Companies exposed to slowing mining investment, which have reported profit downgrades in recent months are expected by Macquarie to fare the worst. Examples of these are camp infrastructure provider Fleetwood (ASX: FWD), gold miners Kingsgate Consolidated (ASX: KCN) and Newcrest (ASX: NCM), and mining services firm Monadelphous Group (ASX: MND).

The reduction in cash flow may limit the ability for the companies to continue ‘boom-time’ dividend payments. Similarly, companies affected by the cyclical slowdown in the IT industry, such as SMS Management Technologies (ASX: SMX) may be unable to maintain dividend payouts on sharply lower revenue. Brokers have suggested a 30% decrease in reported revenue is possible for SMX.

Conversely, industrials exposed to a weaker Australian Dollar, and financial groups exposed to strong equity markets over the previous year may surprise to the upside. Examples of these include healthcare providers Redmed (ASX: RMD) and Sirtex Medical (ASX: SRX), and finance group Platinum Asset Management (ASX: PTM).

Foolish takeaway

Foolish investors will be aware of the stellar performance of high dividend paying stocks in the past 12 months. It is likely that stocks with faster growing dividends will continue to outperform the market in the medium term as more investors search for safe, high yielding stocks during periods of low interest rates.  This earnings season will give investors an insight into which sectors of the economy are performing well, and just how much damage has been done to companies exposed to the mining and IT sectors.

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Motley Fool contributor Andrew Mudie owns shares in Kingsgate.

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