In Brief: Dividends, Consumer Spending, Retail Margins

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Weekly broker wrap: strong dividend recovery, spending trend shift, cautionary international retail margins.

-World-leading recovery in Australian dividends boosted by banks and mining
-Retailers report spending dip but experts warn not to buy in too early
-Read-through from US market suggests discretionary retailers could face margin declines

By Danielle Austin

Record first quarter dividends lead global recovery

In the wake of a strong first quarter, and a record twelve-month growth period, Australian dividends have largely rebounded from their notable decline during the pandemic. At the depth of the pandemic-driven decline Australian dividends fell more than twice as far as the rest of the world but have now recorded a record rebound. Australian dividends grew 38.9% in the first quarter, reaching $97.9bn in the twelve-months to the end of March and reflecting a result that is 81.7% higher than the preceding twelve-month period.

All sectors reported higher dividends year-on-year as payments continued to normalise and catch-up payments were issued following cuts made during the pandemic, but sizeable contributions from the big four banks and the mining industry, historically responsible for more than 40% and 25% of dividends respectively, drove the result. In particular, BHP Group ((BHP)) distributed $10.8bn to its shareholders in the period, accounting for almost 60% of all Australian dividends paid in the first quarter, and with further dividend payments planned the company will likely close out the year as the largest global dividend payer for the second consecutive year.

In a wider look at the global market, the Janus Henderson Global Dividend Index noted global dividends rose 11% to a first quarter record of US$302.5bn. While the current uncertain political outlook and continuing geopolitical conflicts have seen the analysts maintain their expectations for the coming quarters, on incorporating the strong first quarter result Janus Henderson lifts its global dividends forecast for 2022 to US$1.54 trillion, reflecting a headline increase of 4.6%.

Consumer spending declines, analysts warn investors of early buy-in

With cost-of-living pressures coming further into focus during the final stretch of the recent federal election, market analysts have noticed a trend-shift in consumer spending. Despite talk of inflationary pressures over recent months, retailers had largely reported persistent consumer spending prior to the last few weeks. Having spoken to retail industry insiders, analysts from Barrenjoey suggest discretionary retail has declined around -10% since March and April, and while there is a perception that consumer spending typically softens leading into an election, Barrenjoey notes this isn’t always the case.

Despite the timing of the trend-shift, Barrenjoey suspects the shift is driven by lasting impacts, warning pricing pressures are likely to get worse before they get better, with further rises to interest rates, petrol prices, and food prices all expected. Notably, the slowing of consumer spending comes as many retailers report some reversion in supply constraint issues, likely implying promotional programs will normalise moving forward.

For investors, Barrenjoey suggests it remains too early to buy into the sector, with pressures not yet reflected in expectations.

Analysts look to US retail market as a predictor of domestic market movements

While the Australian retail industry was a beneficiary of the covid pandemic, with retail goods per capita spending increasing around 20% and consumers spending to levels previously forecast to be achieved in 2037, investors are now looking to the US market to provide a read-through to Australia’s outlook moving forwards. Analysts from Jarden estimate the US market is roughly three months ahead of the Australian market in terms of inflation and post-covid reopening, and could provide an approximation of the next quarter in Australia.

Jarden notes retailers reported a sharp and material fall in profitability in the first quarter, and analysts remain cautious on the US retail market, highlighting the sharp change in conditions could be reflective of what’s to come in Australia’s third and fourth quarters. Further, the disappointing results and outlook saw share prices for retailers decline dramatically, with both Wal-Mart and Target reporting their largest daily falls in more than 20 years.

[Note: Other US retailers have subsequently posted strong rallies on result releases, following an initial sector de-rating – Ed]

Among a number of key themes impacting outlook, inventory build could place pressure on retail margins. With retailers working to build inventory in recent quarters in a bid to mitigate elevated costs of supply chain issues and constraints, an expected decline in retail demand could leave retailers with an excess of stock and slower inventory turnover, meaning retailers could look to discount stock which will impact on margins.

Morgan Stanley analysts noted Australia retains an elevated savings rate of 13.6% compared to the US’s 6.7%, which the broker expects will provide a buffer to a potential spending decline, also warning that some of this buffer will likely be absorbed by the rising cost of living. Meanwhile, Jarden anticipates food retailers will be the least impacted, followed by hardware, while household goods, recreation and fashion are most at risk., and within its own coverage identifies Woolworths ((WOW)), Coles ((COL)), Treasury Wine Estates ((TWE)), Metcash ((MTS)) and Costa Group ((CGC)) as likely to retain fair margins with potential for upside risk, while JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Super Retail Group ((SUL)), Universal Store ((UNI)), Accent Group ((AX1)) and Premier Investments ((PMV)) could be at risk of margin decline based on US results.

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