Low rates boost company profits despite challenging times

So far, the December 2013 half yearly reports of our major companies, with rare exceptions such as Coca-Cola Amatil, have produced surprisingly upside results for investors with increases in both profits and dividends. This unexpected but pleasing development could be the result of caution on the part of both company analysts and investors in over-allowing for the impact of a slowing economy and rising unemployment on company profitability.

It's now evident that both lower interest rates and improving confidence have been amore important influence allowing many of our larger companies to boost their overall profitability. Instead of indicating difficult times ahead for investors, rising unemployment may be revealing the extent of companies' efforts to increase profitability.

With our wage levels and conditions high by international standards, efforts to increase efficiency will inevitably encourage labour saving investments and job shedding. This certainly has been the case with our financial institutions and large mining companies forced to adapt to lower commodity prices. Both these sectors have announced profits well above market expectations. 

There's one week remaining in the reporting season and companies with disappointing news to report often leave it until as late as possible to release their accounts. At this stage, nevertheless, despite several poor results, after-tax earnings for the half year appear to have increased by around 10 per cent.

A useful barometer to trends in the incomes of quality dividend-paying companies is provided by the results of established listed investment companies owning diversified portfolios of Australian shares. Those companies which have already reported have recorded increased dividend income from their portfolios over the past six months, again around 10 per cent in many cases.

Given that many dividends declared in this reporting season have been increased, including the 0.5 cent increase in the widely held Telstra to 14.5c, listed investment company income and dividend payouts in the coming six months will also be higher. 

While share prices have also increased, the prospect is that dividend payouts and yields for 2013-14 will remain attractive and provide underlying support for the market.

With both property and share prices firming up and the prospect of interest rates, although not likely to fall, staying relatively low, the prospect is for better times for investors to continue. This is despite the background of rising unemployment and the outlook for a tough May budget.

The biggest uncertainty is whether the Australian dollar, which recovered to more than US90c recently, will resume its downward movement. A lower dollar would help cushion the impact of any further weakening of the economy and employment and ensure strong investment returns for the third year running.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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