Dividend bonanza: $26 billion to be paid out

From

Economic and Financial market perspectives

  • Cash payouts: Since the start of the financial year companies have paid out around $4 billion in dividends to shareholders. But dividend payouts really start to ramp up from September 18. Overall, around $26 billion will be paid to shareholders over coming months, up from $22 billion in the interim profit-reporting season earlier in the year.
  • Dividends in vogue: The majority of companies reporting full-year earnings results (91 per cent) chose to pay a dividend and 83 per cent of these companies lifted or maintained dividends.
  • Injection into the economy: Dividends totalling $20 billion will be paid out by listed companies to their shareholders in the four weeks beginning September 18.

What does it all mean?

  • It is clear that dividends remain in vogue. But as has been apparent for the last few reporting periods, there is an ongoing re-assessment by companies about just blindly paying a dividend at all costs. More companies see value in investing in their businesses. Especially with threats such as the entry of Amazon into Australia. Scentre Group and Westfield are reconfiguring and redeveloping shopping centres to improve consumer experiences and ultimately attract more people to their centres. Telstra also is in the process of adjusting pay-out ratios, ploughing more money back into the company than just issuing dividends.
  •  Of the ASX 200 companies reporting for the year to June, around 91 per cent of firms elected to pay a dividend, up from the long-term average of 86 per cent, but down from the record level of 92 per cent a year ago.
  • Certainly there hasn’t been a shortage of cash available to firms. Of the 139 companies reporting full-year results, 91 per cent reported a profit and 65 per cent lifted profit – above the “normal” proportion of 60 per cent. Aggregate cash holdings rose by 27 per cent over the year to $91 billion. Adding in the 31 companies reporting half-year earnings, cash stood at a record $113 billion.
  • Over the period from July to December, over $26 billion will be paid to shareholders as dividends. A year ago dividend payouts were around $24 billion, while in the interim earnings earlier this year, dividend payouts totalled around $22 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 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, the dollars potentially could lift spending. Certainly the dollar value of payouts has lifted. Consumer confidence appears to be improving. Inflation is still low. And interest rate settings look to remain on hold.

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
  •  In short, the recent earnings season was very good, but perhaps not great. The February 2017 reporting season could be characterised as great. At that time only eight companies from the ASX 200 produced a statutory loss for the six months to December. That is 94 per cent of companies recorded a profit. And excluding BHP, profits were up 36 per cent.
  • In the recent August reporting season, some analysts expressed disappointment at the smaller number of firms beating expectations with their results. But many companies were priced for perfection going into earnings season. So slight misses were punished. And while analysts may have had disappointments, the big picture view for shareholders is very good.
  •  In the August 2017 earnings season almost 91 per cent of full-year reporting companies made statutory profits. And ex-BHP, earnings lifted by 20 per cent. Actually if heavyweights CBA and Telstra are also excluded, earnings are up by 38 per cent on a year ago. Statutory earnings by all full-year companies were up 63 per cent on a year ago.
  • Of all companies reporting full-year earnings, 64 per cent lifted cash holdings over the year and 36 per cent cut cash levels. Cash holdings of full-year reporting companies stood at $90.8 billion at June 30, up 26.9 per cent. Adding in half year reporting companies and cash stood at a record $113.2 billion.
  • Of all full-year reporting companies, 91 per cent issued a dividend and 9 per cent didn’t. Of those reporting a dividend, 69 per cent lifted the dividend, 17 per cent cut and 14 per cent left the dividend unchanged.

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 has estimated that around $26 billion will be paid to shareholders from early July to early December 2017. The key period for dividend payments is the four-week period beginning September 18 and ending October 13. Over that four-week period, around $20 billion will be paid out as dividends by listed companies: in the week ending September 22, dividends totalling $2.7 billion will be paid; in the week ending September 29, a massive $11.7 billion will be paid out as dividends; in the week ending October 6 dividend payments totalling $3.1 billion will be made; and in the week to October 13 around $2.5 billion will be paid as dividends.

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) up 75 per cent while total returns have risen by around 313 per cent. The differential (dividend growth) has especially widened from the low point for shares after the GFC in February 2009.
  • So dividends have taken on greater importance.
  • There are a few reasons for this. Investors have been more cautious in 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 2.75 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 just below 2 per cent.
  • In recent years Australian companies have also had to compete with heady property markets 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.
  • A relative reluctance by companies to plough back cash into the business – expansion, renewal, replacement or efficiency measures – also has boosted the funds that can be made available as dividends. Interestingly, more resource companies have also sought to offer dividends than assess growth or investment options.

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 are also more actively weighing up pay-out options, notably 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 companies weren’t successful in trimming costs, improving efficiencies, lifting revenues and recording higher profits, then the decisions on dividends would be far easier. Operating losses and a rundown in cash levels mean there would be far fewer companies in the position to even offer dividends.
  • In a low growth/low inflation environment, investors must clearly pay more attention to total returns on investments. Unfortunately the performance of asset classes like property and shares are still largely assessed via price indicators than those representing total returns.

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