QBE joins profit warning throng

Countryman

It's officially profit warning season on the ASX.

By profit warning season I mean the two months in the lead up to the official profit reporting period - which starts in the second week of February - where those companies who do not look like they will meet their previous profit forecasts warn the market of such an event.

This time around we've seen the likes of Billabong and JB Hi-Fi, and last week QBE joined the list, confirming that if you're not in mining or oil and gas right now, it's tough out there.

QBE, Australia's biggest insurance company and stalwart of the ASX Top 20 listed companies, foreshadowed profit to fall 40 to 50 per cent for calendar year 2011, after a spike in catastrophe claims, and unrealised losses from the impact of difficult investment markets.

QBE earns a large proportion of its income in the United States, where Hurricane Irene, tornadoes, wildfires, hail, flood, wind and snow storms have all resulted in an increased number of claims, with QBE's crop insurance business particularly hard hit.

Locally, bushfires in WA and storms in Melbourne have had an impact, while overseas riots in Europe and floods in Thailand added to the damage.

Of note for investors seeking high yielding rather than capital growth stocks, QBE has cut the final dividend for 2011 to 25c per share, down from 66c per share this time last year. This takes the total dividends paid to investors in 2011 to 87c, down from $1.28 in 2010.

With the increasing proportion of income coming from overseas, the franking credit proportion of the QBE dividend has been dropping significantly, down from 60 per cent franking in 2007 to 10 per cent franking in 2011.

Partially franked dividends are usually less attractive to Australian based investors, especially superfunds, compared to the blue-chip stocks that are fully franked (100 per cent franking) due to the tax advantage that franking credits provide.

The reduction in dividend is also a partial factor as to why QBE was sold down 20 per cent on the back of the downgrade as yield-seeking investors reposition their portfolio for the upcoming dividend season.

For example, a stock like Telstra which is currently trading at $3.29 and paying a 14c fully franked dividend in February, is on raw numbers more attractive than the 25c partially franked dividend that QBE is paying, with QBE trading at $11 per share - more than three times the price of Telstra.

Before the downgrade, QBE was trading on an estimated dividend yield of 11.6 per cent based on last years dividend payments, and is just another example that if something looks too good to be true, then it probably is.

Which brings me to my final point, with a number of companies reporting and due to pay dividends in the coming months, it may be worthwhile casting an eye over your portfolio to see if any of your stocks could be susceptible to similar downgrades.

The smoking gun is an abnormally high forecast dividend yield (as was the case with QBE).

Your stockbroker can provide this information, or you can find it yourself from various sources such as the ASX website.

It's worth checking in this challenging economic climate.

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If you would like a free subscription to Cameron Bartram's market update, contact Sentinel Stockbroking on 9225 0028 or cbartram@sentinelgroup.com.au

_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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