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Confession Season

The calendar year is just getting underway, but the business year for most companies is now half over. Reporting season, which begins next week and runs through most of February, will provide a good update on whether our listed companies are treading water or setting the pace with improved earnings.

Although only Commonwealth Bank will report an actual profit result, the other three big banks will provide trading updates. From this information, we will likely only confirm that the financial sector inAustraliais in rude good health.

CBA’s half-year result (Feb 13) will be scrutinised for changes in net interest margins, problem loans, credit growth, market share of various segments (especially housing loans) and the cost of running the business relative to total revenue.

Of course, the company’s hundreds of thousands of shareholders will be hoping the dividend will be nudged higher signalling the confidence of the Board. The share price rise over the last year has suggested most investors already believe our largest bank is in great condition and can afford to reward its shareholders accordingly.

Chasing high dividend yields has been a successful theme for 2012 and should be a sustainable concept this year. Just don’t expect the same degree of capital growth from so-called ‘yield plays’.

Another stock that easily falls into that category is Telstra (reporting Feb 7) which will pay an already indicated half-year dividend of 14cps. Telstra’s tale is one of transition from fixed line legacy earnings to broadband and mobile earnings. But there is a significant amount of new technology earnings to be gained through cloud computing and sophisticated corporate communications management. As long as Telstra stays off the political agenda, it can reliably generate some very significant cash flows into the foreseeable future that will form the basis of higher dividends.

The resource companies too will report profit results but with decidedly weaker grades. Rio Tinto’s full year result (Feb 14) will not contain much love for shareholders after a year of falling iron ore prices and huge write-offs that led to the departure of the CEO, Tom Albanese.

Not yet ready to vacate his CEO chair is BHP’s embattled boss, Marius Kloppers, but his days are already numbered. BHP’s half-year result (Feb 20) may also contain some write downs but even if they don’t matchRIOfor quantum they will still cloud an otherwise steady year.

Elsewhere, we are expecting the usual pot pourri of profit hits and misses. One theme we are hoping to witness is a revival of positive outlook comments from each company. That may be wishful thinking but it will indicate any shift in mood among the country’s larger employers.

One question worth pondering might be: has the market now priced in the expectation of improving earnings, or has it merely resurrected prices from previously unjustified low levels?

We are about to find out.

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