Dividends start flowing: $22 billion to be paid out

Economic and Financial market perspectives

• Cash payouts: This week, dividends started flowing from those companies that reported early in the recent earnings (profit-reporting) season. Conservatively around $22 billion (or around 1.3 per cent of GDP) will be paid out by companies over the next few months.
• Dividends in vogue: The majority of companies reporting half-year earnings results (88 per cent) chose to pay a dividend and almost 82 per cent of these companies lifted or maintained dividends.
• Injection into the economy: Dividends totalling $17.4 billion will be paid out by listed companies to their shareholders in the three weeks beginning March 27

What does it all mean?

• In recent earnings seasons, companies have been almost falling over themselves in the rush to pay out dividends to shareholders. And while some companies remain keen to pay out dividends, others have also been keen to pay down debt levels, to reduce risk and provide some flexibility to respond to opportunities in 2017. There is no longer the single-mindedness to pay a dividend.
• Around 88 per cent of the ASX 200 companies reporting for the six months to December elected to pay a dividend. That is the smallest proportion in four reporting periods (two years) and down from the record 92 per cent in the full year reporting period to June 2016.
• Certainly there hasn’t been a shortage of cash available to firms. Of the 142 companies reporting half-year results, 94 per cent reported a profit and 69 per cent lifted profit – above the “normal” proportion of 60 per cent. Aggregate cash holdings rose by 12 per cent on June levels to $83 billion. Adding in the 28 companies reporting full-year earnings, cash levels were up by 11 per cent on end June levels to $110 billion.
• Over the period from March to July, over $22 billion will be paid to shareholders as dividends. In the interim earnings season a year ago, dividend payouts totalled around $19 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 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. Certainly a number of risk events are out of the way. Consumers remain relatively confident. Inflation is still low. And interest rates don’t look to be going anywhere in the short term.

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). Read more at www.commsec.com.au/reportingseason
• As a recap, the latest reporting season was very, very good, despite a raft of political events making for challenging conditions. It’s worth noting that the economy contracted 0.5 per cent in the September quarter before bouncing back by 1.1 per cent in the December quarter.
• Of the 142 companies assessed from the ASX 200, all but 8 companies recorded a profit for the six months to December: that is, 94 per cent of companies recorded a profit. Overall, 69 per cent of companies increased profit over the year; above the long-term average near 60 per cent.
• Companies are cashed up. Aggregate cash holdings rose by 12 per cent on June levels to $83 billion. Adding in the 28 companies reporting full-year earnings, cash levels were up by 11 per cent on end June levels to $110 billion.
• Companies continue to return money to shareholders in the form of dividends. 88 per cent of companies (125 of 142 companies) paid a dividend. Of companies paying a dividend, 67.5 per cent lifted dividends; almost 14 per cent maintained dividends; and almost 19 per cent of companies cut dividends.

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.
• 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 has estimated that around $22 billion will be paid to shareholders from early March to early July 2017. The key period for dividend payments is the five-week period beginning March 14 and ending April 14.
• Over the three-week period from March 27, $17.4 billion will be paid out as dividends by listed companies: in the week ending March 31, dividends totalling $7.9 billion will be paid; in the week ending April 7, $7.3 billion will be paid out as dividends; and in the week ending April 14 dividend payments totalling $2.1 billion will be made.

The importance of dividends

• We live in a world where inflation and interest rates are far lower than a decade ago. In part the global financial crisis has led to greater conservatism by consumers and businesses. But even before the GFC, inflation and interest rates were trending lower, reflecting ageing populations across the developed world. Population growth has slowed – or is even going backwards in some countries. Economic growth rates have similarly been pared back.
• In Australia, population growth is still high compared with other developed nations and annual growth is around 1.3 per cent. As a result, economic growth is generally higher than other advanced nations. Annual growth stands at 2.4 per cent and expected to lift to 3 per cent over 2017. At the same time inflation has moderated. The headline rate of inflation stands at 1.5 per cent.
• Technology is allowing companies to become more efficient and reduce costs. At the same time consumers can buy goods whenever they want from wherever they are. Businesses are aware that competition has become more global.
• The interesting thing is that today the Australian cash rate stands at 1.5 per cent, while the average dividend yield for listed companies is around 4.0 per cent. The super-normal return from equities should lead to more money entering the sharemarket and pushing up prices. And that does seem to be occurring although many fret that other sharemarkets seem to be doing better. Still, the All Ordinaries index is up 11.2 per cent over the year while total returns, including dividends, are up by 16.2 per cent.
• Going further back, if you indexed the All Ords and the All Ords Accumulation index at January 2004 it would show share prices (All Ords) up 76.2 per cent while total returns are up by 209.2 per cent. The differential has especially widened from the low point for shares after the GFC in February 2009.
• One complication here in Australia is the strength of property markets – not just residential, but also commercial property. With prices posting firm gains, investors have tended to favour property over shares or cash.
• But a flood of new homes will be completed over the next 12-18 months. This will lead to softening growth of property prices. Rental markets are already softening, pointing to a softening of total property returns.
• In contrast, companies continue to make money – that is especially clear from the latest profit reporting season. But the higher profits aren’t boosting share prices to the same extent as other markets
• The US Dow Jones has lifted around 23 per cent over the past year with the German Dax up a similar magnitude, the London market up 19 per cent and Japanese market up 14 per cent.

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 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: stronger confidence and an inflow of funds represent a potential spending boost.
• The preference of companies to issue dividends – and indeed maintain or lift dividends – will remain in focus. Investors need to determine if this is indeed the new “black”. That is, they need to ask if the low inflation/low interest rate world is here to stay. If it is, the question is whether companies will continue to be successful in trimming costs, finding new revenue sources and thus making money. If this is the new “black”, then investors will need to research more closely about potential winners and losers.
• Companies, also need to decide whether dividend payments should be maintained, let alone increased over time. There still needs to be adequate cash maintained for reinvestment in the business and applied to new opportunities – entering new markets or engaging in mergers and acquisitions.
• If the growth of share prices outstrips inflation and returns on other assets, perhaps companies can hold or trim dividends and plough more money back into the business.
• It is abundantly clear that Corporate Australia is making money, serving to top up high cash balances and thus allowing companies to keep paying dividends to shareholders. How long this situation will prevail is the $64 question. But it does highlight the need to keep a close watch on your investments and be open to changing strategies in a dynamic environment.