One of the major themes of the FY14 reporting season was the torrent of dividend – and capital return – largesse from Australia’s major companies.
Commonwealth Bank, CSL, BHP Billiton, Suncorp, Rio Tinto (interim dividend) and Boral all delivered double-digit rises in dividend payments, with Boral and Suncorp both delivering rises of 36%-plus.
Although Wesfarmers only managed a 10-cent (+5.6%) rise in its actual dividend, it delivered a huge bonus, with a special fully-franked 10-cent “centenary dividend,” to mark 100 years of the company, and an extra $1 per share “special distribution” associated with share consolidation.
Suncorp rewarded shareholders with a 30 cents a share special dividend, despite lifting revenue by only 1%, while Telstra lifted its final dividend for the first time in seven years, and announced a $1 billion share buyback.
Yield bonanza
Across the market, according to Shane Oliver, head of investment strategy and chief economist at AMP Capital, 65% of companies increased their dividends from a year ago (up from a proportion of about 60% in the last two years).
It is music to the ears of self-managed super fund (SMSFs), who rely on dividend income – turbo-charged by the partial or full rebates of associated franking credits, depending on whether their fund is in “accumulation” or “pension mode. And given that SMSFs now hold an estimated 16% of the stock market, their demand for income is a big influence on companies.
But not everyone is as enamoured of the payout party. Recently some influential voices – led by Reserve Bank of Australia (RBA) governor Glenn Stevens – have questioned the fixation on high dividend payouts, arguing that it could be coming at the expense of investment for growth, which in turn would drive national economic growth.
According to UBS Wealth Management, Australian companies are now paying out on average 69% of net profits, an all-time record, except for an artificial spike in 2009, when profits slumped, but many companies chose to maintain dividends. Goldman Sachs says the average industrial-company payout ratio is running at 50% of free cash flow (earnings before interest and tax, plus depreciation and amortisation, minus changes in working capital: it is the capital available for investment once all the ongoing annual obligations have been met.) Goldman Sachs says this compares with about 30% in the decade before the global financial crisis, when the average company re-invested about 70% of free cash flow back into its business.
All the major banks have target dividend payout ratios in the range of 70%–80%, with the exception of Australia and New Zealand Banking Group (ANZ), at 65%–70%.
The global payout party
According to Factset, the S&P 500 Index companies in the US have a dividend payout ratio at present of 31.9%, and that figure “remains one of the highest non-recession levels in 10 years,” the data group says. (Although more US companies are paying dividends these days: Factset adds that the representation of dividend payers in the S&P 500 has risen to the highest level (425, or 85%) since 1995.)
Factset also says that at June 30, the MSCI World Index payout ratio sat at 40%, down from levels above 60% in June 2009, when profits slumped, but dividends were maintained.
Global funds manager Henderson Group says Australian firms paid $US40.3 billion ($44.5 billion) in dividends last year, up a staggering 89% since 2009. Henderson said that was the largest increase among the ten biggest developed-world stock markets, and was more than double the 43% increase in payouts worldwide in that period.
Other capital management strategies
Companies in other countries do other things with their cash. Since 2007, according to research from funds manager Philo Capital, US companies have paid out a total of US$2.5 trillion in buybacks, more than half as much as the US$1.6 trillion they have paid in total dividends. At a much lower average dividend payout ratio, US companies arguably have much more firepower for future investments, acquisitions or share buybacks.
This is what Glenn Stevens was alluding to: that if Australian companies focus too much on dividend payments, they could be sacrificing business growth, and thus economic growth.
The opposite argument is exemplified by Perpetual Investments head of equities Matthew Williams, who said recently: “Unless management can convince us they have a better use for excess capital we think they should maximise their ability to pay franked dividends back to shareholders.” Wesfarmers chief executive Richard Goyder echoed that, saying it was a balance between the two – and no-one could argue that Wesfarmers has not been able to grow the company in recent decades, while still maximising the flow of income to shareholders.
In the meantime, while individual companies grapple with this dilemma of dividends versus investment, dividends can be expected to increase, and because of Australia’s unique dividend imputation system, SMSFs will continue to generate mouth-watering effective yields – particularly when considering the prices they actually paid for their income-generating stocks.
FY 15 DPS forecasts – Top 20 Stocks and percentage increase/decrease on previous year#
BHP Billiton (BHP): FY15 DPS 125.7 cents*, +3.9%
Commonwealth Bank (CBA): FY15 DPS 422.5 cents, +5.4%
Westpac (WBC): FY14 (ends Sept 30) DPS 184.5 cents (+6%), FY15 DPS 193.1 cents, +4.7%
Rio Tinto (RIO): FY14 (ends Dec 31) DPS 221.2 cents* (+15.2%), FY15 DPS 230.8 cents*, +4.4%
ANZ Bank (ANZ): FY14 (ends Sept 30) DPS 176.4 cents, up 7.5%, FY15 DPS 184.4 cents, +4.5%
National Australia Bank (NAB): FY14 (ends Sept 30) DPS 199.6 cents, up 5.1%, FY15 DPS 209 cents, +4.7%
Telstra (TLS): FY15 DPS 30.9 cents, +4.9%
Wesfarmers (WES): FY15 DPS 221.5 cents, +16.6%
Woolworths (WOW): FY15 DPS 144.9 cents, +5.8%
CSL (CSL): FY15 DPS 128 cents*, +4.2%
Woodside Petroleum (WPL): FY14 (ends Dec 31) DPS 257.6 cents (+152.5%), FY15 DPS 252.4 cents, –2.2%
Macquarie (MQG): FY15 (ends March 31) DPS 297.3 cents, +14.3%
Suncorp (SUN): FY15 DPS 96.5 cents, +28.7%
Scentre Group (SCG): FY14 (ends Dec 31) DPS 20.4 cents@, FY15 DPS 23.4 cents, +14.7%
AMP (AMP): FY14 (ends Dec 31) DPS 26 cents, +13.2%; FY15 DPS 28.1 cents, +8%
Origin Energy (ORG): FY15 DPS 50.3 cents, +0.6%
Westfield Group (WDC): FY14 (ends Dec 31) DPS 52.4 cents, +2.7%; FY15 DPS 54.5 cents, +4%
Transurban (TCL): FY15 DPS 39.2 cents, +12%
* Reports in US$
# excludes SingTel and Alcoa
@ pro forma forecast
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Follow the Switzer Super Report [1] on Twitter
Also in the Switzer Super Report:
- Peter Switzer: Why I’m still buying the best yield stocks [2]
- Paul Rickard: Market on a high- portfolios finish up in August [3]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [4]
- Penny Pryor: Shortlisted – Cover-More and Qube [5]
- Staff Reporter: Spring has sprung on property [6]