Economic e-News - September 2017

By Craig Turnbull
Chief Investment Officer


No sizzle in the latest corporate profit results

Over the month of August, many of Australia’s largest corporations reported their full or half year profit results, and the verdict from commentators and analysts have ranged from "not great, but good enough" to "patchy" or "disappointing".

If the share market is anything to go by, the profit results were generally underwhelming with the ASX 200 continuing the sideways trend of the last few months.

 

Source: ABS

First, some of the better results

The resurgence of global commodity prices fuelled the profit results of our big miners including BHP and Rio Tinto.

Iron ore now accounts for 44% of BHP’s group earnings, helping the world’s largest mining company to post a full year underlying profit of US$6.7 billion, up 454% from the previous year. BHP also lifted their final dividend by over 200% to US$0.43.

Rio Tinto’s half year underlying earnings rose 152% to US$3.9 billion on the back of stronger commodity prices and tighter controls on debt and spending. Shareholders also benefited from a 144% hike in the interim dividend to US$1.10.

Qantas is flying high, reporting a full year net profit after tax of $853 million on the back of stronger domestic business and a record result from their frequent flyer program. While the dividend remained steady, Qantas shares have surged more than 60% since the start of the year.

Stronger investment income and higher insurance prices helped drive up IAG’s financial year net profit after tax by almost 50% to $929 million, and investors received a full year dividend of $0.33.

Other companies to report positive results included Treasury Wine Estates, Fortescue Metals, Bendigo Bank, Cochlear and the A2 Milk Company.

Some good but not quite good enough results

A number of companies reported solid profits but still managed to disappoint investors due to weaker earnings expectations, or other factors such as corporate governance and reputation.

Domino’s Pizza reported a full year profit after tax of $118.5 million, up almost 30% on the previous year. However, the earning guidance for the next financial year disappointed investors and shares dropped 20% in the wake of the announcement.

QBE Insurance announced half year net profit after tax of $345 million, also up 30% from last year. But again, a downgrade in earnings expectations saw the share price fall sharply, and it has continued to drift lower in recent weeks.

Despite posting a $9.88 billion full year cash net profit after tax, up 4.6% from the previous year, Commonwealth Bank shares have continued to slide, down by around 10% since the start of August.

Investors have become increasingly concerned about the current APRA and ASIC enquiries into the bank’s culture and governance, as well as the Federal Court action over alleged breaches of anti-money laundering regulations.

This underlines the importance of good corporate governance and how investors need to actively manage this risk across their investment portfolio.

The outlook for the next 12 months and beyond

Some commentators have observed that the strong growth in dividends over recent years appears to be slowing with more companies looking to invest a greater proportion of their revenues back into the business.

This is supported by the latest ABS numbers showing a seasonally adjusted 2.7% increase of investment in equipment, plant and machinery over the June quarter.

While it’s true that this trend may mean smaller dividends for investors in the short term, it does have the potential to drive economic growth and improve profits and investment returns over the longer term.

 

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Markets at a glance

for the month ending 31 August 2017

upArrow Australian shares1 up by 0.71%
upArrow Australian Government Bonds yieldup to 2.660%
downArrow Australian dollar down to US$0.7898
noArrow Cash ratesteady at 1.50%
downArrow International shares down by 0.04%

 

1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)

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