In a note to investors, Montgomery Investment Management’s chief investment officer, Roger Montgomery, said the bulk of the largest Australian companies are simply not growing the wealth of their shareholders.
In the 10 years to 8 June 2016, the S&P/ASX 100 returned just 1.1 per cent per annum, Mr Montgomery said – and as at February 2016 the top 100 companies had produced no return at all since 8 June 2006.
“Most of the large-cap companies in Australia are mature businesses with little ability to retain any sizeable proportion of their annual profits to reinvest at an attractive rate of return,” Mr Montgomery said.
Blue-chip stocks are under pressure to increase dividends at a time when revenue growth is flat and aggregate net profits are falling, he said.
Unless investors manage to speculate successfully on the expansion of price/earnings ratios, the dividend yield is the best outcome they can expect from Australian large cap companies, Mr Montgomery said.
“At Montgomery we consider ourselves investors rather than speculators, so we would not buy shares presuming a market ‘rerating’ of the desirability of a company and its shares,” he said.
The gap between equity growth and earnings growth is particularly evident within the four big banks, Mr Montgomery said – starting with the Commonwealth Bank.
“Despite being the best-performing bank in Australia and this country’s largest listed company, one might be surprised that the economics of CBA are attractive but not earth-shattering,” he said.
“Since 2006, shareholders’ equity invested in the company has tripled from $19 billion to $60 billion. Despite this growth, earnings have not tripled; earnings have little more than doubled.
“In other words, as the company grows, it appears to be finding it tougher to maintain the very high levels of profitability it once enjoyed,” Mr Montgomery added.
The story is much the same at Westpac, where shareholders have invested more than four times the $14 billion in equity held in 2006 – yet profits have grown just over 2.5 times, he said.
At ANZ, equity has more than tripled over the past decade but profits have only doubled, Mr Montgomery said.
As for NAB, it is “arguably the worst performing bank in this group”, he added.
“This is reflected ultimately in the fact that, despite its blue-chip status, its share price is lower today than it was in 1999.
“The poor performance is due to a litany of large losses made on the overseas reinvestment of profits and capital generated domestically,” Mr Montgomery said.
“NAB is the only bank showing worsening arrears and impairments at the moment, and although it is due to specific issues, it demonstrates that there are particular pockets of concern in the Australasian market (ie, mining, oil and NZ dairy) resulting from the fall in commodity prices.”
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