A salute to corporate Australia

The resilience of Australia's corporate sector over the past five years has confounded many global investors. Aggregate profitability has not declined despite the significant macro headwinds that have curtailed top-line growth, notably the terms of trade shock. Corporate Australia has responded admirably by trimming costs aggressively, restructuring, divesting under-performing assets that have been peripheral to their core focus, deferring capital spending where feasible and lifting payout ratios to cater to investors' insatiable appetite for income. The macroeconomic consequences of this belt tightening has led to a shortfall in aggregate demand, but that's been a problem for the RBA to address, not corporate Australia. Although an earnings discount model shows that multiple expansion has driven the market higher in the past five years, a dividend discount model shows that dividend expansion has been the key driver. I also suggest that there might be some good news for value stocks. Following the bounce of Pacific Brands and Kathmandu this week, investors might start to re-assess the risk reward trade-off for other stocks long considered to be value traps, including Myer. (VIEW LINK)