Economists and analysts can wax lyrical about the economy but it’s the ‘bottom line’ we’re after – specifically the bottom line of Australia’s biggest companies. That’s where you find the truth about Australia’s economic health.
So how did we go this time around?
There are a few key themes emerging from the 2015 reporting season.
The most obvious is that many firms are still relying on cost cutting to boost earnings, rather than raising revenue.
Directors are also keen to keep distributing handsome dividend payments, sometimes at the expense of capital expenditure… and ultimately long term earnings growth.
Most disturbingly perhaps is what’s happening to some of the ASX200’s heavyweight companies: the big banks and miners.
The banks are raising capital at a phenomenal rate in order to create a capital buffer (as a hedge against a possible downturn in the housing market), and the miners are still suffering from the 40 per cent drop in the price of iron ore.
I’ve taken some obvious companies out of the list to try to tell the whole story.
Miners: Rio Tinto
Rio Tinto released its first-half results, showing earnings had tumbled to $US806 million.
The fall was largely due to the plunging iron ore price, as a result of a glut in the market and slowing demand from China.
Fund manager Roger Montgomery is forecasting the price of iron ore to fall to between $10 and $20 US a tonne.
That may sound crazy but he says it’s not unusual from an historical standpoint.
He says China’s economy is slowing and countries like Singapore are already feeling the effects.
He recently spoke to investors at a conference in Singapore and advised them to diversify away from domestic companies because of the slowing economy.
He argues Australia is still yet to feel the full force of China’s economic slowdown.
The price of iron ore has dropped 40 per cent from its recent highs. It’s likely going to drop further still in coming months.
While Australia’s top miners are obviously still considered “blue chip” stocks, the growth investors have come to appreciate from them over the past decade simply isn’t there anymore.
Banks: Commonwealth Bank
The Commonwealth Bank revealed a $9.06 billion full-year net profit.
That profit figure was up five per cent on the previous financial year's result, as was the bank's preferred measure of cash profit at $9.14 billion.
This result didn’t shoot the lights out but it is reasonable, and it’s bang on in line with expectations – perhaps more towards the upper range of forecasts.
The bank also announced a $5 billion capital raising. This is where it gets interesting.
The CBA's move to tap shareholders follows an even bigger $5.5 billion capital raising by the NAB in May, and a $3 billion raising by the ANZ two weeks ago.
The Australian Prudential Regulation Authority has asked the banks to lift their game – quite literally.
They’ve been told to increase their reserves to provide a financial buffer.
In a statement APRA said, “The Australian Prudential Regulation Authority (APRA) has today announced an increase in the amount of capital required for Australian residential mortgage exposures by authorised deposit-taking institutions (ADIs) accredited to use the internal ratings-based (IRB) approach to credit risk.”
There’s a whole bunch of reasons behind this but the most obvious is for insurance against a bursting of the housing bubble.
More generally though it’s a prudent thing for the banks to do in a climate of increased financial risk – especially with historically low interest rates.
It comes on top of other measures too like APRA capping investor housing credit growth at 10 per cent.
Again, the banks still look good, but that strong growth we have come to expect from the banks over the past decade seems to be fading.
Retail: JB Hi Fi
JB Hi-Fi announced a net profit of nearly $137 million for the 12 months to the end of June, up more than 6.3 per cent on a year ago.
Sales also grew by 4.8 per cent to $3.65 billion, with both figures exceeding analyst expectations.
I’m told companies leveraged to the household sector will perform well this year.
We’re in a bit of a sweet spot with record low interest rates, relative low unemployment and rising house prices.
The 2015 Federal Budget was also well received.
Interestingly though, consumer confidence is still kind of low. The Westpac-Melbourne Institute Sentiment Index for August produced a reading of 99.5.
That’s below the 100-point level, indicating pessimists still outnumber optimists. That’s been the case for 16 of the past 18 months.
I’m really sure to make of this sector if I’m honest. I think its growth trajectory could go either way. It’s a mixed bag.
Ah Telstra – the dividend producing juggernaut that it is.
Telstra's full-year net profit actually fell one per cent to $4.23 billion. True to form though, the nation's biggest telecommunications company increased its dividend again to 15.5 cents per share.
The company's decline in profit was mainly due to the ‘come down’ from last year's sale of its Hong Kong-based CSL mobile phone network.
Telstra remains as ‘defensive’ as ever though – from an investment stand-point, in my view.
The vaccine and blood products maker, CSL, reported a record full year profit of $US1,379 million ($1,884).
The profit was six per cent higher than last year's result and in line with consensus forecasts.
Total sales increased two per cent to $US5,459 million.
Various reasons have been given for the rise of the healthcare sector including the fact that many have offshore earnings streams from places like the United States and Europe (which have also benefited from the falling Australian dollar).
The Motley Fool’s Andrew Page likes CSL, Cochlear and Ramsay Healthcare.
It’s tough going for Australian corporates at the moment.
You would not expect otherwise I suppose with interest rates being as low as they are – they are low for a reason.
Analysts, however, point out that investors are being rewarded with increased dividend payouts – and given the relative attractiveness of the equity market, compared to debt, property and cash, shares do look attractive, and their valuations can be better justified.
You can’t escape the fact though that the growth rates for some of the heavyweights of the ASX 200 have been hurt in recent years and nothing obvious is on the horizon to alleviate that.
The Healthcare sector though remains a standout.