Reporting Wrap: Coles and CBA

August was a busy month for Australian investors with the majority of ASX-listed companies reporting FY23 results. Across two articles, we review the results of four current portfolio holdings and the key investor takeaways.    

Coles Group (ASX: COL)

Inflation was a double-edged sword for Coles in FY23. Revenue from continuing operations increased by 5.9% in FY23, largely from higher supermarket prices, improved stock availability and value campaigns such as “Dropped & Locked”. Liquor sales, which account for 9% of revenue, were flat owing to elevated pandemic-induced demand in the prior corresponding period. Coles divested its service station convenience stores during the year.

Key Points:

• Inflation helps sales, hinders profits

• Earnings of $1.04 billion

• Final fully franked dividend of $0.30, total FY23 dividendd of $0.66

Households are increasingly seeking value at the checkout as cost-of-living pressures including recent interest rate hikes reduce disposable income.  Coles noted consumers are shopping more often but are pushing out big purchases such as cleaning products. Customers also moving to home-brand products, particularly for staples like rice and pasta.

Source: Coles

Positively, supermarket inflation looks to be turning a corner, with price requests from suppliers halving over the past six months. Fresh food inflation was 2.3% in the June quarter, down from 4.1% in the prior March quarter. Bakery, grocery and dairy prices remain elevated.

While grocery inflation benefitted the top line, it also hit expense items. Staff costs increased owing to a 5.75% increase in the minimum wage. Loss and waste increased by 20%, with management citing an increase in petty theft. Coles is also facing an additional $120 million in costs and a 12-month delay to its automated fulfilment centre. As a result, earnings for the year were flat.

With a share price of $16, Coles currently trades on a fully franked dividend yield of 4.1%. Supermarkets are defensive investments, meaning sales and earnings are relatively less susceptible to change in the overall economy. This is illustrated by grocery retailing growing an average of 4.8% per annum over the past two decades. Liquor is also resilient, growing 6.8% per year over the same time period.

Commonwealth Bank (ASX: CBA)

Commonwealth Bank benefitted from the Reserve Bank of Australia’s increasing the cash rate from 0.10% to 4.10% over the past 18 months. This has resulted in higher interest income from its loan book with total income for the year improving 10% to $27.2 billion. Profit growth was more subdued, rising 5% to $10.2 billion, owing to a $1.1 billion provision for potential bad debts. Showcasing the true benefit of higher interest rates, earnings before provisions and tax increased by 19%.

Key Points:

• Higher interest repayments flow to the bottom line

• Arrears remain low

• Final fully franked dividend of $2.40, total FY23 dividends of $4.50

CBA remains well capitalised, with $8 billion in extra capital set aside above the minimum set by the prudential regulator. The bank has already provisioned $6 billion for bad debts, against an expected loss of $3.8 billion on current economic projections. Management confirmed it would retain a $2 billion buffer between provisions and the base forecast going forward.

Data from the bank showcased that the impact of higher rates is being felt unevenly among the population. Customers aged 18-34 on average saw their savings decrease over the past year. Conversely, older customer cohorts saw their savings grow, likely as a result of higher interest on term deposits.

Source: Commonwealth Bank

Regarding lending distress, the bank noted that arrears remain low and below pre-pandemic levels. This is despite minimum monthly mortgage repayments increasing from $1,225 to $1,775 since February last year.

Mortgage repayments now represent 21% of pre-tax income, up from 15%. Where there have been some signs of distress are personal loans and to a lesser extent credit cards. This will be something to keep on an eye going forward, as more households roll off fixed loans and the full impact of rate hikes is felt.

Commonwealth Bank declared a $2.40 fully franked final dividend to shareholders. Including the interim dividend of $2.10, Commonwealth Bank paid out 74% of its profits to shareholders. It’s positive to see the bank retaining some profits for reinvestment. It also acts as a buffer should profits fall to maintain dividend payments. The bank also returned $9 billion to shareholders via on and off-market buybacks during the financial year. The dividend will be paid on 28 September to shareholders who own shares on or before 16 August.

Disclaimer: Commonwealth Bank and Coles are held in LPW Portfolios