Economic e-news - September 2018
13 September 2018
By Craig Turnbull
Chief Investment Officer
Local companies still chugging along
According to the Australian Bureau of Statistics (ABS) the Australian economy grew by 0.9% in the June quarter, lifting our annual GDP growth rate to 3.4%.
The figures revealed a strong rise in company profits and this was confirmed with the widespread solid results announced over the course of the recent corporate reporting season.
This positive business sentiment has driven the Australian share market higher over recent months with the ASX 200 reaching 6319 points by the end of August.
Source: Yahoo Finance
Who were real winners in the latest reporting season?
It’s clear that shareholders were the big winners with Australia’s top 25 companies increasing their dividends by an average of 8% over the last financial year. It’s estimated these companies will pay out around $35 billion in dividends over the coming months, up $4 billion on last year.
Higher commodity prices helped BHP Billiton’s total underlying attributable full year profit surge to US$8.93 billion, up 33% from the previous year and allowed the big miner to boost their final dividend by 46% to US$0.63.
The full-year statutory net profit for toll road operator, Transurban Group, climbed more than 120% to $468 million on the back of higher tolls and increased traffic numbers. The final distribution to shareholders was up 4.5% to $0.28.
Rising oil prices and lower production costs helped independent oil and gas producer, Santos Limited, to post a half-year underlying profit of US$217 million, up 99%, and pay its first dividend to shareholders since 2016.
Some of the other companies to report strong profit results and higher dividends included Macquarie Bank, Domino’s Pizza, BlueScope Steel, ASX Limited, OZ Minerals, AGL Energy and Qantas.
There were still a few disappointments
Despite the bumper rewards for many shareholders there were a number of disappointing results. Profits of some companies were affected by changes in international markets, one-off events and even governance issues.
Chinese steel makers’ increasing preference for higher grade iron ore eroded revenue for Fortescue Metals resulting in a 49% fall in their full year underlying net profit after tax to US$1.08 billion, and a reduction of their final dividend to US$0.12.
Oil Search suffered a significant slump in production and sales after an earthquake in the Papua New Guinea highlands forced the closure of their liquefied natural gas facilities. As a result, half-year net profit after tax fell 39% to US$79 million and the interim dividend was halved to just US$0.02.
In the wake of the Hayne Royal Commission, AMP has been forced to set aside $290 million to compensate customers it overcharged for financial advice. This contributed to a 74% collapse in half-year net profits to $115 million, and a 31% cut in the interim dividend.
This is a clear example of how poor corporate governance can not only damage the reputation of an organisation but also have a direct impact on their financial performance, and ultimately their shareholders.
What does it mean for investors?
Although the local economy looks healthy and many companies are reporting strong profits and fat dividends, the share market remains a high-risk investment.
Companies operate in an ever-changing and sometimes very uncertain environment, vulnerable to changes in legislation, technology and consumer preferences as well as one-off events like natural disasters and internal scandals.
This underlines the need to have a diversified portfolio, so any high risk investments, which may offer periods of rapid growth, are balanced out with less risky assets that provide moderate growth and more stable income.
So if you’re concerned about risk, it’s best to have a chat with your financial planner.
Markets at a glance
for the month ending 31 August 2018
Australian shares 1 up by 1.42%
Australian Government Bonds yield2 down to 2.520%
Australian dollar down to US$0.7260
Cash rate3 steady at 1.50%
International shares4 up by 1.13%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)