E-News November 2011
Reporting Season Wrap
The Australian share market reporting season has come and gone for another year, with the market delivering 11 percent growth for the financial year. The “two speed” economy was evident, with resources delivering 30 percent growth while the remainder of the market only gained three percent.
This was a reasonable result in a year where companies battled the global economic backdrop of a sovereign debt crisis in Europe, fears of a double-dip recession in the United States, and a sharp decline in consumer confidence. The main themes of the reporting season were rising costs, the strong Australian dollar, weak consumer demand, modest lending growth, and strong commodity prices.
The balance sheet of corporate Australia is in solid shape following the capital raisings during the early stages of the Global Financial Crisis, with the debt to equity ratio of 27 percent compared to the long-term average of 50 percent. This saw a number of companies announcing share buy-back schemes as a means of improving EPS and maintaining appropriate debt levels. Total buy-backs announced during the reporting season totalled $9 billion - the highest level in four years.
Dividends were generally slightly higher than expected, with average dividend per share growth of 6.8 percent. Only 15 percent of companies reduced their dividends, with nine companies using their excess cash to declare special dividends.
Current global economic uncertainty has made it extremely difficult for companies to issue outlook statement guidance for FY12 with any degree of confidence. For some companies, directors have opted not to give any guidance at all for FY12, preferring to update shareholders and the market at the time of their Annual General Meeting.
Analysts are forecasting EPS growth of high single-digits for FY12, which could be optimistic given the current volatility in global markets. EPS growth for the resource sector is expected to be around 23 percent, with growth in the banking sector of just under 10 percent. The resource sector benefited from booming commodity prices, as long term demand from China shows little sign of abating. Two highlights of the reporting season were BHP Billiton and Telstra. BHP reported the highest profit recorded by an Australian company. The company’s net profit of US$23.7 billion was boosted by surging commodity prices and delivered on flat volume growth.
Telstra reported a 16 percent fall in net profit. Telstra gained momentum in the second half the year following $1 billion in capital expenditureto win back market share in mobile phones. The company reaffirmed its expectations of paying a 28 cent per share dividend for the forseeable future, which equates to a grossed-up yield of just over 13% based on current prices. This is particularly attractive in the current economic climate.
The recent share market weakness and cheap credit available in the US means that companies are likely to be on the lookout for potential takeover targets. This has been highlighted by the recent takeover offers for ConnectEast Group, Foster’s Group, and Macarthur Coal.
The Australian share market looks cheap based on historical perspective, with the market trading on 10.2x FY12 profits compared to the long-term average of 14.5x. The issue going forward is how much global growth will be impacted by the debt crisis in Europe.
Understanding the transition to retirement
The transition to retirement (TTR) initiative was introduced by the Government to encourage older Australians to remain in the workforce and slowly ease out of full-time employment. Once you’ve reached what’s called your ‘preservation age’, the TTR rules allow you to access your superannuation benefits through a regular pension income - without having to retire.
Working Hours that Suit your Lifestyle
Under TTR, you may be able to reduce your working hours without adversely affecting your lifestyle. The earnings within your pension account become tax-free, and, if combined with a salary sacrifice strategy, can help you enhance the value of your superannuation while you draw an income. No work test is required with TTR; there are no restrictions on the hours you must work, or in what capacity.
If your cashflow from switching to part-time work is insufficient, you can use a TTR pension to supplement your income. This allows you to adjust your working hours to suit your pre-retirement lifestyle.
Build your Super while still Drawing a Pension
A salary sacrifice strategy is an effective way to top up your superannuation while you withdraw a TTR pension to maintain your cashflow. If you have surplus income from your salary, you can contribute the surplus back into superannuation with pre-tax dollars. This can actually enhance your superannuation position over time.
What Conditions Must I Meet?
In order to commence a TTR pension, you must have reached your preservation age, based on your date of birth, as follows:
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Date of birth
|
Preservation age
|
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Before July 1960
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55
|
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July 1960 – June 1961
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56
|
|
July 1961 – June 1962
|
57
|
|
July 1962 – June 1963
|
58
|
|
July 1963 – June 1964
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59
|
|
After June 1964
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60
|
If you’re between 55 and 64 there are upper and lower limits on how much pension you can withdraw each year. Lump sums cannot be paid from your super during this time.
Have you got a Power of Attorney?
In recent weeks there has been some media attention around families encountering difficulties as a result of a parent handing control of their finances to one or more of their adult children. The sensationalist coverage inferred that entrusting decision-making to a family member via a Power of Attorney was a risky practice. For most families however, the reality is quite the opposite.
What is a Power of Attorney?
A Power of Attorney is a legal document that authorises someone to act on your behalf when you are no longer capable of making decisions for yourself. If you find yourself in a position where you have lost this capability, either permanently or temporarily, due to an illness or an accident, it’s really important that you have a POA in place.
The laws relating to POAs aren’t the same across Australia, so you’ll need to check what applies in your State. For example, in Victoria there are four recognised POAs, covering different types of decisions:
- Enduring Power of Attorney (Financial) enables someone to make financial and legal decisions for you
- Enduring Power of Attorney (Medical Treatment) enables someone to make decisions about your medical treatment
- Enduring Power of Guardianship enables someone to make personal and lifestyle decisions for you, e.g. a decision about your ongoing ability to cope in your own home
- General Power of Attorney enables someone to make specified financial and legal decisions for you. This POA only applies while you still have the capacity to make your own decisions.
If you live in Victoria you can have any or all of these POAs and assign different ones to different people if that is the best option for you.
Why have a POA?
While we don’t like to think about our health failing, the reality for many people is that general aging leads to a reduced capacity for reasoning, or for understanding, retaining, believing, evaluating or weighing up relevant information.
With this sobering thought in mind, it’s vital that you organise a POA as soon as possible and definitely before you lose any mental capacity. If you reach a point where you can’t fully understand the documentation for your POA (as verified by an authorised witness) you can’t actually have one!
In addition, if you don’t have a POA in place it can be a time-consuming and costly exercise for family members who find they need to make application to the courts for one.
Key decisions to make now
When it comes to organising Powers of Attorney, you have two key decisions:
1. Who you should appoint as your attorney and decision-maker
2. What type or types of POA you should choose
Clearly these decisions will vary from person to person and from family to family.
A trusted and capable family member is a common choice for most people. However you need to be confident in their ability to look after your affairs and should have second thoughts about appointing someone you know to be experiencing financial or other difficulties that may lead to impaired judgments on your behalf.
You can appoint joint attorneys, but be sure that all parties are likely to be available when required and can be relied upon to generally agree on the issues that will affect you.
Having an offspring who’s a lawyer or a doctor doesn’t necessarily mean they are automatic choices for Enduring POAs for Financial or Medical Treatment either.
More information
Appointing a Power of Attorney is important and should ideally be done as soon as someone becomes an adult. For more information on POAs in your State, visit one of the websites shown below, or speak to your financial adviser.