Dividend bonanza: Payouts hit $28.5 billionEconomic and Financial market perspectives
Cash payouts: Since late August, ASX 200 companies have paid out around $6 billion in dividends to shareholders. But dividend payouts really start to ramp up from next week. Overall, around $28.5 billion will be paid to shareholders with another $22.5 billion distributed in coming weeks.
Dividends still very much in vogue: The majority of companies reporting full-year earnings results (90 per cent) chose to pay a dividend and 90 per cent of these companies lifted or maintained dividends.
Injection into the economy: Dividends totalling $21.4 billion will be paid out by listed companies to their shareholders in the next four weeks.
What does it all mean?
Dividends remain in vogue. In fact, in contrast to the last reporting period, more companies have chosen to pay out a dividend. But the proportion of companies seeking to pay out dividends is still down from the highs in the 2015 and 2016 financial years. In other words, companies are seeking to strike a balance between rewarding shareholders and ploughing money back into their operations.
Of the ASX 200 companies reporting for the year to June, around 90 per cent of firms elected to pay a dividend, up from the long-term average of 86 per cent, but down from the record levels of 91-92 per cent recorded in the 2015 and 2016 full-year results.
There is certainly plenty of cash available to firms. Of the 139 companies reporting full-year results, almost 93 per cent reported a profit, just down from the 94.4 per cent recording a profit in the 2017 half-year results. Aggregate cash holdings rose by 6 per cent over the year to $96 billion. Adding in the 31 companies reporting full-year earnings, cash stood at a record $124.7 billion.
Over the period from July to October, around $28.5 billion will be paid to shareholders as dividends. A year ago dividend payouts were around $26 billion, while in the full-year earnings season in August 2017, dividend payouts totalled around $26 billion. So shareholders continue to be well rewarded.
Some shareholders will receive the dividends as cash and others will employ the proceeds through dividend reinvestment schemes. While the majority of the funds will be paid to domestic investors, other funds will go offshore to foreign investors. And while some of the dividends are paid to ordinary investors, other payments are paid to superannuation funds, thus with more limited short-term consequences for the economy.
While dividends flow at this time every year, the dollars potentially could lift spending. Further, September and October tend to be more challenging months for the Australian sharemarket and investors may be more inclined to spend rather than invest.
The Profit Reporting Season
Regular readers would be aware that each six months CommSec undertakes a detailed review of the profit reporting season – the time when companies report half-year or annual results for the period to June or December. (A far smaller proportion of companies have a different reporting period, such as March or September).
To recap, the recent earnings season was impressive. Six months ago, when describing the first-half 2018 reporting season we said results had been ‘solid, not spectacular’. This reporting season – for companies largely reporting full-year results to June 2018 – the macro picture has been almost been a carbon copy.
But then again business surveys have been positive for most of the period – the NAB survey was at record highs in October and has since held near historic highs. Recent softening reflects uncertainty about the impact of tariff wars being played out across the global economy.
Almost 93 per cent of companies reported a profit, just below the 94 per cent record high in the prior season in February. Aggregate statutory earnings have lifted 8.4 per cent on a year ago. The percentage of companies issuing a dividend is near record highs; expenses have matched sales; and cash levels are at record highs and up 8.5 per cent on a year ago for all ASX 200, half or full-year reporting companies.
Some of the themes of the season:
The share prices of companies that ‘surprised’ either positively or negatively with earnings results, moved sharply on the day of earnings release. The earlier ‘confessional’ period had been generally quiet, thus the lift in volatility when earnings results beat or missed expectations (eg WiseTech, Pact Group, Speedcast International).
A number of the ‘heavyweight’ companies reported declines in statutory profits but ‘underlying’ results remain favourable.
Costs or expenses continue to lift, matching growth of sales as had been the case in the six months to June.
Resource companies have especially noted cost pressures.
Companies exposed to home construction and development have reported early signs of a slowdown. Those effects will be more prominent in the next year.
Of all companies reporting full-year earnings, almost 93 per cent reported a profit. Sixty-two per cent reported a lift in profit and 38 per cent a decline (long-term average 61.5 per cent). Of those reporting a profit, 60 per cent lifted profits and 40 per cent reported a decline.
Of all FY reporting companies, 90 per cent issued a dividend and 10 per cent didn’t. Of those reporting a dividend, 70 per cent lifted the dividend, 10 per cent cut and 20 per cent left dividends unchanged.
Of all companies reporting full-year earnings, 60 per cent lifted cash holdings over the year and 40 per cent cut cash levels.
Cash holdings of both full-year and half-year reporting companies stood at $124.7 billion at June 30, (full-year companies, up 6.2 per cent on a year ago to $96.3 billion).
The Dividend Timeline
IRESS provides data on the dividends declared by companies, the number of shares on issue and the pay date of the dividends. So it is possible to derive a dividend timeline. The ASX 200 companies were assessed.
As always there are complications to the analysis such as where the shareholders are based, whether dividend reinvestment plans operate, special dividend payments and currency translation effects for foreign investors. But the aim is to get a broad idea of the timing and magnitude of dividend payouts.
CommSec estimates that around $28.5 billion will be paid to shareholders by ASX 200 companies from July to late October 2018. The key period for dividend payments is the four-week period beginning September 17 and ending October 12. Over that four-week period, $21.4 billion will be paid out as dividends by listed companies: in the week ending September 21, dividends totalling $2.4 billion will be paid; in the week ending September 28, $12.5 billion will be paid out as dividends; in the week ending October 5 dividend payments totalling $2.4 billion will be made; and in the week ending October 12 distributions total $3.1 billion.
The importance of dividends
If you indexed the All Ordinaries index and the All Ordinaries Accumulation index at January 2004 it would show share prices (All Ords) up 90 per cent while total returns have risen by around 255 per cent. The differential (dividend growth) has especially widened from the low point for shares after the global financial crisis in February 2009. So dividends have taken on greater importance.
There are a few reasons for this. Investors have been more cautious about buying shares, despite the fact that Australian companies have been making money and strengthening balance sheets. So share prices have not fully captured the stronger fundamentals.
The economy has also continued to mature and the “potential” growth rate has eased from around 3.5 per cent to 2.75 per cent. Many of Australia’s biggest companies operate in mature industries. So while companies continue to generate good returns, growth options are more limited. Add in the fact that inflation has also slowed from around 2.5 per cent to around 2 per cent.
In recent years Australian companies have also had to compete with heady property markets to secure the affection of investors. With share prices seemingly constrained by a range of influences, that puts more onus on companies to offer attractive dividends or to support share prices with buybacks.
Until recently there has been some reluctance by companies to plough back cash into the business. And expansion, renewal, replacement or efficiency measures have boosted the funds that can be made available as dividends.
What are the implications for investors?
Investors have the usual choice over the next few weeks. Those investors who still elect to receive dividend payments direct to their bank accounts can choose to spend the extra proceeds, save the proceeds (leave it in the bank) or use the funds in combination with other savings and reinvest into shares or other investments.
For companies, retailers and financial firms, the dividends flowing through to shareholders clearly represent opportunities. The Reserve Bank will also monitor the trends in the next few weeks: if confidence lifts, an inflow of funds represents a potential spending boost.
Of the major bourses across the globe, Australia is the largest payer of dividends. In part this reflects the maturity of Australia’s industry sectors. It also reflects the stability of the companies that dominate the ASX20 and ASX50 indexes. And it also reflects the on-going growth of the Australian economy and corporate profitability.
Over the past couple of years many companies took the “safe option” of paying out dividends and buying back shares – in other words, keeping shareholders happy. But many companies are now opting for greater balance.
Adequate cash must be maintained to pay out dividends together with confidence on future profitability. But cash levels as well as modest borrowings are important for reinvestment in the business and applied to new opportunities – entering new markets or engaging in mergers and acquisitions.
Over the past year, costs or expenses have lifted. Aussie companies have done well to lift revenues, profits and dividends in the current environment. And with competition increasingly becoming global, Aussie companies need to get the balance right in focusing on lifting revenues and restraining costs.
Shareholders increasingly realize that it is important to select companies with good potential for solid, sustainable growth in total returns – share price plus dividends. And that means paying attention to all aspects of the business.
Published by Craig James, Chief Economist, CommSec
Dividend bonanza: Payouts hit $28.5 billionEconomic and Financial market perspectives