It’s not all that common for small cap stocks to pay a dividend, yet they account for nearly 80 per cent of the listings on the ASX.

Of the over 2100 stocks listed on the Australian bourse, 1654 are small caps with a market cap of less than $500m.

And of those 1654, less than 2 per cent — or just 29 stocks — actually pay dividends.

The junior resources, and health and biotech plays are the ones least likely to pay a dividend because they don’t generally have too much cash flow beyond what they raise from the market.

On the resources front, it can take up to 10 years, sometimes longer, to turn a new discovery into a fully operational mine. S&P Global Market Intelligence’s research suggests that it can take as long as 20 years to advance from discovery to production.

Either way, there is usually very little cash coming in the door for a good chunk of a junior explorer’s life.

Therefore the trend is for an explorer to advance a new discovery as far as they can, either solo or with a partner, and then eventually get swallowed up by a larger player or sell off the asset to someone that can take it into production – hopefully in the process making the explorer more money than they spent.

It is a similar story on the health and biotech side. Most small caps will start out developing a drug or device, hitting the market up along the way to fund research and clinical studies, before being bought out or selling their drug development to big pharma to commercialise.

So, it’s probably no surprise that there are just three small cap miners and one small cap health stock that are paying dividends.

Here’s a list of the small caps paying dividends (The table was jointly compiled by Stockhead and Peak Asset Management).

Scroll or swipe to reveal table. Click headings to sort. Best viewed on a laptop:

ASX Code Company Industry Share Price March 7 DPS 2020 - interim DPS2019 - Final DPS 2019 - Interim DPS 2018 final DPS 2018 - Interim Market Cap
OPC OPTICOMM Telecommunications 4.92 3.6c 3.6c 3.6c $510m
MRC MINERAL COMMODITIES Mineral Sands/Graphite Production 22c 0.6c 0.7c 0.6c $103.2m
EMB EMBELTON Industrials/Manufacturing 11 20c 20c 20c 30c $23.7m
KOV KORVEST Industrials/Manufacturing 3.54 15c 13c 9c 7c $44.5m
SST STEAMSHIPS TRADING COMPANY Trading 12 42.3923c 9.2998c 13.5886c 15.9908c $372.1m
TRS THE REJECT SHOP Retail 2.75 10c 11c $86.7m
ABA AUSWIDE BANK Financial Services 5.59 17c 18.5c 16c 18c $243.4m
CDP CARINDALE PROPERTY TRUST Real Estate 5.43 18.1c 18.1c 20.1c 18.1c $395.5m
MWY MIDWAY Forestry 1.41 9c 9c 9c $117.9m
TWD TAMAWOOD Home Building 3.35 33c 16c $94.7m
LYL LYCOPODIUM Engineering, Construction, Procurement and Project Management 5.3 15c 15c 18c 15c $222.1m
VRT VIRTUS HEALTH Reproductive Service s 4.07 12c 12c 12c 12c $326.4m
PFP PROPEL FUNERAL PARTNERS Funerals 3.32 4c 5.8c 5.7c 6.4c $328.8m
FID FIDUCIAN GROUP Financial Services 4.95 11.5c 11.3c 11c 11c $156.6m
RND RAND MINING Gold Production 2.05 10c 10c $123.3m
SFC SCHAFFER CORP Industrials/Manufacturing 15.63 45c 40c 30c 30c $219m
SRV SERVCORP Real Estate 4.08 11c 10c 13c 13c $421.2m
TCO TRANSMETRO CORPORATION Hotel Operator 1.26 10c $16.9m
FFI F.F.I. HOLDINGS Food Manufacturing & Distribution 4.99 11c 12c 10c 10c $53.8m
ENN ELANOR INVESTOR GROUP Investment Fund 1.915 9.7403c 9.5102c 8.6065c 6.3248c $232.6m
HOT HOTCOPPER HOLDINGS Communications & Media 13c 0.5c $24.6m
LBL LASERBOND Industrials/Manufacturing 46c 0.5c 0.5c 0.5c 0.4c $46.2m
BRL BATHURST RESOURCES Coal Production 9c 0.255c $159m
CGO CPT GLOBAL LIMITED Information Technology 22c 0.5c 0.25c 0.25c $8.23m
8IH 8I HOLDINGS Financial Services 10c $36.2m
PFG PRIME FINANCIAL GROUP Financial Services 7c 0.2c 0.2c 0.2c 0.45c $13.6m
KPG KELLY PARTNERS GROUP HOLDING Accounting Services 88c 1.1c 1.21c 1c 1.1c $40.9m
MLD MACA Mining Services 87c 2.5c 2c 3.5c $254.6m
SWK SWICK MINING Mining Services 16c 0.3c 0.6c $48.8m
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While the number of small caps that paid a final dividend in 2019 is pretty much on par with 2018, it appears there were more small caps paying interim dividends last year than in 2018 – three times as many in fact.

Retailer The Reject Shop (ASX:TRS), for example, didn’t pay an interim dividend in 2018, but in 2019 it paid 10c a share, or just under $3m, back to shareholders.

Mining services contractor MACA (ASX:MLD) also didn’t pay an interim dividend in 2018, but in 2019 it paid an interim dividend of 2c per share and a final dividend of 2.5c share, equating to a total shareholder payout of $12.1m for 2019.

Bathurst Resources (ASX:BRL), which produces coal in New Zealand, had not previously paid dividends, but declared a maiden final dividend of 0.255c per share for 2019, which returned a total of $5.5m to shareholders.

 

Payout ratios sliding

But while more small caps paid interim dividends in 2019, the payout ratios have been starting to slip and some have been holding back on paying dividends altogether.

Mineral Commodities (ASX:MRC) paid $3.8m worth of interim dividends during 2019, the same amount it paid for the whole of 2018, but said it had deferred a decision on declaring a final dividend for the full year ended December 31, 2019.

And while the aging population keeps business booming and revenues increasing for Propel Funeral Partners (ASX:PFP), the company has continued to cut its dividends.

Its interim dividend payout for the first half of FY20 came in 37.5 per cent lower at 4c per share, holding back nearly $2.4m from shareholders’ bank accounts.

Niv Dagan, executive director at boutique investment firm Peak Asset Management, said with the recent global market selloff, it appeared that Australian companies were holding back on increasing their dividend payouts to investors.

“In particular, the uncertainty relating to the coronavirus combined with weak retail spending, lack of wage growth, falling infrastructure spending and a weak global macro-outlook, has meant that corporate Australia is being defensive,” he explained.

“Swick Mining (SWK) for instance has slashed their dividend payout ratio by 50 per cent, on the back of a weakening outlook.”

 

A shift away from defensive stocks

The way people are investing is also changing.

In the past investors have typically favoured the big banks (NAB, Westpac, Commonwealth Bank, ANZ) and the large telcos such as Telstra, due to the defensive nature of their earnings, according to Dagan.

“However, as net interest margins fall, combined with higher fixed costs and inflated balance sheets, many of the banks have had to tap investors in the form of hybrids,” he said.

“Given interest rates are likely to fall further over coming months, hybrids have come under pressure of late, as investors look for certainty.”

Hybrids are stocks that combine elements of debt securities and equity securities.

According to the ASX, hybrids typically promise to pay a rate of return (fixed or floating) until a certain date, in the same way debt securities do. But there is also the opportunity for a higher rate of return than regular debt securities because of the equity-like features hybrids have.

The good news is that while companies may be cutting dividend payout ratios now, they won’t be doing it forever. But as to when this will happen depends on when global central banks roll out further economic stimulus measures.

“We expect global central banks, including the RBA to unleash further bond purchases to combat weakening global growth,” Dagan said.

“This in time, should see dividend payout ratios return to levels last seen back in 2017/18, however not without a fight.”

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