The latest profit reporting period could be described as 'rich man, poor man', as the divergence between earnings growth for resource and industrial companies has widened.
Companies that reported profits in the first two weeks of the profit season in aggregate slightly exceeded market expectation. Of the first 80 companies to report, 35 had positive earnings surprises and 16 had negative earnings surprises, Macquarie Group research found.
Many companies were still to report as Investor Weekly went to press, although early trends can be drawn with nearly two-thirds of the market, by capitalisation, having reported.
Two trends stood out. The first was slippage in earnings forecasts for industrial companies. Macquarie's earnings-per-share growth forecast for industrial companies in the 2011 financial year is now just 5.2 per cent, down 1 per cent in a week, and well down from 16 per cent forecast growth six months ago.
Buoyed by rising commodities prices, resource companies have collectively met or exceeded already high forecast earnings growth.
Bumper profits from BHP Billiton and Rio Tinto featured. More analysts are upgrading earnings forecasts for resource companies.
A widening gap between resource and industrial earnings presents a dilemma for institutional investors looking to rotate out of mining stocks into better-value industrials and financials this year.
The rotation was evident in January, but it could unwind if industrial companies are hurt by the strength of the mining boom, which is forcing up input costs. Companies such as BlueScope Steel have warned the mining boom is troubling manufacturers.
The second key trend this reporting season has been slightly higher dividends. Investors are pressuring boards to lift dividends or return cash via special dividends, after Australia's top 200 companies raised tens of billions of dollars of equity capital during the global financial crisis.
BHP Billiton, for example, lifted its dividend and expanded its share buyback program, but has received some criticism for its continuing low payout ratio and the absence of a special dividend, which retail investors usually prefer over share buybacks.
Lincoln Indicators chief executive Elio D'Amato said the divergence between resource and industry earnings growth surprised the market. "Companies exposed to commodity price have generally done very well, and industrial companies that failed to meet expectations have been sold off heavily," D'Amato said.
"A larger earnings growth gap between resource and industrial sectors was expected, but the profit season has so far shown the divergence is even wider than forecast before the start of the reporting period. It is a very strong dynamic that shows no signs of slowing," he said.
He said he expected more companies to lift dividends in the next 12 months.
"There's a lot of pressure on boards to increase dividends and return more cash to shareholders. Certainly, the companies we rate highest have had solid dividend increases this profit season, which bodes well for overall total shareholder returns this financial year," he said.
