Rudi’s View: Dividend Cuts, They Are Coming

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Sep 20 2019

A closer examination of analysts' forecasts post the disappointing August reporting season in Australia suggests dividend cuts are on the increase, with plenty more to come.

Rudi's View: Dividend Cuts, They Are Coming

By Rudi Filapek-Vandyck, Editor FNArena

At face value, the August reporting season in Australia was disappointing, but not quite negative enough to spook investors into a general flight out of Australian equities. Enough evidence came from the likes of JB Hi-Fi and Super Retail that consumer spending might be on a little up-swing, and the general expectation remains the downturn in property markets should prove relatively short-lived.

In the background, central bankers are still re-stimulating economies and financial markets are sharing the view the recessions many see coming will be avoided on the back of low bond yields and ever lower cash rates.

Against this backdrop, corporate earnings in Australia managed to squeeze out a tiny gain from twelve months ago, on average, albeit heavily supported by higher-for-longer iron ore prices and a resurgent gold sector. Expectations are the year ahead is likely to simply offer much of the same; low growth for most companies, in particular from the old economy stalwarts, with mining and energy the potential swing factor.

So far not too bad, or so it appears, but maybe the true story is hiding in the dividends?

FY19 Dividends Look Like 'The Peak'

Again, at face value, aggregate dividends in August were up 4.9% from last year, even though we needed special dividends from the likes of Rio Tinto and Fortescue Metals as well as additional payouts on the back of asset sales (Brambles, etc) to get there. Even including these "extras", the contrast with the context one year ago is rather stark. Last year, aggregate dividends were growing by 14%.

Underlying, total dividends corrected for such one-offs actually went backwards. Because most of the attention during reporting season goes out to profits and company outlooks, and the subsequent response in the share price, most investors would have missed the fact that, at the individual level, no less than 23 members of the ASX200 index either cut or completely scrapped dividends in August.

Among the companies whose shareholders received less than they were probably expecting are the likes of IOOF Holdings ((IFL)), Perpetual ((PPT)), Suncorp ((SUN)) and AGL Energy ((AGL)); in each case the running yield this year and in years past is high enough to assume many a yield-seeking investor was affected.

On the flipside is the observation that while August 2019 in many regards represents the worst reporting season for Australian companies post-GFC, a noticeable number of surprises came in the form of a larger-than-expected dividend payout. On UBS analysts' assessment, a net 21% of large cap surprises came in via a higher dividend (or a share buyback).

The implicit suggestion from UBS's observation that company boards have sought to placate shareholders by paying out more than otherwise might have been the case falls in line with CommSec's observation that 88.4% of full-year reporting companies elected to pay out a dividend in August. This percentage is above the 86.3% average over the 19 reporting seasons covered by CommSec.

Note that total dividends increased by 4.9% from a year ago in August but growth in costs outpaced sales increases over the period, and many large caps reported profits going backwards.

This realisation triggered my investigation into what might lay ahead for the income hungry investor in the next twelve months. Judging from analysts' forecasts, it would appear investors better not casually dismiss the beneath-the-surface dividend message from August; there are more cuts coming, and relatively soon too.

Knock. Knock. Who's There? Your Next Dividend Cut!

Somewhat surprising, maybe, there appears to be a higher proportion of anticipated dividend cuts among the out-of-season reporters; companies that release financial results between September and year-end. And yes, this also includes CYBG ((CYB)), Bank of Queensland ((BOQ)) and Westpac ((WBC)) among the banks.

Investors should note National Australia Bank ((NAB)) already cut its dividend earlier in the year while CYBG issued a profit warning in early September.


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