Every earnings season the share prices of some companies skyrockets, while others are punished. But what will be the main drivers of an outperforming stock this time?
In years gone by it could have been earnings per share growth, improving user numbers, better advertising revenue, or expanding margins that resulted in the biggest rises, but this year I’m betting the best performing companies will be those that surprise on dividend payouts.
Interest rates are at record lows and term deposit rates continue to drop, forcing more and more investors into riskier assets in the hunt for a better return. Investors who have moved into shares have bought companies with a strong history of maintaining or growing dividends. As a result, we’ve seen companies such as the big four banks and Telstra Corporation Ltd (ASX: TLS) outperform the market in recent years, as investors trust management to continue paying out a large portion of growing earnings as dividends.
So with more than half of Australia’s major companies having reported earnings to 31 December 2013, which companies have surprised or pleased investors by raising dividends?
Rio Tinto Limited (ASX: RIO) gave investors a pleasant surprise during its earnings report last week by increasing its full-year dividend payout by 15% from $US1.67 to $US1.92. This was on the back of a 10% surge in net profit, and a swing to a net income gain versus a loss last year. Rio Tinto is now yielding 2.8% fully franked, or 4% grossed up.
Telstra Corporation Ltd (ASX: TLS) also beat expectations with a 9.7% rise in net profit allowing the company to raise its half-year dividend from 14 to 14.5 cents per share. This represents the first time since 2007 that Telstra has changed its dividend payout. Telstra is now yielding 5.6% fully franked, or 8% grossed up.
Finally, Australia and New Zealand Banking Group (ASX: ANZ) shareholders have been treated to a 5% rise in the share price since the group announced a 13% increase in cash profit for the quarter that ended on 31 December. While the group is yet to announce its next dividend payout, Morningstar is predicting the dividend to jump 7% to 176 cents per share. ANZ is now yielding 5.6% fully franked, or 8% grossed up.
With term deposits now delivering a return between 2.5% and 3%, investors relying on income from such investments are being forced to search elsewhere for better returns. Companies such as those above will be favoured by income-seeking investors because their grossed-up dividend yields are much better than that achievable in term deposits. Long-term investors will know these companies and management well enough to expect a good return over time.
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Motley Fool contributor Andrew Mudie owns shares in ANZ.