Dividend growth remains the key theme of profit season

At Ausbil, we're positive on the medium term outlook, but perhaps a little cautious in the short term given the mixed results recorded during the recent profit reporting season. Roughly half of the companies reporting beat expectations, yet the share market has roared ahead this year and is on a PE of more than 16X. Volatility is also up. For the balance of the calendar year, broader macroeconomic factors, such as the weak Australian dollar and low oil prices will be key drivers and should generally be positive. But let's not forget that the Reserve Bank of Australia lowered the cash rate last month because of worries about growth and employment. Further cuts seem likely and are a sign of cautious times.

In summary, it was a good reporting season for the mining and gaming sectors on a relative basis, but tough for the food and beverage sector and for contractors. Overall earnings growth was less than two percent and was outpaced by dividend growth, which was about 5%. Payout ratios also edged higher.

At Ausbil, we are also concerned about rising costs among the industrial companies. Many industrial companies have been very successful in making efficiency gains, but how much is left? We also wonder how much longer maintenance costs can be delayed before that comes back to bite the industrials. Among the leading resource stocks, the cost-out programs of BHP Billiton and Rio Tinto were more successful than expected, which has led to EBIT margin upgrades. Earnings will still fall, but by less than previously expected for the big miners. The flipside of the cost focus by the big miners is that they are lowering the cost curve for the major commodities, which ultimately places further downward pressure on prices. 

Overall market earnings growth is likely to be negligible this financial year, but if we strip out the resource laggards, EPS growth could be as high as 8% to 9% because of the weaker Australian currency and greater vigilance on costs.

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