Dividends rescued from fears of armageddon

Lenore Staats

“We thought they may have been off 5 per cent to 10 per cent but I think now that there may be no drop at all. So good dividends have come out of those sectors.” Healthcare firm Sonic Healthcare and oil and gas giant Woodside Petroleum were standouts for the […]

“We thought they may have been off 5 per cent to 10 per cent but I think now that there may be no drop at all. So good dividends have come out of those sectors.”

Healthcare firm Sonic Healthcare and oil and gas giant Woodside Petroleum were standouts for the fund manager during the last week, while banks made a surprisingly positive contribution.

Payouts from the banks “have certainly been hit and are down significantly but haven’t suspended completely,” said the fund manager. “Commonwealth Bank of Australia was at the top end of expectations, and ANZ also managed to pay a dividend at the top end of expectations,” he said. “It was definitely better than it could have been.”

Improving signs

The signs that investors may not be as disappointed on dividends as expected started to emerge with the end of the first full week of reporting season.

JP Morgan’s Australian equity strategist, Jason Steed, wrote at the start of the week that “in keeping with the trend of recent seasons, revisions to dividend forecasts have been less negative than those to earnings”.

“This trend reflects a persistent willingness of boards to raise payout ratios to maintain or grow dividends. So far in August, over half of those that have reported have seen dividend forecasts raised.”

About 80 per cent of companies by market capitalisation had reported by the close of business on Thursday, or nearly 70 per cent of companies, said Shane Oliver, head of investment strategy and chief economist at AMP Capital.

The second full week of the August reporting period bought out some of Australia’s biggest corporate names. Along with banking groups ANZ and Westpac, conglomerate Wesfarmers, supermarket group Coles, and healthcare giant CSL all reported results.

Reporting season so far has been a “pretty mixed bag” said Jason Beddow, managing director of the $5.2 billion Argo Investments. “E-commerce is up, online adoption is up, and that has done quite well, Health is doing relatively well and iron ore and gold have been strong.”

Earnings for financial year 2020 have been either positively or negatively affected by the shutdowns related to the COVID-19 pandemic, said Anton Tagliaferro, founder of Investors Mutual.

“I think that most corporates are in reasonably good shape,” said the fund manager, with interest rates supportive at 0.25 per cent in Australia.

About 27 per cent of companies have exceeded expectations while 26 per cent missed expectations so far, said Dr Oliver. To date, 67 per cent of companies have reported lower earnings in the August reporting season than a year ago, noted Dr Oliver, worse than the 58 per cent that reported lower profits in the global financial crisis.

“I think that investors were probably expecting a lot worse. Companies are still hanging in there and surviving. That has given investors a bit of confidence, which is why the market has been been able to rise over the month.”

“When you look at the results, 59 per cent of companies have seen their share price outperform after results,” he said. “The normal outperformance is 54 per cent while the last two reporting seasons have seen 51 per cent of companies outperform after reporting results.”

Dividends could be playing a part in those gains as well. “Companies do get rewarded for paying decent dividends,” said Mr Price.

The potential for a better-than-expected dividend performance from Australian companies during the August reporting season could be a reassuring sign for the future.

“I think it’s a sign that the world doesn’t seem anywhere near as bad as we feared back in March, so that’s definitely part of it. Things could get worse but they could get a lot better. That’s part of the appeal of dividends – they are a sign of confidence.”

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