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Good afternoon,

I tell you what, it's been busy at Seneca the last couple of weeks!  I'm struggling to get time during a Friday to get up and make a cup of coffee (my almond-milk, stovetop coffee maybe my favourite part of the iso-life), let alone write 1000 words of market jibberish for you lot!

The ASX 200 closed down over 5% on Friday, falling 100 points in the final hour and a bit of trading.  The US markets closed down 2.81% on their Friday trading, despite the ISM Manufacturing Index beating estimates (41.5 vs 36.7).  USD stronger against most currencies, the AUD included.
Despite the market going nowhere for the week, there was actually heaps going on and lots of news to digest. 

The Federal Reserve held rates steady at 0-0.25% with the FOMC saying the ongoing public health crisis poses considerable risks to the economic outlook and reiterated that it will maintain rates at the current level until the economy is on track to achieve the Fed's maximum employment and price stability goals.  Chair Powell reckons elected officials could do more on the fiscal policy front, adding now is not the time to let deficit concerns get in the way of winning the battle.

Below is a chart of the US weekly jobless claims and the year-on-year growth in M0 money supply (how much currency the Fed has printed).  If you want to learn about what M0 is, watch this video.
While we are talking about the US, most of big tech reported earnings this week.  I'll quickly rattle through them:
  • Spotify (SPOT) added 11.5% on the day, Q1 earnings beat with revenue largely in line, margins up, premium subscribers up, maintained guidance.  Stock remains range bound ($110-155) as sales growth expectations have slowed from above 20% yoy to more like 12.5% yoy currently, though the company is sustainably profitable now, generating a 24% cash flow return on invested capital (and accerlating) and I think you'll see this business bought or highly profitable.  Anyone who's used Apple Music/Amazon Music knows they suck.
  • Microsoft (MSFT) is up 12% over the last 4 weeks and 3Q revenue did not disappoint. $35.02B ahead of consensus by almost 4%, with EPS also ahead.  Every division also beat consensus revenues and the company noted COVID-19 had minimal net impact on the total company revenue.  
  • Alphabet (GOOGL) +3% this week, 18% this past 4 weeks.  Results were better than many feared, with advertising revenue actually strong across Search and YouTube, but March saw declines in the mid-teens, but apparently some early signs of improvement also observed. 
  • Facebook (FB) 1Q revenue of $17.74B ahead of consensus $17.33B, though earnings missed slightly. Users, Average Revenue Per User (ARPU) both ahead of consensus, though the company did say they are expecting a reduction in demand for advertising... the in April there were signs of stabilisation.
Big 4 Banks, Dividends & 2H Reports

NAB & ANZ have now both reported, while Westpac will report next week.  No one really cares about the backward looking revenue (I'll give you a clue, its always flat!) and the focus is on cost control, capital adequacy, bad-debts/provision expense charges.

NAB cut there dividend by 64% to 30cps and announced at $3.5bn capital raising to boost their common equity tier 1 ratio (CET1) from a worst-in-class of 10.4% to c. 11.2%.  Raising money to pay dividends is dumb.  NAB provisioned an extra $807m for COVID-19 related expected losses.  I'm expecting dividends to resume in FY21, but only offering shareholders c.95cps. 

I actually liked the ANZ.  I know that sounds dumb with cash profits down 60% pcp.  What I liked is they deferred their dividend (smart) and didn't raise any issue new equity (see, smart).  What really impressed me was ANZ's institutional business grew 10% and cut costs by 1% pcp... so yep, the retail bank is battling COVID-19 (ANZ also provisioned, a much more realistic $1.67bn) and capital could be better (CET1 10.8%).  Dividend to be revisted at August trading update, which will be important for all banks, as they should provide a decent look at the asset quality damage incurred as a result of the COVID-19 induced recession.

I think CBA's dividend will be revised down further, with analysts only expecting a 20% cut at this stage, vs 65-75% for the other 3 banks, on a year ago.

The takeaway is bank dividends are being cut for the next few years, not just this year.  The below chart shows dividends per share estimates for 2 YEARS forward i.e. FY22, indexed at 100, 3 months ago.
....what about Macquarie (MQG)

Despite having different drivers, MQG dividends are also going to be down 20%+.  In the GFC, MQG revenues fell 33% but they were able to pad this by cutting costs by 25%... profits still fell over 50%.  With recent results driven heavily (read, circa 25%) by performance fees and invesmtent income, MQG won't be immune.  

However, MQG has a beautiful balance sheet, strong capital position and is now trading at a market multiple of 13x (financial ex-REIT's also 13.7x), so this negativity is largely in the price.
Let's just take a moment to consider 2 actual companies.  

Given today's topic of discussion so far, lets compare 2 acutal companies.

Company 1 operates on 2% margins, previously delivered an return on equity (ROE%) of 18.4% but has been falling steadily each year to 12% currently (peer group is in the same trend and offer 10% ROE), its got a great track record for paying dividends at over a a 5% yield however revenue has not grown over the past 5 years and its profits have actually fallen by 3%.  Company 1 has achieved an annual, compounding, total shareholder return of -2.65% over the past 5 years.

Company 2 operates on 63% gross margins that have been gently expanding over the past 5 years, its ROE% is increasing, from 14% in 2015 to 42% last year.  Sales are growing at an average of 13% over the past 5 years and profits at 18% over the same period.  It also has a great track record for paying dividends consistently.  Company 2 has acheived an annual, compounding total shareholder return of 37%. 

Company 1 is Commonwealth Bank (CBA)
Company 2 is Microsoft (MSFT)

If you own company 1 and not company 2, you my friend, can not be helped. 
And from now on, my answer to "is it time to buy the banks?" is no, its time to buy Microsoft. 
Movers & Shakers 

I've taken a bit more an in-detail look at the ups and downs this week.  

OK so travel, tourism, retail and essentially, everything that's been heavily impacted by COVID-19 did well. 
  • Gaming stocks on averaged added 9.75% (CWN, JIN, SGR, TAH, PBH)
  • Travel stocks added 20% on average (CTD, FLT, WEB)
    • though Qantas (QAN) only up 2.25%
  • Consumer Discretionary in general was up 6.9% with other big jumps from
    • Retailers: Nick Scali (NCK +12.35%), City Chic (CCX +12.14%) and Accent Group (AX1, +11.5%) 
    • Media:  Ooh! Media (OML +29%), Village Roadshow (VRL +21%), Nine (NEC +13%)
The next best performing sector was IT, with really the most beat up names recently leading the way. 
  • Audinate (AD8) is down 40% over the past 3 months, up 18% for the week. 
  • Nearmap (NEA) is down 25% over the past 3 months, up 17% for the week
  • EML Payments (EML) is down 54% for 3m, up 10% this week
Meanwhile....
  • Xero (XRO) was down 6% over the past 3 months, and down 3% this week
  • Megaport (MP1) is up 8% over past 3 months, down 2.3% this week 
you get the idea.
Gold stocks fell with the gold price (Gold -1.63% this week) and Austal (ASB) despite winning a big Australian contract, lost a bigger one in the US. 

It really was the smaller in scale, but relatively important for the index, large cap moves that held back the market this week with the ASX Small Ordinaries (+3.5%) outperforming the ASX top 20 (-1.55%) by over 5%

Rio Tinto (RIO) down 5.36%, CSL down 4.78%, IAG and SUN down c.4.5%, BHP down 2.3%. 

Transurban (TCL +6.6%)
and Amcor (AMC +4.6%) the best of the 20 leaders. 
Have a good weekend, 
LL
Luke Laretive
CEO & Investment Adviser

T  +61 3 8639 1601  |   M  0451 122 656 | lukel@senecafs.com.au
Level 2 Professional Chambers
120 Collins Street Melbourne VIC 3000 
AFSL No. 492686
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