Profits at UK’s biggest firms at lowest level since crash says the Share Centre

3rd June 2013

Sales from Britain’s top firms rose at their slowest pace in five years in 2012 while post-tax profits plunged 29.7% to £114.5bn, the lowest since the recession says new research writes Philip Scott.

Profit Watch UK, a quarterly report analysing 350 leading companies, from stockbroker The Share Centre, found UK sales made £2.07 trillion in 2012, representing a rise of only 2.1%, or £42.6bn, more than in 2011. The net margin, or profits as a percentage of sales, fell from 8% to 5.5%. In addition trade failed to keep-up with the pace of inflation at 2.8%, marking a real-term fall in trade.

The study revealed how hugely dependent investors in UK stocks are on a few big companies.  The top 10 firms by sales accounted for an astonishing 50% of all revenues in 2012, at some £1.04trillion, while the top 10 by profit make up a staggering 57% of all after tax profits.

What is more, there is a very strong concentration by industry as mining, oil & gas and financials collectively made up 86% of all UK plc revenues in 2012, up from 59% in 2007.

Their share of profits was 37% in 2012, down from 69% in 2007 and 72% in 2011.  The Share Centre estimates that stocks outside the UK 350 would add less 2% to the revenue total and a smaller amount to the profit total.

The profitability squeeze was broadly spread. Some 23 sectors increased their revenues in 2012 while 14 saw them fall, worse even than during the recession in 2009. Only half saw their profits rise with cyclical sectors falling furthest.  The previous low point was 2008 when only three sectors grew their profits.

Helal Miah, investment research analyst at The Share Centre, says: “The weakness in 2012 reflects a perfect storm for UK listed firms as the three largest profit producing industries all suffered at the same time, a rather unusual coincidence of events.

“Firms selling commodities on world markets produced greater volumes, but had to accept lower prices for these raw materials, while a flat lining UK economy and the prolonged European recession made it very difficult for a whole range of companies to make any headway.

“The UK market is heavily skewed to a small number of big companies and big sectors.  Investors need to be careful when building their portfolio that they take account of this concentration as they select stocks.  Copying the UK index may not be the best way to diversify your risk.”

Justin Cooper, chief executive of Capita Registrars, commenting on The Share Centre’s study says: “Investors are clamouring at the gates for more income from their equity investments.  But the lacklustre performance from UK Plc and the continuing challenges companies face in slack economic conditions here and abroad underpin our conviction that they are not in a position to sustain the rapid growth in the dividends they have been paying out lately. Dividends cannot outstrip profits indefinitely.  We reiterate our expectation that headline UK payouts will be flat at £80.5bn this year.”

Given the headwinds in the largest industries, revenues are likely to remain under pressure, but profitability should improve says Miah. “At its current level, and based on typical valuations for the last four years, the market is implying profits will bounce back to £160bn this year. That will be hard to achieve and suggests investors are prepared to pay a higher price for profit, particularly as equities are the best place to find income at present. This is underpinned by the strength of defensive sectors compared to cyclicals.”

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