The UK's biggest companies may continue to struggle to increase their sales this year, although profits should improve following a disastrous 2012, a new report highlights.
Last year sales from companies in the FTSE 350 rose at their slowest pace in five years, according to The Share Centre Profit Watch UK report. Sales were just 2.1% higher than in 2011.
Despite sales inching slightly ahead, profits after tax plunged 29.7% to £114.5 billion, a decline of £48.4 billion compared to 2011, the lowest profit from UK firms since 2009.
The report shows that the UK stockmarket's three biggest industries – financials, oil and gas, and basic materials (mostly miners) – were worst affected by the squeeze on revenue and profits. Falling commodity and energy prices made revenue growth hard to achieve for the oil and gas sector, while the banking industry saw weak lending affect its top line. Meanwhile costs rose sharply and there were large asset writedowns by miners and banks.
A perfect storm
Helal Miah, investment research analyst at The Share Centre, calls the weakness in 2012 "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".
Looking at this year, he says investors will be hoping to see some reversal. "Given the headwinds in the largest industries, revenues are likely to remain under pressure, but profitability should improve," he predicts. "At its current level, and based on typical valuations for the last four years, the market is implying profits will bounce back to £160 billion 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."
Responding to the report, Justin Cooper, chief executive of Capita Registrars, says the lacklustre performance from UK plc "underpins our conviction that [companies] 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 £80.5 billion this year."
The report also reveals how dependent investors in UK shares are on a few big companies. The top 10 firms by sales accounted for 50% of all FTSE 350 revenues in 2012, while the top 10 by profit made up a staggering 57% of all net profits.
Miah notes: "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."
This article was written for our sister website Money Observer