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Corporate Australia solid, not spectacular, says CommSec

Corporate Australia solid, not spectacular, says CommSec

Reporting season shows Australian companies are holding more cash and a smaller percentage declared a dividend, with profits not rising like they were, CommSec research finds.

Corporate Australia remains in strong shape, according to CommSec's review of the Australian Securities Exchange (ASX) earnings season, with all but eight of the half-year reporting companies making a profit for the six-month period, despite stronger growth in expenses.

Cash holdings for all ASX 200 companies reporting were up 4.3% to almost $115bn, and while a smaller percentage of companies declared a dividend, in aggregate, dividends per share were 9.4% up on a year ago, CommSec found.

"A record share of companies reported a profit. But aggregate statutory earnings were down 1.5% on a year ago. A smaller percentage of companies issued a dividend, expenses outpaced sales and cash earnings were up only modestly on a year ago," CommSec said in its report.

A record 94% of half-year reporting companies made a profit, according to figures from CommSec, up from a long-term average of 87%.

Despite profits being up, CommSec highlighted other figures such as only 56% of companies lifted profits, which was below the 61% average and the smallest in five years.

“This reporting season - for companies largely reporting half-year results to December 2017 - can be described as solid, not spectacular. Effectively, companies seem to be laying the groundwork for the future,” CommSec said in the report.

Overall 87% of companies declared a dividend to shareholders, the smallest proportion for three years.

“As a result of decisions or circumstances that have led to a lift in expenses, thus restraining profits, a smaller proportion of companies have issued dividends,” said CommSec. “For some time this had been expected - companies had to reach a point where they needed to spend more on the business.”

However, for those paying dividends, the desire was to lift or maintain the dividend with dividends per share up 9.4% on a year ago.

“In fact almost 92% of the dividend payers, elected to lift or maintain dividends - the highest share in the 16 reporting seasons we have tracked,” said CommSec.

What other trends marked this reporting season?

In the report, CommSec outlined several key themes of this reporting season:

  • Department stores remaining under pressure, less so for speciality retailers
  • TV and radio broadcasters benefiting from advertisers move away from social media
  • More reports of companies lifting margins
  • Agricultural companies benefitting from strong demand, especially in Asia
  • Companies dependent on home construction and development benefitting from strong activity levels in south-east Australia
  • Technology and telecom companies struggling
  • Transport and infrastructure companies performing well

What’s ahead?

“Corporate Australia is solidly in the black. But the bottom-line profits aren’t rising like they were in the recent past. And that is understandable,” said CommSec. “The base level of corporate profits is higher; global competition continues to lift; companies are investing more; and there was a solid lift in energy costs in the second half of 2017.”

CommSec expects that the Australian economy will grow at a faster pace over the next year with a near record number of homes being built and a growing number of infrastructure projects to support construction, industrial and transport sectors. The report also stated that resources companies and other companies with overseas operations will benefit from stronger global economies.

“US sharemarkets have been volatile over February as investors weigh up high valuations and the prospects for higher interest rates,” said CommSec. “The Australian sharemarket will be affected like other sharemarkets should the volatility continue.”

CommSec expects the All Ordinaries to be trading in a 6,250-6,650 point range by the end of calendar year 2018 with the ASX200 around 100 points lower than the stated range.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.