Corporates whinge but profits rise

Company profits Source: AMP CapitalEarnings season: Enjoy special dividends while they last

Contrary to much of the commentary about corporate results, most local companies have reported fatter profits than they managed a year ago and increased their dividends while only a relatively small minority – 12 per cent – have had to cut their dividends. And if you could ignore the resources sector for a moment, the story is considerably brighter.

A reporting season that has so few corporates needing to trim dividend payouts is hardly a sign of miserable times. It’s partly the nature of news then that those feeling pain, those with CEOs having a big whinge, receive disproportionate coverage while those getting on with improving their businesses’ bottom line are less noticed.

As the accompanying graph from the scorecard kept by AMP’s Shane Oliver shows, with the reporting season 70 per cent over, two-thirds of companies have reported higher profits and one-third lower – not far off the average over the past six years.

Furthermore, the average for this reporting season is dragged down by the resources sector feeling lower commodity prices. According to Oliver, earnings expectations for resources stocks are down about 20 per cent while the rest of the market is up 7 per cent.

And talking of expectations, 40 per cent of those reporting so far have beaten market expectations while 30 per cent have disappointed – percentages that aren’t as good as they were six months ago, but still around average and never mind what the whole business of corporates massaging analysts’ expectations means anyway.

That said, business conditions are undeniably harder than management and shareholders would like and tougher than they have been, especially compared with those rosy-in-retrospect pre-GFC days of unsustainable economic bubbling. The reality beyond the current political nonsense is that all Australian industries are in the midst of a major restructuring, adjusting to a more sustainable level of consumer spending, a necessity nicely explained by the RBA’s Glenn Stevens in his Glass Half Full speech a year ago and updated last month.

Which is why it’s wrong to dismiss profits gained from cost-cutting, as seems to be the fashion. Oh it’s not as happy a story as winning the lottery or selling more goods and services on bigger margins, but cutting the cloth to fit is an important a guide to management’s ability during this great restructuring. Those that do it intelligently also are setting their company up for further profit increases when stronger growth rolls round.

The pain of reducing costs is real enough and usually not felt at the top of the organisation – just ask the CEO of BlueScope rolling in an 82 per cent pay rise after receiving $5.1 million last year. And much of that pain is being inflicted by management that proved second rate at handling the good times.

You hear plenty about the Big Two miners, BHP and Rio, slashing costs under their new CEOs. Not so much was discussed about the bloated bureaucracies that sprouted during the bubble prices era, the days of easy excess when problems in the resources sector were greeted with the solution of throwing another dump truck of money at them. While it’s outside our local listed company view, the MUA certainly carries some responsibility for the Gorgon project’s cost blowout, but Chevron carries much more for embracing levels of excessive spending back when money seemed to be no object.

Meanwhile, back at the main game indicated by dividend payments, it remains instructive that companies paying strong dividends outperform over the longer term despite the apparent loss of capital when they turn it over to shareholders.

Portfolio manager for Fidelity’s Australian equities fund, Paul Taylor, likes to cite various studies demonstrating the superiority of the big dividend payers, the most interesting of which being how they overcome that loss of capital compared with other profitable companies that are miserly at dividend time. (Disclosure: I heard Taylor tell this story while hired by Fidelity to MC the function.)

Turns out that a high dividend ratio forces boards and management to be more careful with their capital management – they’re much less likely to waste it on dumb takeovers and wild adventures than those who are always looking for a way to spend big retained profits.

It’s an interesting lesson and one that has worked for Taylor, his fund beating the benchmark over all time frames for the past decade, right through the first and second stages of the resources boom.

There’s also a message in there somewhere about the local corporate landscape when 66 per cent of companies can increase dividends during harder times and only 12 per cent have to cut them. While some sectors are certainly hurting, maybe the overall story isn’t as bad as we like to scare ourselves.

Michael Pascoe is a BusinessDay contributing editor.

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