Corporate Results Are Up - So Why Won't The Market Budge? / The Investor Deluge

The Sunday Age

Sunday February 20, 2005

RICHARD WEBB

SHARE investment can be a fickle business. Over the past couple of weeks we have been bombarded with more than 100 booming company results, not least the spectacular $3.5 billion half-year net profit from mining giant BHP Billiton on Wednesday, the largest ever made by an Australian company over a sixmonth period.

Overall, profits have been better than market expectations - by about 1.5 to 3 per cent, depending on which stockbroker you ask - and are expected to remain so in what will be the biggest reporting week this week.

CommSec chief equities economist Craig James has calculated that the Australian listed companies to have reported so far have achieved a combined 35 per cent lift in profit to $13.3 billion for the second half of 2004. That's going some.

AMP Capital Investors head of investment strategy Shane Oliver said 65 per cent of them had exceeded market expectations, 13 per cent had been in line and 22 per cent had been worse than expected."

That means 78 per cent have either been better or matched expectations while some of the profits have shown very strong growth and we've seen some decent dividend payouts," he said. "But the sharemarket reaction has been subdued."

A fortnight ago the sharemarket appeared to be on a roll and powering higher, yet, despite the profit fireworks, the All Ords has slipped a few points and investors appear more cautious.

Has something gone wrong?

Not really. In the main, the second half of last year was a sweet period and shareholders have reaped the rewards through bumper dividend distributions.

BHP declared a 69 per cent lift in its half-year dividend and said this would be the benchmark from which future dividends would be declared.

But here lies one of the problems, according to FW Holst senior investment adviser Michael Heffernan. Sharemarket indices do not account for dividends paid and share prices should fall to reflect the dividend distributed. For example, if a 10 cent dividend is declared, a stock price should fall by 10 cents on the day the stock goes ex dividend, which is seven days after the dividend is declared - that's the date from which, should you buy the share, you would not be entitled to receive the dividend distribution whereas had you bought the share the day before, you would have been entitled to it.

Mr Heffernan said the sharemarket may be where it was a fortnight ago but by all accounts it should be lower. "You are going to see an overall decline in share prices because companies go ex-dividend," he said. "But look at Commonwealth Bank - it delivered an absolutely fantastic result and has gone ex an 85 cent dividend, yet its share price was around $32 a couple of weeks ago and it's now over $35.

That's a great sign for the banking sector."

The CommBank interim dividend alone effectively took $1.1 billion out of the company.

Mr Heffernan believed the results augured well for the rest of the year."

Just because the sharemarket hasn't run through the last couple of weeks doesn't mean that that the profit reporting season has been disappointing- it hasn't," he said. "I think by and large, for the bigger stocks and the situations stocks in the mid-cap areas, the results have been excellent."

But while dividends are a factor, we have also seen some trends emerge that have left investors cautious.

ABN AMRO Morgans' Simon Bond said there had been evidence of a structural shift, where commodity producers such as BHP and Rio have done exceptionally well, but some of the consumer companies have struggled to push through price increases, even though their raw material costs have jumped."

Some of these consumer companies have turned in fabulous results but investors are asking, if they can't get price rises through, where do they go from here."

Also, whilemany of themajor companies have produced exceptional profits, among the medium-sized companies, performance has been more mixed, and these smaller companies are perceived as indicators of where the economy and corporate profits are going.

Stockbroker Goldman Sachs JBWere has found that the results from the resources sector have been 1 per cent higher than its expectations overall, but if you strip out BHP and Rio, profits are 3.7 per cent below what had been expected.

Macquarie Equities senior financial advisor Martin Roche said this mixed performance was preventing the sharemarket moving higher."

Results for ASX100 companies are so far slightly ahead of forecasts but outside the ASX100, profits have been weaker," he said. "The reason for this, we believe, are that the small caps are leading indicators of emerging trends in the economy and are generally the first to feel the impact of tougher trading conditions.

AMP's Mr Oliver said concern over interest rates and profits going forward had kept investors sidelined."

I think the market is looking for how earnings growth will unfold from here," he said. "The market reaction has been subdued but that's partly because investors had been anticipating strong profits while other negatives have emerged, such as the prospect of higher interest rates."

The investor deluge

THE Australian Stock Exchange reduced the window in which companies must report their results with its Enhanced Disclosure Reforms of 2002. Companies used to have a 75-day window to report but this period has been reduced to two months. Is too much information being dumped on investors in too short a time for them to digest it?

CommSec chief equities strategist Craig James believes there is an element of this and he thinks this is partly why the sharemarket hasn't surged higher on what, on the face of it, appears to be a fantastic profit reporting season."

The compressed reporting period does seem to be a bit of a disservice to smaller investors particularly," he said. "The individual investor gets everything dumped on their desk in a few weeks and has little time to work through the numbers."

Even for the major stockbroker research teams, it appears close to information overload. Some of the daily investor reports last week were the size of a short novel, running at more than 100 pages.

This week is the last full week in which profits must be declared and it is set to be the biggest of the profit reporting season, with over 50 major companies dumping their earnings. Is this any different to how it used to be?

"No", according to a spokesman for the Australian Stock Exchange."

The fact is 1300 of the 1600 companies listed on the stockmarket have a July 30 balance date, and all we have done is shorten the period of risk where stocks could be trading on information that had not been declared to the rest of the market."

So it's the companies themselves that decide they are going to report their profit in the same week, a few days before the profit reporting period expires.

© 2005 The Sunday Age

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