Spotlight on dividends: Payouts total $27.5 billion
Economic and Financial market perspectives

Cash payouts: In 2020 so far, ASX 200 companies have paid out around $5.3 billion in dividends to shareholders. But dividend payouts really start to ramp up in late March. Overall, around $27.5 billion will be paid out to shareholders in the period to late May, down from around $29 billion in both the February 2019 and August 2019 earnings seasons.

Harder to lift dividends: A smaller share of the companies that reported half-year earnings results chose to pay a dividend: that is, around 87 per cent. The share of companies issuing a pay-out is down from the 88 per cent that paid dividends in the August 2019 reporting season. And only 52 per cent of dividend payers elected to lift dividends, down from 55 per cent in the August 2019 reporting season.

Injection into the economy: Around $22 billion will be paid out by listed companies to their shareholders in the next five weeks.

What does it all mean?

• A more difficult operating environment has made it harder for listed companies to increase profits. And, in turn, companies have found it harder to lift dividends.

• However, despite finding it harder to lift profits, still 87 per cent of full-year reporting companies in the ASX 200 chose to pay out a dividend, slightly above the long-term average of 86 per cent.

• But of the ASX 200 companies reporting for the half-year to December and paying a dividend, 52 per cent elected to lift dividends, the lowest proportion in 6½ years. The trend was actually in favour of companies keeping dividends stable – the 29 per cent of companies leaving dividends unchanged was the highest in eight years.

• Of the 140 companies reporting full-year results, 92 per cent reported a profit, above the average of 88 per cent over the past decade. But only 51 per cent lifted profits (long-term average, 60 per cent). Aggregate cash holdings were down 1.7 per cent over the year to $82.4 billion. Adding in the 30 companies reporting full-year earnings, cash levels stood at $112 billion at the end of December.

• Over the period from January to late May, around $27.5 billion will be paid to shareholders as dividends, down from around $29 billion paid out in both the February and August 2019 earnings seasons.

• 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, lifting consumer spending, given tepid wage growth and the challenging economic environment.
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).

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• To recap, the results show Corporate Australia has been holding up in challenging conditions. Overseas, the China-US trade war dominated in the second half of 2019 together with the on-going uncertainty of Brexit. The global economy slowed, causing a raft of central banks to cut interest rates to support growth.

• Closer to home, the Reserve Bank cut interest rates three times. In response the Aussie dollar eased, boosting the fortunes of exporters, miners and globally-focussed companies.

• Aussie consumers continued to adjust to the new ‘norm’ of 2.0-2.5 per cent annual wage growth. Home prices started to lift, especially in NSW and Victoria.

• But despite the challenges, it is clear that companies are still making money. In fact, 92.1 per cent of the companies that reported half-year results, reported a statutory profit (net profit after tax), above the 88.4 per cent long-term average. But only 50.7 per cent of companies lifted profits compared with a year ago. Although that is still better than the 48.6 per cent result in the interim reporting season in February 2019.

• Aggregate statutory earnings lifted by 3.3 per cent on a year ago, but once BHP and CBA are excluded, profits fell by 5.6 per cent on the year.

• Some of the themes of the season:

The novel coronavirus outbreak (COVID-19) dominated the earnings season. Investors were keen to know the initial impact of the outbreak on Australia’s listed companies.

Companies affected by bushfires: including Coles, Telstra; and Super Retail Group.

Analysts were divided on whether the earnings season was good. Overall, it could be described as OK. Around 52 per cent of companies that reported results saw a lift in their share prices on the day of earnings release with an average gain of 0.6 per cent.

Companies achieved success in controlling expenses while noting modest increases in revenues. Sydney Airport was one company to indicate it was keeping a ‘tight leash’ on costs. Monadelphous again noted strong demand for labour, pushing up wages. Boral noted heavy cost cutting.

Housing construction and development companies have become more positive on the outlook.

Consumer-dependent companies continue to report mixed fortunes depending on success achieved in strategies to engage with customers.

For half-year reporting companies:

On profits, 92.1 per cent reported a profit (all but 11 of 140 companies).

Only 50.7 per cent reported a lift in profit (long-term average 60.3 per cent).

Of those reporting a profit, 55 per cent lifted profits and 45 per cent reported a fall in profit.

Of all HY reporting companies, 87.1 per cent issued a dividend (long-term average 86.2 per cent).

Of those reporting a dividend, 52 per cent lifted the dividend, 19 per cent cut dividends and a near record 29 per cent left dividends unchanged.

On cash holdings, 55 per cent lifted cash holdings over the year and 45 per cent cut cash levels.

Cash holdings of both full-year and half-year reporting companies stood at $112 billion as at December 31, (for half-year companies cash was down 1.7 per cent on a year ago to $82.4 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 $27.5 billion will be paid to shareholders by ASX 200 companies from January-May, but largely from mid-March to mid-April. The key period for dividend payments is the five-week period than began on March 16. Over that five-week period, $21.8 billion will be paid out as dividends by listed companies:

in the week ending March 20, dividends totalling $1.8 billion will be paid;

in the week ending March 27, $7.1 billion will be paid out as dividends;

in the week ending April 3 dividend payments totalling $6.0 billion will be made;

in the week ending April 10 distributions total $4.8 billion; and

in the week ending April 17 distributions total $2.0 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 risen 1.5 times in the period since (even despite the recent falls) while total returns have risen 3 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.

• 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. 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 1.5-2.0 per cent.

• 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.

• 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 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.

• And in the current challenging times, it will be interesting which way investors jump.

• Some investors – especially those running small businesses – may need the extra dollars to fill gaps in cash flows.

• Others may see the benefit of using dividends to supplement other funds and borrowings 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 from the current market sell-off, choosing to channel the dividends into sharemarket purchases.

• The dramatic market sell-off has been largely indiscriminate. Companies that are more secure in terms of the earnings outlook have been sold off at the same time as other companies that face more challenging prospects. And that means investors will have to do their homework. Dividend yields for some companies may look attractive. But if earnings over the next few months slump, those companies will have hard decisions to make on pay-outs.

• The company may deduce that earnings will quickly bounce back once the coronavirus outbreak is contained. As a result, dividend payouts may maintained – either by running down cash or even borrowing.

• Shareholders will have to decide whether they take the same view.

• The Federal Government and Reserve Bank will be closing watching spending and savings trends in the next few months. Dividend payments are flowing. Businesses will be looking to buy assets in order to take advantage of attractive write-off provisions. And the Government will start distributing $750 one-off payments to aged pensioners and welfare recipients.

• 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.

• Listed companies are still keen to pay dividends, although a record proportion have decided to maintain rather than lift dividends. Others are focused on share buybacks.

• The alternative is to plough more money back into the firm or scour for acquisitions. Some companies seem reluctant to tread the path of acquisitions due to past disappointments. APA and Ansell both indicated that they were keeping an eye on possible acquisitions. (Seven West Media is actually looking to sell assets). Viva Energy is looking for opportunities ‘that make sense’. SEEK said it was looking to cut dividend to lift capital expenditure and mergers/acquisitions. Appen said it may alter dividend policy to focus on reinvestment and acquisitions.

• The hard part for both companies and investors is making forecasts in the current tumultuous times. A global pandemic of the current scale hasn’t been seen since 1919. So determining whether the future upturn for the economy and sharemarket are ‘V-shaped’ or L, U or even W-shaped is difficult to forecast.

Published by Craig James, Chief Economist, CommSec