LET THEM EAT DIVIDENDS

BHP Billiton might not be digging the world's biggest and most expensive hole at Olympic Dam any more, but shareholders hit pay dirt in the reporting season.

Dividends are mostly higher, despite generally indifferent results.

In all, some 69 per cent of companies have reported a higher profit, if only just, for the year, says the head of investments strategy at AMP Capital Investors, Shane Oliver. But they're cashed up and trimmed down rather than riding a surge in sales.

A slew of companies had already downgraded profit hopes, doubtless aware that a disappointing result would rebound on the share price and, worse, the executive remuneration package.

But analysts are doing the opposite. The reporting season has prompted Lincoln Indicators to lift next year's profit forecasts for 57 per cent of stocks. Still, that comes with a backhanded compliment. "It's not that results were outstanding as such, but that everyone thought they'd be bad and deep down feared would be worse," the chief executive of research house Lincoln, Elio D'Amato, says. He tips the market will rise about 400 points to 4700 by the end of the year.

Less optimistic is CommSec's chief economist Craig James, who adds another six months. "The market will zig-zag two steps forward and one step back," he says.

Broking analysts tend to be caught out by economic turning points, an occupational hazard since they're looking at specific stocks or industries rather than the big picture.

"Analysts were over-optimistic for three years in a row, especially with industrials and double-digit growth," Deutsche Bank equities strategist Tim Baker says. "Each time it comes out close to zero."

For this financial year, only a few months ago they had been expecting 14 per cent profit growth on average - since trimmed to 11 per cent, which "will come back further but won't go to zero," Baker says.

Oliver expects non-mining profits to rise by an average of 7 per cent in the next year, much lower than was expected this time last year, but higher than this year. Better still, dividends have either held fast or increased.

SHAREHOLDER FEAST

In fact, 62 per cent of companies have raised their dividends and only 18 per cent cut them - the more spectacular flops being Billabong, Seven West Media, Perpetual, Sims Metal Management and Tabcorp (the top-yielding stock because its price dropped even more than the 8 cent dividend cut).

Stunners were carsales.com (from 10.5 cents to 19.2 cents), CBA ($1.87 to $1.97), Reject Shop (up from 8 cents to 18 cents), and Wesfarmers (up 10 cents to 95 cents).

"Just over 80 per cent have either raised or maintained their dividend," Oliver says. "It highlights how companies are determined to signal stability on the dividend front."

They're taking a bigger punt than they're likely to admit. Earnings aren't up because of a revenue surge but cost cutting and cheaper rates on lower debt.

Mostly, the higher dividends are the result of boards paying out, not earning, more.

They're gambling that the recession in Europe is short-lived, yet, on the evidence so far, it's getting worse.

They're also assuming that China overcomes its economic slowdown, which will depend on what happens in Europe, its biggest customer. Then there's the sickly economic recovery in the US, which could go either way next year.

No wonder management forecasts for the next year weren't exactly effusive.

"There was a slight positive balance," Oliver says. "They either affirmed the existing outlook or were a bit more positive."

DWINDLING RESOURCES

The problem is the reporting season was a shocker for the miners, which will be a dampener for economic growth and so sap confidence.

"The mining sector will be a drag on sentiment for a quite a while," D'Amato says. "There's also the potential impact of a prolonged strong dollar."

Who would have thought that a year ago?

The two-speed economy has changed gears. It's the miners going into reverse while battered industrials are picking up pace.

"The banks will be up 1 per cent and non-bank industrials 3 to 4 per cent," Oliver says. "It looks as if non-bank, non-resource earnings were at their worst a year or so ago."

Retailing is generally weak and the retailers didn't do quite as badly as expected - Wesfarmers did a lot better - so their share prices are generally on the way up again.

Stocks said to be defensive, because you hold them when you're scared of everything else, such as health care, did well but their share prices have already had a run.

"The question is whether health care can hold up seeing as the valuations are hot. There's a valid reason for the market premium but they're not going to increase 10 per cent next year," D'Amato warns.

Mining services stocks that supply accommodation, machinery or labour to the big mining companies shot the lights out, but the worry is it can't get any better for them - more likely worse in a few years as the mining boom fades.

The cash machines

WHEN reporting last year's mega profit, questions from several senior reporters to outgoing Commonwealth Bank chief executive Ralph Norris were prefaced with fulsome praise for lifting the dividend.

I've never seen that happen before. Neither had he, judging by his bemused look.

If that's what a 9? increase can do, successor Ian Narev can expect bear hugs having added another 10?.

But that's nothing on what might be down the track.

The bank is generating so much capital that even under the tougher Basel 3 rules it could eventually return some to shareholders.

The CBA reports out of sync with the other banks, which have different financial years, but a quarterly update by ANZ about the same time for the first nine months suggests the same story.

So expect the other banks to also lift their dividends.

A Commonwealth Bank share returns almost 9 per cent on the dividend alone if bought for about $54, after taking the 30 per cent franking credit into account.

Even if it did not lift its dividend, the NAB's yield would be in double digits.

These yields are twice what the banks pay savers.

But that's nothing. A popular ploy is buying a bank stock just before the dividend is declared and holding it for 13 months. This enables the investor to collect three dividend payments for an annualised return in the high double digits.

While analysts expect the banks to continue paying high dividends, don't expect any great shakes from their share prices.

Credit growth is slow and the likely rise in unemployment could lead to bad debt write-offs.

So to keep shareholders happy, the banks are sacking staff and freezing pay.