Investors brace for a dearth of dividend cash

Analysts and economists have varying views about the earnings season in which the sharemarket rose 2.6 per cent amid some big hits and misses by well-known companies, and they warn that payouts will remain under pressure in the year ahead.

Some investors were rewarded with special dividends from companies including Wesfarmers ($1.50 per share), Qantas (9.9c), JB Hi-Fi ($1) and Australian Foundation Investment Company (5c).

However, there was earnings and dividend weakness among mining and healthcare stocks.

CommSec chief economist Ryan Felsman said he estimated $38bn in total dividends would be paid out in the coming weeks, led by giants BHP ($4.7bn) and CBA ($4.3bn).

Mr Felsman said dividends would be slightly down on last year but he noted there had been some positive surprises.

“There’s some management confidence, despite conservative guidance across the market,” he said.

Mr Felsman said companies that impressed included Brambles, Seek, Lottery Corp, Downer EDI and Lendlease.

“The forward 12-month estimated dividend yield of the ASX 200 is around 3.3 per cent, well below the long-run average of 4.5 per cent,” he said.

Weakness in mining dividends and soaring share prices elsewhere – with the ASX 200 closing near record highs last week – are conspiring to keep the dividend yield under pressure.

“We are seeing a mixed backdrop,” Mr Felsman said. “Part of the reason for that is the miners BHP and Rio recently announced their weakest profits in five or six years, and we have seen the miners be more conservative with their dividend payments.”

Mr Felsman said research had found more than 60 per cent of dividends were in line with expectations, with more beating than missing forecasts. “The real story is we have seen overall payments down slightly compared with last year,” he said.

AMP deputy chief economist Diana Mousina said it was a “fairly good earnings season” amid a strong performance by shares, particularly consumer discretionary stocks.

“According to UBS, companies with US exposure like Amcor, BlueScope and James Hardie all had downbeat assessments on US businesses,” she said.

“Tech-related businesses like REA Group, Car Group and Seek all had solid earnings growth.”

Investors Mutual portfolio manager Mike O’Neill said the reporting season had been mixed, and he also noticed a big contrast between Australia-focused companies and US-focused ones.

“It does seem that the Australian consumer is in a lot better shape than the US consumer,” he said.

Mr O’Neill said real estate investment trusts (REITs) were a highlight, while banks and resources could be the biggest drag on dividends going forward, with bank yields down because their share prices had outpaced profit growth. The Commonwealth Bank’s current yield is below 3 per cent and Westpac and NAB are below 4 per cent.

“The pressure on banks and resources could get worse in terms of dividend payout,” Mr O’Neill said. “Some other sectors will probably do more of the heavy lifting – industrials, some of the better-quality REITs and a few parts of the market when you can actually see a growing profile of dividends and conservative balance sheets. But it’s going to be dominated by banks and resources, unfortunately.”

Morningstar equity strategist Lochlan Halloway said the reporting season had progressed “reasonably well” but there had been a big increase in share price volatility following some company results.

“We’re not used to seeing the blue chips behave like this,” he said. “CSL and James Hardie collapsed, down 30 per cent and 17 per cent respectively. It was CSL’s worst day since listing and James Hardie’s worst day since 1973.

“And (last) week, Woolworths plunged 15 per cent, its heaviest selloff since 1994. For context, the biggest move for an ASX 20 stock last August was CSL, down 5 per cent on results day. These are once-in-a-generation moves, and we’ve seen three in a fortnight.”

Wealth Within chief investment analyst Dale Gillham said he expected flat or negative growth in dividends in the year ahead, after a “disappointing” earnings reporting season. “We are going to see a lot more pressure on dividends, and I’m not sure companies will be able to maintain dividend yields,” he said.

Mr Gillham said super funds were now “the bully in the room” and they would not want dividends to be cut too much.

“I think there’s going to be a bit of tug of war between the boards, CEOs and super funds, so I don’t think they are going to cut too much too soon,” he said.

This article first appeared in The Australian as ASX dividend warning: experts reveal what’s ahead for payouts