The gulf between the UK’s top 40 companies and the rest of the country’s corporates has widened as profit trajectories for both sides diverged in the first quarter of 2019.
In the latest Profit Watch data from The Share Centre, which analyses results reported in the first quarter of the year, the UK’s 40 biggest firms saw profits rise by 11% overall, helped by a recent spate of strong performances in several blue-chip companies.
For example, Royal Bank of Scotland Group PLC (LON:RBS) swung to its first pre-tax profit in a decade in the fourth quarter of 2018 while Lloyds Banking Group PLC (LON:LLOY) and HSBC Holdings PLC (LON:HSBA) have both reported higher full year earnings.
READ: Lloyds sees 2018 profits miss forecasts after a weak fourth-quarter but still hikes dividend, launches share buyback
The strong performances helped push profits in the banking sector to £27.7bn last year, their highest level since 2007.
Meanwhile, the oil sector, which includes FTSE 100 supermajors Royal Dutch Shell PLC (LON:RDSA) and BP PLC (LON:BP.), has seen pre-tax profits rise by two-thirds, with mining giants Rio Tinto PLC (LON:RIO) and BHP Group PLC (LON:BHP) also helping to push earnings in their industry up by 18% after reporting profit growth in their latest full year and half year results respectively.
By contrast, firms outside the top segment have struggled, with overall profits in the first quarter tumbling nearly 18%.
The data also showed that nearly half of the companies outside the top 40 reported a fall in profit in the period compared to only a quarter of the largest firms.
A strong performance by heavyweights pushed overall pre-tax profits from UK companies to their tenth successive quarter of growth, although it slowed to 4.4% year-on-year from double-digit growth in recent quarters.
The impressive performance from the top 40 also doesn’t seem to have been reflected in the wider economy, with 11 out of the 20 sectors seeing falling profits with asset managers, industrials and retailers among the biggest losers.
The retail sector in particular has seen the last 12 months marred by a series of high profile collapses including House of Fraser and Debenhams as well as some near-misses from Mothercare PLC (LON:MTC) and Carpetright PLC (LON:CPR) as market trends continue to undermine the high street.
And it seems the slowdown is set to continue, with The Share Centre showing that market analysts have lowered their estimates for median earnings growth over 2018/19 to 4% from 6.7% nine months ago, while profits are expected to grow by 8.3% compared to 9.6% previously.
Dividends provide solace in the gloom
While the data may be painting a fairly bleak picture for the UK’s corporates (except the top 40 of course), investors could yet find reasons to be cheerful.
Despite the decline in profits for most companies, around £767bn worth of dividends have been generated since 2009, while yields remain at historic highs.
Richard Stone, chief executive of The Share Centre, said that the fat payouts meant investors were making “good returns on their holdings, even without significant capital growth” and that UK-listed shares appeared to represent “good value both compared to historical levels and to markets elsewhere around the world, implying that bad news and the moderating of expectations is more than priced in”.
In short, it seems that now is the time to be an income investor rather than a day trader.