Surge in dividends: Over $41 billion to be paid

Company Reporting Season

Listed companies have already started to pay out their dividends to shareholders. From mid-August to September 17, ASX 200 companies have, or will be, paying out around $5.5 billion in dividends to shareholders. But the distributions reach a peak in the week beginning September 20.

CommSec estimates that over $41 billion in dividends will be paid in coming weeks. In the interim reporting season that ended in February, $25.8 billion was 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.

Earnings Season: August 2021

CommSec released its final assessment of the Company Reporting Season on September 1.

• Overall we concluded that while it wasn’t the best season in recent times (in an aggregate sense, results in 2017 were superior), it was markedly better than the results of seasons that preceded over 2020 and in February 2021. Many companies noted that they had generally done well over the past year with a number declaring that they had the best year on record or were in the strongest position they had ever been in. But still travel and hospitality businesses have struggled.

• The profit results have emphasised how positive conditions had been for many listed companies over the past year, supported by government and central bank stimulus, economic recoveries overseas and improvement in local job market conditions. A stand-out of the earnings results from listed companies was the increases in dividend payments, but there also wasn’t a shortage of companies wanting to pursue growth opportunities.

• Overall a higher proportion of companies reported a profit but that metric was still short of the longer-term averages.

• The good news was that more companies lifted profits and trimmed losses. As a result cash at hand is now at lofty levels.

• Not all companies decided to use the cash to issue dividends – caution still exists. In fact 19 per cent of companies didn’t issue a dividend (long-term average, 15 per cent). However, those companies that are issuing dividends are providing bumper capital returns.

Recap: Aggregate results for the full-year reporting ASX 200 companies

• The following is a recap of the aggregate results of the listed companies that reported financial results for the year to June 30.

• Over the year to June, aggregate revenues lifted by 6.5 per cent with 77 per cent of companies lifting revenues (average increase 18.2 per cent). Aggregate expenses rose by just 1.0 per cent with 67 per cent of companies reporting higher expenses (average increase 12.6 per cent).

• In the first snapshot, aggregate net profit was up 32 per cent on a year ago. In the second snapshot, aggregate profits were up 56 per cent. At the conclusion of the season aggregate profits were up almost 76 per cent on a year ago (earnings per share doubled). Around 82 per cent of all companies reported a profit (long-term average, 87.7 per cent). Around 72 per cent of companies lifted profits over the past year (long-term average, 60 per cent).

• Cash holdings lifted by 68 per cent to $184 billion. But only 57 per cent of companies lifted cash balances compared with a year ago. (Including half-year reporting companies, cash levels stand at a record $220.1 billion.)

• Overall, 81 per cent of full-year reporting ASX 200 companies issued a dividend (long-term average, 85 per cent). Aggregate dividends rose by 70 per cent. Almost 60 per cent of companies increased dividends; 13 per cent cut dividends; 9 per cent left dividends stable; and 19 per cent didn’t report a dividend.

• Over the past three seasons the proportion of companies not reporting a dividend has fallen from 31 per cent to 21 per cent and then to 19 per cent, but this is still above the long-term average of 15 per cent. Seventeen companies issued a final dividend after not reporting a final dividend a year ago.

• Special dividends and buybacks were a feature of the earnings season with around $20 billion in buybacks announced alongside special dividends. The big banks, in particular, delivered on capital returns, the Commonwealth Bank buyback ($6 billion) following earlier moves by NAB ($2.5 billion) and ANZ ($1.5 billion). Retailers Wesfarmers ($2.3 billion) and Woolworths ($2 billion) also rewarded investors.

• A feature of the August reporting season was the abnormally high dividend payouts of the mining sector, supported by record-breaking commodity prices and profits.

• And major bank dividend payouts ‘normalised’ after regulator APRA removed its cap on dividend payments in December. Lenders released provisions after holding funds in case of a COVID-related housing crash (which didn’t materialise).

• Some analysts are forecasting record annual dividend growth of around 17 per cent, more than triple the average annual growth rate. According to the latest Bloomberg estimates, forward 12-month dividend per share (DPS) annual growth is 45.5 per cent, after plunging to -33.5 per cent in August 2020 – the biggest payout cut since 2009.

• The Materials, Financials, Industrials and Consumer Discretionary sectors lead dividend payout growth, but Energy and Utilities companies lag. The dividend bonanza comes after Aussie firms slashed or withheld dividend payments last year during the pandemic shock.

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 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 $41 billion will be paid to shareholders by ASX 200 companies from mid-August, but largely over the period of mid-September to early-October.

• The key period for dividend payments is the five-week period that began on Monday September 13. Over the five-week period, $34 billion will be paid out as dividends by listed companies:

• in the current week ending September 17, dividends totalling almost $1.4 billion will be paid;

• in the week ending September 24, $15.2 billion will be paid out as dividends;

• in the week ending October 1, dividend payments totalling $13.6 billion will be made;

• in the week ending October 8, dividend payments totalling $2.8 million will be made; and

• in the week ending October 15, distributions total $835 million

• Earlier – over the period August 10-September 3 – almost $3.4 billion was paid, especially by real estate investment trusts (REITs) and other financial firms and property asset managers. And later in 2021, Wesfarmers is planning to return $2.3 billion in capital to shareholders.

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 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 has changed in the Covid-19 period. New investors have been entering 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 currently with near zero 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.

• In the current environment, listed companies have been keen to reward investors with higher dividends. Profits have risen and cash has soared. And companies have concluded that shareholders have missed out on ‘normal’ distributions as Covid arrived on the scene in early 2020.

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.

• 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.

• Small businesses may see the benefit of ploughing dividends back into the business, (perhaps supplemented by 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 – especially given recent volatility – choosing to channel the dividends into sharemarket purchases. And of course there are tax implications to consider.

• In a case of déjà vu, six months ago we wrote: “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.”

• Six months down the track, again we are waiting for vaccination rates to lift so our Australian economies can re-open. But there has been greater progress on this front and that does provide grounds for optimism.

• From an investor perspective, the dividend recovery is incredibly important. Regular income payments to investors can cushion portfolios from bouts of volatility in sharemarkets, preserving capital.

• In fact, CommSec is currently forecasting that the S&P/ASX 200 index finishes the year around 7,450 points, just shy of current levels near 7,435 points. Already in September, investors have already begun to reassess company valuations amid rising economic risks, including the reduction in central bank stimulus, building inflationary pressures and record Delta infections.

• Of course, Australian shares benefit from tax advantages, including dividend franking, when compared to global peers.

• Also, total sharemarket returns are often boosted by the franked dividends of our largest companies and sectors, especially the banks.

• Aussie shares also continue to enjoy a yield advantage. Current dividend yield estimates for the S&P/ASX200 index (3.8 per cent) are above those of global peers, such as the US S&P 500 index (1.3 per cent) and the pan-European Stoxx 600 index (3.0 per cent). So average Aussie dividend yields are roughly twice as high as US sharemarkets – an attractive proposition for income hungry investors in a low interest rate environment.

Published by Craig James, Chief Economist, CommSec