The June half earnings reporting season in Australia is now done. The good news is that profits and dividends are up with 67% of companies reporting higher profits than a year ago (see the first chart below) and 64% increasing dividends from a year ago which is a good sign regarding the quality of earnings.
Overall earnings per share growth for 2016-17 looks to have come in around 17.7% which is a huge improvement after two years of declines. However, looking beneath the surface it’s not quite so good.
First, the huge upswing in earnings owes to a 124% rise in resource sector profits and there is no doubt that the turnaround here is impressive and reflecting this they have increased their dividends substantially. However, profit growth in the rest of the market is more modest at around 6%.
What’s more, only 39% of companies have surprised on the upside (which is less than normal and the weakest since 2013) and 31% have surprised on the downside.
Outlook guidance has also been a bit soft. All of which partly explains why the share market fell fractionally in August. 55% of companies saw their share price outperform the market the day they reported but beneath the surface there has been intense volatility with some very sharp declines in share prices for companies who disappointed (eg Dominos, Telstra, Suncorp, QBE, Bluescope, Healthscope, Harvey Norman) either in terms of the result, outlook comments or dividends.
The problem of course is that PEs are relatively high and so much had already been factored in. As a result, expectations for earnings growth for the current financial year have been revised down a bit to 2.3%, although again it’s worth noting that profit growth for the market excluding resources is expected to remain relatively stable at around 4.3%.
Key themes have been: large caps doing better than small caps; resources stocks back to strength; constrained revenue growth with the domestic economy just okay with housing still strong but retailing mixed; some disappointment from foreign earners; dividends (ex Telstra) continuing to roar ahead; and indications of stronger business investment.
While underlying profit growth for Australian listed companies (ie, excluding the volatility in resources earnings) at around 6% is all right – it’s well below that in the US (at around 11%) and Europe and Japan (at around 30% lately) so it’s another reason to maintain a bias towards global shares over Australian shares.