As the half-yearly reporting season draws to a close, a study by CommSec paints a robust picture of Australian corporate health.
All but 8 of the 135 companies (94%) produced a profit for the six months to December. Excluding BHP Billiton, aggregate profits lifted by 37%, with a significant number electing to pay dividends and cash levels surged by almost a tenth indicating companies have plenty of firepower to invest if the need arises.
“The earnings season has been good. Very good,” CommSec Economists Craig James and Savanth Sebastian said in a note.
“Recently many were surprised by survey results that showed that business conditions are the best in nine years. The earnings results confirm that Corporate Australia is in good shape.”
According to CommSec, three key factors played a role — commodity prices, especially iron ore, coal and oil have risen contrary to expectations, the record-breaking home building boom and a relatively lower currency against the greenback, which helped companies with offshore operations.
Before the earnings season, the Aussie sharemarket could have been considered slightly overvalued with an historic price-earnings ratio sitting near 17, above the longer-term average of 15.7. But the latest earnings results justify the recent gains in the sharemarket. And with the economy gaining momentum in recent months, share prices have scope to track profits higher, CommSec said.
The following four charts illustrate how good the reporting season so far has been.
Most companies are making money
The following chart shows the proportion of companies returning profits. By that measure, it’s been one of the best reporting season this decade.
Above Average profit increase:
Almost 70% per cent of companies increased profit over the year, above the long-term average near 60%.
Rewarding shareholders: Among companies paying a dividend, 69% lifted dividends, 14% maintained dividends and 18% of companies cut dividends.
High cash levels: Cash levels are near the highest in at least 14 seasons and Australia’s biggest companies have access to nearly $108 billion.
While Australian companies are sitting pretty now, they face some challenges, CommSec said.
They will need to brace themselves to meet geopolitical uncertainties including the French elections.
Besides that, commodity prices are forecast to ease over 2017 and the biggest question locally is how and when will the east coast building boom end?