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Majority of Australian companies gain increased profits for the year 1994-95; economy is expected to slow down in 1995-96

ADRIAN THIRSK: Well, BHP might not have the broadest of smiles right now, but it seems plenty of other Australian businesses do. This year's reporting season has delivered better than expected results with a majority of companies posting stronger profits than last year. That is despite a slowdown in annual GDP and three official interest rate rises.

To examine the year's results in more detail and assess the outlook for this financial year, we've spoken with chief economist at the Australian Stock Exchange, Michael Heffernan.

MICHAEL HEFFERNAN: The current profit season has been one where the results that have been achieved have been little short of tremendous. And I say that in view of the fact that I've looked at about 206 company results for the year ending June, and in fact about 70 per cent of those show profit increases for the year, and of those, 50 per cent have shown increases of 20 per cent or more.

ADRIAN THIRSK: What about the change in the company tax rate, that being put back up to 36 per cent? Has that shown up in the results?

MICHAEL HEFFERNAN: Well, I don't think so yet, because that 36 per cent rate hasn't yet cut in to the company profit result. But it certainly will this time next year. But I suppose for every cloud there is a silver lining, and it does mean that as the companies pay a higher level of tax, it means that investors in those companies where the companies pay their full rate of tax are going to get a higher degree of franking. In other words they are going to get a greater tax credit with which to offset income from other sources.

ADRIAN THIRSK: Are there any other particular factors that are likely to be crucial in the year ahead?

MICHAEL HEFFERNAN: Oh, without a doubt I think the two key things are going to be activity generally - and I think it's quite clear that the economy is going to slow down under the weight of the higher interest rates that we had last year, but that's going to be offset to a degree by the impact of the huge increase in employment that we've seen over the last twelve months - 400,000! An absolutely staggering increase in employment over the last twelve months. So that's going to cushion the downswing.

Indeed, with those people who formerly were unemployed now have got a job, they've got about an extra three or four hundred dollars a week in their pockets, so to speak. And that's going to inject, of itself, about $8 billion into the economy. So that's clearly going to benefit listed companies.

But the other cloud, if you like, is what's going to happen to inflation. And if inflation does break above the Reserve Bank's range of 2-3 per cent - that's on an underlying basis, on a nominal basis inflation is higher than that, about 4 per cent. So if inflation does get higher, then we might see the Governor of the Reserve Bank, Bernie Fraser, saying, 'Well, I think we've got to slow the horse down a bit,' and then we might see the possibility of interest rate movements perhaps in an upward direction.

ADRIAN THIRSK: Returning then, finally, to the latest crop of company profit results, would you say that they are now fully priced into those shares trading on the stock exchange?

MICHAEL HEFFERNAN: Well, you'd have to look at the fact .. I mean, goodness me, you had the Commonwealth Bank there with a dividend yield of about 8 per cent! That's fantastic when you look at the fact that that's basically tax free! I'm summarising here. And if you look at some of the other banks, you look at Woolworths with a dividend yield of about 5 per cent, again tax free! You'd have to be getting 9 per cent from an investment somewhere else to be competitive with that.

The dividend returns have been absolutely magnificent. Whether, of course, they can continue increasing at that rate, well it's yet to be seen. But twelve months ago people were saying, how could the great profit results then be repeated - but in fact they were. So you'd have to say, I think, that when you still have dividend yields of about 8 and 9 per cent for major blue chip Australian companies, you'd have to say there is a lot more up side, up swing, left in this market yet.

ADRIAN THIRSK: Michael Heffernan, chief economist with the ASX.