COMSEC’s Craig James released a note this morning that I was going to ignore. But it’s been picked up in the gormless MSM so I’m going to have to address it. Here it is at the AFR:
Australia’s biggest companies need to start spending their $71.1 billion cash pile on mergers and acquisitions this year or face the wrath of shareholders, a leading economist says.
The cash pile of almost half of ASX 200 companies grew by 44.8 per cent in 2013, as corporations tightened their belts during an election year, according to data compiled by CommSec.
Despite economic conditions still being soft, with unemployment at its highest in a decade, CommSec chief economist Craig James said now was the time for companies to loosen their purse strings.
Mr James said companies had no reason to hold on to their cash, with business confidence and conditions improving since the federal poll last September as well as consumer confidence ‘‘picking up’’.
Here is the original note:
- The improvement in economic conditions over the past six months is clearly evident in the interim profit results of 98 of Australia’s largest listed companies.
- Aggregate profits for the six months to December are up 18.4 per cent on a year ago. Excluding heavyweight companies (BHP, CBA, TLS, WES, FOX and NWS) profits are up 35.2 per cent.
- So far just over 60 per cent of companies have lifted dividends while just over 25 per cent have left dividends unchanged. But in aggregate, dividends have only lifted 3.9 per cent on a year ago.
- Total cash of the 98 companies stood at $71.1 billion at the end of December, up 44.8 per cent on a year ago.
- Overall, companies are well placed to invest, employ or launch merger/acquisition actions.
Can I ask, what is the ASX 98? Aggregate profits for the ASX200 are projected to be up 14% by most analysts with a few now feeling more aggressive. Mr James’s favourite metric, the ASX98, may be a useful media exercise but it’s misleading as well.
That does not mean that Mr James is wrong that more profitable firms aren’t well placed to grow. On internal businesses metrics they are.
But that is not the problem. What is holding back these firms is a lack of demand. Again, from the NAB Business Survey, when firms are asked what is constraining their output two thirds say weak demand:
Like every other economy on earth, Australian business is wrestling with overcapacity in the new normal of higher savings. Investing more in that environment has no logic to it, though M&A plus cost-out deflation sure does. Lousy top-line growth and improving margins will define the era.
