February 2019 - Portfolio Update
The financial markets have enjoyed a strong recovery this year, despite growth rates in the major global economies showing signs of fatigue. Equity markets have been supported by a more conciliatory tone by the US Federal Reserve on future interest rate rises and the possibility of moderating its quantitative tightening program to increase money supply in order to stimulate the economy. Moreover, the ASX 200 received further support in the February 2019 reporting season that delivered the strongest growth in dividends in almost 20 years. The uplift in dividends was driven by the combination of high commodity prices boosting cash flows and companies increasing dividend pay-out ratios and/or special dividends to release excess franking credits ahead of the Federal Election.
The Blended Australian Equities Portfolio finished the month of February up 7.16% compared to the ASX Accumulation Index up 5.98%.
The Australian Income Portfolio finished the month of February up 7.36% compared to the ASX Accumulation Index up 5.98%.
Positive attribution for the Blended Australian Equities Portfolio and Australian Income Portfolio was driven by Cleanaway Waste Management (CWY), Brambles (BXB) and BHP Group (BHP). A key highlight of the 1H19 reporting season was CWY’s earnings result that delivered underling earnings growth of 14.7% and a 50% uplift in its interim dividend. We remain positively disposed towards CWY’s investment proposition given its high level of earnings visibility (>80% of earnings contracted) and growth optionality across each of its businesses.
Whereas, Coles Group (COL), Woolworths (WOW) and Event Hospitality and Entertainment (EVT) weighed negatively on the Blended and Income portfolios’ attribution. The grocery stores, Coles and Woolworths, delivered softer than expected 1H19 results. Consensus estimates for their June 2019 profit outlook have been downgraded, reflecting a more subdued retail environment. While short term momentum in the grocery sector has clearly slowed in 1H19, we retain our investment in both Coles (reasonable valuation metrics) and Woolworths (post the sale of its petrol business) which underpins its commitment to return up to $1.7bn to shareholders in the coming months.