A company’s earnings are the key element SMSF trustees should be taking into account in order to achieve consistent earnings from the equities held in their portfolios, according to an industry educator.
Speaking at the recent selfmanagedsuper Trustee Empowerment Day 2017, VectorVest director of education Russell Markham said: “If you’re looking to buy a stock and you’re looking for it to go up in capital value and you’re also looking at the earnings of those companies to continue powering on and to continue to get some great dividend and franking credits, you really need to pay attention to the growth rate of the company.”
To this end, Markham noted SMSF investors should be asking if the growth rate of the organisation is sustainable and whether it can keep meeting and exceeding the current dividends it is declaring.
“So make sure, when you’re looking for stocks, you’re picking your stocks with safe, reliable, ongoing earnings. In other words, you want to find those stocks that are powering up their earnings,” he said.
“That’s because the chances are if earnings are powering up, then those companies are more likely to meet or exceed dividends, so buy companies that are making more money.”
Markham singled out the experience of Commonwealth Bank of Australia (CBA) shares as a classic example of the significance of strong earnings.
“With CBA, earnings started to fire up and up went the share price. Then earnings went a bit sideways and the share price went sideways. It’s kind of in a holding pattern right now,” he said.
To further his argument, Markham highlighted the situation Telstra and its shareholders have experienced this year.
“I’m on record via my presentations earlier in the year with the Australian Shareholders’ Association and the Australian Investors Association noting time and time again that Telstra’s dividends are under massive threat,” he said.
“[I said] as long as I keep seeing earnings falling I am not confident that they will meet or exceed their current dividends and we all know the story as to what has taken place recently.
“So notice the correlation – falling earnings and what that starts to do with the share price.”