Our home-grown Australian investment bank did something it rarely does – it disappointed with a soft first half profit result.
The Macquarie Group Ltd (ASX: MQG) share price is underperforming as a result with the stock tumbling 1.1% to $132.41 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index clawed back from morning losses to trade 0.1% in the black.
While Macquarie isn't the only one in the sector to be on the back foot, it's fallen harder than other large financials except for Australia and New Zealand Banking Group (ASX: ANZ) after its poorly received profit results yesterday.
Weight of expectations
I don't classify Macquarie's results in the same category though. ANZ bombed out despite relatively weak expectations, while Macquarie has lost favour today because it didn't exceed high expectations.
Cynics will say Macquarie has itself to blame. It's trained investors to always expect more with management consistently under-promising and over-delivering.
The fact that it stuck to its full year guidance felt almost like a broken promise even as the bank delivered an 11% increase in first half net profit to $1.5 billion and upped its interim dividend by over 16% to $2.50 a share (franked at 40%) compared to the same time last year.
What I found interesting is that it highlighted in bold that the interim dividend is lower than the final dividend it paid in FY18 of $3.60.
Is Macquarie lowering expectations in order to beat it?
I find that strange because Macquarie's interim dividend is always lower than the final dividend (at least since 2012). I am not sure what the purpose of highlighting this is unless it's a deliberate strategy to further soften expectations for the full year.
Management is already prepping investors for bad news as it said a few times that FY20 profits will be down on FY19. If that comes to pass, it would break its six-year track record of delivering ever higher annual profits.
Investors were hoping (and maybe still are) that this is just another under-promise, and that may have contributed to the weak share price performance today.
Foolish takeaway
But I think any share price weakness is an opportunity for longer-term investors to buy the stock as management's track record in delivering for shareholders is one of the best on the S&P/ASX 100 (Index:^ATOI) (ASX:XTO) index.
The investment bank is also making inroads in reducing the lumpiness of its earnings. It's annuity-style net profit contribution in 1HFY20 gained 15% over the same time last year and increased 11% over the last half.
"Our first-half result highlights the benefits of the business and geographic diversity of the Group, with increased client activity across many of our business lines and favourable market conditions across the Commodities and Global Markets platform in particular," said its chief executive Shemara Wikramanayake.
The stock may not look like a bargain even with today's modest sell-off, but quality companies never are.
