Could your dividends be at risk this ASX reporting season?

How cautious are companies going to be with their cash pile this year?

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Key points
  • It’s now reporting season, where investors get a look under the hood of businesses
  • The market will get to see how much of an impact inflation and interest rates have had on the financials of ASX shares
  • One expert thinks businesses will be cautious about how much they pay in dividends to shareholders

The ASX share market is entering into an interesting time. After all the talk of interest rates and inflation, we're now going to get insights into how companies have performed with ASX reporting season.

With the relative strength of the economy, some businesses have been reporting solid results.

For example, this morning Nick Scali Limited (ASX: NCK) reported a 70% increase in net profit and grew the dividend by 14%. January 2023 trading was "better than the group's expectations". However, the Nick Scali share price fell over 10% in response.

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.

Image source: Getty Images

Will earnings hold up in this ASX reporting season?

As reported by ABC, Andrew Tang from Morgans said:

We are going through a period where it's expected that economic fundamentals are going to deteriorate from rising interest rates, so how companies perform through that period is of critical importance to a lot of investors.

We're looking for some pretty strong results from some of the Aussie retailers defying expectations of an imminent slowdown and a collapse in earnings expectations.

We saw some really great updates from Super Retail Group Ltd (ASX: SUL), the owner of BCF as well as Rebel Sports, do particularly well, which shows you just how resilient the Australian consumer is.

So we do think that that will continue to play out over the course of February when companies provide results.

However, the tricky thing to factor in for ASX retail shares is that the latest Australian Bureau of Statistics (ABS) showed a 4% decline in sales in December.

What's the outlook for ASX dividends?

A lot of the Australian economy's strength relates to the strength of households.

There are the banks like Commonwealth Bank of Australia (ASX: CBA), ANZ Group Holdings Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB).

Retailers are part of the picture, with names like Wesfarmers Ltd (ASX: WES), JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN).

There are plenty of businesses that are related to property and goods, like CSR Limited (ASX: CSR), Brickworks Limited (ASX: BKW), Temple & Webster Group Ltd (ASX: TPW), Beacon Lighting Group Ltd (ASX: BLX), Stockland Corporation Ltd (ASX: SGP), Mirvac Group (ASX: MGR) and so on.

A weaker economy could mean difficulties for ASX shares and dividends.

ABC reported that Morgans' Tang said:

We are a little bit more cautious around dividends, the environment, I guess.

Unless you're a corporate that is very confident on the outlook for your company and the demand profile, then I think a lot of corporates will tend to reserve some of that capacity for the full-year results.

I think there's a lot of concerns that the mortgage cliff, with a lot of fixed-rate mortgages rolling off in the second half of the year, will really come down on earnings.

We're certainly not in that camp but I think just think the general fear and confidence around the outlook for the economy may keep a lot of corporates on the sidelines when it comes to paying out dividends.

Foolish takeaway

Readers will be able to catch all the ASX reporting season headlines as results are reported on the Motley Fool website.

With a number of retail businesses reporting their FY23 first-half result, comparing against a locked-down FY22 first-half, I think it could be another positive month of growth in those results. However, the outlook statements could be the most influential for some time for various sectors.

Motley Fool contributor Tristan Harrison has positions in Brickworks. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks, Harvey Norman, Super Retail Group, and Temple & Webster Group. The Motley Fool Australia has positions in and has recommended Brickworks, Harvey Norman, Super Retail Group, and Wesfarmers. The Motley Fool Australia has recommended Jb Hi-Fi, Temple & Webster Group, and Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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