Bottom-line profits of corporate Australia are rising lik...

Bottom-line profits of corporate Australia are rising like the recent past: CommSec's Craig James

Craig JamesDecember 7, 2020

CommSec has analysed all results from ASX 200 companies. Traditionally brokers or analysts focus on smaller subsets of results. And some merely focus on just whether companies have met or fallen short of “market expectations”.

So far 125 of the ASX200 have reported half-year earnings. The earnings season effectively ends on February 28.

Some of the key results:

In aggregate, revenues are up 7.0% on a year ago; expenses are up 8.2%; profits are down by 1.5%; dividends are up 9.5% and cash is up 5.3%.
Excluding BHP, CBA and Telstra, profits are up 3.2% on a year ago.

The following points relate to those companies that have reported half-year results (HY reporting companies).

On revenues, 81% reported increases and 19% reported declines.
On expenses, 78% reported increases and 22% reported declines.
On profits, 94% reported a profit.
57% reported a lift in profit and 43% a decline (long-term average 61.4%).
Of those reporting a profit, 57% lifted profits and 43% reported a decline.
Of all HY reporting companies, 86% have issued a dividend and 14% haven’t.
Of those reporting a dividend, 75% lifted the dividend, 8% cut and 17% left dividends unchanged.
Of all companies reporting half-year earnings, 57% lifted cash holdings over the year and 43% cut cash levels.
Cash holdings of both full-year and half-year reporting companies stood at $112 billion at December 31, up 4.4%.

The trends

Surveys conducted of the business sector over the past six months have generally been positive. The NAB business conditions index hit record (21-year) highs in October 2017. Using rolling averages, business conditions are at decade highs.
So it makes sense that companies are making money. In fact all but seven of the 125 ASX200 companies reporting for the six months to December, reported a profit. The 94.4% of companies recording a profit matches the record high proportion in the 2017 interim reporting season a year ago.
But aggregate profits aren’t soaring. In fact aggregate profits are down 1.5% on a year ago. Stripping out heavyweight companies, a small lift in aggregate profit was achieved.
In addition, if you look at the proportion of companies able to lift profits, it was only 57% – the smallest share in five years.
So where have the funds gone? Aggregate revenues lifted 7% over the year but expenses posted a stronger 8.2% increase. Some companies have chosen to invest more into their business. Others may have lifted marketing expenses to stay competitive. Still others may have faced higher costs – certainly energy bills have continued to lift along with other commodity prices.
Cash levels are still healthy, up 5.3% on a year ago for half-year reporting companies. But in the year to June 2017 cash levels were up by 23.5%.
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.
For some time this had been expected – companies had to reach a point where they needed to spend more on the business. So the 86% of companies issuing a dividend was the smallest proportion for three years.
The important point is that for those companies paying a dividend, the desire has been to lift or maintain the dividend. 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.
In aggregate, dividends per share were up 9.5% on a year ago.

What are the implications for interest rates and investors?

Corporate Australia remains in strong shape. All but seven of the half-year reporting companies recorded a profit for the period despite stronger growth in expenses.
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. 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.
Looking ahead, the Australian economy is expected to grow at a faster pace over the coming year. A near record number of homes are being built although fewer new projects are likely to be started over the coming year, especially in Sydney and Melbourne and the Brisbane apartment market.
A growing number of infrastructure projects will support prospects of construction, industrial and transport sectors.
Resource companies and other companies with substantial operations overseas will benefit from stronger global economies. The challenge will be to restrain costs, particularly energy costs.
US sharemarkets have been volatile over February as investors weigh up high valuations and the prospects for higher interest rates. The Australian sharemarket will be affected like other sharemarkets should the volatility continue. But the Australian sharemarket is attractively valued with the lagged price-earnings at 15.79, only slightly above the long-term average.
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.