Dividends top $22 billion, but have they peaked? CommSec's Craig James

EXPERT OBSERVATION

Economic and Financial market perspectives

• Cash payouts: Since mid-February, ASX 200 companies have paid out around $3.3 billion in dividends to shareholders. But dividend payouts really start to ramp up from today. Overall, around $22 billion will be paid to shareholders over coming weeks.
• Dividends still in vogue: The majority of companies reporting half-year earnings results (87%) chose to pay a dividend and 91.5% of these companies lifted or maintained dividends.
• Injection into the economy: Dividends totalling $18 billion will be paid out by listed companies to their shareholders in the next four weeks.

What does it all mean?

Dividends remain in vogue. But as has been apparent for the last few reporting periods, companies are seeking better balance between paying out dividends and investing in their businesses. The world has seemingly become a smaller place with companies across the globe competing with one another for the affection of consumers. Businesses need to invest in the brands, their businesses and their futures. That was certainly the response by Coca Cola Amatil which plans to spend $40 million in promoting brands Coke, Mount Franklin and Pump. The aim is to lift sales, profits (earnings per share) and ultimately support the share price and dividends.

Of the ASX 200 companies reporting for the six months to December, around 87% of firms elected to pay a dividend, up from the long-term average of 86%, but down from the record level of 92% in the 2015/16 full-year results.

There is certainly plenty of cash available to firms. Of the 135 companies reporting half-year results, a record 94% reported a profit. Aggregate cash holdings rose by 6% over the year to $87 billion. Adding in the 32 companies reporting full-year earnings, cash stood at a record $115 billion.

Over the period from February to May, over $22 billion will be paid to shareholders as dividends. A year ago dividend payouts were also around $22 billion, while in the full-year earnings season in August 2017, dividend payouts totalled around $26 billion. So shareholders continue to be well rewarded.

Some shareholders will receive the dividends as cash and others will employ the proceeds through dividend reinvestment schemes. While the majority of the funds will be paid to domestic investors, other funds will go offshore to foreign investors. And while some of the dividends are paid to ordinary investors, other payments are paid to superannuation funds, thus with more limited short-term consequences for the economy.

While dividends flow at this time every year, the dollars potentially could lift spending. However, April tends to be a good month for the Australian sharemarket and part of the reason is that investors are keen to put their dollars to work in listed companies.

The Profit Reporting Season

Regular readers would be aware that each six months CommSec undertakes a detailed review of the profit reporting season – the time when companies report half-year or annual results for the period to June or December. (A far smaller proportion of companies have a different reporting period, such as March or September). 

To recap, the recent earnings season – for companies largely reporting half-year results to December 2017 – can be described as solid, not spectacular. Effectively, companies seem to be laying the groundwork for the future.

A record share of companies reported a profit. But aggregate statutory earnings were down 1.5% on a year ago. A smaller percentage of companies issued a dividend, expenses outpaced sales and cash earnings were up only modestly on a year ago.

Some of the themes of the season:

• Department stores remain under pressure but less so Specialty Retailers.
• TV and Radio Broadcasters have benefitted as advertisers drift away from social media.
• There were more reports of companies being able to lift margins.
• Agricultural and export-focussed consumer good companies benefitted from strong demand in Asia.
• Companies dependent on home construction and development have benefitted from strong activity levels in south-east Australia.
• Technology and Telecom companies have struggled.
• Transport and Infrastructure companies have out-performed.

Of all companies reporting half-year earnings, 57% reported a lift in profit and 43% a decline (long-term average 61.4%). Of those 94% of companies reporting a profit, 56% lifted profits and 44% reported a decline.

Of all the half-year reporting companies, 87% issued a dividend and 13% didn’t. Of those reporting a dividend, 74.5% lifted the dividend, 8.5% cut and 17% left dividends unchanged.

Of all companies reporting half-year earnings, 58% lifted cash holdings over the year and 42% cut cash levels. Cash holdings of both full-year and half-year reporting companies stood at $115 billion at December 31.

The Dividend Timeline

IRESS provides data on the dividends declared by companies, the number of shares on issue and the pay date of the dividends. So it is possible to derive a dividend timeline. The ASX 200 companies were assessed.

As always there are complications to the analysis such as where the shareholders are based, whether dividend reinvestment plans operate, special dividend payments and currency translation effects for foreign investors. But the aim is to get a broad idea of the timing and magnitude of dividend payouts.

CommSec estimates that around $22 billion will be paid to shareholders from mid-February to early May 2018. The key period for dividend payments is the three-week period beginning March 26 and ending April 13. Over that three-week period, $16.6 billion will be paid out as dividends by listed companies: in the week ending March 30, dividends totalling $10 billion will be paid; in the week ending April 6, $4.1 billion will be paid out as dividends; in the week ending April 13 dividend payments totalling $2.5 billion will be made.

The importance of dividends

If you indexed the All Ordinaries index and the All Ordinaries Accumulation index at January 2004 it would show share prices (All Ords) up 84% while total returns have risen by around 339%. The differential (dividend growth) has especially widened from the low point for shares after the GFC in February 2009.

So dividends have taken on greater importance.

There are a few reasons for this. Investors have been more cautious about buying shares, despite the fact that Australian companies have been making money and strengthening balance sheets. So share prices have not fully captured the stronger fundamentals.

The economy has also continued to mature and the “potential” growth rate has eased from around 3.5% to 2.75%. Many of Australia’s biggest companies operate in mature industries. So while companies continue to generate good returns, growth options are more limited. Add in the fact that inflation has also slowed from around 2.5% to just below 2%.

In recent years Australian companies have also had to compete with heady property markets to secure the affection of investors. With share prices seemingly constrained by a range of influences, that puts more onus on companies to offer attractive dividends or to support share prices with buybacks.

Until recently there has been some reluctance by companies to plough back cash into the business. And expansion, renewal, replacement or efficiency measures have boosted the funds that can be made available as dividends.

What are the implications for investors?

Investors have the usual choice over the next few weeks. Those investors who still elect to receive dividend payments direct to their accounts can choose to spend the extra proceeds, save the proceeds (leave it in the bank) or use the funds in combination with other savings and reinvest into shares or other investments.

For companies, retailers and financial firms, the dividends flowing through to shareholders clearly represent opportunities. The Reserve Bank will also monitor the trends in the next few weeks: stronger confidence and an inflow of funds represent a potential spending boost.

Of the major bourses across the globe, Australia is the largest payer of dividends. In part this reflects the maturity of Australia’s industry sectors. It also reflects the stability of the companies that dominate the ASX20 and ASX50 indexes. And it also reflects the on-going growth of the Australian economy and corporate profitability.

Over the past couple of years many companies took the “safe option” of paying out dividends and buying back shares – in other words, keeping shareholders happy. But many companies are now opting for greater balance.

Adequate cash must be maintained to pay out dividends. But cash levels as well as modest borrowings are important for reinvestment in the business and applied to new opportunities – entering new markets or engaging in mergers and acquisitions.

Aussie companies have been successful in recent years in trimming costs and improving efficiencies. But the path to higher profits and retained earnings is also growth of revenues. And that objective is more difficult in a globalized world, affected by disruption and technology-driven innovation.

Shareholders increasingly realize that it is important to select companies with good potential for solid, sustainable growth in total returns – share price plus dividends. And that means paying attention to all aspects of the business.

Craig James is chief economist at CommSec.