Jane Shoemake
Key points
- In Q1 2021, Australian companies were among better performing dividend payers compared to rest of the world
- Mining drives strong start to 2021 for Australian dividends, up 60% year-on-year as commodity prices soar
- Australian banks are likely to restore dividends to around 70% of their 2019 level with the easing of Reserve Bank limits
- Australian dividends set to grow by 40% in 2021, with payouts to reach 85% of 2019 level
- Janus Henderson’s index of dividends ended the quarter at 171.3, its lowest level since 2017, but growth is now likely
- Janus Henderson upgrades its 2021 global dividend forecast to A$1.78 trillion (USD$1.36 trillion), a headline increase of 8.4% and equivalent to an underlying rebound of 7.3%
There are clear signs of a forthcoming revival in Australian dividends following the first quarter of 2021, according to the latest Janus Henderson Global Dividend Index. On the back of strong growth, Australian dividends are set to reach 85% of their pre-pandemic 2019 levels by the end of the year.
The latest report noted that as a result of its heavy dependence on mining and financial services companies, Australia shares characteristics with emerging markets, despite socially and economically resembling its developed, Western peers.
As such, its hybrid economy is well placed to take advantage of the recent surge in commodity prices, and strong industrial production in China.
While on an underlying basis, Australian dividends were flat year-on-year at -0.2%, the result actually ensured Australia was among the better performing comparable countries, thanks in part to the commodities boom driving increased mining dividends. Globally, dividends were 1.7% lower than the same period last year, a far more modest decline than in any of the preceding three quarters, all of which saw double-digit falls. Dividends from Asia-Pacific ex-Japan were 6.0% lower on an underlying basis, with the 16.9% fall in Hong Kong making a significant impact. This meant the index of Asia-Pacific’s dividends fell to 190.6.
Concentration risk hits Australian income investors hard
The report noted that sector concentration characterised by heavy dependence on a few large banks and mining companies, with a long tail of smaller payers is common in individual countries, even developed markets, but it is particularly extreme in Australia.
In 2019 and 2020, the top ten payers in Janus Henderson’s index contributed almost four fifths (78%) of Australian dividends – and the pandemic did nothing to disrupt that pattern. Comparatively, Canada which has a similar dependence on banking and energy dividends accounted for three fifths (62%) and the UK likewise saw 67% of its dividends paid by the top 10 in 2020. By contrast, at the global level the 10 biggest payers made up just a tenth of world dividends in each of the last two years.
This concentration proved costly to local income investors when dividends fell 40% in 2020 in Australian dollar terms, placing Australia among the hardest hit nations in the world off the back of the COVID-19 pandemic.
In Q1 2021, just one company in five (18%) globally made year-on-year cuts to dividends, far fewer than a third (34%) that have cut over the last year. This compared to over half the Australian companies in Janus Henderson’s index cutting year-on-year dividends in the first quarter, highlighting the need for Australian investors to think globally for income.
Mining companies lead recovery, but banks catching up
Mining companies really stood out in the first quarter, as resurgent commodity prices drove significant growth in payments boosted by large one-off special dividends. Fortescue Metals almost doubled its distribution and became Australia’s largest payer in the first quarter. Including BHP’s special dividend, mining payouts jumped 60% year-on-year in Australian dollars, with further increases signalled to arrive later in the year rounding off the 60% growth for mining dividends in calendar year 2021. Rio Tinto upped its payout by half in April, for example.
Dividends from financial companies in particular were boosted by a number of companies restarting dividends, albeit generally at lower levels, that had been interrupted by the pandemic, in many cases owing to regulatory restrictions. The biggest negative impact came from Commonwealth Bank of Australia, which nevertheless made a much smaller cut in the first quarter than it did in the third quarter of 2020. This provided an unseasonal boost to the sector in Q1, with banks expected to likely to restore dividends to around 70% of their 2019 level.
Janus Henderson expects healthy increases from defensive retailers like Coles and Woolworths too, but a number of other companies will find it harder to grow their dividends substantially and some may pay nothing.
Consequently, dividend growth of around 40% is certainly achievable in Australia this year. This would take payouts to A$70.9bn, around 85% of their 2019 level, though with caution that there is still a high degree of uncertainty around the near future, both in Australia and around the world.
Matt Gaden Head of Australia at Janus Henderson said: “Our outlook clearly points to a dividend revival in Australia after a dividend drought last year. A key factor for the dividend drought is the heavy concentration towards banks and mining stocks in Australia compared with other global markets which are much more diversified. As the economic recovery continues, we’re anticipating further dividend increases, with payouts reaching 85% of their 2019 levels. The dividend bounce back should be a big relief to Australian investors, particularly self-funded retirees.”
Jane Shoemake Client Portfolio Manager on the Global Equity Income Team at Janus Henderson said: “The successful vaccine rollout in the US and the UK in particular is enabling society and the economies here to begin to normalise to some extent and offers encouragement for other countries following closely behind with their own inoculation programmes. Even so with infection rates still out of control in Brazil and India, and the third wave in Europe still curtailing economic and social activity while the vaccines are administered, there is still a lot of uncertainty for company profits and, in turn, dividends. On top of this, there remain political sensitivities around shareholder payments, while the timing and extent of the removal of regulatory restrictions on banking dividends, especially in Europe and the UK is still unclear. We also expect share buybacks to return as a use for surplus cash and this too will influence how much is returned via dividends (especially in the US). All these factors are adding a layer of unpredictability to dividend payments.
“Despite this uncertainty, we are more optimistic given that Q1 was undoubtedly better than expected and we are now more confident that companies are willing and able to pay dividends, especially those companies that have traded well. There is certainly much less downside risk to payouts this year than previously anticipated, though the timing and magnitude of individual company payouts is going to be unusually uneven and this will add volatility to the quarterly figures. Special dividends will play a role too. Since late last year we have been adding to areas of the market that will benefit as economies reopen and where there is increased confidence in a business’s ability to generate cashflow and pay a dividend. As we move into the second quarter, the year-on-year comparisons will look very positive because it was the worst period for dividend cuts last year.”