Dividend report: Over $42 billion to be paid

Company Reporting Season

Since early August, S&P/ASX 200 listed companies with June or December reporting dates have been paying
out dividends to shareholders. In fact from August 29 to September 9, around $2.3 billion has been paid out.
(Actually going back further, from July 1 to August 29 around $8.3 billion was paid out as dividends, covering
companies with different reporting periods such as some of the major banks with March and September
reporting periods).

Distributions are ramping up, reaching a peak in the week beginning next Monday, September 19.

CommSec estimates that over $42 billion in dividends have been paid since August 29, or will be paid in coming
weeks. That compares with around $36 billion in dividend payouts in the February 2022 reporting period and
the reporting season in August 2021, when the current composition of ASX 200 companies paid out over $41
billion dividends. (Note that the composition of the S&P/ASX 200 subtly changes each quarter).

Earnings Season: August 2022

CommSec released its final assessment of the Company Reporting Season on August 31.

Overall we observed that there was no shortage of factors or themes affecting earnings results: floods in Eastern
Australia; Covid-19 (including Delta and Omicron); supply-chain challenges; war in Ukraine; housing cycle fluctuations; higher interest rates; labour shortages; cost pressures; higher prices for consumers and tensions with China.

However, despite all the challenges, revenues outpaced expenses, with many companies opting to pass on higher costs to consumers. And that approach served to support bottom-line profits.

In an aggregate sense profits lifted by 56.3 per cent (excluding BHP, up 36.5 per cent). In fact, all but 8 per cent of full-year reporting companies issued a statutory profit. And just under 63 per cent of companies lifted profits over the year (long-term average 60 per cent).

But despite the higher profits, cash levels have been cut – by choice or as a consequence of the challenging times. Aggregate cash levels fell compared with a year earlier after soaring to record highs in the February profit reporting season. Only 46 per cent of companies recorded higher cash levels than a year earlier.

In response, companies have adopted different strategies. Some companies have been shoring up operations ahead of the challenges ahead. Some stocked up on inventories or equipment to protect their businesses from supply-chain difficulties. Some companies increased employment and lifted wages. And indeed others lifted, or chose to pay, dividends.

The S&P/ASX 200 companies reporting either full-year or half-year accounts have announced dividends totalling
$42.3 billion, broadly in line with a year earlier. But while dividends remain healthy, just over 27 per cent of
dividend payers announced cuts in dividends, above the historic average.

Of the full-year reporting companies, 84 per cent issued a dividend, close to the long-term average. But in aggregate
(summing the dividends per share) dividends fell by 6 per cent. Only 61 per cent of companies actually were able to lift dividends. Recap: Aggregate results for the full-year reporting S&P/ASX 200 companies

The following is a recap of the aggregate results of the S&P/ASX 200 listed companies that reported financial results
for the twelve months to June 30, 2022.

Over the year to June 2022, aggregate revenues rose by 10.6 per cent with 87 per cent of companies lifting
revenues. The average increase in revenue was 34.5 per cent.

Aggregate expenses lifted by 8.6 per cent with 86 per cent of companies reporting higher expenses. The average
increase in expenses was 21.1 per cent. In the previous earnings season aggregate expenses rose by 7.3 per cent
with 80 per cent of companies reporting higher expenses.

Aggregate statutory net profits lifted by 56.3 per cent (up 36.5 per cent if BHP is excluded). Earnings per share
(EPS) rose 27.1 per cent (ex BHP, up 23.4 per cent). The average increase in profit across the 132 companies was
41.8 per cent. Just under 63 per cent of companies lifted profits over the year. Only 11 companies (8 per cent) of the
132 full-year reporting companies reported a statutory loss.

Aggregate cash holdings have been cut by 12.8 per cent or around $17.8 billion. (Add in the full-year reporting
companies and cash levels were down by 9.8 per cent). Banks, insurers and infrastructure firms have cut cash
holdings. Only 46 per cent of companies elected to, or were able to, lift cash balances compared with a year ago.

Aggregate dividends fell by 6.1 per cent after lifting by 5.9 per cent in the February reporting season. By number, 111 or 84 per cent of companies issued a dividend (in February, 81 per cent issued a dividend). Just over 61 per cent of
companies lifted dividends; 27.4 per cent cut dividends; 11.5 per cent left dividends stable.

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 S&P/ASX 200 companies were assessed.

As always there are complications in 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 $42 billion will be paid to shareholders by ASX 200 companies from late August
through to October.

The key period for dividend payments is the five-week period that began on Monday, September 12, 2022. Over a five-week period, almost $38 billion, have been or will be paid out as dividends by listed companies:

in the current week ending September 16, 2022 dividends totalling almost $2 billion will be paid;

•  in the week ending September 23, $17.4 billion will be paid out as dividends;
• in the week ending September 30, dividend payments totalling $11 billion will be made;
• in the week ending October 7, dividend payments totalling $5.5 billion will be made; and
• in the week ending October 14, distributions total $1.8 billion (around $1 billion will also paid from mid-October to mid-November).

Earlier – over the period from July 1 to August 29, 2022 – around $8.3 billion was paid by ASX 200 companies with
reporting periods different to end-June or end-December, notably ANZ, National Australia Bank and Macquarie Bank.

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 more than doubled in the period since (up 120 per cent) while total returns have risen almost 5 times. The differential (dividend growth) especially widened from the low point for shares after the global financial crisis (GFC) in February 2009. So dividends have taken on greater importance over time.

There are a few reasons for this.

The economy has continued to mature and the “potential” growth rate has eased from around 3.5 per cent to 2.3 per
cent (even less currently with near zero population growth). Many of Australia’s biggest companies operate in mature industries like banks, retailing, health and real estate rather than “growth” industries such as technology. So while many companies continue to make money, growth options are more limited.

Over time, Australian companies have to compete with property markets, the security of bank deposits 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.

In the current uncertain environment, listed companies have continued to pay dividends but a higher proportion have reduced payouts compared with a year ago. Some companies have been paying out more in wages (employing more staff at a higher cost), purchasing new equipment and stocking up on inventories.

The recent corporate reporting season also highlighted that management teams are directing a larger proportion of their cash to share buybacks and mergers & acquisitions (M&A) over paying out dividends, with payout ratios still below prepandemic levels.

Outlook

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.

With the cost of living rising together with interest rates, some investors may use dividends to maintain the standard of living or meet higher loan repayments.

Of course there always are those investors that see longer-term opportunities – especially given recent volatility –
choosing to channel the dividends into sharemarket purchases. The performance of investment returns over time when dividends are included in the calculation is especially emboldening – that old saying that ‘it is time in the market that is important rather than timing the market’.

From an investor perspective, dividend payouts are incredibly important. Regular income payments to investors can
cushion portfolios from the bouts of volatility in sharemarkets, preserving capital. And the extra cash put ‘back to work’ in the sharemarket could help stabilise or even support the ASX during the current bout of volatility.

The issues that dominated over the last six months will continue to dominate over the next 6-12 months. So for
investors, it will simply be a case of analysing which companies respond best to the challenges.

While Covid-19 lockdowns look to be a thing of the past, what we have learned from the past 2½ years is that you can never say never. The ‘living with Covid’ environment still means that people will contract the virus and likely be forced to stay at home. Eventually, it is possible that countries will eventually do away with confinement periods and that could alleviate supply-chain difficulties.

Tight job markets are expected to continue across Australia, but much will depend on the return of migrants to fill
vacancies. The Federal Government has instituted an ‘approved employer’ scheme that is allowing quicker access to
bringing in foreign workers. In fact, around 35,000 more workers will likely enter the country in financial year 2023.

In terms of inflation and interest rates, much will depend on the alleviation of supply-chain issues and an easing of
energy prices – a key culprit in the global inflation problem. Commonwealth Bank (CBA) Group economists tip the cash rate to reach 2.6 per cent in November 2022 and then hold at these levels through to the end of the 2022/23 financial year.

The housing cycle will prove interesting. Rental markets are tight, as are job markets and housing supply is only
responding slowly to higher demand. While interest rates have lifted and are expected to rise further, they still remain historically low. Declines in home prices will also allow greater access to the market by first home buyers. Housingdependent companies still appear generally positive about the outlook.

CommSec expects the S&P/ASX 200 index to trade in a 7,100-7,400 point range by June quarter 2023, a lift of
around 10 per cent on the year. Aussie sharemarket valuations have become more attractive with the Price/Earnings
(P/E) ratio declining from 17.7 times earlier this year to 13.7 times currently. And the dividend yield of 4.6 per cent is
around the historical average since the mid-2000s.

With the reporting season now in the rear vision mirror, Aussie investors are likely to focus their laser-like attention on company valuations and earnings as central banks continue to lift interest rates to combat soaring inflation, while
attempting to engineer a ‘soft landing’ for the economy. Research analysts are expecting weaker earnings growth this
financial year and next as the economy slows. Company profit margins are likely to be squeezed by higher costs, destocking and discounting due to elevated inventory levels as supply chain disruptions ease.

Originally published by Craig James, Chief Economist and Ryan Felsman, Senior Economist, CommSec