Growth goes AWOL at Australia’s largest listed firms

Investors are waking up to the fact that there’s never been such a conspicuous lack of growth among our top 20 firms.

A customer uses the self-serve checkout at Coles (Picture/Mark Scott)

Australian investors received a rude awakening this week. Most Australians concentrate their sharemarket investments in the top stocks but among our top 10 companies there is now only one conventional growth stock.

And among the next 10 there is also only one growth company, although there are two infrastructure groups (Westfield and Transurban) that have growth agendas, but that’s not the same as a conventional growth business.

This realisation came home to me when Wesfarmers shares dropped sharply after its disappointing results took it out of the growth classification.

The Wesfarmers saga reveals just how many analysts don’t understand what is happening to our stocks.

The Coles result was no surprise — it was exactly as I, with the help of Charlie Nelson at Foreseechange, had predicted — the volume growth in supermarket sales has fallen back and we are looking at close to a stagnant market (Lean times ahead as part time work trend leads to vicious circle, October 21 and Supermarkets fighting for share in stagnant market, Oct 10).

Woolworths, Coles Aldi and others are investing billions to lift their share of a retail market that is stagnant because Australian consumer incomes are not rising. There is a fight for the discretionary dollar where restaurants and cafes are disrupting conventional retailers.

There will be quarterly variations but no long-term growth until the industry fundamentals change. Of course, I expect Woolworths to bounce back a little because their past management has been so poor but it’s no easy task to gain major ground in a stagnant market. Woolworths has to hope that Coles becomes arrogant or that the supermarket game changes. While supermarkets are stagnant, Wesfarmers will be boosted by Bunnings’ growth.

In looking for growth in the top 20-market capitalisation list, I have eliminated the four miners — BHP, Rio Tinto, Newcrest and Fortescue. They are currently doing well because they are being driven by commodity prices and lower costs. I will return to the cost issue later.

There are six banks on the list — the Big Four plus Macquarie and Suncorp. The banking business is no longer a growth area unless one of the banks finds a CEO who can mobilise a bank customer base much more effectively.

I have not classed Brambles as a growth stock although some might argue with that and, for the moment, Telstra is an income play.

That leaves us with only two stocks that look like they can generate real growth in their business — Amcor and CSL.

Both generate most of their earnings overseas. That means that there are no Australian domestically oriented, conventional, non-mining growth businesses in our top 20 stocks. I think that this is a first for our nation and an indictment of the way our top firms are being managed.

Australia’s large enterprises, including government enterprises, have occupied a bigger and bigger share of the economic pie over the last couple if decades but all too often their decision-making processes are too slow and cumbersome for the modern business environment.

As a result disrupters are taking market share while governments under pressure from electorates like to lift regulation, which stunts growth. That especially applies to banks that occupy six of the top 20 slots.

To make matters worse, the large institutions and their analysts discourage large corporates to take risks. All too many analysts think about is their profit forecasts and they don’t want anything to interfere with them. That’s one reason why the market missed the fundamental change in supermarket retailing.

One day we will discover a large corporate CEO who reckons he or she can grow the business and, with board backing, ignores the institutions and goes direct to retail shareholders.

Meanwhile in areas like retail, banking and many others, disrupters will take the growth.

The most common corporate strategy to cope with a lack of growth is to look for a merger but given the big stakes large companies have in the economy, mergers will be tough. The Tabcorp-Tattersall’s merger proposal is a typical response to the activities of disrupters in an industry, in this case gambling.

And in big mergers often the “winner” looks to subsume the target and the business spends so much time on the merger that they forget what’s happening around them. The biggest beneficiary of the Optus-Hutchinson merger was Telstra.

The second approach to overcome poor fundamental growth is to slash costs. The miners led by BHP and Rio Tinto have shown just what Australian chief executives can do if they put their mind to it.

All the big banks have large cost reduction ideas but, in my view, they are paying out too much of their profits in dividends given the quick developments taking place in the industry. Cost reduction in banking requires extensive investment. Many disagree with my view on dividends and I recognise their point of view.

Meanwhile the smarter analysts have already woken up and middle-ranking shares have outperformed the leaders in the current year. And unless there is the proverbial bomb put under our top corporate boards that is where the action will stay.