THE BIG PICTURE: The good news from profit reporting season

The earnings or profit-reporting season is coming to a close. And generally most observers are concluding that it wasn’t as bad as feared. Clearly investors were conditioned for weaker profits and, indeed, this occurred.

CommSec have assessed the results of 114 of the ASX 200 companies that reported profits for the year to June.

In aggregate, profits totalled $42.2 billion, down 22.9% over the year. So companies are making money, just not as much money as they made a year ago. In fact, 86% of our sample of 114 major companies made money over the past year.

Certainly it is no surprise that profits fell over the year when you consider the raft of challenges facing corporate Australia: conservative consumers; falling home prices; weak non-engineering construction; uncertainty about new taxes; a strong Aussie dollar; a new European debt crisis; a slowdown of the Chinese economy; and the slow progress of the US economy.

Add in that many companies – especially in the mining sector and engineering construction – experienced higher costs over the past year. So while aggregate sales rose by 2.3% over the past year, cost of sales or expenses rose by 7.3%. In essence, companies have faced something of a profits squeeze.

But investors can gain a lot of heart from the fact that balance sheets are in good shape. Aggregate cash holdings of the 114 companies stood at $51.3 billion at the end of June, more than covering the profits recorded by the companies for the past year.

And importantly, despite the apparent “challenging” or tough times, companies have been increasing or maintaining dividends. In our sample of firms, 59 companies increased dividends and 16 maintained dividends while only 21 companies cut payments to shareholders.

The fact that dividend payments are being maintained or increased confirms the solid position of balance sheets. The interesting question being – especially if global conditions stabilise – how many companies will be content to lift dividends in the year ahead or instead choose merger and takeover opportunities.

The week ahead

In Australia the change of season is ushered in with a barrage of economic data. So investors need to brace for the spring data tsunami with more than a dozen key indicators to be released over the coming week.

In the US, it’s a far tamer week with a holiday kicking off proceedings on Monday.

So where do we start? We could almost label today ‘manic Monday’ as a barrage of statistics are issued.

Amongst the indicators released will be the monthly inflation gauge; RP Data-Rismark home prices; job advertisements; retail trade; the Australian Bureau of Statistics’ Business Indicators publication; and the Performance of Manufacturing index.

In addition, the ABS expands its census offerings.

It’s difficult to come up with a standout from Monday’s economic data, but most will be focusing on home prices and retail trade. While we tip a 0.6% lift in spending during July, risks are to the downside given the drying up of stimulus in the month.