‘Dividend recession’ heading for the Australian market

The experts aren’t sugar coating it: dividend payments are expected to be hit much harder during the COVID-19 pandemic than they were during the global financial crisis (GFC).

UBS says, based on consensus expectations, dividends per share (DPS) are expected to fall by 39 per cent in FY2020, almost double the 20 per cent drop during the 2008 GFC.

Online employment group Seek (ASX:SEK) has decided not to pay a final dividend for the 2020 financial year despite paying a 13c-per-share interim dividend a little less than two weeks ago.

Meanwhile, the Australian Prudential Regulation Authority has advised banks and insurers to maintain caution in planning capital distributions, including dividend payments.

UBS says more than 35 per cent of the companies reporting in August are not expected to pay a dividend, compared to less than 10 per cent that reported in August 2019.

However, it still expects some companies such as Brambles (ASX:BXB), Evolution Mining (ASX:EVN), Fortescue Metals (ASX:FMG) and Wesfarmers (ASX:WES) to maintain or grow their DPS.

Earnings facing big hit

The drop in dividends is due at least partly to the expected 21 per cent fall in earnings per share (EPS) during FY2020, equal to the fall experienced during the GFC.

Financial stocks are expected to bear the brunt with a 28.3 per cent drop as banks make provisions for bad debt charges.

The resources sector is also expected to be impacted by the fall in oil and coal prices, with EPS expected to fall 12.9 per cent.

Most of this is due to the collapse in oil prices, which is expected to slash EPS for the energy sector by 44.4 per cent, while solid pricing for iron ore, copper and gold is expected to moderate the fall for metals and mining to just 3.6 per cent.

However, the discretionary retail industry is expected to defy the rest of the market and post a 5.9 per cent gain.

More specifically, UBS believes that companies such as BHP (ASX:BHP) and South 32 (ASX:S32) have EPS upside potential due to the strong commodity price environment.

The COVID-19 pandemic is also expected to benefit companies such as ResMed (ASX:RMD) due to the strong demand for ventilators.

Earnings guidance a sign of confidence

UBS notes that 22 ASX 100 stocks have reaffirmed or upgraded their guidance while another 28 stocks did not change or provide guidance.

The Swiss bank believes companies that are able to provide guidance are likely to outperform in the near term.

UBS added that on average, stocks that withdrew or lowered guidance underperformed by 2 per cent following the announcement while stocks that reinstated, reaffirmed and/or upgraded guidance outperformed by 1.6 per cent.