Reece Birtles
Shareholders are increasingly concerned about companies becoming more conservative in their payout ratios and debt levels. According to data collated on S&P/ASX 200 companies, this current reporting season saw average payout ratio decrease from 62% to 53%, while the debt-to-revenue ratio has also dropped from 33% to 22% since pre-Covid.[1]
“This retention of earnings, rather than reinvesting them into high-return growth opportunities, is a concern for shareholder value,” said Reece Birtles, chief investment officer at Martin Currie. “The lack of pressure on boards and management regarding this trend appears to be a byproduct of the momentum-driven market. As conditions shift, we hope to see a return to dividends as a core indicator of shareholder value.”
“For investors, dividends will continue to play an important role as they provide more reliable returns than capital gains and can act as a ‘safety net’ during heightened volatility,” he added.
However, there were some positive signs of capital management during this reporting period.
“We saw special dividends from companies like JB Hi-Fi, Super Retail Group, and Lottery Corporation, as well as improved payout ratios from Chorus, Commonwealth Bank, and Independence Group. Additionally, South32, Brambles, and Aurizon conducted buybacks,” noted Birtles.
“Conversely, several companies reduced their payout ratios, which unfortunately signals earnings stress. Companies such as Mineral Resources, Dexus, and Insignia were among those taking this action.”
Martin Currie has updated its income scorecard to reflect broker revisions post-reporting season and to track how companies have met dividend expectations over the last 12 months. It also analyses how dividend growth projections have changed and assessing if these stocks provide inflation protection.
“Our analysis highlighted the resource sector as an area of concern for income. While the sector delivered strong dividends relative to expectations over the past year, the outlook is now much more challenging, with most future dividend downgrades in this sector,” Birtles said. “Woodside, in particular, is a concern due to its M&A decision to invest in two new U.S. projects, which is putting pressure on its ability to maintain strong dividend payouts.”
“The banking sector also delivered solid earnings and reasonable dividends over the last 12 months. However, there’s been no change in forecasts due to stagnant underlying growth. For instance, Commonwealth Bank’s share price has surged in the past year, but with flat dividends, future yields have dropped significantly, leaving it below the bond yield—no longer qualifying as a strong dividend stock.”