If the first half of earnings season is any guide Australian companies are concentrating on dividend payments and short-term profits rather than expansion plans as the outlook for growth becomes more clouded.
The sharpened focus on delivering returns could be a result of investors showing a strong dislike for marginal projects during volatile economic times, according to Michael Bush, National Australia Bank's head of credit research.
Mr Bush, who analyses the top 50 companies on the ASX200, said the message from investors is clear: 'Don't talk to us about long-term growth: we want some short-term returns'.
Australian companies face a more uncertain outlook for earnings growth than in recent years, as the retail, housing construction and lending sectors continue to struggle. The dollar remains well-supported by the mining boom, but it has heaped pressure on other parts of the local economy, namely the manufacturers.
In this environment, Mr Bush said companies were managing their finances conservatively - as they have since the onset of the GFC - and were responding to the market demand for short-term profits. He said the focus on dividends and short-term earnings was evident in reports from companies like BHP Billiton, Rio Tinto and Wesfarmers.
Data from Merrill Lynch, for example, showed that 33 per cent of companies which have reported since the start of February have beaten dividend expectations, but the same percentage as fell short. However, on profits, a net 15 per cent of all companies which have reported so far have missed expectations.
"Sales have also tended to disappoint though not as badly, highlighting the margin pressure being faced by companies,” said Merrill Lynch strategist Tim Rocks.
City Index chief market analyst Peter Esho said that overall corporate health was solid so far but there had been more of a focus on capital management and dividends rather than ambitious merger and acquisition activity.
“The market is not incentivising any large risk-taking by the companies,” he said. “The market just wants the money.”
The major banks' profits and update statements are good examples of companies heading along this path, as well as Newcrest, BHP Billiton, Rio Tinto, and Telstra.
Mr Esho said a company which operated cautiously could become more attractive for takeover or acquisition bids in the months ahead, with spin-offs of commercial property portfolios and smaller gold producers potential sectors for activity.
Merrill Lynch said the biggest profit misses last week were Primary Healthcare Limited, Brambles, energy producer Santos and Wesfarmers, said Merrill Lynch.
czappone@fairfax.com.au
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