Top broker warns earnings expectations for the ASX reporting season are too high

If you are feeling nervous about the ASX reporting season, you should be as Citigroup is warning that expectations may be set too high.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The S&P/ASX 200 Index (Index:^AXJO) is giving up all of its morning gains as investors took profits and moved to the sideline ahead of the reporting season.

The top 200 stock benchmark is up by only 0.1% in after lunch trade after jumping by more than 1% this morning.

If you are feeling nervous about the profit reporting season, you may have good reason to be as Citigroup is warning that expectations may be set too high.

Risk of earnings misses

Analysts have been paring their FY20 profit forecast for ASX stocks in light of the COVID-19 crisis with consensus expectations tipping around a 15% hit to earnings and no growth for FY21.

But Citi's base case is for company bottom lines to fall by 20% for the last financial year and that's not the end of the bad news.

$27 billion dividend hole

"Citi forecast of aggregate FY20e dividends in the Citi universe has fallen 37% from $72bn to $45bn," said the broker.

"Banks contributed the most to this decline with all September-reporting banks having reduced or cut their interim dividends."

These banks include National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking GrpLtd (ASX: ANZ).

Will CBA pay a dividend?

Commonwealth Bank of Australia (ASX: CBA) is the only big bank that will hand in its earnings report card in August and Citi doesn't think it will pay a final dividend for FY20.

This is likely to cause the stock to tumble as I believe the market is expecting a CBA to cut its dividend but still pay one.

4 other things to watch in the reporting season

There are four other things that Citi is telling investors to watch for. Firstly, it's balance sheet strength as the new COVID-19 outbreak in Victoria and growing clusters in New South Wales reminds investors that rolling lockdowns will be a feature for some time yet.

Secondly, investors shouldn't be holding their breath when it comes to earnings guidance. In this fast changing COVID-19 environment, most boards will be reluctant to stick their neck out.

"A far greater importance will be placed on any trading updates provided and whether the trajectory of sales or earnings has changed," explained Citi.

"We think investors need to be careful in interpreting the COVID-19 disruptions called out by companies, given there has been impacts on both revenue and costs that may not be clearly disclosed."

The third expectation is for our big ASX miners, like Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP), to deliver strong results. This is thanks to the gravity-defying iron ore price.

One of the trickiest sectors to navigate

Lastly, be wary of listed ASX retailers. Their sales may have been bolstered by government stimulus, but this is being steadily withdrawn.

"Trading updates for the reporting season are expected to be positive given government support and the superannuation withdrawal," added Citi.

"This may prove misleading as there will be a step down in stimulus come the December quarter, which is likely to result in weaker retail sales growth."

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, BHP Billiton Limited, Commonwealth Bank of Australia, National Australia Bank Limited, Rio Tinto Ltd., and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A young woman smiles as she rides a zip line high above the trees.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a bountiful session for investors this hump day.

Read more »

An excited man stretches his arms out above his head as he reaches a mountain peak.
Record Highs

Breaking: CBA shares hit a new record of $180

CBA shares can't possibly keep rising can they?

Read more »

A happy young couple celebrate a win by jumping high above their new sofa.
52-Week Highs

Guess which ASX 200 furniture retailer is up 400% in 5 years?

Up 400% over the past five years is not bad for a furniture retailer. Here's why this quiet compounder has…

Read more »

Arrows pointing upwards with a man pointing his finger at one.
Share Market News

Morgans says these ASX stocks can rise 30% to 80%

These shares could be cheap according to the broker. Let's see what it is saying.

Read more »

Two people shaking hands in the boardroom on a merger.
Mergers & Acquisitions

What did Macquarie make of the Brickworks and Soul Patts merger?

Macquarie sees simplification, scale, and upside… but it also has a warning..

Read more »

A cool young man walking in a laneway holding a takeaway coffee in one hand and his phone in the other reacts with surprise as he reads the latest news on his mobile phone
Mergers & Acquisitions

PointsBet share price surges 11% on improved takeover offer

The bidding war for PointsBet shares continues apace today.

Read more »

A man has a surprised and relieved expression on his face. as he raises his hands up to his face in response to the high fluctuations in the Galileo share price today
Broker Notes

Leading broker tips 50%+ upside for IDP Education shares

The team at Macquarie thinks this beaten down stock could be a buy.

Read more »

Man looking happy and excited as he looks at his mobile phone.
Share Gainers

Why Coronado, DroneShield, Lovisa, and Mayne Pharma shares are racing higher today

These shares are having a good time on hump day. But why?

Read more »