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Dividends: Around $26 billion to be paid out
Economic and Financial market perspectives

More companies pay dividends: In the interim reporting season that concluded in February 2021, just under 79 per cent of ASX 200 companies issued a dividend (long-term average 86 per cent). That is up from 69 per cent in August 2020; but down from 87 per cent of companies that reported half-year earnings back in February 2020.

Dividend payouts: Dividend payouts have begun and will extend through to May. CommSec estimates that $25.8 billion will be paid to shareholders. Payouts in the August 2020 reporting season were $21.6 billion. In the February 2020 season, announced dividends were $27.5 billion. But over March and April many companies reacted to the COVID crisis by cutting spending, abandoning guidance and/or shelving or cancelling dividends.

Dividends in 2019: Dividend payouts were around $29 billion in payouts in both the February 2019 and August 2019 earnings seasons.

Injection into the economy: The biggest week for payouts is the week beginning March 22 when $12 billion will be paid out by listed companies to their shareholders.

What does it all mean?

• It is still all about COVID-19. Over the last year the global pandemic has restricted domestic and global movements, forcing communities and businesses into lockdowns. Governments and central banks have provided unprecedented support for people and businesses.

• For some companies it has been the toughest year in living memory. Notably companies most negatively affected have been those dependent on people mobility. Especially global mobility – companies dependent on foreign travel such as airlines and booking companies. Local lockdowns and the closure of foreign borders have buffeted services like hospitality, accommodation, arts & recreation and gaming operators as well as commercial and retail property businesses and toll road operators.

• Energy companies were hit over 2020 by lower – often government administered – prices and demand although 2021 is looking to be a better year.

• For others like retailers, conditions have been arguably the best since the recovery period of the previous economic ‘emergency’ – the global financial crisis.

• And then there are the miners, supported by favourable commodity prices and Chinese demand, although experiencing the headwinds of a firmer Australian dollar. It is worth pointing out those Aussie dollar headwinds for companies with a significant foreign presence.

· Overall though companies are making money again. In fact, 86 per cent of companies reported statutory profits for the six months to December. Aggregate cash holdings are up 50 per cent on a year ago. That means more companies are in a position to issue – or even increase – dividends. But understandably many companies are exercising caution. And other companies, especially those dependent on movement of people across foreign borders, are not in a position to pay dividends.

• Over the period from late-February to early-May, around $25.8 billion will be paid to shareholders as dividends, up from $21.6 billion six months ago.

• Some shareholders will receive the dividends as cash and others will deploy the proceeds through dividend reinvestment schemes. While the majority of 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, more shareholders may look to spend the dollars in coming months, perhaps on domestic holidays or upgraded big-ticket purchases like cars.
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).

The latest report focussed on the 141 companies in the S&P/ASX 200 that reported interim earnings for the six months to December 2020. Another 31 companies reported results for calendar 2020.

• It’s worth recapping the aggregate results. And these numbers refer to those companies reporting half-year earnings to December 31, 2020.

Profits

• Of the 141 companies from the ASX 200 group that reported for the six months to December 2020, 121 companies or 86 per cent managed to produce a statutory profit (net profit after tax). This proportion is well up on the 75 per cent of companies reporting statutory profits (net profit after tax) for the year to June.

• Over the past decade, on average around 88 per cent of companies have reported a profit rather than a loss.

• Of the companies to report a profit for the half-year to December, 60 per cent managed to lift earnings while 40 per cent recorded a fall in earnings.

• In aggregate (summing all the profit results), earnings are down 17 per cent on a year ago. Revenues fell in total by just 0.9 per cent, short of the 0.1 per cent aggregate lift in expenses.

Dividends

• In the six months to December 2020, 111 companies (79 per cent) elected to pay a dividend. If we go back to the full year to June 2020, only 68 per cent of companies elected to pay a return to shareholders. The average over the past 20 reporting seasons stands at 86 per cent. So dividends are returning, but there is still some way to go.

• Almost 35 per cent of companies lifted dividends; 14 per cent held dividends steady; 30 per cent of companies cut dividends; and 21 per cent of companies elected not to pay a dividend.

• Of the 30 companies not paying a dividend, 21 similarly elected not to pay a dividend six months ago.

• Of the 72 companies paying a dividend, 44 per cent lifted dividends; 18 kept the payout steady; and 38 per cent of companies cut the dividend.

• In aggregate, dividends were up 4 per cent on a year ago.

Cash

• In the full-year earnings season six months ago, companies elected to trim or not pay a dividend and instead use the cash to shore up stretched balance sheets.

• Companies are paying dividends again, but they remain wary, choosing to hold more cash.

• Aggregate cash at hand (cash as at December 31) was up over 50 per cent on a year ago (up from $82 billion to $124 billion). Add in the companies reporting for the year to December and cash holdings stand at $166 billion.

• Overall 70 per cent of companies lifted cash levels from a year ago, notably retailers and banks.
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 $25.8 billion will be paid to shareholders by ASX 200 companies from late-February to early May, but largely over March and April. The key period for dividend payments is the five-week period that began on Monday, March 15. Over the five-week period, $23 billion will be paid out as dividends by listed companies:

in the current week ending March 19, dividends totalling $1.3 billion will be paid;

in the week ending March 26, $12 billion will be paid out as dividends;

in the week ending April 2, dividend payments totalling $5.9 billion will be made;

in the week ending April 9, dividend payments totalling $824 million will be made; and

in the week ending April 16, distributions total $1.8 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) have almost doubled in the period since (despite falls from record highs) while total returns have risen almost 4 times. The differential (dividend growth) especially widened from the low point for shares after the global financial crisis in February 2009. So dividends have taken on greater importance over time.

• 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. That attitude changed somewhat in the past year. In fact a flurry of new investors have entered the market to grasp opportunities, especially in the low inflation era with near zero returns on deposits.

• The economy has also continued to mature and the “potential” growth rate has eased from around 3.5 per cent to 2.5 per cent (even less with historically-low population growth). Many of Australia’s biggest companies operate in mature industries. So while many companies continue to make money, growth options are more limited.

• Over time, Australian companies have to compete with property markets and overseas equities 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.

• Of course in the current environment, the choice about what to do with cash is even more difficult. Should the company step up dividend payments or wait until there is greater certainty about the outlook. Should the extra cash held by companies be used for capital spending and mergers/acquisitions? As always the answer will vary across companies and sectors. But investors will be carefully assessing the decisions made.

What are the implications for investors?

• Investors have the usual choice over the next few weeks. Those investors that 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.

• Some investors – especially those running cafes, restaurants, recreation and sporting businesses – may need the extra dollars to fill gaps in cash flows. For some small businesses, there is no choice, it is a case of survival – all funds must be deployed.

• Others may see the benefit of using dividends to supplement other funds and borrowings (such as early withdrawal of superannuation) to buy equipment and thus take advantage of the Federal government’s asset write-off and depreciation allowance changes.

• Still other investors may see longer-term opportunities – especially given recent volatility – choosing to channel the dividends into sharemarket purchases. And of course there are tax implications to consider.

• But now we move into a new phase for both the economy and the sharemarket. The economic recovery has been stronger than many expected. Vaccines are being rolled out in Australia as they are across the globe. That may mean that domestic lockdowns become a thing of the past. Global economies are starting to re-open.

• With economic recovery comes fresh challenges – and we are seeing that at the moment. Investors are worried that continued stimulus and support measures being applied to the recovering economies means higher inflation. And those fears are being manifest in rising longer-term bond yields.

• Investors are probably getting a little too optimistic. There are still challenges ahead with mutant strains of the virus. It will still take some time to get people back to work. Spare capacity will be with us for years, not just months. And the end of the ‘JobKeeper’ wage subsidy looms.

• We remain positive on the outlook for the economy and the sharemarket. But while federal, state and territory governments and the Reserve Bank have guided the economy through the crisis phase, now they will need to be agile in their responses to economic recovery.

• CommSec expects the All Ordinaries to be in a range of 7,200-7,600 by end-2021, with the range for the ASX 200 between 7,000-7,400 points. The hard part is in determining whether equities have become – or are becoming – too expensive. While less of a challenge with ‘normal’ interest rates, it is harder to resolve the ‘cheap/dear; debate with near zero rates. The ‘chase for yield’ is supportive of risk assets, but rising real interest rates – as inflationary expectations mount – present the biggest near term challenge to interest rate sensitive sectors of the sharemarket.

Published by Craig James, Chief Economist, CommSec