ASX dividends to hit $73b as it rains upgrades
Corporate Australia is on track to pay out $73 billion in dividends this financial year as analysts race to upgrade their forecast payouts, keeping pace with the stronger-than-expected economic recovery, and leading broker JPMorgan to declare a “dividend supercycle” awaits.
The magnitude of upgrades will go down as the biggest in 20 years for the Australian sharemarket.
“It’s been an outstanding reporting season and revisions to the dividend outlook have been one of the features,” said Hasan Tevfik senior research analyst at MST Financial.
This earnings season, with about 60 per cent of the top 200 companies having reported financial results, payouts have come in 8.5 per cent ahead of market expectations. This is the biggest beat for 40 reporting seasons, or since 2001, on Mr Tevfik’s numbers.
The dividend upgrades are equivalent to about $5.7 billion, and bring total forecast payouts for the financial year to $73.3 billion, Mr Tevfik said. That is higher than last year’s $63.3 billion, but lower than 2019’s record $88 billion.
Payouts plunged nearly 30 per cent in 2019-20 when companies put capital management on ice to survive COVID-19.
“For those sailing close to the covenant wind, the first step was to raise capital. For others, which encompassed most of the market, dividends were cut deeply,” JPMorgan’s Australian equity strategist, Jason Steed, said.
“We were optimistic that this results season would herald a turnaround in earnings and dividend expectations. The reality, thus far, has exceeded our elevated expectations."
Iron ore miners have been the dividend standouts. Fortescue Metals Group revealed a record interim dividend of $1.47 per share. Rio Tinto also paid the biggest dividend in its history, unveiling $US5.57 per share of total dividends in 2020.
BHP smashed its interim dividend record by 55 per cent and shareholders will receive a better-than-expected $US1.01 per share.
Together, the big three iron ore miners will pay out $19.37 billion.
“The main engine of dividends has been the iron ore plays,” said Hugh Giddy, large cap portfolio manager at Investors Mutual. “They are making super, super profits. It’s beyond belief how much money they are making relative to their cost of production.”
COVID-19 beneficiaries also handed back much higher amounts of cash to shareholders: retail conglomerate Wesfarmers raised its interim dividend by 17 per cent to 88¢ a share; pizza chain Domino’s lifted its dividend 33 per cent to 88.4¢; consumer electronics retailer JB Hi-Fi’s dividend soared 82 per cent to $1.80 a share.
These companies will together pay $1.1 billion in dividends to shareholders.
“It’s unusual to get the two biggest parts of the market – banks and iron ore – seeing big dividend upgrades. Previously it has been one or the other,” Mr Tevfik said.
“Because the banks were asked to cut their payout ratios, they are provisioned for a poor economic environment and now we are seeing a reversal of that. And that’s happening at the same time that the iron ore price is at $US160 a tonne.”
Capex still stuck
Some uncertainty lingers after last year’s pandemic, Mr Tevfik said, although corporate nervousness appears to be showing up in lower levels of capital expenditure and costs rather than reduced dividends. “Capex forecasts are coming down. Companies are conserving capital,” he said.
Investors will get more clues about the strength of corporate capital spending this week, with capex data due out on Thursday. RBC Capital Markets is expecting a 1 per cent decline in fourth-quarter capital expenditure.
“COVID has obviously disrupted the economy and made things more uncertain, so there’s a tendency for people to be a bit more balance sheet conscious,” Mr Giddy said. “Even though interest rates are low, companies may keep their powder dry and their leverage low.”
However, it is likely that “companies will become a little less conservative as the recovery comes through”, Mr Tevfik said. “It’s probably going to be a very long time before we get back to that $88 billion [of dividends] but I think eventually we will.”
Mr Steed said: “Looking forward, particularly for banks, energy and financials, the trends look strong. So strong, in fact, that we believe an Australian dividend supercycle is in the offing.”