Markets: Earnest industrials

Deutsche Bank’s Tim Baker says 2014 could be the year industrial earnings burst free of stagnation.

Despair not. Industrial company earnings in 2013 will show earnings per share growth of 4-5 per cent, says Deutsche Bank’s Tim Baker. That’s an improvement of the “zero growth” of the last three years. In 2014 the EPS growth for non-financial industrial stocks will be even better than 2013, approaching 9 per cent, says Baker. 

On the liabilities side of company balance sheets, record low short-term interest rates are helping keep a lid on corporate debt costs after a concerted effort by chief executives and chief financial officers to slash lending.

“Corporate borrowing rates have remained low, and there is a natural lag to companies’ interest costs as debt is refinanced,” says Baker. “Some further positive surprise around lower interest costs seems likely.”

Further supporting the stock prices of non-financial industrials are higher payout ratios. The S&P/ASX200 Index companies have payout ratios of almost 75 per cent, according to Deutsche Bank. Since 1990 the payout ratio has been on average about 65 per cent, says the firm.

“Lowly-geared balance sheets still give companies the means to enhance shareholder returns,” says Baker. “Below average business confidence is likely to restrain appetite for alternate uses of cash, such as investments or acquisitions.”

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