update reporting season

Corporate profits have risen strongly and boards are keeping the dividends flowing in throughout the 2017–18 reporting season, reflecting strong business conditions and sentiment.

According to CommSec analysis, of the 139 ASX 200 companies who reported for the year to June, both top-line and bottom-line performance have been strong. Revenues were up 7.4 per cent on the previous year and profits rose 8.4 per cent. Cash rose 5.7 per cent and dividends were up by 13.6 per cent.

Nearly two thirds of companies (62 per cent) reported a profit and of those that did, 60 per cent reported an increase in profit on the previous year. Among those were Boral (up 48 per cent to $441m), Qantas (up nearly 15 per cent to $980m) and Cochlear (up nearly 10 per cent to $245m).

+7.4% Revenues

+8.4% profits

+5.7% Cash

+13.6% Dividends

Source: CommSec ASX 200 companies reporting for year to June 2018

Companies who bucked this trend were BHP, which reported a 22.5 per cent fall in net profit to $4.8b, Telstra, whose earnings fell 8.4 per cent to $3.56b and Wesfarmers, down nearly 60 per cent to $1.19b.

Finance sector companies that were before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry also reported a fall in earnings. CBA reported its first fall in profit in a decade, down six per cent to $9.41b, hit by increased expenses and one-off costs from regulatory penalties and the Royal Commission. AMP also reported a 74.2 per cent fall in net profit to $115m. Higher funding costs have also pressured banking sector margins in the second half of the financial year. CommSec chief economist. Craig James said that while conditions continue to be strong, there is a caution on the outlook. “For resource companies, the global outlook remains positive, but the trade wars bear watching, together with rising costs.”

According to analysis by Morningstar Australasia, while results for the 2017–18 financial year generally met expectations, the weighted average was lower, held back by banks and telecommunications. Resources and energy companies continued to perform strongly, with earnings up over 20 per cent, while the rest of the market averaged growth around five per cent.

The firm’s head of equities research, Peter Warnes, said dividend growth was “pleasing”, just exceeding earnings growth and underpinning the market, and “solid balance sheets and restrained growth capital expenditure allowed directors to allocate more free cash flow to shareholders via dividends and share buy-backs.”

While results were positive, Warnes said top-line or revenue growth was underwhelming, reflecting the lack of inflationary pressures and difficulty raising prices in an increasingly competitive environment.

“Guidance for 2018–19 was downbeat, with management citing increasing cost pressures starting to impact operating margins. Rising energy and imported raw material costs are unlikely to abate in the near-term and analyst earnings downgrades were quite prevalent.”

Warnes said at present there are few factors pushing local bond yields higher. “Household debt is very high, wages growth struggles to match inflation, meaning real wages growth is minimal and the savings ratio is just two per cent. China’s growth is slowing, although resources and LNG exports will continue to drive net exports as a positive contributor to Australia’s GDP growth. Offsetting this is the elephant in the room — household consumption — which is also being affected by falling house prices and a contracting wealth effect.”